3.1 Introduction
Most UK businesses that trade as limited companies are required to publish three
financial statements each year. These are:
l the income statement (also known as the profit and loss account);
l the balance sheet (also known as the position statement); and
l the cash flow statement.
These statements provide a very valuable source of information for financial man-
agers who work within the business, and for investors, potential investors and their
advisers. They also provide helpful insights for others who have a relationship with
the business, including customers, employees, suppliers and the community in gen-
eral. It is likely that managers will have access to information beyond that which
is made public. The nature of the additional information and the way in which it is
derived, however, are probably very similar to the nature and derivation of published
information. In this chapter we shall consider the nature of the three accounting
statements, the rules that are followed in preparing them, and the way they may be
interpreted so that the user is able to draw conclusions about the business that go
beyond the obvious.
Financial (accounting) statements
and their interpretation
In this chapter we shall deal with the following:
‘the financial statements published by companies
‘the accounting conventions that underpin those statements
‘creative accounting
3.2 The financial statements
‘the use of accounting ratios
‘accounting ratios in detail
Chapter 3