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Financial statements 4

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Part four of FaBEducation.com's Financial Statements presentation on their active learning programme in business finance for non-financial managers and entrepreneurs

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Financial statements 4

  1. 1. www.fabeducation.com Financial statements ④ Enterprise Formations and The Venture Triangle of ⑤
  2. 2. www.fabeducation.com The rules for preparation and presentation of financial statements are set out in the International Financial reporting Standards (IFRA) laid down by the International Accounting Standards Board (IASB) The United States uses the US Generally Accepted Accounting Principles (US GAAP) but are in the process of moving to the IFRS Public companies – i.e. those listed on a stock exchange are governed by strict rules in terms of when and what they publish in terms of their financial statements Private companies do not have to publish financial statements and the information they must file with the companies offices in their jurisdiction is extremely limited. The key accounting principles discussed earlier apply to both listed and private firms as does the basic content and structure of the financial statements. The 52 largest stock exchanges in the world together have only 46,000 listed companies. Private and Public Companies Europe has 28 million private companies and the US 27 million. [IASB “A Guide to the IFRS for SMEs” March 2012]
  3. 3. www.fabeducation.com An extension of the person who owns it A separate legal entity to the owners with “Articles of Association” Sole Trader v Limited Companies Owns the assets AND Owes the liabilities Profit/Loss is combined with other income for tax No rules & regulations other than general law and activity specific licences etc. Owners’ liability limited to the share capital invested Files and pays tax Set up costs but may be well justified by protection Subject to regulations and must submit annual returns to CRO
  4. 4. www.fabeducation.com Partnerships Two or more individuals own, run and are responsible for liabilities of the enterprise. Authorities and profit shares defined by a partnership agreement A legal entity in and of itself – can sign contracts and borrow money Partnership creditors usually have recourse to the personal assets of each partner for settlement of debt Partnership must file an income tax return but does not typically pay tax: the individual partner income is part of their overall personal tax liability
  5. 5. Pros and Cons Company • Incorporation incurs set up costs • Companies Acts – Keep accounting records – Produce audited accounts* – File accounts and annual return with CRO – Keep Statutory Books • Companies have greater borrowing potential and can use current assets as security for a “floating charge” • Shares may be transferred to maintain continuity • Incorporation give impression of a soundly based organisation. There may be prestige attached to directorship Sole Trader/Partnership • No formation costs but written partnership agreement is advised • Annual accounts are not required by law but are necessary as Revenue compute tax based on them • Unrestricted in amounts they can borrow but can’t create floating charges. • A partnership cannot exist separately from the partners and so a change in partners means the end of one business and the commencement of another. • The unincorporated business does not carry the same prestige. www.fabeducation.com* Subject to size threshold
  6. 6. Business Concept Financial Model Business Model What we are Vision, products / services, customers, unique selling proposition and capabilities What we do • Buying and selling activities including policies on inventory, debtors and creditors • Overheads – managing and administering the business • Funding the business (Liabilities, share capital and retained profits) • Fixed asset acquisition and disposal How we make the best if what we have Dynamic models showing the Profit and Loss Account, Balance Sheet and Cash Flow that would result from the business model The Venture Triangle Look before you leap! Functions like a flight simulator to safely explore and test options for the business model before committing to them Good business ideas deserve smart business models validated by effective financial models

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