see 6.2

A Basic Understanding of Financial Statements

A training manual for European Works Council members

Produced with support from the European Commission

ISBN 2-930139-44-7

Contents Page

1 Introduction 51.1 Foreword1.2 Acknowledgements

2 Objectives of this training manual 82.1 To increase users’ awareness of what information is

contained in published financial statements2.2 To enable users to find information of specific interest to

European Works Council members in published financial statements

3 How to use this training manual 113.1 As part of a training course with a tutor3.2 As a self study guide3.3 As a reference work for specific financial statements3.4 As a reference work for specific financial terms

4 The European Works Council Directive 134.1 Aims of the Directive4.2 Sources of financial information4.3 The Annual Report4.4 The company and the group

5 Definitions of the key financial statements 175.1 The balance sheet5.2 The income statement5.3 The cash flow statement

6 The balance sheet 196.1 Introduction6.2 Specimen balance sheet6.3 Dates and currencies6.4 Contents of the balance sheet6.5 Format of the balance sheet6.6 Relationship between headings, subheadings and totals6.7 Notes to the accounts6.8 Explanation of selected terms6.9 Exercises

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7 The income statement 397.1 Introduction 7.2 Specimen income statement7.3 Dates and currencies7.4 Contents of the income statement7.5 Format of the income statement7.6 Relationship between headings, subheadings and totals7.7 Notes to the accounts7.8 Explanation of selected terms7.9 Exercises

8 The cash flow statement 518.1 Introduction8.2 Specimen cash flow statement8.3 Dates and currencies8.4 Contents of the cash flow statement8.5 Format of the cash flow statement8.6 Relationship between headings, subheadings and totals8.7 Notes to the accounts8.8 Explanation of selected terms8.9 Exercises

9 An example of the financial statements of a French multinational company(Lyonnaise des Eaux)

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9.1 Introduction9.2 Specimen financial statements9.3 Differences in format9.4 Explanation of selected terms9.5 Exercises

10 An example of the financial statements of a German multinational company (Volkswagen)

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11 An example of the financial statements of a UK multinational company (Imperial Chemical Industries)

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12 Solutions to exercises 91

Glossary(English, French, German, Italian, Spanish)

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Index of terms 98

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1 Introduction

1.1 Foreword

1.2 Acknowledgements

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1 Introduction

1.1 Foreword

The European Trade Union College (ETUCO) and the Association for European Training of Workers on the Impact of New Technology (AFETT) have been involved in projects designed to promote effective training for European Works Council members since 1993. ETUCO/AFETT have produced a series of related training materials including a set of transparencies on the EWC Directive, a set of grids describing the systems of workplace representation in each EU member state, and a simulation exercise (FERUCCI simulation, available on-line at http://www.etuc.org/etuco/ewcmat.cfm )

ETUCO/AFETT also run specialised courses for members of European Works Councils, tailoring the training needs to meet the specific needs of each group. In order to further support this work, we have developed this training manual which is designed to help members of European Works Councils understand their company’s financial information so that they may carry out their role more effectively. It may be used as part of a conventional training course, or as a self-study guide, as it contains exercises, the solutions to these, and a glossary of useful terms for reference. We hope that you find it useful, and we would appreciate any feedback from you on your experience of using this material, which is also available on our website at ( http://www.etuc.org/etuco/ewcmat.cfm ).

Jeff BridgfordDirectorETUCO/AFETTBoulevard Emile Jacqmain 155B-1210 BrusselsBelgium

Tel.: +32 2 224 05 30Fax: +32 3 224 05 33E-mail: [email protected]://www.etuc.org/etuco/

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http://www.etuc.org/etuco/

mailto:[email protected]

http://www.etuenet.org/en/etuco/ewcmat.cfm

http://www.etuenet.org/en/etuco/ewcmat.cfm

1.2 Acknowledgements

This training manual has been prepared on behalf of the European Trade Union College by John Laidler, lecturer in accounting at the University of Newcastle, and Peter Donaghy, freelance tutor of Business English.

The authors are grateful for the information and material they have received from trade union organisations including in particular the TUC, UNISON (United Kingdom) and CC.OO (Spain). They also wish to acknowledge the help and advice received from tutors working with the European Trade Union College, especially Hellmut Gohde, as well as the useful observations made by European Works Council members who studied the material on training courses delivered by the authors. However, ultimately the views expressed in this training manual and the inclusion or exclusion of material herein reflect the decisions of the authors themselves.

We are grateful to the following companies for kind permission to reproduce their financial statements: Lyonnaise des Eaux, Procter & Gamble, Imperial Chemical Industries & Volkswagen.

No responsibility for loss occasioned to any person acting or refraining from action as a result of material in this training manual can be accepted by the publisher, the European Trade Union College or the authors of the material, P J Donaghy and J Laidler.

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2 Objectives of this training manual

2.1 To increase users’ awareness of what information is contained in published financial statements

2.2 To enable users to find information of specific interest to European Works Council members in published financial statements

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2.1 The first objective

The first objective of this training manual is to enable users to obtain awareness of what information is contained in the financial statements published by multinational companies. At this stage we are concerned with the English language version of the financial statements issued by multinational companies.

The principal financial statements published by multinational companies are sometimes referred to using different terminology, depending on the country of origin of the statements and the style of the translation. The names of these statements (with common alternative terms in brackets) are as follows:

the balance sheet (statement of financial position)

the income statement (statement of earnings / profit and loss account)

the cash flow statement

These statements form part of a company’s Annual Report and are publicly available.

These statements contain information, which is of interest to European Works Council members.

These statements are likely to be referred to in European Works Council meetings.

As a result of using this training manual European Works Council members should:

know what to expect to find in the balance sheet, income statement and cash flow statement

know where to locate particular items in the balance sheet, income statement and cash flow statement

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2.2 The second objective

The second objective of this training manual is to enable readers to be able to find information of specific interest to European Works Council members in published financial statements

The three basic financial statements which are published by multinational companies (balance sheet, income statement and cash flow statement) contain information about a company’s performance over a year and its financial position at the end of that year.

As a result of using this training manual European Works Council members should be able to know where to look for information to answer the following questions about a company:

Has the company made a profit? How do this year’s results compare to the previous year? What changes has the company made in its investment in plant? What was the value of the company’s total sales and how does this compare with

the previous year? How much did the company pay in taxes last year?

Information in these financial statements might also be a useful starting point for European Works Council members to ask further questions, such as:

How is the amount spent on equipment distributed among the companies in the group?

How is the wage bill divided between the number of employees in different locations?

This training manual is not concerned with analysis and interpretation of financial data. This is considered to be more the work of experts. However, this training manual will help European Works Council members to discuss financial statements with experts with greater confidence.

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3 How to use this training manual

3.1 As part of a training course with tutors

3.2 As a self-study guide

3.3 As a reference work for specific financial statements

3.4 As a reference work for specific financial terms

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3.1 As part of a training course with tutor

A basic understanding of the balance sheet, income statement and cash flow statement provides part of the knowledge that European Works Council members will find useful. It will be very helpful if they are able to receive further explanations and examples drawn from their own sector provided by an experienced tutor. Tutors will select the sections that they consider to be most relevant to the needs of learners. Additional exercises can be prepared to develop a greater understanding of the most relevant aspects.

3.2 As a self-study guide

Users should be able to work on their own or with colleagues with this training material in order to obtain a awareness of what information is contained in the balance sheet, the income statement and the cash flow statement. It is recommended that users work through the sections of the training manual in the order in which they appear. The exercises at the end of Sections 6 – 11 can be used in conjunction with the corresponding solutions in Section 12 to assess progress and understanding.

3.3 As a reference work for specific financial statements

Users may feel the need to learn more about specific financial statements. It is recommended that such users consult the Contents pages and then they can choose the sections which are of specific interest to them.

3.4 As a reference work for specific financial terms

In some cases there may be a need to check the understanding of a specific financial term. The Index of terms enables this training manual to be used for this purpose. Users will be directed to the section where explanations of a specific term are provided. The glossary enables users to identify the translations in French, German, Italian and Spanish of some important terms.

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4 The European Works Council Directive (EWC):

4.1 Aims of the Directive

4.2 Sources of financial information

4.3 The annual report

4.4 The company and the group

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4.1 Aims of the European Works Council Directive

The 1994 European Works Council Directive seeks:

“to improve the right to information and to consultation of employees in Community-scale undertakings and Community-scale groups of undertakings” through “the exchange of views and establishment of dialogue between employees’ representatives and central management or any more appropriate level of management.” (Articles 1 & 2)

The Appendix to the Directive indicates that:

“The European Works Council shall have the right to meet with central management once a year, to be informed and consulted, on the basis of a report drawn up by the central management, of the progress of the business...” and that “the meeting shall relate in particular to the structure, economic and financial situation, the probable development of the business...”

The Directive obviously provides very wide terms of reference for European Works Councils and these are reflected in the agreements which have been signed to date between employees’ representatives and the management of multinational companies. Agreements usually include reference to economic, financial, social and employment topics. This training manual is concerned with understanding basic financial information which is provided in published financial statements and which is closely inter-related with these topics.

It is also clear from current practice that management will select various documents to form the basis of consultation and discussion. Evidence so far suggests that employees are likely to encounter a vast array of facts, figures and forecasts. This of course can be very confusing. It can be difficult to compare one year with another and one company with another. For these reasons this training manual concentrates on certain specific sources of information.

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4.2 Sources of financial information

It is difficult to ascertain what would be the most useful sources of financial information for employees. The position is further complicated by sectional and national differences in the way economic and financial information is presented. What may be appropriate for one industry or in one environment may not be so appropriate elsewhere.

On the other hand some detailed information which companies may use to monitor performance on a regular basis, such as internal management accounts, may not be readily accessible or may be classified as confidential.

There are a large number of reports produced by analysts and experts and produced in trade journals and newspapers. These can often provide useful opinions on the performance and future prospects of a company. These need to be collected and monitored carefully. European Works Council members will benefit from the services of economic and research departments where these are available.

4.3 The annual report

One source of information which is open to everyone is the company annual report document. As a result of the harmonisation of European company legislation, all companies are obliged to produce an annual report.

This publicly available document includes annual financial statements which are a record of past performances.

Although these financial statements are largely directed at shareholders and investors, they nevertheless present a picture which can be extremely useful for EWC members, of how the company has performed under the company’s management.

Therefore for the purpose of discussing financial information, it is apparent that reference will be made, either directly or indirectly, to the three key annual financial statements contained in the annual report, namely:

the balance sheet (or statement of financial position), the income statement (or profit and loss account) the cash flow statement

At the same time the annual report document also contains other reports containing information of interest to European Works Council members such as: statement from the company chair person business and operational review research and development report

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health and safety issues human resources review environmental issues

While these reports and reviews are directed at shareholders rather than employees it is interesting and useful to see if the same messages are being given to the labour force. Material in the annual report document could form the basis of questions that European Works Council members could raise at meetings.

However, this current training manual concentrates on obtaining an awareness of the financial information contained in the three key financial statements to be found in the annual report.

4.4 The company and the group

European Works Councils are concerned with the business of multinational companies on a group-wide basis rather than on a single country basis. Meetings are expected to look at topics which affect the overall running of the group rather than to look at issues of concern to single companies within the group.

It is important therefore to be clear about the composition and nature of the undertaking or entity which is the focus of the European Works Council

We need to appreciate the significance of the terms group, parent company, and subsidiary company.

Many multinational companies are part of a larger structure. That is to say, they are part of a group of companies which is usually referred to simply as the group (or group company).

In order to give a more accurate picture of the financial situation of a company it is necessary to look at the overall situation of the group as a whole. In order to do this the financial statements of all the members of a group are added together. In other words they are consolidated to form what is called group statements or consolidated statements.

The group will usually consist of a principal company called the parent company and a number of other companies which are owned by this parent company and which are usually referred to as the subsidiary companies.

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5 Definitions

5.1 The balance sheet

5.2 The income statement

5.3 The cash flow statement

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5.1 The balance sheet

This shows the financial situation of an entity (i.e. a company or a group), at a particular moment in time, usually at the end of the entity’s financial year. It is sometimes referred to as the statement of financial position.

5.2 The income statement

This shows how the profit or loss of an entity (i.e. a company or a group), for a particular period of time has been arrived at. It is sometimes referred to as the statement of earnings and in some countries it is called the profit and loss account

5.3 The cash flow statement

This shows how an entity’s (i.e. a company’s or a group’s) activities are reflected in the form of cash flowing into and out of the entity over a particular period of time.

We are now going to look at each of these financial statements in detail in order to see what they contain and to help us to locate items which may be of interest to European Works Council members.

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6 The balance sheet

6.1 Introduction

6.2 Specimen balance sheet

6.3 Dates and currencies

6.4 Contents of the balance sheet

6.5 Format of the balance sheet

6.6 Relationship between headings, subheadings and totals

6.7 Notes to the accounts

6.8 Explanation of selected terms

6.9 Exercises

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6.1 Introduction

The balance sheet shows the financial situation of an entity (i.e. a company or a group), at a particular moment in time, usually at the end of the entity’s financial year. It is sometimes referred to as the statement of financial position.

6.1.1 The difference between company and group balance sheets

The usual structure for a multinational company is that there will be a parent company and a number of subsidiaries. Taken together, the parent company and the subsidiary companies are called the group. Each individual company (i.e. the parent and each subsidiary) will prepare its own balance sheet. In addition, a balance sheet will be prepared for the group as a whole.

The balance sheet prepared for the group will be called either the group balance sheet or the consolidated balance sheet.

Not all these balance sheets will be publicly available as part of a multinational’s annual report. The balance sheet below the US company Procter and Gamble (see 6.2) is a consolidated balance sheet. Likewise the annual reports for Lyonnaise des Eaux and Volkswagen contain only the group balance sheet as shown below in 9.2 and 10.2.

However, in section 11.1 we can see that ICI presents figures under one column for the group and then a separate column of figures for the parent company referred to as the company.

European Works Councils are concerned with understanding the position of a multinational business as a whole as opposed to just an individual part of that business. Members of European Works Councils therefore need to look at the group balance sheet (consolidated balance sheet).

6.1.2 Differences in presentation

We are going to look at the ways in which the information contained within the balance sheet may be presented. At this stage we are not concerned with the specific meanings of the items in the balance sheet. These will be explained later (see 6.8 Explanation of selected terms).

There are several different ways in which the information found in a balance sheet may be presented. These are often referred to as differences in format.

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The company may be based in the USA in which case the format of the balance sheet will usually reflect the normal US style as seen in the specimen balance sheet in 6.2 below.

If the company is based in Europe the specific format of the balance sheet will be according to the legislation of the country concerned and will reflect one of the two formats laid down in an EU Directive on Company law. Examples of balance sheets produced by a French, a German and a UK company are shown in 9.2.1, 10.2.1 and 11.2.1 respectively.

The balance sheet may have been translated into English for public relations purposes and its format and language may therefore be influenced by the nature of the readership it is expected to reach or even the background of the translator. This also applies to the other financial statements discussed in this manual, i.e. the income statement (see 7.1) and the cashflow statement (see 8.1). It has to be remembered that there are differences between US and UK English and this applies to accounting terminology as much as in any other area.

Members of European Works Councils can expect to handle balance sheets with different styles of presentation according to the country of origin of the company concerned and the policy it has adopted in preparing the financial statements it publishes.

As many multinational companies have their head offices in the USA we begin by looking in section 6.2 at a specimen balance sheet which reflects the normal US style. The specimen statements used in section 6.2, 7.2 and 8.2 of this training manual are from the 1997 Annual Report of Procter and Gamble (P&G). P&G is a multinational company with its head offices in the US and, as such, it is subject to US accounting regulations. The company is listed on the New York, Cincinnati, Amsterdam, paris, Basle, Geneva, Lausanne, Zurich, Frankfurt, Antwerp, Brussels and Tokyo stock exchanges.

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6.2 Specimen balance sheet

The Procter and Gamble company balance sheet from the 1997 annual report.

Consolidated Balance Sheets

(Amounts in Millions Except Per Share Amounts)

June 30 1997 1996

ASSETS

Current Assets

Cash and cash equivalents $ 2,350 $ 2,074

Investment securities 760 446

Accounts receivable 2,738 2,841

Inventories

Materials and supplies 1,131 1,254

Work in process 228 210

Finished goods 1,728 1,666

Deferred income taxes 661 598

Prepaid expenses and other current assets 1,190 1,718

Total Current Assets 10,786 10,807

Property, Plant, and Equipment

Buildings 3,409 3,369

Machinery and equipment 14,646 14,174

Land 570 569

18,625 18,112

Less accumulated depreciation 7,249 6,994

Total Property, Plant, and Equipment 11,376 11,118

Goodwill and Other Intangible Assets

Goodwill 3,915 4,175

Trademarks and other intangible assets 1,085 1,095

5,000 5,270

Less accumulated amortization 1,051 989

Total Goodwill and Other Intangible Assets 3,949 4,281

Other Non-Current Assets 1,433 1,524

Total Assets $27,544 $27,730

1 Restated for two-for-one stock split effective August 22, 1997.

See accompanying Notes to Consolidated Financial Statements.

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June 30 1997 1996

LIABILITIES AND SHAREHOLDERS'EQUITY

Current Liabilities

Accounts payable $ 2,203 $ 2,236

Accrued and other liabilities 3,802 3,981

Taxes payable 944 492

Debt due within one year 849 1,116

Total Current Liabilities 7,798 7,825

Long-Term Debt 4,143 4,670

Deferred lncome Taxes 559 638

Other Non-Current Liabilities 2,998 2,875

Total Liabilities 15,498 16,008

Shareholders'Equity1

Convertible Class A preferred stock, stated

value $1 per share (600 shares authorized) 1,859 1,886

Non-Voting Class B preferred stock, stated

value $1 per share (200 shares authorized;

none issued) - -

Common stock, stated value $1 per share

(2,000 shares authorized; shares outstanding:

1997 - 1,350.8 and 1996 - 1,371.1) 1,351 1,371

Additional paid-in capital 559 294

Currency translation adjustments (819) (418)

Reserve for employee stock ownership

plan debt retirement (1,634) (1,676)

Retained earnings 10,730 10,265

Total Shareholders' Equity 12,046 11,722

Total Liabilities and Shareholders' Equity $27,544 $27,730

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6.3.1 Dates

It is important to be clear about the period of time which we are referring to.

A balance sheet gives us a picture of the financial situation of a company at a particular moment of time. This is usually at the end of the twelve months period when the company’s year ends which may or may not coincide with the calendar year.

In order to make the figures more meaningful, companies are obliged to provide the comparative figures for at least the preceding year. Therefore you will find further colums in the balance sheets which give you the figure for each item for the previous year. Comparative figures must also be given in the other financial statements discussed in this manual, i.e. the income statement (see 7.3) and the cashflow statement (see 8.3).

In the case of the specimen, Proecter & Gamble, shown in 6.2 above, the date 30 June is given on the same line as that of the years 1997 and 1996. This tells us that the balance sheet figures refer to the financial years which ended on the 30 June of both these years. In fact the heading is also plural, consolidated balance sheets, because figures for two years are presented.

If we look at the examples in sections 9.2, 10.2 and 11.2 we find the following:

9.2 Lyonnaise des Eaux Consolidated balance sheet 1996 with figures also for 1995 1994- we need to look elsewhere in the finacial statements to see that this is the position on 31 December in each of these years

10.2 Balance sheet of the Volkswagen Group, December 31, 1996 with figures also for 1995

11.2 ICI Balance sheets as at 31 December 1997 with figures also for 1996. There are separate balance sheets for the Group and the Company

6.3.2 Currencies

It is important to be clear about the currency we are referring to.

The currency in which the accounts are designated is usually indicated somewhere in the headings of the balance sheet by an appropriate symbol or abbreviation.

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Task

Look at the specimen balance sheets in sections 6.2, 9.2, 10.2 and 11.2. Note the currency in which the figures are expressed

You will see that they are given as follows:

Procter & Gamble $ amounts in millionsLyonnaise des Eaux FRF millionsVolkswagen DM millionICI £m

6.4 Contents of the balance sheet

Now we can examine what a balance sheet contains ;

On the one hand, the balance sheet reflects what a company OWNS, that is, its assets, such as cash, machinery and equipment.

On the other hand, the balance sheet reflects what a company OWES, that is, its liabilities, such as money borrowed from third parties and what is due to its shareholders, which we refer to as shareholders’ equity.

The balance sheet therefore consists of assets, liabilities and shareholders’ equity which are arranged under different headings and subheadings.

All balance sheets contain these three items. The relationship between them can be expressed as:

assets minus liabilities equals shareholders’ equity

or, as:

assets equals liabilities plus shareholders’ equity

The specimen Procter and Gamble balance sheet in 6.2 is set out in a way which reflects the latter equation (assets = liabilities + shareholders’ equity).

6.5 Format of the balance sheet

Let us consider the overall shape of the balance sheet in order to be able to recognise the different kinds of formats we are likely to meet.

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Companies present their balance sheets in accordance with the formats permitted under the relevant national legislation. This also applies to the income statement (see 7.5).

There are generally two styles of format : horizontal format and vertical format

6.5.1 Horizontal format

The Procter & Gamble specimen balance sheet in 6.2 shows assets on the left hand side and liabilities and shareholders’ equity on the right hand side of the balance sheet. This is often referred to as a horizontal format.

The two sides of the balance sheet end up with the same final figure, in other words they balance.

Total Assets $27,544m

Total Liabilities and Shareholders’ Equity $27,544m

We can see the same format in the Lyonnaise des Eaux balance sheet in Section 9.2.1 where:

the figure for Total Assets on the left hand side is FRF 163,781m and the figure for Total Liabilities on the right hand side is FRF 163,781m

Sometimes the same effect is obtained by positioning the two “sides”, that is the assets side and the liabilities and shareholders’ equity side, on the same page, one “side” above the other.

This is the case with the balance sheet of the Volkswagen Group as shown in section 10.2

AssetsBalance -sheet total DM 94,568m

Shareholders’ equity and liabilitiesBalance-sheet total DM 94,568m

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6.5.2 Vertical format

On the other hand we may find, especially with companies based in the UK, that a different balance sheet format is used where the items follow one another down the page in a series of relationships . This is referred to as a vertical format.

An example of this is shown in the specimen balance sheets of ICI shown in section 11.2. Here in this format you will also find two totals which balance although you may have to look a little more closely to find them. This is clearly a different style of presentation which requires more explanation and this is provided in section 11.1.

Please note that at this stage you are not expected to understand these different headings but simply to begin to recognise the way a balance sheet may look and how the total are reached.

Remember that there will be a difference in the way the figures are set out because of national legislation and because companies in different industrial sectors may have different kinds of assets and liabilities or companies may use different words to describe them.

Task

Look at the balance sheet of your company.

Does it have a separate total for assets on one side and a separate total for liabilities on the other ?

or are the assets and liabilities merged and taken away from each other in a vertical format ?

6.6 Relationship between headings, subheadings and totals.

Let us consider some typical examples of headings and subheadings in order to see where the totals appear and how these totals are arrived at.

Remember we will explain the meaning of the specific items later on.

The Procter & Gamble balance sheet in 6.2 is divided into two main parts:

ASSETS

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and

LIABILITIES AND SHAREHOLDERS’ EQUITY

Underneath these two headings are a number of main headings as follows:

ASSETSCurrent assetsProperty, Plant, and EquipmentGoodwill and Other Intangible AssetsOther Non-Current Assets

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent LiabilitiesLong-term DebtDeferred Income TaxesOther Non-Current LiabilitiesShareholders’ Equity

Some of these headings are then followed by a number of subheadings with corresponding figures which when totalled represent the total for the main heading.

Examples are as follows:

Current assets

Cash and cash equivalents 2,350Investment securities 760Accounts receivable 2,738Inventories Materials and supplies 1,131 Work in process 228 Finished goods 1,728Deferred income taxes 661Prepaid expenses and other current assets 1,190Total current assets 10,786

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Current LiabilitiesAccounts payable 2,203Accrued and other liabilities 3,802Taxes payable 944Debt due within one year 849Total Current Liabilities 7,798

We can observe the following aspects of the layout:

The headings are followed by a number of sub headings with figures which are then totalled in order to give the overall figure for the item indicated in the heading.

The word total is sometimes then used together with the heading as in Total

Current Assets.

A line may also be used to separate the sub totals from the total. Sometimes we may find more lines and even boxes used to separate some of the figures.


The amount of detail which is provided in the balance sheet and the other financial statements will vary. However, in all cases it is impossible to give every detail on the face of the balance sheet itself.

For this reason companies provide further details and explanations of certain key items by way of notes to the accounts (which are often just referred to as notes).The extent of information given in the notes is partly determined by the law of the country in which a multinational company has its headquarters and partly by the company voluntarily disclosing further information

You will usually find cross- reference to notes either in a separate column or alongside particular items by way of a number. This is illustrated in the specimen French, German and UK financial statements in sections 9.2, 10.2 and 11.2.

There are not direct cross- reference numbers in the specimen US style financial statements used in section 6.2, 7.2 and 8.2 although the Procter & Gamble Annual Report does contain a further details and explanations in a section entitled Notes to Consolidated Financial Statements.

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It is in the notes that many of the details of specific interest to European Works Council representatives will be found. The notes are important also because they facilitate comparisons with the previous year with respect to some of the detailed information.

The notes may contain information on such things as the investments which the group has in other undertakings, employee share schemes and details of the shareholdings of directors

Task

Now look at the specimen sets of balance sheets in sections 9.2, 10.2 and 11.2 and find the references to notes.

We have not reproduced a notes to the accounts section in this training manual as the amount of detail contained in the notes is outside the scope of this work.

However, here are some examples of the type of items which may be found in the notes (and which expand the information in the balance sheet and income statement) which are of interest to European Works Council representatives:

segmental information including:breakdown of the turnover and profit from the different classes of business within a company and from geographic areas in which the company operates

average number of employees in different sections of the company and their distribution by country

changes in fixed assets investments in subsidiary undertakings method of valuation of stock and values of types of stock breakdown of the amounts borrowed by the company amounts provided for pensions and for reorganisation costs details of share option schemes details of the acquisition of other companies details of the disposal of parts of the group breakdown of employee costs: salaries, social security costs and pension costs directors’ pay pension fund details breakdown of the main companies within the group

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6.8.1 Current assets

Current assets are assets which a company possesses but which it does not intend to hold long-term i.e. current assets are assets held by a company on a short-term basis. The definition of short-term for this purpose is usually taken as one year.

We will now describe some of the main types of current assets: inventories (6.8.1.1), accounts receivable (6.8.1.2), investments (6.8.1.3), accrued income (6.8.1.4) and prepaid expenses (6.8.1.5).

6.8.1.1 Inventories.

An example of a current asset is inventories i.e. the goods a company holds in stock (in UK company accounts the word stock is used rather than the US term inventories).

A company may have different types of inventories. For example, we can see from the specimen balance sheet in 6.2 that Procter and Gamble under the heading inventories has three types:

materials and supplies which consist of raw materials and supplies bought in for the manufacture of an end product

work in process which represents goods which are being manufactured but which have not been completed at the balance sheet date

finished goods which are the goods which have been manufactured or bought in and are held in stock at the balance sheet date.

6.8.1.2 Accounts receivable

Accounts receivable are the amounts owed by customers to whom a company has granted credit facilities in order to buy the products or services which the company supplies. The company will receive payment some time in the future. They are sometimes simply called receivables.

6.8.1.3 Investments

Another example of a current asset is investments or investment securities which the company possesses but which it does not intend holding long-term.

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If the intention is to have the investment for a temporary period, i.e. for the short-term, then the investment would be classed as a current asset. It might be, for example, that a company has some cash which it does not need until three months time; in which case the company could invest the available cash by putting it on deposit and earning interest or by making some other suitable short-term investment.

For investments held on a long-term basis see under fixed assets 6.8.2 below.

Two other items which might be included in current assets are accrued income (6.8.1.4) and prepaid expenses (6.8.1.5).

6.8.1.4 Accrued income

This item represents sums which have been earned but which have not yet been received. For example, assume that a company placed some money in a bank deposit account on 30 September and that the bank pays the interest on the account on 31 March. Let us also assume that the financial year end of the company is 31 December. When the company draws up its balance sheet on the 31 December, three months worth of interest will have been earned on the deposit account - even though the bank will not pay the interest until the following 31 March. This amount of interest will be included by the company in its balance sheet as a current asset.

6.8.1.5 Prepaid expenses (also called prepayments)

These (current assets) represent amounts paid out by a company before its balance sheet date but where the benefit from the payment will not be gained until after the balance sheet date. For example, if a company which draws up its balance sheet to 31 December 1997 has paid a fire insurance premium on 30 September 1997 covering the year ended 30 September 1997, the company will have the benefit of insurance cover until 30 September 1998. If the amount of the premium is $2400, then the company has made a prepayment of $1800 (i.e. 9 months for the period January to September 1998). The company will include this amount as a current asset in its balance sheet drawn up at 31 December 1997.

6.8.2 Property, plant and equipment

6.8.2.1 Classification in balance sheet

Assets are, in general, things which a person or a company owns. In the case of a company some of its assets, such as buildings or machinery, will have been acquired with the intention of using them in the business and which will probably be held for a long period of time. They are not intended for resale. These assets may be referred to as fixed assets. Sometimes, such assets as property, plant and equipment are referred to as tangible assets because they are assets which have a physical existence i.e. they can be touched.

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A company like Procter and Gamble might own assets such as machinery and equipment, land and buildings which are held by the company and used by the company. In the Procter and Gamble balance sheet these three assets are grouped together under the heading property, plant and equipment. This is the classification used by most US companies.

6.8.2.2 Accumulated depreciation

One important aspect of the way in which a company accounts for its property, plant and equipment is the charge it makes in its accounts for the wearing out of these assets in the course of their use in the business. This is called the depreciation of the assets. A company will try to spread the cost of an asset over its working life by making charges to each year’s income statement.

As an example of this, suppose a company buys a machine on 1 January 1991 for $20,000 and that the machine is expected to have a useful life of ten years. We might make a charge each year to the income statement for its depreciation of $2,000

i.e. $20,000 by 10 years $2,000 per year

The amounts charged to the income statement in each year will gradually accumulate. The year end totals are referred to as accumulated depreciation

When we look at the balance sheet we will see that after three years i.e. 31 December 1993, the value of the machine in the balance sheet will be $20,000 less accumulated depreciation of $6,000 as follows :

Cost of machine on 1 January 1991 $20,000

less

3 years accumulated depreciation = 3 X $2000 = $6,000

equals

Value of machine on 31 December 1993 $14,000

Further details about depreciation should be given in the notes section of a company’s annual report.

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6.8.3 Other non-current assets

Items which companies might include under this heading include investments intended to be held on a long-term basis (i.e. investments which are not considered to be current assets).

If a parent company has shares in subsidiaries which, for various permissible reasons, are not included in the consolidated figures, the cost of the shares in those subsidiaries may be included under the heading of non-current assets.

6.8.4 Goodwill and other intangible assets

We have already seen in 6.8.2 that fixed assets such as property, plant and equipment can be referred to as tangible fixed assets. We need to recognise that companies might own intangible fixed assets i.e. assets which have no physical form therefore we cannot touch them, but they are worth something i.e. if we want an intangible asset we have to pay for it. Some examples are explained below in sections 6.8.4.1 (goodwill) and 6.8.4.2 (other intangible assets).

6.8.4.1 Goodwill

Goodwill is an intangible asset. It is represented by the excess of the purchase price of a company over and above the value of the assets less liabilities included in the balance sheet. for example, if the assets less liabilities recorded in the balance sheet have a market value of $10m and a prospective buyer offers $11 the excess of $1m can be referred to as goodwill. Goodwill can arise owing to a number of factors, for example, the company might possess a well-known brand name, or it might be situated in a highly desirable location.

Goodwill is built up during the life of a company but the only occasion when a verifiable value can be attributed to the goodwill is when the company is sold,. In such a case we can refer to the goodwill that has been paid for as purchased goodwill.

6.8.4.2 Other intangible assets

Items which companies might have under this heading include, patents, trade marks and brand names. We can take patents as an example. Suppose that a company wanted to be able to manufacture a special piece of equipment but that another company had the legal right to manufacture the special equipment. If the first company wanted to acquire the right to be able to make the special equipment, it would have to buy the patent. In other words, the second company owns an assets, the patent,. This asset would be included in its balance sheet as an intangible asset

6.8.4.3 Accumulated amortization

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Amortization is another word for depreciation. It is often used instead of depreciation when we refer to intangible assets. A company spreads out the cost of its intangible assets over a period of time (just as it spreads out the cost of its tangible assets). The accumulated amortization is therefore equivalent to the accumulated depreciation which is described in detail in 6.8.2.2.

6.8.5 Current liabilities

Liabilities are amounts that a company owes to other people or other companies. In such cases we say that a company owes money to third parties. The people or other companies (i.e. the third parties) to whom a company owes money are also referred to as the company’s creditors. A company might owe money in respect of goods which have been supplied or for services which have been provided. Or, the company might have borrowed money which will have to be repaid in due course. The amounts which a company owes to its creditors will usually be due for payment at different times. For example, some of the amounts owing for goods supplied might be due for payment in one month whereas a loan received might not be due for repayment for five years.

Liabilities to third parties need to be distinguished between current liabilities and long-term liabilities. Current liabilities represent the part of a company’s total liabilities that is due for payment within the next twelve months.

6.8.5.1 Accounts payable

Current liabilities in the Procter and Gamble balance sheet include accounts payable. This represents the amounts owing to suppliers for goods and services supplied on credit and which have not been paid for at the balance sheet date. These amounts are also called trade payables.

6.8.5.2 Accrued liabilities

Accrued liabilities are amounts which relate to one accounting period but which are not paid until a subsequent accounting period. An example is the amount for electricity consumed in one accounting period before the balance sheet date (according to a meter reading) but which is not billed by the electricity company and hence, not due to be paid until after the balance sheet date.

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6.8.5.3 Debt due within one year

Debt represents the amount a company has borrowed from outside sources. For balance sheet presentation the amount of any loan that is due to be repaid within the next twelve months is included under current liabilities as debt due within one year. It is also called debt payable within one year. Any amount due after twelve months is included as long-term debt.

6.8.6 Long-term debt

The heading long-term debt covers the amounts which are owed by the company to lenders for monies borrowed where settlement (i.e. repayment) is not due until after one year.

6.8.7 Deferred income taxes

This item arises from a technical accounting adjustment and it represents a possible tax liability to be paid at some time in the future. It is not due for payment in the next twelve months and, hence, it is not a current liability.

6.8.8 Other non-current liabilities

This item represents amounts set aside to meet a liability that will be incurred at some time in the future but we are not sure what the amount will be or when it will arise. An example is pension liabilities.

6.8.9 Shareholders’ equity (or Stockholders’ equity)

We know from our discussion in section 6.4 that the basic relationship that exists in any company balance sheet is:

assets minus liabilities equals shareholders’ equity

In other words, if we deduct from the assets the amounts we owe to outsiders (i.e. third parties), we will be left with what belongs to the shareholders. We call this amount the shareholders’ equity or the stockholders’ equity. We sometimes come across other terms which are used instead of shareholders’ equity or stockholders’ equity, for example, total shareholders’ funds or capital and reserves.

There are two items which make up shareholders’ equity:

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(1) the amounts brought into the business by the owners, i.e. the shareholders; (2) the reserves of the company.

We will now examine each of these in turn. 6.8.9.1 Amounts brought into the business by the owners: shares and additional paid-in capital

If a company is set up in the form of a limited company, the owners will contribute the funds required to start the business in the form of shares. For example, if there was a requirement for $10m funding then the prospective owners would be asked, between them, to provide $10m. The total amount will be divided into shares. It could be 10 million shares of $1 each or 20 million shares of 50 cents each or some other convenient subdivision. The amount stated for each share is referred to as the stated value. (Other terms used instead of stated value are nominal value or par value). The total value of the shares may be called capital stock.

In the specimen statements, the stated value of the Procter and Gamble common stock is $1 per share. The stated value of a share is likely to be different from its market value. Hence, when a company issues further shares of an existing class, the issue price will be near to the market price. For example, a $1 share might be issued at $1.50. The 50 cents is referred to as additional paid-in capital and is shown in the balance sheet. For example, the Procter and Gamble (see specimen balance sheet in section 6.2) shows additional paid-in capital $559m.

In the Procter and Gamble balance sheet of 30 June 1997 there are a number of different types of stock as follows:

$mConvertible Class A preferred stock 1,859

Non-voting Class B preferred stock (none issued) -

Common stock 1,351.

Each type of share carries different rights.

Convertible stock carries rights to be converted into common stock

Preferred stock carries preferential rights as to dividends and possibly repayment in the event of liquidation.

Common stock usually carries rights to the profits remaining after payment of dividends have been made to shares carrying preferential rights and to any surplus available in the event of the company winding up (i.e. coming to the end of its life)..

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Authorized shares. Each company has to establish in its rules the number of shares it will be authorized to issue. However, the company might not issue all of its authorized shares. For example P&G has no Class B shares in issue.

Capital stock is the name given to the total of the different types of shares. An alternative name is share capital.

6.8.9.2 Reserves

One way in which reserves can be built up is when the company makes profits which it does not distribute to the shareholders as dividends. In other words, when the company retains the profits for use within its business. This is called retained earnings.

The reserves in the Procter and Gamble balance sheet consist of:

$mRetained earnings 10,730 Less : currency translation adjustment (819)Less: Reserve for employee stock ownership

plan debt retirement (1,634) --------- 8,277

The figure 8227 is not included in the P&G balance sheet but is given here so that, overall, we can see that the shareholders’ equity is made up of:

$m Shares issued 3,210Additional paid-in capital 559Reserves 8,277

-------- 12,046

There is a great deal of detailed information lying behind this overall summary. For US based multinationals the details are set out in a separate statement called the Consolidated Statement of Shareholders’ (or Stockholders’) Equity.

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6.9 Exercises

1. What was the change in the group’s investment in property, plant and equipment for the last financial year?

2. Has there been an increase or decrease in inventories compared with the last financial year?

3. What is the total of retained earnings at 30 June 1997?

Answers to questions 1 -3

Summary

You should now be able to:

(1) recognise most of the main headings in a balance sheet

(2) understand how the totals in a balance sheet are arrived at

(3) appreciate that there are the different balance sheet formats

(4) recognise that further details are available in the form of the notes section of the annual report

(5) understand the meaning of some of the main terms found in a balance sheet

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7 The income statement

7.1 Introduction

7.2 Specimen income statement


7.4 Contents of the income statement

7.5 Format of the income statement




7.9 Exercices

7.1 Introduction

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The income statement shows how the profit or loss of an entity (i.e. a company or group) for a particular period of time has been arrived at.It is sometimes referred to as the statement of earnings. In some countries it is referred to as the profit and loss account.

The income statement (or statement of income) is also known as the statement of earnings (or earnings statement or the profit and loss account. In this section we will use the term income statement to refer to all three possible terms.

We are going to look at the ways in which the information contained within the income statement may be presented. At this stage we are not concerned with the specific meanings of the items in the income statement. These will be explained later.

There are several different ways in which the information found in an income statement may be presented.

Members of European Works Council can expect to handle income statements with different styles of presentation according to the country of origin of the company concerned and the policy it has adopted in preparing the financial statements it publishes

If the company is based in Europe the specific format of the income statement will be according to the legislation of the country concerned and will reflect one of the four formats laid down in a EU Directive on Company Law

On the other hand the company may be based in the USA in which case the format of the income statement will usually reflect the normal US style.

The income statement may have been translated into English for public relations purposes and its format and language may therefore be influenced by the nature of the readership it is expected to reach. This also applies to the two other financial statements discussed in this manual, i.e. the balance sheet (see 6.1) and the cashflow statement (see 8.1).

As many multinational companies have their head offices in the USA we begin by looking in section 7.2 at a specimen income statement which reflects the normal US style. This is taken from the Procter and Gamble annual report for 1997. Notice that Procter and Gamble use the term statement of earnings as the title for its income statement

Reference will also be made to the statements of multinational companies that have their head offices in France (see section 9), Germany (see section 10) and the UK (see section 11).

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7.2 Specimen income statement

Consolidated Statements of Earnings

(Amounts in Millions Except Per Share Amounts)

Years Ended June 30 1997 1996 1995

Net Sales $35,764 $35,284 $33,482

Cost of products sold 20,316 20,762 19,561

Marketing, research, and administrative expenses 9,960 9,707 9,677

Operating Income 5,488 4,815 4,244

Interest expense 457 484 488

Other income, net 218 338 244

Earnings Before Income Taxes 5,249 4,669 4,000

Income taxes 1,834 1,623 1,355

Net Earnings $3,415 $3,046 $2,645

Net Earnings Per Common Share1 $2.43 $2.14 $1.85

Fully Diluted Net Earnings Per Common Share1 $2.28 $2.01 $1.74

Dividends Per Common Share1 $.90 $.80 $.70

Average Common Shares Outstanding1 1,360.3 1,372.6 1,372.0

1Restated for two-for-one stock split effective August 22, 1997.


The Procter & Gamble Company and Subsidiaries

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7.3.1 Dates

First of all we need to look at the period of time to which the income statement refers.

An income statement can refer to any particular period of time (for example, three months, six months etc). However, as far as the annual financial statements are concerned, the income statement refers to the business activity which has taken place during the preceding twelve months and this will be stated on the statement itself.

As is the case with the balance sheet, companies are obliged to provide the figures for the previous year for comparative purposes. Therefore we will find a further column in the income statement which gives us the figure for each item for the preceding year. Comparative figures must also be given in the other financial statements discussed in this manual, i.e., the balance sheet (see 6.3) and the cashflow statement (see 8.3).

Task

Look at the specimen statements of income in sections 7.2, 9.2, 10.2 and 11.2. Note the terms used to describe the statements and identify the periods of time covered by the statements.

You will see that they are as follows:

7.2 Procter & Gamble - Consolidated Statements of Earnings: Years Ended June 30 1997: 1996: 1995

9.2 Lyonnaise des Eaux- Consolidated Income Statement : 1996 with the previous two year’s figures for comparison. We need to look elsewhere in the financial statements to see that this is the position on 31 December in each of these years.

10.2 Volkswagen Group- Statement of Earnings for the Fiscal Year Ended December 1996 with the previous year’s figures for comparison.

11.2 ICI Group Profit and Loss Account for the year ended 31 December 1997 with the previous two year’s figures for comparison.

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7.3.2 Currencies

In each case we also need to note the currency in which the accounts are designated. This information is usually stated in the headings or in the columns of figures in the income statement.

Task

Look at the specimen statements of income in sections 7.2, 9.2, 10.2 and 11.2. Note the currency in which the figures are expressed

You will see that they are as follows:

Procter & Gamble $ amounts in millionsLyonnaise des Eaux FRF millionsVolkswagen DM millionICI £m

7.4 Contents of the income statement

First of all we will examine in general terms what an income statement shows. We will then see in section 7.5 how these features apply to the Procter and Gamble specimen.

The income statement usually indicates, for the time period concerned, six important amounts:

(1) the amount of income received by the company as a result of the sale of goods and services. This might be called its revenue or its turnover or its sales.

(2) the costs incurred in producing the goods or services provided by the company and in running the business.

(3) the difference between (1) and (2) i.e. the profit or loss derived from the operating activities of the company. This might be called operating income or trading profit/loss.

(4) interest paid and received.

(5) how much of the profit is to be paid in taxes.

(6) the amount of profits, after deducting taxes, which is available for the company and its shareholders. This may be called net earnings, net income or net profit.

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7.5 Format of the income statement Let us consider the overall shape of the statement of income in order to be able to recognise the different kinds of formats we are likely to meet.

As previously stated companies present their statements of income in different ways or formats depending on the amount of choice that their national legislation allows. Similarly, the balance sheet (see 6.5) will be drawn up in accordance with the rules laid down in the relevant national legislation.

There are generally two style of format : horizontal format and vertical format.

7.5.1 Horizontal format

In some countries, we may find only one style of presentation i.e. a horizontal format. Legislation in Spain, for example, permits only the horizontal format. Here the information is presented on two separate sides:

on one side: on the other side:

under the title of under the title of debit credit

costs and profits income and losses (in different forms) (in different forms)

7.5.2 Vertical format

Procter and Gamble, in common with most US companies, uses a vertical format. choice of one of the two vertical formats which are permitted by the European Union.

However, the purpose is the same whatever the style, and we can still identify the same information which is of interest to European Works Council members in the income statement, irrespective of the format.

The vertical format is used in the specimen statements found in sections 7.2, 9.2, 10.2, 11.2.

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Those European companies which prefer the vertical type of presentation have a

7.6 Relationship between headings, sub headings and totals

Unlike the balance sheet, the income statement does not arrive at two sets of figures which have to balance. Instead it moves through a series of stages where figures are added or subtracted in order to show the relationship between the income generated by the business and the costs incurred in running the company. The difference between these is called the results or earnings or profit (or loss) at different stages. We need to consider how totals at each stage have been arrived at. Lines are generally used to indicate subtotals and we need to look carefully to see if the figures have been added or subtracted

Thus in the Procter & Gamble Consolidated Statements of Earnings (see section 7.2) we find:

1997 $m

Net Sales 35,764Cost of products sold 20,316Marketing, research and administrative expenses 9,960Operating income 5,488 In this example we can see that two figures (20,316 and 9,960) are deducted from the net sales figure to arrive at the figure for operating income.

If we look at the Lyonnaise des Eaux Consolidated Income Statement (see section 9.2) we find that the operating income which is referred to as operating results is derived by adding together sales and other operating revenues and then deducting the items which make up operating expenses which have similarly been added together. This, in summary, is as follows:

Operating revenues 98,540Operating expenses 93,180

Operating results 5,360

At other times brackets are used to indicate that a figure needs to be subtracted from the previous figure.

Thus in the ICI group profit and loss account (see section 11.2) we find:

Turnover 11,062

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Operating costs (10,721)

This means that the operating costs of 10,721 have to be deducted from the turnover of 11,062.

If we look at the Procter and Gamble specimen income statement again (see 7.2), we can see that having arrived at the figure for the operating income ($5,488m), there are two further items before we arrive at a figure for earnings before income taxes. These two items are:

(1) interest expense $457m which is deducted from the operating income (2) other income, net $218m which is added to the operating income.

In other words:

operating income $5488mminus interest expense 457plus other net income 218equals earnings before income taxes $5249m

The next step is the deduction of income taxes to arrive at the net earnings i.e.

earnings before income taxes $5249mminus income taxes 1834equals net earnings $3415m

Below the figure for net earnings, a number of other figures are set out. The various terms used are included in the explanations in section 7.8 below.

Earnings is one of the key figures of interest to European Works Council members. Considerable care, however, needs to be exercised here because there are several references to earnings each of which has a different implication. For example, in the Procter and Gamble statement we need to distinguish between earnings before income taxes and net earnings.

We also need to appreciate that other terms might be used instead of earnings. Examples are results, income, and profit. Their use depends on the country of origin of the company and it also sometimes depends on how the concept has been translated into English

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The figure for net earnings ($3,415m in the specimen income statement in section 7.2) is included in the balance sheet. In the specimen balance sheet in section 6.2 it is included within the retained earnings figure of $10,730m


As is the case with the balance sheet, the amount of detail which is provided in the income statement will vary from country to country and from company to company.

In all cases, however, it is impossible to give very much detail on the face of the profit and loss account itself. For this reason, many companies are provide further details and explanations of certain key items by way of the notes to the accounts section of the annual report (which are often just referred to as notes).

Some companies make reference to notes on the face of the accounts by way of numbers, either in a separate column, or alongside particular items.

It is here in the notes that many of the details of specific interest to European Works Council members will be found (see section 6.7 for examples).

The notes might contain information on such things the analysis of sales and operating profit according to divisions or sectors or geographical regions.

7.8 Explanation of selected income statement terms

7.8.1 Net sales

This is the total amount which a company obtains from the sale of its goods and services. Some companies use the word turnover rather than sales.

7.8.2 Cost of products sold

This represents the cost of manufacturing the goods which a company sells. It includes all costs incurred in getting the goods to a state in which they can be sold. Some companies use the terms cost of goods sold.

7.8.3 Operating income

The operating income is the balance remaining when a company’s operating expenses are deducted from its net sales. The operating expenses are the expenses incurred during the course of the company’s ordinary business activities. In the Procter & Gamble statement of earnings, the operating expenses consist of the cost of products sold and marketing research and administrative expenses.

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7.8.4 Interest expense

Companies which borrow money from outside sources have to pay interest on their borrowings. The interest payable which relates to a particular financial year will be charged to that year’s income statement as a separately disclosed item known as interest expense.

7.8.5 Earnings before income taxes

This consists of:

operating income less interest payable plus interest receivable and other income (i.e. income not derived as a result of operating activities).

7.8.6 Net earnings

The final figure in the income statement represents:

operating incomeless interest payableplus interest receivable and other incomeless income taxes

In other words earnings less income taxes.

7.8.7 Net earnings per common share

The figure for net earnings per common share is an additional bit of information which some companies include in their annual report, either voluntarily or because of the existence of a specific accounting regulation. Where there is a regulation, this will include the method to be used in the calculation of the figure.

The basis of the calculation is:

to divide (1) the net earnings which are attributable to the holders of common shares, by (2) the number of shares issued to shareholders.

(1) The net earnings attributable to holders of common shares are what remains after any preference dividends have been taken into account.

If a company has preference shares in issue they will usually carry the right to a preference dividend (i.e. a dividend paid before any dividends can be paid to the holders of common shares).

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The preference dividend for Procter and Gamble for the year ended 30 June 1997 is $104m. This figure is given here to enable us to complete the calculation of net earnings per common share (in practice we would find it in other supporting statements within the annual report).

The net earnings after preference dividend is $3,311m calculated as follows:

Net earnings $3,415mminus preference dividend 104

$3,311m

(2) We need to define how we arrive at the number of shares issued to Shareholders. The normal rule is to take the average number of shares held by shareholders during the year.

Hence, in the specimen income statement we can arrive at the figure for net earnings per common share, as follows:

dividethe net earnings after preference dividends, $3,311mby the number of common shares, 1,360.3m

Which gives us a figure for net earnings per common share of $2.43

7.8.8 Fully diluted net earnings per common share

This is a variation of the item net earnings per common share discussed immediately above (7.8.6). In this case the figure is arrived at by dividing:

the net earnings attributable to holders of common shares

by

the number of common shares in issue plus the number of common shares which a company is contracted to issue.

The reason for this item is to show the situation, when, for example, a company has some form of preference or loan stock which carry rights to be converted into common stock, the same amount of net earnings will have to be divided by a greater number of shares once the extra shares are issued.

7.8.9 Dividends per common share

This is the amount, expressed in the currency of the company concerned, payable to the holders of common shares as a distribution to them of part of the net earnings.

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In the case of the specimen company, Procter and Gamble, the dividend for the year ended 30 June 1997 is 90 cents per share.

7.9. Exercises

4. Has the group made a profit for the year ended 30 June 1997?

5. How did the results for the 1997 compare with 1996?

6. What was the value of the group’s sales for 1997 and how did this compare with last year ?

7. What type of expenses have been deducted from the net sales to arrive at a figure for operating income?


Summary

You should now be able:

(1) to recognise the most important headings in an income statement

(2) to appreciate that there are different income statement formats

(3) to understand how the totals in the income statement have been arrived at

(4) to recognise that further details are available in the form of the notes section of the annual report

(5) to understand the meaning of selected terms found in the income statement

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8 The cash flow statement

8.1 Introduction

8.2 Specimen cash flow statement


8.4 Contents of the cash flow statement

8.5 Format of the cash flow statement




8.9 Exercises

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8.1 Introduction

This shows how an entity’s activities are reflected in the form of cash flowing into and out of the entity over a period of time.

In recognition of the vital importance to any company of being able to generate cash and control its cash flows, most companies present a cash flow statement as part of the annual report.

A cash flow statement provides shows how the change in cash flow over the year has occurred by highlighting the impact on cash of the various activities undertaken by the company during the year.

In cash flow statements the activities of the company are usually analysed into: operating activities: concerned with how much cash is generated from the

company’s usual operations (for example, manufacturing and selling laundry and cleaning products in the case of Procter and Gamble).

financing activities: concerned with how the company is financed, for example, by obtaining funds from shareholders by issuing new shares

investing activities: concerned with how the company has used its available cash, for example, by investing in fixed assets.

The cashflow statement may have been translated into English for public relations purposes and its format and language may be influenced by the nature of the readership it is expected to reach or even the background of the translator. This also apllies to the other financial statements discussed in this manual, i.e., the balance sheet (see 6.1.2) and the income statement (see 7.1).

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8.2 Specimen cash flow statement

Consolidated Statements of Cash Flows

(Amounts in Millions)

Years Ended June 30 1997 1996 1995

Cash and Cash Equivalents, Beginning of Year $ 2,074 $ 2,028 $ 2,373

Operating Activities

Net earnings 3,415 3,046 2,645

Depreciation and amortization 1,487 1,358 1,253

Deferred income taxes (26) 328 181

Change in accounts receivable 8 17 (161)

Change in inventories (71) 202 (401)

Change in accounts payable, accrued and other liabilities 561 (948) 435

Change in other operating assets and liabilities 503 (134) (449)

Other 5 289 65

Total Operating Activities 5,882 4,158 3,568

Investing Activities

Capital expenditures (2,129) (2,179) (2,146)

Proceeds from asset sales 520 402 310

Acquisitions (150) (358) (623)

Change in investment securities (309) (331) 96

Total Investing Activities (2,068) (2,466) (2,363)

Financing Activities

Dividends to shareholders (1,329) (1,202) (1,062)

Change in short-term debt (160) 242 (429)

Additions to long-term debt 224 339 449

Reductions of long-term debt (724) (619) (510)

Proceeds from stock options 134 89 67

Treasury purchases (1,652) (432) (115)

Total Financing Activities (3,507) (1,583) (1,600)

Effect of Exchange Rate Changes on

Cash and Cash Equivalents (31) (63) 50

Change in Cash and Cash Equivalents 276 46 (345)

Cash and Cash Equivalents, End of Year $ 2,350 $ 2,074 $ 2,028

Supplemental Disclosure

Cash payments for:

Interest, net of amount capitalized $ 449 $ 459 $ 444

Income taxes 1,380 1,339 1,047

Liabilities assumed in acquisitions 42 56 575


The Procter & Gamble Company and Subsidiaries

54


8.3.1 Dates A cash flow statement is drawn up for a period of time, and for a company’s

annual report this will be the company’s financial year. In the case of the specimen cash flow statement in section 8.2 for Procter and Gamble this is 30 June 1997.

Comparative figures for the previous year will be given. Following the US practice, Procter and Gamble presents details for three years. Comparative figures must also be given in the other financial statements discussed in this manual, i.e., the balance sheet (see 6.3) and the income statement (see 7.3).

If we look at the examples in sections 9.2, and 11.2 we find the following:

9.2.3 Lyonnaise des Eaux Consolidated Statement-Cash flow 1996 withfigures also for 1995 and 1994- we need to look elsewhere in the financial statements to see that this is the position for the year ended 31 December in each of these years

11.2 ICI Statement of Group cash flow for the year ended 31 December 1997 with figures also for 1996 and 1995.

8.3.2 Currencies

It is important to be clear about the currency we are referring to. The currency in which the accounts are designated is usually indicated somewhere

in the headings of the cash flow statement by an appropriate symbol or abbreviation.

Task

Look at the specimen cash flow statements in sections 6.2, 9.2, and 11.2. Note the currency in which the figures are expressed

You will see that they are given as follows:

Procter & Gamble $ amounts in millionsLyonnaise des Eaux FRF millionsICI £m

55

8.4. Contents of the cash flow statement

As a minimum we can expect all cash flow statements to contain three key elements:

Opening balances.This is the amount of cash at the beginning of the financial yearUS based companies express this in terms of cash and cash equivalents. Cash equivalents being items such as certain short-term deposits which can be readily turned into cash.

Cash flows from: operating activitiesfinancing activitiesinvestment activities

cash balance (or cash and cash equivalents) at the end of the financial year.

8.5 Format of the cash flow statement

The manner of presentation of a cash flow statement depends on the regulations of the country in which a multinational has its headquarters.

The format in the specimen Procter and Gamble consolidated statement of cash flow (see 8.2) follows US practice. We will consider other formats in sections 9 and 11.

8.6 Relationship between headings, sub headings and totals

If we look at the figures in the specimen Procter and Gamble (see 8.2) consolidated statement of cash flow for the year ended 30 June 1997, we can see that the starting point is the opening balance as follows:

$mCash and cash equivalents - Beginning of year 2,074

The totals of the cash flow (in or out) from the three major activities are included as main headings. These are:

$mTotal Operating Activities (i.e. in this example cash flow in) 5,882Total Investing Activities (i.e. in this example, cash flow out) (2,068)Total Financing Activities (i.e. in this example, cash flow out) (3,507)

56

We can see that the company’s operating activities have contributed cash of $5882m, but the cash holding has been reduced by cash outflows from investing activities, ($2068m) and financing activities, ($3,507m). Notice how brackets are used around these two sets of figures to indicate amounts flowing out.

Details are provided of how the totals for operating activities, investing activities and financing activities are arrived at. For example, with regard to operating activities, we know from the income statement that we already have a figure of $3,415m for earnings. However, it is necessary to make a number of adjustments to determine the effect on cash flow of these activities.

Using the total figures we can summarise the cash flow statement as follows:

$mcash and cash equivalents, beginning of year 2,074

add: cash inflow from operating activities 5,882(deduct): cash outflows from

investing activities (2,068)financing activities (3,507)effects of exchange rate changes (31)

change in cash and cash equivalents 276

cash and cash equivalents, end of year 2,350


Just as in the balance sheet and the income statement, the amount of detail which is provided in the cash flow statement will vary from country to country and from company to company.

However, in all cases it is impossible to give very much detail on the face of the cash flow statement itself. For this reason, many companies are provide further details and explanations of certain key items by way of the notes to the accounts section of the annual report (which are often just referred to as notes).

Some companies make reference to notes on the face of the accounts by way of numbers, either in a separate column, or alongside particular items.

It is here in the notes that many of the details of specific interest to European Works Council members will be found (see section 6.7 for examples)

The notes may, for example, contain information on such things as acquisitions, disposals and restructuring within the group.

57


8.8.1 Cash equivalents

These are short-term (usually three months or less) investments which can readily be converted into cash.

8.8.2 Treasury purchases

This represents the expenditure of cash by the company on buying back its own shares. These shares may be held temporarily by the company before subsequent cancellation or reissue.

8.9 Exercises

8. How much was paid in income taxes this year?

9. How much was received from the proceeds at asset sales during the year ended 30 June 1997 ?

10.With regard to the item “cash and cash equivalents”, how much was generated from the group’s operating activities during the year ended 30 June 1997?


Summary

You should now be able:

(1) to recognise most of the main headings in a cash flow statement

(2) to understand how the totals in a cash flow are arrived at

(3) to recognise the format that is normally used to present cash flow information

(4) to recognise that further details are available in the form of the notes section of the annual report

(5)to understand the meaning of some of the main terms found in a cash flow statement

58

9 An example of the financial statements of a French multinational company (Lyonnaise des Eaux)

9.1 Introduction

9.2 Specimen financial statements

9.3 Differences in format


9.5 Exercises

59

9.1 Introduction

Lyonnaise des Eaux (LE) is a multinational company with its head offices in France, and as such, it is subject to French law. It is listed on the Paris and Geneva Stock Exchanges. Its annual report complies with French law.

As a member state of the European Union (EU), France has incorporated EU directives concerning financial statements into French law. Hence, the financial statements of a French company can be expected to be similar to financial statements produced by companies from other EU member states.

In this training manual we are using the financial statements which are contained in the company’s English language version of its Annual Report 1996. We will find, in practice, that European Works Council members will often handle translated versions of financial statements. However, we need to note that the terms used in these versions might be influenced by the style and background of the translator as well as the philosophy of the company itself. Here, as we shall see, LE uses US accounting terminology, similar to that used in the Procter and Gamble (P&G) financial statements illustrated in sections 6, 7 and 8 above. There are, however, some differences between the formats which are discussed in section 9.3 below.

The financial statements included in the annual report consist of a group balance sheet (Consolidated Balance Sheet), a group income statement (Consolidated Income Statement) and a group cash flow statement (Consolidated Statement-Cash Flow). These are the statements reproduced in 9.2 below.

The annual report also includes a notes sections. Certain items in the balance sheet, statement of earnings and cash flow statement are crossed referenced, by numbers, to the appropriate notes

It is in the notes that many of the details of specific interest to European Works Council representatives will be found. The notes are important also because they facilitate comparisons with the previous year.

9.2Specimen financial statements from the 1997 annual report of Lyonnaise des Eaux

The following financial statements are reproduced below:

9.2.1 Consolidated Balance Sheet

9.2.2 Consolidated Income Statement

9.2.3 Consolidated Statement – Cash Flow

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9.2.1 Consolidated Balance Sheet

CONSOLIDATED BALANCE SHEET (ASSETS) (IN FRF MILLIONS)

NOTE Nº 1996 1995 1994

Gross Depreciation or provisions

Net

Intangible assets 5 8,018 2,591 5,427 6,048 6,194

Goodwill 7 10,906 2,709 8,197 8,693 8,087

Property, plant and equipment 5 96,002 30,928 65,074 53,679 51,403

Other non-current assets (1) 6 9,535 2,359 7,176 8,213 7,758

Investments in companles accounted for under the equity method

8 3,466 109 3,357 2,866 2,862

TOTAL FIXED ASSETS (A) 127,927 38,696 89,231 79,499 76,304

Inventories and work in progress 9 18,633 1,054 17,579 24,416 23,756

Trade receivables and related accounts (2) 28,923 1,575 27,348 27,772 26,290

Other operating receivables (2) 12,437 1,064 11,373 10,690 10,212

Marketable securities 10 6,853 3 6,850 5,646 7,145

Cash and equivalent 7,160 7,160 6,139 7,802

TOTAL CURRENT ASSETS 74,006 3,696 70,310 74,663 75,205

Prepayrnents and deferred charges 11 4,240 4,240 2,727 2,610

TOTAL ASSETS 206,173 42,392 163,781 156,889 154,119

(1) due in less than one year 2,809 802 2,007 1,545 971

(2) due in more one year 2,861 1,119 1,742 1,561 1,341

(A) For further details, see review by sector

Lyonnaise des Eaux 1996

61

CONSOLIDATED BALANCE SHEET (LIABILITIES) (IN FRF MILLION)

NOTE No 1996 1995 1994

Capital stock 3,559 3,483 3,407

Additional paid-in capital (share premium) 8,260 7,781 7,307

Retained earnings and reserves 6,217 6,148 5,896

Foreign currency 12.2 -1,178 -2,059 -1,686

Asset revaluation reserve 264 241 239

Group net income for the year (excluding minority interests) 1,349 906 1,061

Treasury stock 40 -39 -38

SHAREHOLDERS’ EQUITY 12.1 18,431 16,461 16,186

Minority interests 13 11,939 10,844 11,608

Perpetual subordinated loans 14 294 297 315

Special accounts relating to concession assets (1) 15 24,874 25,129 24,255

Provisions for losses and expenses 16 16,208 15,713 14,738

Borrowings (A) -17 36,231 26,573 27,400

Trade payables and related accounts 44,388 50,000 48,943

Other liabilities 5,922 7,357 5,951

TOTAL LIABILITIES (2) 86,541 83,930 82,294

Accrued income and equivalent 11 5,494 4,515 4,723

TOTAL LIABILITIES 163,781 156,889 154,119

(1) Of which counterpart of fixed assets received from franchiser

19,708 20,404 20,033

(2) Due in less than one year 60,251 63,657 59,977

Due in more than one year 26,290 20,274 22,317

(A) For further details, see review by sector.


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9.2.2 Consolidated Income Statement

CONSOLIDATED INCOME STATEMENT (IN FRF MILLION)

NOTE Nº 1996 1995 1994

Sale (A) 91,620 98,615 99,965

Other operating revenues 6,920 6,734 6,123

OPERATING REVENUES 98,540 105,349 106,088

Purchases 12,833 18,522 20,246

Taxes other than income tax 2,393 2,196 2,099

Payroll costs 24,352 25,502 25,017

Revenues collected on behalf of public authorities 5,354 5,088 4,643

Other expenses 39,904 41,700 41,701

Depreciation, amortization and provisions 8;344 8,101 8,174

OPERATING EXPENSES 93,180 101,109 101,880

OPERATING RESULTS 1 5,360 4,240 4,208

Revenues trom investments in subsidiaries and affiliates 198 185 160

Other financial revenues 1,514 1,876 1,805

FINANCIAL REVENUES 1,712 2,061 1,965

Interest expense 2,508 2,147 2,137

Other financial expense 325 538 519

FINANCIAL EXPENSE 2,833 2,685 2,656

NET FINANCIAL RESULTS 2 (1,121) (624) (691)

INCOME BEFORE EXCEPTIONAL ITEMS AND TAX (A) 4,239 3,616 3,517

EXCEPTIONAL RESULTS 3 (669) (508) 116

Employee profit sharing (135) (161) (175)

Income tax 4 (1,172) (1,138) (1,248)

Share in net income of companies accounted for under the equity method

8 366 205 341

NET INCOME BEFORE AMORTIZATION OF GOODWILL

2,629 2,014 2,551

Amortization of goodwill 7 (540) (663) (457)

of which Group share (393) (426) (301)

CONSOLIDATED NET INCOME 2,089 1,351 2,094

Group share (A) 1,349 906 1,061

Minority interests 740 445 1,033

(A) For further details, see review by sector


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9.2.3 Consolidated Statement - Cash Flow

CONSOLIDATED STATEMENT- CASH FLOW (IN FRF MILLION)

1996 1995 1994

CASH POSITION AT START OF YEAR 8,957 11,778 13,123

Exchange rate variations 358 (86) (34)

Consolidation and other changes (mergers, transfers, etc.) 1,469 (372) (316)

ADJUSTED CASH POSITION AT START OF YEAR

10,784 11,320 12,773

Cash flow provided from opérations 7,308 6,058 6,558

Cash adjustments (2,104) (1,584) 353

CASH FLOWS FROM OPERATIONS 5,204 4,474 6,911

lnvestments in tangible and intangible assets (A) 7,693 6,254 6,870

Investments in other non-current assets (A) 9,742 3,374 3,134

Other net (decrease) increase in cash (19) 503 560

Disposais of tangible and intangible assets 1,273 831 689

Disposais of other non-current assets 2,853 1,445 1,972

CASH FLOWS FROM INVESTMENTS (13,290) (7,855) (7,903)

Dividends paid 1,240 1,246 985

Net increase in borrowings 6,249 118 (1,540)

Increase in shareholders' equity and minority interesis 2,715 2,015 1,983

Other increases (decreases) in cash (112) 131 535

NET CASH FLOWS FROM FINANCING ACTIVITIES

7,612 1,018 (7)

TOTAL CASH FLOWS FOR THE PERIOD (474) (2,363) (999)

NET CASH AT END OF YEAR 10,310 8,957 11,774

Year end results 2,089 1,351 2,094

Elimination of results of companies accounted for under the equity method for inclusion of dividend recelved

(129) 9 (59)

Depreciation and provisions 11,589 10,548 10,416

Releases of provisions (6,104) (5,197) (5,457)

Capital gains on asset disposais (464) (608) (436)

Other charges 327 (45) 0

CASH FLOW PROVIDED FROM OPERATIONS (A) 7,308 6,058 6,558

(A) For further details, see review by sector.Lyonnaise des Eaux 1996

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9.3.1 Consolidated balance sheet

The overall layout is broadly similar to that of the P&G consolidated balance sheet (see 6.2). However, we can see that for comparative purposes LE gives figures for three years (1994, 1995, and 1996) instead of two years. Moreover, for 1996, three figures are presented for most items in three separate columns entitled:

Gross, Depreciation Netor provisions

We need to be careful when making comparisons, for example, when we are comparing the figures for different years, that we select the figures from the appropriate columns. We need to concentrate on the column entitled Net. Thus, if we wish to compare the 1996 figure for inventories and work in progress with that of 1995, we need to compare FRF 17,579m with FRF 24,416m.

In general, the LE balance sheet has fewer main headings than the P&G balance sheet.

Thus, we can see that the LE balance sheet has only two main headings on the assets side.

Using the 1996 figures, we can see Total fixed assets (89,231) and Total current assets (70,310) both of which are made up of a number of items. We can see that these are added together with a third heading Prepayments and deferred charges (4,240) to produce the figure for Total assets (163,781).

On the liabilities side there are also two main headings but the position is not set out in such a straightforward manner as on the assets side. Using the 1996 figures, we can see Shareholders’ equity (18,431) and Total liabilities (86,541) both of which are made up of a number of items. We have to be careful here because the figure of 86,541 is made up of only three figures as shown below:

FRF millionsBorrowings 36,231Trade payables and related accounts 44,388Other liabilities 5,922

86,541

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The Total liabilities figure of 163,781 is made up as follows:

FRF millionsShareholders’ equity 18,431

Minority interests 11,939Perpetual subordinated loans 294Special accounts relating to concession assets 24,874Provisions for losses and expenses 16,208

BorrowingsTrade payables and related accounts 86,541Other liabilitiesTotal liabilities

Accrued income and equivalent 5,494

Total liabilities 163,781

It is confusing that the term total liabilities is used to refer to two separate totals. However, this shows that we need to be careful when reference is made to figures in the financial statements and that we know which ones are being referred to

9.3.2 Consolidated income statement

In general, the layout of the LE income statement is similar to the P&G income statement (see P&G consolidated statement of earnings, section 6.2). Both statements contain the figures for three years. Both statements start with a figure for sales and, after deducting various expense and tax items, arrive at a figure for net earnings. However, in the LE statement this figure is called the consolidated net income, the amount being FRF2,089m.

However, there are differences between the presentation of the LE and the P&G income statements. We can see that the LE income statement contains more items than that of P&G.

Thus, on the face of the LE statement we can see that there are more details given of costs and expenses, including reference to an item of importance to European Works Council members, Payroll costs i.e. the cost of employing the labour force.

We also need to be careful when looking at some of the figures to see if they are added or subtracted. If we look the composition of the figure for Income before exceptional items and tax (4,239), we find that it is made up as follows:

66

FRF millionsOperating results 5,360to which are added Financial revenues (198 + 1,514) 1,712and from which are deducted Financial expenses (2,508 + 325) 2,833to give Income before exceptional items and tax 4,239

We can also see that the difference between: Financial revenues 1,712and Financial expenses 2,833, which is (1,121), is separately identified and is shown in brackets to denote that the figure has to be deducted from Operating results to arrive at the figure for Income before exceptional items and tax

i.e. Operating results 5,360net financial results (1,121)

Income before exceptional items and tax 4,239

From this stage, we can see that the next main subtotal, net income before amortization of goodwill FRF 2,629m is arrived at as follows:

FRF millionsIncome before exceptional items and tax 4,239

Deduct:Exceptional results (669)Employee profit sharing (135)Income tax (1,172)

Add:Share in net income of companies accounted for under the equity met 366

Net income before amortization of goodwill 2,629

Finally we arrive at the consolidated net income FRF 2,089m as follows:

67

FRF millionsNet income before amortization of goodwill 2,629

Deduct:Amortization of goodwill (540)

Consolidated net income 2,089

9.3.3 Consolidated Statement-Cash Flow

The LE cash flow statement is similar to the P&G statement (see section 8). They both start with opening balances at the beginning of the year. In the LE statement these are called Cash position at start of year and in the P&G statement they are called Cash and cash equivalents, beginning of year. In the LE statement, two adjustments are made to arrive at a figure for adjusted cash position at start of year. Both statements then show the impact of three major activities on the companies’ cash flow. In the LE statement they are called Cash flows from operations (Operating activities in P&G), Cash flows from investments (Investing activities in P&G) and Net cash flows from financing activities (Financing activities in P&G).

We saw in section 8.6 that, in the P & G statement, these three amounts are summed to produce a figure of change in cash and cash equivalents (276 for P&G). Similarly, in the LE statement, the three items are summed to produce a figure called total cash flows for the period. The figure is (474) and is shown in brackets to denote that is a negative amount. The 474 is then deducted from the start of year figure 10,784 to arrive at the figure for net cash at end of year of 10,310.

As with the P&G statement, details are provided to show how the total cashflow from each of the three major activities is made up. Thus, for example, we see:

Dividends paid 1,240Net increase in borrowings 6,249Increase in shareholders’ equity and minority interests 2,715Other increases(decreases) in cash (112)Net cash flows from financing activities 7,612

However, as we have already seen, we need to be careful when considering whether the figures are added or subtracted. While we usually put figures in brackets to indicate that they are subtracted, this is not always the case in practice. Hence, in the above example, while the figure (112) represents a decrease in financing and is therefore subtracted, the figure 1,240 although not in brackets, represents dividends

68

paid (i.e. cash flowing out) and is, therefore, also subtracted. We can see that the total 7,612 is in fact arrived at as follows:

FRF millionsNet increase in borrowings 6,249Increase in shareholders’ equity and minority interests 2,715

8,964Deduct:Dividends paid 1,240Other increases (decreases) in cash 112

1,352

Net cash flows from financing activities 7,612

We will find that there is a variety of ways in which companies present the figures within their financial statements. This is because there is no international convention with regard to the way the figures in financial statements are provided. Hence, it is necessary for users to familiarise themselves with the methods of presentation used by a particular company.


9.4.1 Terms from the consolidated balance sheet

9.4.1.1 Investments in companies accounted for under the equity method

There are shares held by one company in another company where the former company is able to exert significant influence over the other company. The other company can be referred to as an associated company. Significant influence may be deemed to be present if the shareholding is above a certain minimum level e.g. 20%. In the group balance sheet the investing company’s shareholding in the associated company will be valued at cost plus the relevant proportion of the associated company’s profits and losses since it was acquired.

9.4.1.2 Capital stock

This is made up of the shares of a limited company. It might be subdivided into various classes, for example, preferred stock, which carries preferential rights , and common stock which gives the residual rights to the company’s net assets and earnings.

69

9.4.1.3 Treasury stock

Stocks or shares issued by a company which a company has bought back and holds- possibly with the intention of subsequent reissue.

9.4.1.4 Minority interests

The part of a subsidiary company’s net assets which is not owned by the parent company or another group company. For example, if the parent company holds 90% of the shares of a subsidiary and the other 10% are held outside the group, the 10% holding is shown in the group balance sheet as minority interest. Similarly 10% of the subsidiary’s earnings would be shown in the group income statement (profit and loss account).For LE the bottom two items in the income statement show the analysis of the consolidated net income 2,089 FRF millions between :

FRF millionsGroup share 1,349Minority interest 740

2,089

9.4.1.5 Provisions for losses and expenses

Amounts set aside out of earnings to provide for a loss or expense which is likely to be incurred or which is certain to be incurred but where there is uncertainty as to the actual amount or date when the item will arise.

9.4.2 Terms from the consolidated income statement

9.4.2.1 Share in net income of companies accounted for under the equity method

The group’s proportion of the current year’s earnings of an associated company. See 9.4.1.1 Investments in companies accounted for under the equity method.

9.4.2.2 Amortization of goodwill

The amount charged in the income statement as a means of spreading the cost of the asset goodwill over its useful economic life.

70

9.5. Exercises

11. Has the group made a profit for the year ended 31 December 1996 ?

12. How did the results for the 1996 compare with 1995 ?

13. What was the change in the group’s total fixed assets for the last financial year ?

14. What was the value of the group’s sales for 1996 and how did this compare with last year ?15. How much was paid in dividends this year ?

16. What were the payroll costs for 1996 ?

17. Has there been an increase or decrease in inventories compared with the last financial year ?

18. What is the minority interests share of the total assets less liabilities at 31 December 1996 ?

19. How much cash was generated from the group’s operating activities during the year ended 31 December 1996 ?

20. How much was received from the disposals of assets during the year ended 30 December 1996 ?

Answers to questions 11 - 20

71

10 An example of the financial statements of a German multinational company (Volkswagen)

10.1 Introduction




10.5 Exercises

72

10.1 Introduction

Volkswagen AG is a multinational company with its head offices in Germany, and as such, it is subject to German law. It is listed on the German Stock Exchange. Its annual report complies with German law.

As a member state of the European Union (EU), Germany has incorporated EU directives concerning financial statements into German law. Hence, the financial statements of a German company can be expected to be similar to financial statements produced by companies from other EU member states.

In this training manual we are using the financial statements which are contained in the company’s English language version of its Annual Report 1996. We will find, in practice, that European Works Council members will often handle translated versions of financial statements. However, we need to note that the terms used in these versions might be influenced by the style and background of the translator as well as the philosophy of the company itself. This has been discussed in respect of the balance sheet (see 6.1.2), the income statement (see 7.1) and the cashflow statement (see 8.1). Here, as we shall see, VW uses both US and UK accounting terminology, while broadly speaking following the formats used in the ICI statements (see 11.2). The differences between the formats are discussed in section 10.3 below.

The financial statements included in the annual report consist of a group balance sheet (Balance Sheet of the Volkswagen Group) and a group income statement (Statement of Earnings of the Volkswagen Group). There is not a cash flow statement, per se, but a similar statement is presented within the finance section of the annual report under the heading Development of short-term liquidity of the Volkswagen Group and this is reproduced in section 10.2 below.

The annual report also includes a notes sections. Certain items in the balance sheet, statement of earnings and cash flow statement are crossed referenced, by numbers, to the appropriate notes


10.2 Specimen financial statements from the 1996 annual report of Volkswagen

73


10.2.1 Balance Sheet of the Volkswagen Group

10.2.2 Statement of Earnings of the Volkswagen Group

10.2.3 Development of short-term liquidity of the Volkswagen Group

74

10.2.1 Balance Sheet of the Volkswagen Group

Volkswagen GroupFinancial Statements for the Fiscal Year Ended December 31, 1996

Balance Sheet of the Volkswagen Group, December 31, 1996 - DM million -

Assets Note Dec. 31, 1996 Dec. 31, 1995

Fixed assets

Intangible assets 120 91

Tangible assets 20,631 18,271

Financial assets 3,274 3,198

Leasing and rental assets 12,118 10,297

36,143 31,857

Current assets

Inventories (2) 10,368 9,392

Receivables and other assets (3) 31,205 27,248

Securities (4) 3,499 2,156

Cash on hand, deposits at German Federal Bank and Post Office Bank, cash in banks

13,080 13,174

58,152 51,970

Prepaid and deferred charges (5) 273 250

Balance-sheet total 94,568 84,077

Stockholders' equity and liabilities

Stockholders' equity

Subscribed capital of Volkswagen AG (6) 1,825 1,714

Ordinary shares 1,387

Non-voting preferred shares 437

Potential capital 346

Capital reserve (7) 4,946 4,557

Revenue reserves (8) 4,378 4,038

Net earnings available for distribution 318 209

Minority interests 468

11,935

Special items with an equity portion (9) 1,374 1,649

Special item for investment subsidies (10) 11 15

Provisions (11) 36,026 31,742

Liabilities (12) 41,996 37,823

Deferred income 3,226 1,858

Balance-sheet total 94,568 84,077

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10.2.2 Statement of Earnings of the Volkswagen Group

Statement of Earnings of the Volkswagen Group for the Fiscal Year Ended December 31, 1996 - DM rnillion -

Note 1996 1995

Sales (13) 100,123 88,119

Cost of sales 90,504 80,699

Gross profit + 9,619 + 7,420

Selling and distribution expenses 8,301 7,089

General administration expenses 2,660 2,368

Other operating income (14) 7,487 6,811

Other operating expenses (15) 5,760 4,659

Results from participations (16) + 509 + 229

Interest results (17) + 1,209 + 979

Write-down of financial assets and securities classified as current assets

131 210

Results from ordinary business activities + 1,972 + 1,113

Taxes on, income 1,294 777

Net earnings (18) + 678 + 336

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Finance

Development of short-term liquidity of the Volkswagen Group million DM

1996 1995

Net earnings + 678 + 336

Depreciation and write-up of tangible assets + 4,780 + 6,345

Depreciation and write-up of leasing and rentai assets + 4,042 + 3,479

Change in medium and long-term provisions + 2,294 + 1,307

Other expenses and income not affecting payments - 706 - 1,067

Cash flow + 11,088 + 10,400

Change in short-term provisions + 2,070 + 2,038

Change in inventories and trade receivables - 4,973 - 3,111

Change in liabilities (excluding liabilities to banks and customer deposits)

+ 4,146 + 2,085

Change in other items - 263 + 175

Inflow of funds from current operations + 12,068 + 11,587

Inpayments from disposal of fixed assets + 2,433 + 2,344

Outpayments for additions to fixed assets - 15,279 - 13,072

Outflow of funds in respect of capital investments - 12,846 - 10,728

Inpayments in respect of capital increases + 500 + 294

Outpayments to stockholders (dividends) - 220 - 137

Change in medium and long-term liabilities to banks - 1,135 - 341

Outflow of funds in respect of financing operations - 855 - 184

Change in funds - 1,633 + 675

Funds at start of period + 2,392 + 1,717

Funds at end of period + 759 + 2,392

Automotive Automotive Financial Services

Financial Services

Volkswagen Group

Volkswagen Group

Change

million DM Dec. 31, 96 Dec. 31, 95 Dec. 31, 96 Dec. 31, 95 Dec. 31, 96 Dec. 31, 95

Liquid funds 12,944 12,987 184 187 13,080 13,174 -94

Securities 3,311 2,156 188 - 3,499 2,156 +1,343

Long-term financial investments

1,903 2,255 - - 1,353 1,706 -353

Gross liquidity 18,158 17,398 372 187 17,932 17,036 +896

Short-term liabilities to banks and customer deposits

-7,442 -7,786 -9,778 -6,858 -17,173 -14,644 -2,529

Total funds + 10,716 + 9,612 -9,406 -6,671 +759 + 2,392 -1,633

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10.3.1 Balance sheet of the Volkswagen Group

The amount of detail on the face of the balance sheet is less than on the specimen P&G balance sheet (see 6.2), and the figures are set out vertically on one page, rather than side by side on two pages. There are some differences both in terminology and in the way in which certain items are grouped together. However, the overall relationship previously discussed in section 6.4 (assets = liabilities + shareholders’ equity) can be identified and described as follows:

Dm MillionsAssets 94,568

=

Stockholders’ equity 11,935

+

Liabilities 1,374 94,568 1136,02641,996 3,226

10.3.2 Statement of earnings of the Volkswagen group

VW uses the same title as P&G for its income statement, i.e. Statement of Earnings. The basic structure of the statement is the same for both companies i.e. starting with sales and subtracting various expense and tax items and adding various income items. There are differences in the types of subtotals which are arrived at.

VW compares sales with cost of sales to arrive at a sub total of gross profit. There are no further sub totals until the Results from ordinary activities. This is shown before Taxes on income and, hence, is similar to the P&G subtotal Earnings before income taxes. Therefore taxes on income are deducted to arrive at net earnings.

Earnings per share figures are not presented on the face of the income statement but some figures are set out in a section on finance of the annual report.


78

Although VW does not present a cash flow statement as such, this statement from a section on finance in the annual report, does give information similar to that in a cash flow statement. The focus being on funds rather than on cash. Funds is a broader concept and, for VW embraces cash, short term deposits less borrowings from banks and short and long-term investments.

The statement follows a similar pattern to a cash flow statement in identifying:

inflow of funds from current operations (i.e. making and selling vehicles)

outflow of funds in respect of capital investments

outflow of funds in respect of financing operations

For VW the net effect of these three items is a decrease in funds over the year of 1,633DM millions. This can be summarized as follows:

DM millionsHence, having started with funds of 2,392

as funds have decreased by 1,633

the funds at the end of the period are 759

10.4 Explanation of selected items

10.4.1 Terms from the Balance Sheet of the Volkswagen group

10.4.1.1 Fixed assets

Fixed assets are assets which are owned by a company and have been acquired with the intention of using them in the business. They will probably be held for a long period of time and are not held for resale.

For companies from the EU member states, fixed assets have to be classified into tangible fixed assets, intangible fixed assets and investments (sometimes referred to as financial assets) and each class has to be separately stated.

79

10.4.1.2 Intangible assets

Intangible assets are those assets which have no physical form but they are worth something i.e. if we wanted them we would have to pay for them. Examples could be such things as goodwill and trade marks. However, for any specific company, for example VW, we would have to go to the notes section of the annual report to identify specific items included under this heading.

10.4.1.3 Tangible assets

Tangible assets are those assets which have a physical form, such as a building, a machine, a computer. However, for any specific company, for example VW, we would have to go to the notes section of the annual report to identify specific items included under this heading.

10.4.1.4 Financial assets

These are investments held by a company. They comprise shareholdings and bond or loan stock holdings in other companies.

10.4.1.5 Leasing and rental assets

Assets which a company possess under the terms of a lease or rental agreement whereby the company has substantially all the risks and rewards associated with the ownership of the asset. Such assets are valued and brought into the balance sheet as assets. This is done in order to facilitate comparison between companies regardless of whether the assets they use are owned or held on a lease.

10.4.1.6 Securities

In this context, i.e. included in current assets, securities are investments (financial assets) held on a short -term basis.

10.4.1.7 Prepaid and deferred charges

This is expenditure which has been paid in advance but which is to be carried forward to be charged in future income statements.

10.4.1.8 Deferred income

This is income which has been received by the company but which is to be carried forward to be added to income in future income statements. An example is a government grant which the company has received in one year but where the benefit lasts for several years. Hence it is spread over the income statements of a number of years.

80

10.5 Exercises

21. Has the group made a profit for the year ended 31 December 1996?

22. How did the results for the 1996 compare with 1995?

23. What was the change in the group’s investment in fixed assets for the last financial year?

24. What was the value of the group’s sales for 1996 and how did this compare with last year?

25. How much is the charge for taxes on income on the results for 1996?

26. What expenses have been deducted from the sales to arrive at a figure for gross profit?

27. Has there been an increase or decrease in inventories compared with the last financial year?

28. What is the total assets at 31 December 1996?

29. How much cash was generated from the group’s operating activities during the year ended 31 December 1996?

30. How much was received from the disposal of fixed assets during the year ended 31 December 1996?


81

11 An example of the financial statements of a UK multinational company (Imperial Chemical Industries plc)

11.1 Introduction




11.5 Exercises

82

11.1 Introduction

Imperial Chemical Industries plc (ICI) is a multinational company with its head offices in the UK, and as such, it is subject to UK law. Its shares are listed on the stock exchanges in London, New York, Frankfurt, Paris, Amsterdam, Basle, Geneva, Zurich, Brussels and Antwerp. Its annual report complies with UK law.

As a member state of the European Union (EU), the UK has incorporated EU directives concerning financial statements into UK law. Hence, the financial statements of a UK company can be expected to be similar to financial statements produced by companies from other EU member states.

In this training manual we are using the financial statements which are contained in the ICI Annual Report 1997. The official language used for the annual report is English. However, it is important to note that some of the accounting terminology used in the UK is different from that used in the US. Therefore, we can expect to find some differences in the terms in ICI and those which we have seen in the Procter and Gamble (P&G) financial statements illustrated in sections 6, 7 and 8 above. There are also some differences between the layouts and these are discussed in section 11.3 below.

The financial statements contained in the annual report include the group and company balance sheets (Balance sheets), a group income statement (Group profit and loss account ) and a group cash flow statement (Statement of Group cash flow). These are the statements reproduced in 11.2 below. In addition, ICI includes certain other statements which are not of relevance to this training manual.

The annual report also includes a notes section. Certain items in the balance sheet, profit and loss account and cash flow statement are crossed referenced, by numbers, to the appropriate notes


11.2 Specimen financial statements from Imperial Chemical Industries

83


11.2.1 Balance sheets11.2.2 Group profit and loss account11.2.3 Statement of Group cash flow

Note that in addition to the financial statements above, some of the pages reproduced from the annual report contain other financial statements which are not relevant to this training manual. European Works Council members should take care to identify the financial statements referred to above, in the first instance, and they should not be confused by the existence of other important financial statements which might be presented alongside.

84

11.2.1 Balance sheets

Balance sheets

at 31 December 1997

Group Company

1997 1996 1997 1996

Notes £m £m £m £m

Assets employed

Fixed assets

Tangible assets 12 3,956 4,457 431 463

Investments

Subsidiary undertakings 13 10,093 6,781

Participating and other interests 14 254 172 68 50

4,210 4,629 10,592 7,294

Current assets

Stocks 15 1,319 1,389 75 93

Debtors 16 2,457 2,132 3,065 2,900

Investments and short-term deposits 17 935 560 1 100

Cash at bank 32 340 341 22 32

5,051 4,422 3,163 3,125

Total assets 9,261 9,051 13,755 10,419

Creditors due within one year

Short-term borrowings 18 (1,105) (186) (1) (1)

Current instalments of loans 20 (950) (243) (807) -

Other creditors 19 (2,583) (2,523) (6,683) (6,838)

(4,638) (2,952) (7,491) (6,839)

Net current assets (liabilities) 413 1,470 (4,328) (3,714)

Total assets less current liabilities 4,623 6,099 6,264 3,580

Financed by

Credîtors due after more than one year

Loans 20 2,975 1,174 694 200

Other creditors 19 67 72 3,262 688

3,042 1,246 3,956 888

Provisions for liabilities and charges 21 1,342 757 218 56

Deferred income: Grants not yet credited to profit 14 20 - -

Minorîty interests - equity- 79 470

Shareholders' funds - equity

Called-up share capital 22 727 725 727 725

Reserves

Share premium account 581 576 581 576

Revaluation reserve - 35

Goodwill reserve (4,239) (1,000)

Associated undertakings' reserves 26 71

Profit and loss account 3,051 3,199 782 1,335

Total reserves 23 (581) 2,881 1,363 1,911

Total shareholders' funds (page 49) 146 3,606 2,090 2,636

4,623 6,099 6,264 3,580

Included within Group net current assets are debtors of £405m (1 996 £306m) which fall due after more than one year. Included within the Company net current assets are debtors of £313m (1996 £207m) which fall due after more than one year.

The accounts on pages 44 to 89 were approved by the Board of Directorson 11 February 1998 and were signed on its behalf by:

Sir Ronald Hampel DirectorAG Spall Director

85

11.2.2 Group profit and loss account

Group profit and loss account

for the year ended 31 December 1997

1997

Continuing operations Discontinued Total

operations

Ongoing Operations Exceptional

operations to be items

discontinued

Notes £m £m £m £m £m

Turnover 4,5 7,731 984 - 2,347 11,062

Inctuding acquisitions 1,402 1,402

Operating costs 3,5 (7,310) (1,011) (202) (2,198) (10,721)

Other operating income 5 64 1 12 77

Trading profit (loss) 3,4,5 485 (26) (202) 161 418

lncluding acquisitions 180 (34) 146

Share of profits less losses of associated undertakings 7 16 - - - 16

Profits less losses on sale or closure of operations 3 (446) 777 331

Profits less losses on disposals of fixed assets 3 35 35

Profit (loss) on ordinary activities before interest 4 501 (26) (613) 938 800

Net interest payable 8 (212) (7) (31) (32) (282)

Profit (loss) on ordinary activities before taxation 289 (33) (644) 906 518

Tax on profit (loss) on ordinary activities 9 (53) 7 28 (192) (210)

Profit (loss) on ordinary activities after taxation 236 (26) (616) 714 308

Attributable to minorities (14) - - (35) (49)

Net profit (loss) for the financial year 222 (26) (616) 679 259

Dividends 10 (232)

Profit retained for the year 23 27

Earnings (loss) per £l Ordinary Share 11 30.5p (3.6p) (84.7p) 93.4p 35.6p

Statement of Group total recognised gains and losses


1997

£m

Net profit for the financial year 259

Currency translation différences on foreign currency net investments and related loans (259)

Share of other reserve movements of associated undertakings and other items 4

Total gains and losses recognised since last annual report

4

86

11.2.3 Statement of Group cash flow

Statement of Group cash flow


1997 1996 1995

Notes £m £m £m

Net cash inflow from operating activities 24 757 1,006 1,191

Returns on investments and servicing of finance 25 (171) (122) (94)

Taxation (151) (250) (162)

435 634 935

Capital expenditure and financial investment 26 (623) (935) (618)

(188) (301) 317

Acquisitions and disposals

Acquisitions 27 (4,366) (234) (276)

Disposals 28 2,124 74 206

(2,242) (160) (70)

Equity dividends paid (231) (225) (206)

Cash (outflow) inflow before use of liquid resources and financing

(2,661) (686) 41

Management of liquid resources 29 (249) 741 210

Financing

Issues of shares 9 49 17

Increase (decrease) in debt 2,928 (50) (156)

30 2,937 (1) (139)

Increase in cash 32 27 54 112

Reconciliation of movements in shareholders' funds


1997 1996 1995

Notes £m £m £m

Net profit for the financial year 259 275 535

Dividends (232) (232) (217)

Profit retained for year 27 43 318

Issues of ICI Ordinary Shares 7 3 5

Goodwill movement

Acquisitions 23 (3,516) (184) (178)

Disposals 23- 277 7 12

(3,239) (177) (166)

Other recognised (losses) gains related to the year 23 (255) (187) 31

Net (reduction) increase in shareholders' funds (3,460) (318) 188

Shareholders' funds at beginning of year 3,606 3,924 3,736

Shareholders' funds at end of year 146 3,606 3,924

87


11.3.1 Balance sheets

In accordance with UK regulations, ICI has presented, side by side, figures for the ICI group and figures for the ICI parent company. (See section 4.4 for the relationship between the company and the group). We will be commenting , principally, on the group balance sheet as that is the one with which European Works Council members are more concerned.

The balance sheet contains assets, liabilities and shareholders’ equity. However, when compared with the P&G specimen balance sheet (see 6.2), it will be seen that there are differences in both format and terminology. We will cover terminology in section 11.4 below.

The main format difference is that the item current liabilities (called here creditors due within one year) is not included under a general heading for liabilities but instead it is deducted from current assets to produce a net difference. This can be seen for 1997 in the following summary:

£mCurrent assets 5,051Creditors due within one year (4,638)Net current assets (liabilities) 413

This format is used to emphasize the relationship between the current liabilities, i.e. the creditors due within one year, and the assets which can be expected to produce the cash to pay off these liabilities.

It follows that the balance sheet totals will be different i.e. a total for assets employed which is total assets less total liabilities £4,623m and is the same as the Financed by total £4,623m the latter being made up of the liabilities other than the current liabilities, and the shareholders’ equity.

88

11.3.2 Group profit and loss account

There are some differences in format as well as in terminology when we compare the ICI statement with that of P&G (see 6.2.2). The main difference in terminology being the use of the term profit(loss) as the equivalent of earnings. Explanations of selected terms are given in section 11.4 below.

The structure is similar to the P&G specimen income statement with the exception that ICI includes a detailed analysis of the contribution to earnings from continuing operations and discontinued operations. This is interesting but for our purposes we need only be concerned with the final column which is entitled Total. In general here, we need to be careful to identify the column we wish to discuss because the ICI statement contains many columns.

The profit and loss account amount starts with a figure for turnover of £11,062m (i.e. the equivalent of net sales in the P&G income statement). As additional information, we are told that this is including acquisitions of £1,402m. In other words, this figure is already included within the figure £11,062m. Operating costs (cost of sales ) (£10,721m) are then deducted and Other operating income, £77m, is added to produce the figure for Trading profit (loss) of £418m.

Note the use of brackets around the term loss. If the company suffers a loss rather than a profit the figure will appear in brackets. However, here the figure, 418, without brackets denotes profit.

A number of further additions are then made for profit from sources other than operating activities in order to arrive at profit(loss) on ordinary activities before interest of £800m

There then follow a number of deductions: for interest payable; for tax for profit attributable to minorities (see 9.4.1.4)

We then arrive at the figure for net profit(loss) for the financial year of £259m. This is the same as the net earnings in the P&G income statement. Following UK practice, the dividends payable for the year are then deducted to arrive at the profit retained for the year of £27m

89

11.3.3 Statement of group cash flow

The overall picture is the same as that in the P&G specimen statement (see 6.2.3) i.e. the statement shows how the group’s activities have affected its cash flow for the year.

The format is in accordance with UK regulations. These require the identification of operating activities and financing activities (referred to here as returns on investments and servicing of finance) and investing activities (referred to here as capital expenditure and financial investment and acquisitions and disposals). A number of other headings are given as required. A great deal of detailed supporting information is given in the notes to the accounts to which appropriate cross-references are made.


11.4.1 Terms in the balance sheet

11.4.1.1 Stocks This is an alternative term for inventories (see 6.8.1.1).

11.4.1.2 Debtors

An overall term used for amounts owed to the company. It is similar to the US term accounts receivable (see 6.8.1.2). However, the latter term does not include prepayments (see 6.8.1.5).

11.4.1.3 Provisions for liabilities and charges

Amounts set aside out of earnings (profits) to provide for a loss or expense which is likely to be incurred or which is certain to be incurred but where there is uncertainty as to the actual amount or date when the item will

11.4.1.4 Share premium account

The excess of the issue price over the stated value of shares issued. For example, a company issues 100 million shares at a price of £1.50 per

share. The stated (or nominal) value of a share is £1.00. In respect of this issue, the share premium account will show £50m i.e. 100m x (£1.50 - £1.00).

90

11.4.1.5 Goodwill reserve

This is the total amount deducted from the reserve figure in respect of goodwill (see 6.8.4.1) arising on the acquisition of other companies. For example, if one company pays £10m for goodwill when acquiring another company, the £10m may be included as an asset or deducted from reserves. Where the latter course is adopted, the total such amounts for all companies acquired (goodwill reserve) is shown as a deduction under the reserves heading.

11.4.2 Terms in the group profit and loss account

11.4.2.1 Attributable to minorities

This item represents the proportion of the profit on ordinary activities which belongs to shareholders outside of the group (see minority interests section 9.4.1.4)

11.4.3 Terms in the statement of group cash flow

11.4.3.1 Management of liquid resources

This represents changes during the year (i.e. purchases and sales) of those short-term investments which are readily convertible into cash.

91

11.5 Exercises

31. Has the group made a profit (before accounting for dividends) for the year ended 31 December 1997?

32. How did the results for 1997 compare with 1996?

33. What was the change in the group’s total fixed assets for the last financial year?

34. What was the value of the group’s sales (turnover) for 1997 and how did this compare with last year?

35. How much was paid in income taxes this year?

36. What is the figure for operating costs which has been deducted from the turnover in the income statement?

37. Has there been an increase or decrease in the company’s stocks compared with the last financial year?

38. What is the total of retained profits at 30 December 1997?

39. How much cash was generated from the group’s operating activities during the year ended 31 December 1997?

40. How much was spent on the acquisitions of other companies during the year ended 31 December 1997?


92

12 Solutions to exercises

Solutions 1 - 10 relate to Procter and Gamble

1. 1997 $11,376m , shown in Consolidated Balance Sheets.1996 $11,118mi.e. a change ( an increase) of $258m over the financial year.

2. A decrease of $57m.In the Consolidated Balance Sheets, inventories are:

1997 1996Materials and supplies 1,131 1,254Work in process 228 210Finished goods 1,728 1,666

3,087 3,1303,130 - 3,087 = 57

3. $10,730m, shown in Consolidated Balance sheets, under Shareholders’ Equity.

4. Yes. $3,415m , shown in the Consolidated Statements of Earnings.

5. 1997 $3,415m1996 $3,046mi.e. an increase of $369m

6. 1997 $35,764m net sales, shown in Consolidated Statements of Earnings 1996 $35,284m

i.e. an increase of $2,480 over last year’s (1996) figure.

7. Cost of products sold; marketing, research and administrative expenses, shown in Consolidated Statements of Earnings.

8. $1,380m , shown in Consolidated Statements of Cash Flows,in the Supplemental Disclosure at the bottom of the Statement.

9. $520m, shown in Consolidated Statements of Cash Flows.

10. $5882m, shown in Consolidated Statements of Cash Flows.

93

Solutions 11 - 20 relate to Lyonnaise des Eaux

11. Yes. Consolidated Net Income FRF 2,089m , shown in Consolidated Income Statement, is the profit made by the group. The group’s share of this, after allowing for minority interest, is $ 1,349m.

12. From Consolidated Income Statement we have:1996 1995

Consolidated net income FRF 2,089m FRF 1,351m i.e. a decrease of FRF 738m

13. 1997 FRF89,231m, this the Net figure shown in Consolidated Balance Sheet (Assets).

14 1996 FRF 91,960m, shown in Consolidated Income Statement1995 FRF 98,615mi.e. a decrease of FRF 6,655m.

15 1996 FRF 1,240m, shown in Consolidated Statement-Cash Flow as part of net cash flows from operating activities.

16. 1996 FRF 24,352m, shown in Consolidated Income Statement.

17. A decrease of FRF 6,837mIn the Consolidated Balance Sheet (Assets), inventories and work in progress are:

1996 1995FRF 17,579m FRF 24,416m

24,416 - 17,579 = 6,837We have taken “inventories” in the question to have referred to both inventories and work in progress (as in the answer to question 7).

18. 1996 FRF 11,939m, shown in Consolidated Balance Sheet (Liabilities).

19. 1996 Cash Flow from Operations FRF5,204m, shown in Consolidated Statement-Cash Flow.

20. 1996 FRF 4,126mi.e. from Consolidated Statement-Cash Flow:Disposal of tangible and intangible assets 1,273Disposal of other non-current assets 2,853

4,126

94

Solutions 21 - 30 relate to Volkswagen

21. Yes. DM 678m, shown in Statement of Earnings.

22. 1996 DM 678m1995 DM 336mi.e. an increase of DM 342m

23. 1996 DM 36,143m1995 DM 31,857mi.e. a change (an increase) of DM 4,286m over the last financial year.

24. 1996 DM 100,123m, shown in Statement of Earnings1995 DM 88,119mi.e. an increase of DM 12,004m over last year’s (1995) figure.

25. DM 1,294m, shown in Statement of Earnings.

26. Cost of sales, shown in Statement of Earnings,

27. An increase of DM 976mIn the Balance Sheet, inventories are:

1996 1995DM 10,368m DM 9,392

10,368 - 9,392 = 976

28. DM 94,568m, shown in Balance Sheet as balance sheet total (including the item prepaid and deferred charges).

29. DM 11,088m, shown in Development of short-term liquidity statement.

30. DM 2,433m, shown as In payments from disposal of fixed assets in Development of short-term liquidity statement.

Solutions 31 - 40 relate to ICI

95

31. Yes. £ 259m, shown in Group profit and loss account (total column).

32. 1997 £ 259m1996 £ 275mi.e. a decrease of £ 16m

33. 1997 £ 4,210m, shown in Balance Sheets (Group column)1996 £ 4,629mi.e. a change (a decrease) of £ 419m over the last financial year.

34. 1997 £ 11,062m, shown in Group profit and loss account (total column) 1996 £ 10,520mi.e. an increase of £ 542m

35. £ 151m, shown in Statement of Group cash flow.

36. £ 10,721m, shown in Group profit and loss account (remember that the name for an income statement in UK company accounts is profit and loss account).

37. A decrease of £ 18m

1997 1996£ 75m £ 93m

93 -75 = 18Remember that UK multinationals include figures for the group and for the company itself. As the question specified “company” the answer is taken from the figure in the company column.

38. Group Company£ 3,051m £ 782m, shown in Balance sheets as Profit and loss account under Shareholders’ funds - equity.Neither group nor company was specified in the question, therefore the answer contains figures for both the group and the company.

39. £ 757m, shown in Statement of Group cash flow.

40. £ 4,366m, shown in Statement of Group cash flow as Acquisitions.

96

Glossary (English, French, German, Italian, Spanish)

The financial statement terms in this glossary have been selected because of their particular relevance for members of works councils.

EEN ENGLISH FRENCH GERMAN

asset actif Vermogensgegenstand

balance sheet bilan Bilanz

consolidated financial comptes annuels konsolidierter Abschluß statements consolidéscreditor créditeur Gläubigercurrent assets actifs circulants Umlaufvermögencurrent liabilities passif à court terme kurzfristige Verbindlichkeiten

debtor débiteur Schuldnerdepreciation dépréciation Abschreibungdirectors' pay appointement des Geschäftsleitervergütungen

directeurs

earnings bénéfices Gewinnemployee turnover rotation des employés Mitarbeiterfluktuationexcess profits excédents de bénéfices Mehrgewinne

financial year exercice Geschäftsjahrfixed assets immobilisations Anlagevermögenfunding financement Finanzierung

goods biens Warengoodwill fonds de commerce Firmenwertgroup groupe Konzern

human resources ressources humaines Arbeitskräftepotential

income statement compte de résultat Gewinn-und Verlustrechnung intangible assets actifs incorporels immaterielle Vermögenswerteinventories stocks Vorräteinvestment investissement Investition

labour force main-d’oeuvre Belegschaftland and buildings terrains et constructions Grundstücke und Gebäudeliability passif Verbindlichkeitloan prêt Darlehenloss perte Verlust

minority interest intérêt minoritoire Minderheitsbeteiligung

operating costs coûts d’exploitation Betriebskostenoperating profit bénéfice d’exploitation Betriebsgewinn

parent company société dominante Muttergesellschaftpayroll feuille de paie Lohn-und Gehaltsliste

97

pension fund fonds de retraite Pensionsfondsplant and machinery installations techniques Betriebseinrishtung

et machinerieprofit after tax bénéfice après impôt Gewinn nach Ertragssteuernprofit before tax bénéfice avant impôt Gewinn vor Ertragssteuern

sales Ventes Umsatzshare capital capital social Grundkapitalstock Stock Vorrätesubsidiary company Subsidiaire Tochtergesellschaft

tangible asset actifs corporels materielle Vermögenswerteturnover Chiffre d’affaires Umsatz

undertaking Entreprise Unternehmen

ENGLISH ITALIAN SPANISH

asset Attività activo

balance sheet stato patrimoniale balance de situación

consolidated financial Bilancio consolidato cuentas anuales consolidadas statementscreditor Creditore acreedorcurrent assets Attività correnti activos corrientescurrent liabilities Passitvità correnti pasivos corrientes

debtor Debitore deudordepreciation Ammortamento amortizacióndirectors' pay Emolumenti degli honorarios de los consejeros

Amministratori

earnings Utili beneficiosemployee turnover Ricambio del personale rotación de la plantillaexcess profits Sovraprofitto beneficios exagerados

financial year esercizo ejerciciofixed assets immobilizzazioni inmovilizadofunding

goods merce bienesgoodwill avviamento fondo de comerciogroup gruppo grupo

human resources risorse umane recursos humanos

income statement conto economico cuenta de pérdidas y ganancias

intangible asset attività immateriali inmovilizado inmaterialinventories giacenze existenciasinvestment inversión investimento

98

labour force forza lavoro mano de obraland and buildings terreno terrenos y edificiosliability passività pasivoloan prestito prestamoloss perdita pérdida

minority interest interessenza di interés minoritario minoranza

operating costs costi operativi costes de explotaciónoperating profit utile operativo beneficio de explotación

parent company società controllante sociedad dominantepayroll libro paga nóminapension fund fondo pensioni dondo de pensionesplant and machinery impianti e macchinari instalaciones y maquinariaprofit after tax utile dopo le imposte beneficio después de

impuestosprofit before tax utile prima delle imposte beneficio antes de impuestos

sales vendite ventasshare capital capitale sociale capital socialstock giacenza existenciassubsidiary company società contollata sociedad dependiente

tangible asset attività materiali activos tangiblestrade creditors debiti verso fornitori acreedores por

operaciones de tráficoturnover fatturato cifra de negocios

undertaking impresa empresa

99

Index of terms

accounts payable 6.8.5.1accounts receivable 6.8.1.2accrued income 6.8.1.4 accrued liabilities 6.8.5.2accumulated amortization 6.8.4.3accumulated depreciation 6.8.2.1additional paid-in capital 6.8.9amortization 6.8.4.2, 8.6amortization of goodwill 9.4.2.2assets 6.4authorized shares 6.8.9

capital and reserves 6.8.9capital stock 6.8.9.1, 9.4.1.2cash equivalents 8.4, 8.8.1cash position at start of year 9.3.3common stock 6.8.9.1consolidated net income 9.3.2convertible stock 6.8.9.1cost of products sold 7.8.1creditors 6.8.5current assets 6.8.1current liabilities 6.8.5

debt due within one year 6.8.5.3debtors 11.4.1.2deferred income 10.4.1.8deferred income taxes 6.8.7depreciation 6.8.2.1, 8.6dividends per common share 7.8.9

earnings 7.6earnings before income taxes 7.8.5effect of exchange rate changes 8.8.2

financial assets 10.4.1.4financing activities 8.1, 8.6finished goods 6.8.1.1fully diluted net earnings per common share 7.8.8funds 10.3.3fixed assets 6.8.2.1, 10.4.1.1

goodwill 6.8.4.1goodwill reserve 11.4.1.5

100

income before exceptional items and tax 9.3.2intangible assets 6.8.2.1, 10.4.1.2interest expense 7.8.4inventories 6.8.1.1investing activities 8.1, 8.6investment securities 6.8.1.3investments 6.8.1.3, 6.8.2, 10.4.1.1-2investments in companies accounted for under the equity method 9.4.1.1

leasing and rental assets 10.4.1.5liabilities 6.4long term debt 6.8.6long-term assets 6.8.2

management of liquid resources 11.4.3.1materials and supplies 6.8.1.1minority interests 9.4.1.4

net earnings 7.4.5net earnings after preference dividend 7.8.7net earnings attributable to holders of common sharesnet earnings per common share 7.8.7net income 7.4.5net profit 7.4.5net sales 7.8.1nominal value 6.8.9.1

operating activities 8.1, 8.6operating expenses 7.6operating income 7.8.3operating results 7.6other intangible assets 6.8.4.2other non-current assets 6.8.3other non-current liabilities 6.8.8

par value 6.8.9.1payroll costs 9.3.2pension liabilities 6.8.9preference shares 6.8.9, 7.8.7preferred stock 6.8.9.1, 7.8.7prepaid and deferred charges 10.4.1.7prepaid expenses 6.8.1.5prepayments 6.8.1.5property, plant and equipment 6.8.2provisions for liabilities and charges 11.4.1.3provisions for losses and expenses 9.4.1.5

101

purchased goodwill 6.8.4.2

receivables 6.8.1.2reserves 6.8.9retained earnings 6.8.9.2revenue 7.4.1

securities 10.4.1.6share capital 6.8.9share in net income of companies accounted for under the equity method 9.4.2.1share premium account 11.4.1.4shareholders’ equity 6.4, 6.8.9stated value 6.8.9.1stockholders’ equity 6.8.9.2stocks 11.4.1.1

tangible assets 6.8.2.1, 10.4.1.3total shareholders’ funds 6.8.9trade payables 6.8.5.1treasury purchases 8.8.2treasury stock 9.4.1.3

work in process 6.8.1.1

102

see 6.2

Documents

Transcript of see 6.2