Financial statements

Habari Mwanafunzi! Welcome to Financial Statements!

Ever looked at your end-of-term school report card? It tells you (and your parents!) exactly how you performed in different subjects, right? You see your score in Math, your grade in English... it’s a summary of your hard work over the term.

Well, think of Financial Statements as the official "report card" for a business. They are a set of formal reports that tell the story of a company's financial health and performance over a period of time. They answer crucial questions like: "Did we make money?", "What do we own?", and "Where did our cash go?".

So, grab your calculator, a cup of chai, and let's dive into the language of business! Twende Kazi!

The Main 'Subjects' on the Business Report Card

In Kenya, and globally, we follow specific standards (called IFRS) to prepare these statements. For our Financial Accounting I course, we will focus on the most important ones. These are the "core subjects" every business must report on:

• The Income Statement: Shows the company's profitability. Did it make a profit or a loss?
• The Statement of Financial Position (Balance Sheet): Shows the company's assets, liabilities, and equity. What does it own and what does it owe?
• The Statement of Cash Flows: Shows the movement of cash. Where did the money come from and where did it go?
• The Statement of Changes in Equity: Shows how the owner's stake in the company changed over the period.

Image Suggestion: A vibrant, colourful illustration of a Kenyan entrepreneur standing proudly in front of her modern *duka* (shop). She is holding a large, glowing report card. The subjects on the report card are labeled "Income Statement," "Balance Sheet," and "Cash Flow," each with a green checkmark or an upward-trending arrow. The style should be modern, optimistic, and digital-art-inspired.

1. The Income Statement (or, The "Profit & Loss" Account)

This statement is all about performance over a period of time, like a month, a quarter, or a year. It’s like asking, "How well did Wanjiku's Duka do in the month of May?" It has a very simple and powerful formula at its core.

    Revenue - Expenses = Net Profit (or Net Loss)

Let's break it down:

• Revenue (or Sales): This is the money the business earns from selling its goods or services. For Wanjiku's duka, this is the cash from selling sugar, flour, milk, and airtime.
• Expenses: These are the costs incurred to generate that revenue. This includes rent for the shop, electricity from KPLC, salaries for any helpers, and the cost of the goods she sold.

Real-World Scenario: Wanjiku's Duka

Wanjiku runs a small shop in a busy Nairobi estate. At the end of June, she wants to know if she made a profit. She sits down and lists everything out:

• Total Sales (Revenue): KES 150,000
• Cost of goods sold: KES 80,000
• Rent for the shop: KES 15,000
• Electricity bill: KES 5,000
• Her own salary/drawings: KES 20,000

Let's prepare a simple Income Statement for her:

    Wanjiku's Duka
    Simple Income Statement
    For the Month Ended 30th June

    Sales (Revenue)                    KES 150,000
    Less: Cost of Goods Sold           (KES 80,000)
    ---------------------------------------------
    Gross Profit                       KES  70,000

    Less: Operating Expenses
      Rent                             (KES 15,000)
      Electricity                      (KES  5,000)
      Salary                           (KES 20,000)
    ---------------------------------------------
    Net Profit                         KES  30,000
    =============================================

Success! Wanjiku's duka had a net profit of KES 30,000 for June. This report tells her she had a successful month!

2. The Statement of Financial Position (The Balance Sheet)

If the Income Statement is a video of the year, the Balance Sheet is a snapshot. It shows the financial position of a business on a single day, usually the last day of the financial period (e.g., "As at 31st December").

It is built on the most fundamental concept in accounting: The Accounting Equation.

    Assets = Liabilities + Equity

This equation MUST always balance. Let's see it visually:

    +------------------------+      +------------------------+
    |         ASSETS         |      |      LIABILITIES       |
    | (What the business OWNS)|  =   | (What the business OWES)|
    | e.g., Cash, Inventory, |      | e.g., Loans, Suppliers |
    | Equipment, Buildings   |      +------------------------+
    +------------------------+      |          EQUITY        |
                                    | (The Owner's Stake)    |
                                    | e.g., Capital, Profits |
                                    +------------------------+

Let's use a different example:

Real-World Scenario: Omondi's Boda Boda Business

Omondi starts a boda boda business. He contributes KES 20,000 of his own savings (Equity). He gets a loan of KES 80,000 from a local SACCO (Liability). He uses the total KES 100,000 to buy a new motorcycle (Asset).

Let's see his Balance Sheet on Day 1:

    Omondi's Boda Boda
    Statement of Financial Position
    As at Day 1

    ASSETS
      Motorcycle (Non-Current Asset)      KES 100,000
    -------------------------------------------------
    Total Assets                          KES 100,000
    =================================================

    EQUITY AND LIABILITIES
      Equity
        Owner's Capital                   KES  20,000

      Liabilities
        SACCO Loan (Non-Current Liab.)    KES  80,000
    -------------------------------------------------
    Total Equity and Liabilities          KES 100,000
    =================================================

See? Assets (100,000) = Liabilities (80,000) + Equity (20,000). It balances perfectly! This statement shows us exactly what Omondi owns and who has a claim to it (the SACCO and himself).

How Do They Connect? The Magic Link!

The Income Statement and the Balance Sheet are not separate islands; they are deeply connected. The Net Profit you calculate in the Income Statement belongs to the owner(s).

This profit increases the owner's stake (Equity) in the business. So, the Net Profit from one statement flows directly into the Equity section of the other!

    +-----------------------+
    |    INCOME STATEMENT   |
    |                       |
    | Revenues - Expenses   |
    |         =             |
    |      NET PROFIT       | ----+
    +-----------------------+     |
                                  | (Increases Owner's Stake)
                                  V
                      +-----------------------------+
                      | STATEMENT OF FINANCIAL POS. |
                      |           (Balance Sheet)   |
                      |                             |
                      | Assets = Liabilities + EQUITY|
                      |                        ^     |
                      |                        |     |
                      |      [Beginning Equity      |
                      |       + NET PROFIT          |
                      |       - Drawings]           |
                      +-----------------------------+

So, Wanjiku's profit of KES 30,000 from her Income Statement will be added to her Capital/Equity on the Balance Sheet at the end of June. This shows her business is not only profitable but also growing in value!

Who Uses These Report Cards and Why?

It's not just the owner who reads these statements. Many different people (we call them stakeholders) are interested.

• Owners/Investors: Like Wanjiku and Omondi, they want to know if their business is profitable and growing. An investor looking to buy shares in Safaricom on the Nairobi Securities Exchange (NSE) will carefully read their financial statements.
• Lenders (Banks, SACCOs): Before giving Omondi a loan, the SACCO would want to see his business plan and projected statements to ensure he can pay them back.
• The Government (KRA): The Kenya Revenue Authority uses the Income Statement to determine how much Corporate Tax a business should pay. No guesswork!
• Management: The people running the company use these statements to make smart decisions. "Our electricity expense is too high, let's find ways to save power."
• Suppliers: A company that supplies flour to Wanjiku might want to see her statements to know if she is a reliable customer who can pay her bills on time.

Image Suggestion: A modern, bright office in Nairobi with a glass table. Around the table are diverse Kenyan professionals: a woman in a sharp business suit (Investor), a man in a bank uniform (Lender), and a person in a KRA-branded polo shirt (Government). They are all looking collaboratively at a tablet displaying financial charts and graphs that are trending upwards. The mood is professional and positive.

Final Word of Encouragement

Mambo iko vipi? I know this seems like a lot, but don't worry! Financial statements are the backbone of accounting. The more you practice preparing them and the more you understand the stories they tell, the more confident you will become.

Start with simple examples like the ones we used today. Try creating a personal balance sheet for yourself! What are your assets (phone, laptop)? What are your liabilities (a small loan from a friend)? The principles are the same everywhere.

Keep practicing, ask questions, and soon you'll be reading company reports like a pro! Safi sana!