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income 
and expenditure account
which shows the surplus of income over expenditure (or a deficit where 
expenditure exceeds income). 
4.3 The statement of financial position 
The 
statement of financial position
is a list of all the assets owned by a business and all the liabilities 
owed by a business at a particular date.
Assets are the business's resources, eg buildings to operate from, plant and machinery to manufacture 
goods, inventory to sell and cars for its employees. These are all resources which it uses in its 
operations. Also, it may have bank balances, cash and amounts of money owed to it. These provide the 
funds it needs to carry out its operations and are also assets. It may owe money to the bank or to 
suppliers: these are liabilities.
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PART C: ACCOUNTING AND REPORTING SYSTEMS, CONTROLS AND COMPLIANCE 
 
212
 
4.4 The statement of cash flows 
The 
statement of cash flows
shows sources of cash generated during a period and how these funds 
have been spent.
The statement of cash flows takes the information presented in the profit or loss account and statement 
of financial position and analyses it into cash flows from different types of activity (such as operating 
(trading profit or loss) and investing (eg buying or selling non-current assets)).
4.5 Sustainability and integrated reports 
Pressure from shareholders, customers, regulators and the media has led to companies recognising the 
need to collect and report non-financial data. 
Integrated reporting
refers to the integration (combining) of financial and non-financial information into 
a single document. However, there are considerable differences of opinion over the type of non-financial 
information that should be included, and how it should relate to financial data. 
One area on which most agree information should be reported is sustainability. Sustainability is 
concerned with protecting the environment from damage – to be sustainable, an activity should be able 
to continue forever.
4.6 Internal reports 
Businesses will wish to prepare internal reports to help them run the day-to-day operations of the 
business.
Examples of internal reports include the following. 

Cost 
schedules 

Budgets 

Variance 
reports 
4.7 Cost schedules 
Cost schedules are needed at regular intervals to enable managers to keep a check on what the business 
is spending. Cost schedules may be produced, for example, for the following areas. 

Wages and salaries 

Departmental 
costs 

Cost of sales

Selling 
expenses 

Administration 
costs 
4.8 Budgets 
Most businesses will prepare a budget. This may be a budget for the year ahead, showing projected 
sales, the costs involved in generating those sales, overheads and projected profits. Budgets may be 
produced for the business as a whole and for individual departments. The finance department will also 
produce a cash flow budget (or cash flow forecast) identifying the amounts of cash likely to come into 
and out of the business each week or month. This will enable the department to identify potential 
problems and arrange overdraft facilities or loans with the bank well in advance.
4.9 Variance reports 
Once the budget has been agreed, the actual costs must be measured. The cost schedules should be 
compared to the budget and any differences accounted for. These differences are called variances and 
the variance report details the differences between actual and budgeted costs, and explains any material 
variances. Action can then be taken as needed. 
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CHAPTER 8
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THE ROLE OF ACCOUNTING