FINANCIAL STATEMENTS

Introduction

2 main types of accounting

 

Financial accounting: formally records, summarises and reports the transactions of the business.

 

Management accounting: presents and analyses financial data to help management take decisions and monitor performance.

We’ll be focusing on the latter – it’s much more fun!

Introduction to Balance Sheets

Balance sheet: a snapshot of a firm’s financial position at a particular moment in time.

It shows…

what the business owns (assets)

where funds have been obtained to purchase what it owns

funds invested by the owners (capital)

funds borrowed (liabilities)

 

Assets = capital + liabilities

https://www.youtube.com/watch?v=ixCPM5HznRU

Assets

Task 1: List 10 things you can think of that you or your parents own (their assets).

1. 2.

3. 4.

5. 6.

7. 8.

9. 10.

Assets (cont.)

Assets can be classified into…

Non-current assets: life span of > a year

Current assets: held for < one year

Task 2: Classify each item in your list above into non-current and current assets: Non-current (Fixed) Assets Current Assets

Capital and Liabilities

Task 3: List where the money has come from/comes from to purchase these items.

1. 2.

3. 4.

Capital and Liabilities (cont.)

These funds can be classified into capital, non-current and current liabilities.

Capital: funds invested or re-invested by you or your parents as opposed to borrowed.

Non-current (long-term) liabilities: monies owed which do not have to be settled < one year.

Current liabilities: monies owed that must be paid < year.

Task 4: Classify each item in your list into capital, current and non-current liabilities: Capital Non-Current Liabilities Current Liabilities

Household Balance Sheet Activity

Task 5:

Put the figures below into the correct first column of the Household Balance Sheet on the following page.

Do not attempt to total anything at this stage. Credit card debt is R460.

Interest free medium term loan used to purchase some new furniture is R2,400

The mortgage remaining on the house is R120,000.

Savings used to put down the deposit on the house was R25,000.

Net earnings spent on the house and household items over the years is R216,050.

House is valued at R300,000.

Contents are valued at R40,000.

Cars are valued at R18,000.

Supplies of food, beauty products, cleaning agents, petrol, etc is valued at R430.

Cash and money in savings account is R5,680.

Bank overdraft is R200.

£ £

Non-Current (Fixed) Assets

House 300,000

Contents 40,000

Cars 18,000

358,000

Current Assets

Supplies 430

Cash and bank account 5,680

6,110

Current Liabilities

Bank overdraft 200

Credit card debt 460

660

Net current assets/liabilities 5,450

TOTAL Assets less Current Liabilities 363,450

Non-Current Liabilities

Interest free medium term loan 2,400

Mortgage 120,000

122,400

TOTAL Net Assets 241,050

Householder’s Funds / Capital:

Savings 25,000

Net earnings 216,050

TOTAL Net Income and savings 241,050

The Structure and Contents of Balance Sheets

Assets

Non-current assets Purchased for long term use (> one year)

Current assets

Expected to be turned into cash during the next twelve months. The main elements of current assets are… Inventories (trading stock): includes raw materials, components, finished

products and “work in progress” Trade and other receivables (debtors)

Trade debtor: a customer who is allowed to buys goods or services on credit (customer gets the goods/services, but pays at a later date).

Cash and cash equivalents

Liabilities

Current liabilities

Amounts owed by the business due to be paid within the next twelve months.

The main elements of current liabilities are… Trade and other payables (creditors)

Trade creditor: when a business buys from a supplier and then pays for those goods and services some time later – the period depends on the length and amount of credit the supplier allows.

Non-current liabilities

Amounts owed by the business to be settled in more than one year’s time.

Eg. bank loans and mortgages.

Equity

Shows the value of capital invested into the company by shareholders and the profits that have been retained. The two main parts are… Share capital: the cash raised by the company from the sale of shares.

Reserves & Retained earnings: the total net profits earned by the company since it was formed which have been retained (reinvested in the business)

EXERCISE 1 Match the statements on the right with the research on the left - by drawing a line from one to the other.

Current liabilities

Capital

Assets

Shareholder’s equity

are items owned by the business.

concerns monies owed by a business which do not have to be settled within one year.

is the money invested or kept within the business by

the owners / shareholders.

consists of money raised by selling shares, retained earnings, reserves, share premiums and

revaluations

Non-current liabilities

are monies owed by the business that

must be paid within one year from

the balance sheet date.

EXERCISE 2 Match the statements on the right with the research on the left - by drawing a line from one to the other.

Working capital

Non-current assets

Total equity or shareholders’

funds

Liabilities

Net assets

are what the business owes to other organisations

or individuals.

is the sum of the capital, retained earnings and any other reserves.

is assets (non-current and current) less liabilities (current and non-current).

are items that are usually held for a relatively short period of time, ie under one year.

are items that usually have a life span of more than a year, and do not get used up in the production or

provision of a product or service.

Current assets is the finance available for the day-to-day running of

a business.

Working capital (net current assets)

Working capital: the day-to-day finance used in a business. Working capital = current assets - current liabilities Working capital provides a strong indication of a business’ ability to pay its debts. Current liabilities: amounts to be paid in the next twelve months. Current assets: cash and other assets available to pay current liabilities.

Working Capital Cycle

Introduction to Income Statements

Task 1: Imagine Table A is your personal Income Statement for the last month. What would your surplus (net income) be?Income R

Part time job – net earnings 1320

Jobs around house 140

Total

Expenses

Monthly mobile 180

Socialising 630

Music/Mag’s/DVD’s/Games 240

Clothes 210

Birthday presents 150

Total

Deficit / Surplus

The Structure and Contents of Income Statements

(R) REVENUE (TURNOVER) 47 298

- COST OF SALES (43 668) = GROSS PROFIT 3 630

- EXPENSES (707) +/- ONE-OFF ITEMS (132) = OPERATING PROFIT 2 791 + FINANCE INCOME 262

- FINANCE COSTS (250) = PROFIT BEFORE TAX 2 803

- TAXATION (673) = PROFIT FOR THE YEAR 2 130

- DIVIDENDS TO SHAREHOLDERS 1 000 = RETAINED PROFIT 1 130

Revenue: total value of sales made to customers (cash or credit).

Cost of sales: direct/variable costs of generating the revenue.

E.g. raw materials and labour costs of production.Gross profit: Revenue - cost of sales. Expenses: not directly related to producing the goods or services (fixed costs).  E.g. marketing, transport admin expenses

One-off items: items that have a one-off; not a normal part of trading.

E.g. the sale of a part of the business, expenses involved in a takeover.

Operating profit: records how much profit has been made in total from the trading activities of the business.Finance income and costs: interest paid on borrowings - interest income received.Tax: corporation tax payable on the recorded profit.Profit for the year: Profit before tax - taxDividends to shareholders: portion of profit shared out to the owners of the company (shareholders). Retained profits: profits kept by the company and added to the company's balance sheet under reserves & retained earnings.