bs and is v2
TRANSCRIPT
-
8/6/2019 BS and IS v2
1/15
Why have a Business?
To build WEALTHWEALTH
'Wealth' refers to some accumulation of resources
Richness' refers to an abundance of such resources
To make some money (a PROFIT)(a PROFIT)!
To have FUN!!
Other reasons To accomplish your personal dreams and goals
To fulfil your passion and pass it on to others
To provide a chance of a good future for yourself / family / children
To create EmploymentS
o, how do you know if you are making money ? Is it the size of your bank balance? Is it the number of buildings and machines owned? The number of people that you give work to?
How do you TRACK your progress in building this wealth?
Some Good Reasons:
-
8/6/2019 BS and IS v2
2/15
Why have a Business?
Tracking progress
Balance Sheet
Income Statement (Profit & Loss Account)
ALL Companies should / do use Financial Reporting:
Cash Flow Statements
-
8/6/2019 BS and IS v2
3/15
Accounting Systems
Accounting systems classify activities of a
company into five types of accounts.
Balance sheet accounts
Income statement accounts
1. Assets1. Assets2. Liabilities2. Liabilities
3. Owners Equity3. Owners Equity
4. Revenues4. Revenues
5. Expenses5. Expenses
-
8/6/2019 BS and IS v2
4/15
Income Statement
Income = Revenue - Expenses
Revenue
Income from sales of
goods and services
Increases ownersequity
Expenses
Costs incurred in
earning revenue
Decreases ownersequity
-
8/6/2019 BS and IS v2
5/15
Why have a Business?
Accounting SystemsIncome Statement (P&L)
Revenue R2,000Less
Cost of goods sold (COGS)
Material (Direct) R1 120Labour (Direct) R 160
Overheads (Indirect) R 320
Total COGS - R1 600
Gross Profit R 400Less: General & administrative expenses - R 250
Net Profit Before Tax R 150Less: Income Tax Due (30%) - R 50
Net ProfitAfterTax R 100
70%10%20%
-
8/6/2019 BS and IS v2
6/15
A Balance Sheet Equation
Why have a Business?
Items youown
Amounts youoweowe
leftover
Owners Equity = Assets Liabilities
AssetsAssets =
LiabilitiesLiabilities =
Owners equity = What is after liabilities arepaid, but owed to the Owner
-
8/6/2019 BS and IS v2
7/15
Why have a Business?
So, how do you know if you are making money ? A Balance Sheet
Accounting Systems
Owned
Assets
Current AssetsStock 2 000Debtors 20 000
Cash 3 000
25 000
Fixed Assets
Buildings 500 000P & E 350 000
Office Equip 50 000
Motor Vehicles 100 000
1 000 000
Total 1 025 000
Owed
Liabilities
Current Liabilities
Trade Creditors 15 000Bank Interest 1 500
Tax (VAT, etc) 2 500
19 000
LT Liabilities
Bank Loans 300 000
Owners EquityShareholders 700 000
R. Earnings 6 000
Total 1 025 000XXXXXX
-
8/6/2019 BS and IS v2
8/15
Balance Sheet
The effect of a Stock lossOwned
Assets
Current AssetsStock 2 000Debtors 20 000
Cash 3 000
25 000
Fixed Assets
Buildings 500 000P & E 350 000
Office Equip 50 000
Motor Vehicles 100 000
1 000 000
Total 1 025 000
Owed
Liabilities
Current LiabilitiesTrade Creditors 15 000
Bank Interest 1 500
Tax (VAT, etc) 2 500
19 000
LT Liabilities
Bank Loans 300 000
Owners EquityShareholders 700 000
R. Earnings 6 000
Total 1 025 000XXXXXX
1 900
24 900
1 024 900 1 024 900
5 900
Stock Count?
Stock LOSS!!LOSS!!
-
8/6/2019 BS and IS v2
9/15
Income Statement (P&L)
Recovering the Stock LossRevenue R2,000Less
Cost of goods sold (COGS)
Direct labor R 160
Direct Material R1 120
Overheads R 320
Total COGS - R1 600
Gross Profit R 400Less: General & administrative expenses - R 250
Net Profit Before Tax R 150Less: Income Tax Due (30%) - R 50
Net ProfitAfterTax R 100 ZERO R100?
R2,000 !Another
-
8/6/2019 BS and IS v2
10/15
Inventory and Financial Results
So inventory on the books is notnot as good asinventory converted into products and then
sold.
Because raw material inventory is an
expenseexpenseon the income statement; it
offsets revenue, which reducesreduces assets.
And WIP and Finished Goods inventory
include allocations of direct labor and factory
overhead i.e., costs added in production
which offset revenue and reducereduce assets.
Inventory is an assetasset on the balance sheet,so why not have more of it?
The sale of a manufactured product converts
inventory and its built up costs into revenue,
which includes a profit margin i.e. the value
added by the production process.
Revenues are thus higher than costs, to the
benefit of cash and owners equity on the
balance sheet.
From a supply chain management perspective
as well, converting inventory quicklyquickly intosales is a major objective and has positive
financial statement implications.
How aggregate inventory management is concernedwith the flow of materials through various inventory
classifications to produce a profit
-
8/6/2019 BS and IS v2
11/15
Inventory Turns
A measure of how effectively inventory is being used
Example:
Annual cost of goods sold =
Average inventory =
Annual cost of goods soldAverage inventory in dollars
Inventory turns =
$1,000,000$500,000Inventory turns =
= 2= 2
$1,000,000$50,000
$1,000,000$5,000
= 10= 10 = 100 != 100 !
$1,000,000
$ 50,000
BB
$1,000,000
$ 5,000
CCAA$1,000,000
$ 500,000
-
8/6/2019 BS and IS v2
12/15
Days ofSupply
Used to measure the relationship betweenusage (sales) and inventory
In this example, 6,000 units are sold on average
over a period of 30 days at 200 units per day Inventory turns every 30 days, or 12 times a
year (inventory turns are 12)
Days of supply =200
6,000= 30 days
Inventory on hand
Average daily usage=
-
8/6/2019 BS and IS v2
13/15
Why have a Business?One good Reason: To make some money (a PROFIT)! To build WEALTHSo, how do you know if you are making money ?
Balance SheetIncome Statement
(P&L)
Owned
Assets
Current AssetsStock 2 000
Debtors 20 000
Cash 3 000
25 000
Fixed Assets
Buildings 500 000P & E 350 000
Motor Vehicles 100 000
Office Equip 50 000
Total 1 025 000
Owed
Liabilities
Current LiabilitiesTrade Creditors 15 000
Bank Interest 1 500
Tax (VAT, etc) 2 500
19 000
LT Liabilities
Bank Loans 300 000
Owners EquityShareholders 700 000
R. Earnings 6 000
Total 1 025 000
Owned
Assets
Current AssetsStock 2 000
Debtors 20 000
Cash 3 000
25 000
Fixed Assets
Buildings 500 000P & E 350 000
Motor Vehicles 100 000
Office Equip 50 000
Total 1 025 000
Owed
Liabilities
Current LiabilitiesTrade Creditors 15 000
Bank Interest 1 500
Tax (VAT, etc) 2 500
19 000
LT Liabilities
Bank Loans 300 000
Owners EquityShareholders 700 000
R. Earnings 6 000
Total 1 025 000
-
8/6/2019 BS and IS v2
14/15
Why have a Business?
So, how do you know if you are making money ? A Balance Sheet
Owned
Assets
Current AssetsStock 2 000
Debtors 20 000
Cash 3 000
25 000
Fixed Assets
Buildings 500 000P & E 350 000
Office Equip 50 000
Motor Vehicles 100 000
1 000 000
Total 1 025 000
Owed
Liabilities
Current LiabilitiesTrade Creditors 15 000
Bank Interest 1 500
Tax (VAT, etc) 2 500
19 000
LT Liabilities
Bank Loans 300 000
Owners EquityShareholders 700 000
R. Earnings 6 000
Total 1 025 000
Accounting Systems
-
8/6/2019 BS and IS v2
15/15
Why have a Business?One good Reason: To make some money (a PROFIT)! To build WEALTHSo, how do you know if you are making money ?
Balance Sheet Income Statement(P&L)
Owned
Assets
Current AssetsStock 2 000
Debtors 20 000
Cash 3 000
25 000
Fixed AssetsBuildings 500 000
P & E 350 000Motor Vehicles 100 000
Office Equip 50 000
Total 1 025 000
Owed
Liabilities
Current LiabilitiesTrade Creditors 15 000
Bank Interest 1 500
Tax (VAT, etc) 2 500
19 000
LT LiabilitiesBank Loans 300 000
Owners EquityShareholders 700 000
R. Earnings 6 000
Total 1 025 000
Revenue $2,000
Less
Cost of goods sold (COGS)
Direct labor $ 160Direct Material $1 120
Overheads $ 320
Total COGS - $ 1 600
Gross Profit $ 400Less
General and administrative expenses - $ 250
Net Profit Before Tax $ 150
LessIncome Tax Due (30%) - $ 50
Net ProfitAfterTax $100