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8/14/2019 6 chpt 3&4
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.1
Drs. Galama, Stenden University
LEARNING OUTCOMES
You should be able to
prepare an income statement from relevant
financial information;
discuss the nature and purpose of the
income statement;
explain the main accounting conventions
underpinning the income statement.
discuss the main measurement issues that must beconsidered when preparing the income statement;
Chapter 3 Measuring and reporting financial performance
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.2
Drs. Galama, Stenden University
Measuring profit
Total revenue for the periodless
Total expenses incurred in generating that revenue
Profit(or loss)
for the
period
=
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.3
Drs. Galama, Stenden University
Revenue generated by Rolls-Royce plc during the year
ended 31 December 2006
(3,775m)
Civil aerospace (1,300m)
Marine
(512m)
EnergyDefence aerospace
(1,569m)
53%
18%
22%7%
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.4
Drs. Galama, Stenden University
Relationship between the income statement and the
balance sheet
The above equation can be extended to:
Profit
(Loss)Assets Equity Liabilities
+
()= +
+Sales
revenue
Expenses Liabilities+Assets Equity=
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.5
Drs. Galama, Stenden University
Example 3.1 Better-Price Stores
Income statement for the year ended 31 October 2008
Sales revenue 232,000
Cost of sales (154,000)
Gross profit 78,000
Salaries and wages (24,500)
Rent and rates (14,200)
Heat and light (7,500)
Telephone and postage (1,200)
Insurance (1,000)
Motor vehicle running expenses (3,400)
Depreciation fixtures and fittings (1,000)
Depreciation motor van (600)
Operating profit 24,600
Interest received from investments 2,000
Loan interest 1,100
Profit for the year 25,500
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.6
Drs. Galama, Stenden University
Calculating gross profit for Better-Price Stores
Sales revenue 232,000
Cost of sales:
Opening inventories 40,000
Goods bought 189,000
Closing inventories (75,000) (154,000)
Gross profit 78,000
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7/34Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.7
Drs. Galama, Stenden University
Profit measurement and the recognition of revenue
It is probable that the economic
benefits will be received
The amount of revenue can be
measured reliably
Basic criteria that must be met
before revenue is recognised
Additional criterion is to be
applied where the revenue comes
from the sale of goods
Ownership and control of the
item should pass to the buyer
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Slide 3.8
Drs. Galama, Stenden University
Accounting for sales commission
Sales commission
expense6,000
Income statement
(profit and loss
account)
Balance
sheetat year
end
Cash 5,000
Accrual 1,000
Cash flow
statement
8/14/2019 6 chpt 3&4
9/34Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.9
Drs. Galama, Stenden University
Accounting for rent payable
Rent payable expense16,000
Income statement
Balance
sheetat year
end
Cash 20,000
Prepaid expense 4,000
Cash flow
statement
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.10
Drs. Galama, Stenden University
Accounting conventions and the income statement
Accruals
Materiality
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.11
Drs. Galama, Stenden University
Profit measurement and the calculation of depreciation
The useful life of the asset
The residual value of the asset
The cost (or fair value) of the asset
To calculate a depreciation charge for a period, fourfactors have to be considered:
The depreciation method.
Slid 3 12
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.12
Drs. Galama, Stenden University
Graph of written-down value against time using the
straight-line method
Written
-do
wnvalue(
000)
Asset life (years)
20
40
60
80
0 1 2 3 4
Slid 3 13
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.13
Drs. Galama, Stenden University
Written
-do
wnvalue(
000)
Asset life (years)
20
40
60
80
0 1 2 3 4
Graph of written-down value against time using the
reducing-balance method
Slide 3 14
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.14
Drs. Galama, Stenden University
Calculating an annual depreciation charge
Year 1 Year 3Year 2 Year 4
and so on
Depreciation DepreciationDepreciationDepreciation
less
Residual value
equals
Cost (fair value)
Depreciable amount
Asset life (number of years)
Slide 3 15
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.15
Drs. Galama, Stenden University
Last in, first out (LIFO)
Weighted average cost (AVCO).
First in, first out (FIFO)
Common assumptions used are:
Profit measurement and inventory costing methods
Slide 3 16
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.16
Drs. Galama, Stenden University
Uses of the income statement
Provides information on how
effective the business has been in
generating wealth
Provides information on how the
profit was made
Slide 3 17
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.17
Drs. Galama, Stenden University
LEARNING OUTCOMES
You should be able to
describe the main features of the owners claim
in a limited company;
discuss the nature of the limited company;
explain how the income statement and balance
sheet of a limited company differ in detail from that
of a sole proprietorship or a partnership business.
discuss the framework of rules that surround
accounting for limited companies;
Chapter 4 Accounting for limited companies
Slide 3 18
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.18
Drs. Galama, Stenden University
Main features of a limited company
Limited liability
Perpetual life
Slide 3.19
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.19
Drs. Galama, Stenden University
Two main forms of limited company
Private limited company (Ltd)
Public limited company (plc)
Slide 3.20
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 3.20
Drs. Galama, Stenden University
The economic importance of public limited companies an example
Market share of the four largest grocers: 12 weeks to 15 July 2007
11.1%
Morrison
Other
24.5%
16.7%
Asda
16.2%
Sainsbury
Tesco
31.5%
Slide 3.21
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Corporate governance
Accountability
Disclosure
Fairness.
Three guiding principles:
Slide 3.22
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
The Combined Code
Every listed company should have a
board of directors
There should be a clear division of responsibilities
between the chairman and the chief executive officer
There should be a balance between
executive and non-executive directors
Appointments to the board should be subject to
rigorous, formal and transparent procedures
The board should receive timely information
Slide 3.23
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
The Combined Code (Continued)
All directors should submit themselvesfor re-election at regular intervals
The board has a responsibility for ensuring that a
satisfactory dialogue with shareholders occurs
There should be formal and transparent procedures
for developing policy on directors remuneration
Boards should use the annual general meeting tocommunicate with private investors
Slide 3.24
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
The Combined Code (Continued)
Formal and transparent arrangements should be
in place for internal controls and financial
reporting and for maintaining a relationship with
auditors
Internal controls should be in place to protect
the shareholders wealth
The board should publish a balanced and
understandable assessment of the companys
position and performance
Institutional shareholders have a responsibility touse their votes
Slide 3.25
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Share
issues
Long-term
loans
Long-term finance
Retained
profits
Sources of long-term finance for a typical limited company
Slide 3.26
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Further issues of new shares
Public issues
Rights issues
Private placings
Slide 3.27
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Notavailable
for
dividend
Share capital(at nominal
or par value)
Capital
reserves
Revenuereserves
Available
for
dividend
Availability for dividends of various parts of the shareholders claim
Slide 3.28
E l 4 5 D Sil l
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
(12)Printing and stationery
(4)Insurance
(20)Motor vehicle expenses
(24)Rent and rates
(18)Heat and light
(98)Wages and salaries
320Gross profit
(520)Cost of sales
840Revenue
m
Example 4.5 Da Silva plc
Income statement for the year ended 31 December 2008
Slide 3.29
E l 4 5 D Sil l (C ti d)
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
(45)Depreciation
(4)Audit fee
95Operating profit
(10)Interest payable
85Profit before tax
(24)Taxation
61Profit for the year
m
Example 4.5 Da Silva plc(Continued)
Income statement for the year ended 31 December 2008
Slide 3.30
Example 4 5 Da Silva plc
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
m
305
50Other reserves
25Retained earnings
30Share premium account200Ordinary shares of 0.50 each
Equity
516Total assets
213
36Cash
112Trade receivables
65Inventories
Current assets303
100Intangible assets
203Property, plant and equipment
Non-current assets
Example 4.5 Da Silva plc
Balance sheet as at 31 December 2008
Slide 3.31
Example 4 5 Da Silva plc (Continued)
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Non-current liabilities
100Borrowings
Current liabilities
99Trade payables
12Taxation
111516Total equity and liabilities
m
Example 4.5 Da Silva plc(Continued)
Balance sheet as at 31 December 2008
Slide 3.32
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Accounting standards
how information should be
presented;
how assets should be valued;
what information should be
disclosed;
how profit should be measured.
Deal with issues such as:
Slide 3.33
S f t l ti l ti f UK bli li it d li t d th
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University
Company
law
International
financial
reportingstandards
External
accounting
rules
Stock Exchange rules
imposed by FSA
Sources of external accounting regulations for a UK public limited company listed on the
London Stock Exchange
Slide 3.34
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The relationship between the shareholders, the directors and the auditors
Elect
Report
ElectReview
Account
Shareholders Auditors
Directors