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Week 2: Financial Statements
Nguyen Thu Huong (M.A)Wednesday – 12.30pm – B509
Financial Statements
Provide an overview of a business' financial condition in both short and long term.
Financial Statements
Profit and Loss Account
Balance sheet
Source and Application of Funds
Statement
Profit and Loss Account
Shows revenue and expenditureGives figures for:
Total sales or turnover Costs and overheads
Overheads
Refer to an ongoing expense of operating a
business, but do not directly generate profits.
Include accounting fees, advertising,
depreciation, insurance, interest, legal fees,
rent, repairs, supplies, taxes, telephone bills,
travel and utilities costs.
Profit and Loss AccountTotal sales / Turnover / Revenue (Promotion)
Net sales(Sales costs / Cost of goods sold)Gross profit (Total expenses: SG&A expenses, etc)Net profit before tax(Tax)Net profit after tax Dividends Retained profit (to reinvest or reserve)
Balance Sheet
Shows the financial situation of the company on a particular date (generally the last day of its financial/fiscal year)
Lists:
1. Company’s assets,
2. Liabilities, and
3. Shareholders’ funds.
Balance Sheet
1. Company’s assets: everything of value that
is owned by a person or company. Include:
Cash investments + Property (buildings,
machines, etc.)
Debtors: money owed by customers
(account receivable)
Assets
Assets
Current assets include money in bank,
cash at vault, investments, money owed by customers, inventory.
Long-term assets: fixed assets (buildings,
equipment, machines), financial assets,
investment property, intangible assets .
Assets Intangible assets are nonphysical resources
and rights that have a value to the firm because they give the firm some kind of advantage in the market place.
Examples are goodwill, copyrights, trademarks, patents and computer programs.
Assets
Goodwill reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets.
Balance Sheet
2. Liabilities = creditors (account
payable), consist of the money that a
company will have to pay to someone
else, such as taxes, debts, interest,
mortgage payment, suppliers .
Balance Sheet
3. Shareholders’ funds: Share capital Share premium Company’s reserves (year’s retained profits)
Book-keeping
Is the recording of the value of asset, liabilities, income, and expenses in the daybooks, journals, and ledgers, in which debit and credit entries are chronologically posted to record changes in value.
Book-keeping Daybook is a descriptive and diary-like
record of day-to-day financial transactions. Journal is a formal and chronological record
of financial transactions before their values are accounted in general ledger as debits and credits.
Ledger is a record of accounts, each recorded individually (on a separate page) with its balance.
Book-keeping
Debit and credit: respectively represent a reduction of liability in asset, and the other representing a balancing increase in liability or reduction of asset.
Debit: A debit is recorded on the left hand side of a T account
Credit: A credit balance is recorded on the right hand side of a 'T' account
Book-keeping Single-entry bookkeeping system also
single-entry accounting system is a one sided accounting entry to maintain financial information.
Double-entry bookkeeping means each txn is recorded in two accounts: one is debited and the other is credited, so that the total debits of the transaction equal to the total credits.
Double-entry bookkeeping Assets = Liabilities + Owners’/Shareholders’ Equity
Assets – Liabilities = Shareholders’ Equity Shareholders’ Equity = Net Assets Company’s market capitalization is
Total share value = Shares No. * Market price
Source & Application of Funds Statement
Different names: The sources and uses of funds statement The funds flow statement The cash flow statement The movements of funds statement The statement of changes in financial
position
Source & Application of Funds Statement
Shows the flow of cash IN and OUT of the business between balance sheet dates.
Includes: Sources of Funds, and Application of Funds
Source & Application of Funds Statement
Sources of funds include: Trading revenues, Depreciation provisions, Borrowing, The sale of assets, and The issuing of shares.
Source & Application of Funds Statement
Applications of funds include: The purchase of fixed or financial assets, The payment of dividends, The repayment of loans, and Trading losses (in a bad year).
Consolidated Accounts
If a company has a majority interest in other
companies, the balance sheets and profit
and loss accounts of the parent company
and the subsidiaries are normally
combined in consolidated accounts.
Financial terms
Profit and Loss Account Balance sheet Source and Application of Funds
Statement Overheads Tangible vs Intangible assets Current assets Debtors - Account receivable
Financial terms
Inventory Long-term assets Fixed assets Financial assets Goodwill Liabilities Creditors – Account payable
Financial terms Shareholders’ funds / Net assets Book-keeping Daybooks / Journals / Ledgers Single-entry / Double-entry bookkeeping Company’s market capitalization Trading revenues Depreciation provisions Consolidated accounts
Home workAssets, liabilities and balance
sheet (Vocabulary exercise)Listening 1Listening 2
Preparing for next classStocks and Shares 1Stocks and Shares 2BondsDoing business in the 21st century
Thank you!
