BAO6504

Accounting for Management

Lecture 2

Financial Statements
Reference: Chapters 1 & 4

FINANCIAL STATEMENTS

Income Statement
(Statement of Financial Performance)

Reports revenues less expenses for a

particular period of time

Balance Sheet
(Statement of Financial Position)

Reports assets and claims to those assets at

a particular point in time
2

FINANCIAL STATEMENTS
continued

Statement of Changes in Equity

Reports amount of profit for the

period and the changes in equity

Cash Flow Statement

Reports information regarding cash

receipts and cash payments for a
particular period of time
3

Income statement

Purpose is to report success or

failure of the entitys operations for
a period of time
Managers are interested in the
bottom line because they allocate
resources based on their beliefs
about an entitys future
performance
4

Income statement continued

WONG PTY LTD
Income Statement
for the month ended 31 October 2010
Service revenues
$10 600
Expenses
Salaries expense
$3 200
Supplies expense
1 500
Rent expense
900
Insurance expense
50
Interest expense
50
Depreciation expense
40
5 740
Profit before tax
4 860
Tax expense
2 000
Profit after tax
$ 2 860
5

MERCHANDISING
OPERATIONS

Merchandising businesses buy and

resell inventory
Revenues are referred to as sales
revenue
Expenses are divided into two
categories:

Cost of goods sold

Operating expenses
7

MERCHANDISING
OPERATIONS
Profit measurement process for a
merchandising business
Sales
revenue

Less

Equals
Cost of
goods sold

Gross
profit

Less

Operating
expenses

Equals

Profit
(loss)
8

Cost of goods sold

Cost of goods sold
Inventory, 1 July 2010
Purchases
$325 000
Less: Purchase ret. & allow.
Net purchases
307 800
Add: Freight-in
12 200
Cost of goods purchased
Cost of goods available for sale
Inventory, 30 June 2011
Cost of goods sold

$ 36 000
17 200

320 000
356 000
40 000
316 000

Operating expenses

Selling expenses

Administration expenses

cost of making the sale

e.g. advertising, delivery expenses
cost of operating activities of the general, accounting and
personnel offices
e.g. salaries, rent

Financial expenses

costs of financing the business

e.g. interest expense, discounts allowed

10

PW AUDIO SUPPLY LTD

Income Statement
for the year ended 30 June 2011

Operating revenue
Sales revenue
Gross sales revenue
$480 000
Less: Sales returns and allowances
(20 000)
Net sales revenue
460 000
Less: Cost of goods sold
(316 000)
Gross profit
144 000
Other operating revenue
Rent revenue
$15 000
Interest revenue
9 000
168 000
Operating expenses
... Continued on next slide

11

Operating expenses
Selling expenses
Sales salaries & commission expense
$45 000
Advertising expense
16 000
Freight-out
8 000
Rent expense store space
7 000
Depn expense store equipment
5 000
$81 000
Administration expenses
Office salaries expense
19 000
Electricity expense
4 000
Rent expense office space
10 000
Depn expense office equipment
3 000
Insurance expense
2 000
38 000
Financial expenses
Interest expense
2 000
Discount allowed
4 000
6 000
(125 000)
Profit before income tax
43 000
Less: Income tax expense
(12 900)
Profit after tax
$ 30 100

12

13

Balance sheet

Reports assets and claims to those

assets at a specific point in time
Based on the basic accounting
equation
ASSETS = LIABILITIES + EQUITY

14

Balance sheet continued

Cash
Accounts receivable
Advertising supplies
Prepaid insurance
Office equipment
Total assets

WONG PTY LTD

Balance Sheet
as at 31 October 2010
Assets
$15 200

200
1 000
550
4 960
$21 910
Liabilities and equity

Liabilities
Accounts payable
$ 2 500
Interest payable
50
Revenue received in advance
800
Salaries payable
1 200
Bank loan
5 000
Total liabilities
$ 9 550
Equity
Share capital
10 000
Retained earnings 31/10/08
2 360
15
Total equity
12 360
$21 910

Statement of changes in
equity

Reports amount of profit for period and

other changes in equity such as
adjustments to retained earnings for

Changes in accounting standards

Changes in accounting policies
Correction of errors
Gains recognised directly in equity

Retained earnings refers to

accumulated profit which has not been
distributed to shareholders
16

Statement of changes in
equity continued
WONG PTY LTD
Statement of Changes in Equity (extract)
as at 31 October 2010
Profit
$ 2 860
Retained earnings 1/10/10
0
Dividends
(500)
Retained earnings 31/10/10
$ 2 360

17

The classified balance

sheet

Minimum disclosures:
Assets
Cash assets
Trade and other
receivables
Other financial assets
Inventories
Investments in property
Property, plant and
equipment
Tax assets
Intangible assets

Liabilities
Trade and other payables
Financial liabilities
Tax liabilities
Provisions
Equity
Capital and reserves
Retained earnings or
accumulated losses
18

The classified balance

sheet continued
Current assets

Assets that are cash, held for the

purpose of being traded, or expected
to be converted to cash or used in the
business within one year

Non-current assets

Assets that are not expected to be

sold or consumed within one year
19

The classified balance

sheet continued
Current liabilities

Obligations that are to be paid within

one year

Non-current liabilities

Obligations that are not classified as

current

20