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The main financial

statements

Cash flow statement

Income statement

Statement of financial position

1
Example - Jody

Jody set up in business selling


cakes from a stall at Riccarton
campus.
She bought 100 cakes from a
wholesaler costing 50p each,
paying cash from her own
purse.
On her first day, she sold 80 cakes
for £1 each

2
What cash movements
took place?

Statement of cash flows


£
Opening balance (cash introduced) 50
Cash received from sales of cake 80
Cash paid to buy cakes (50)
Closing balance of cash 80

3
How much profit was
generated?

Income statement
£
Sales revenue 80
Cost of goods sold (80 x 50p) (40)
Profit 40

4
What is the accumulated
wealth at the end of day 1?

Statement of financial
position
£
Cash (closing balance) 80
Inventories of cakes for resale (20 x 50p) 10
Total assets 90

Capital (cash paid in by Jody) 50


Profit 40
Total equity 90

5
Jody – Day 2

Next day, Jody bought 120 more


cakes for £60, using the cash
generated by her sales the
previous day.
On day 2, Jody managed to sell
130 cakes for £1 each

6
Day 2 results

Statement of cash flows


£
Opening balance (from Day 1) 80
Cash received from sales of cake 130
Cash paid to buy cakes (60)
Closing balance of cash 150

Income statement
£
Sales revenue 130
Cost of goods sold (130 x 50p) (65)
Profit 65

7
Statement of financial position
£
Cash (closing balance) 150
Inventories of cakes for resale (10* x 50p) 5
Total assets 155

Capital (cash paid in by Jody) 50


Profit (40 day 1 +65 day 2) 105
Total equity 155

* 20 cakes left over from day 1 + 120 cakes


purchased – 130 cakes sold day 2

8
Statement of financial
position
It shows how the business is financed
and how these funds are deployed

It can provide a basis for assessing


the value of the business

Relationships between assets and


claims can be assessed

Performance can be better assessed

9
Assets
• A resource held by the company
– A probable future benefit must
exist
• Inventories will be sold for cash
– Must be exclusively controlled by
the business
• Scotrail runs a railway, but tracks
are owned by Network Rail
– Benefit from a past transaction or
event
• Factory must have been purchased,
not just agreement to buy
– Must be measurable in monetary
terms
• Value of workforce cannot be
included as an asset
10
Classification of assets

• Typical business assets


– Property
– Plant and equipment
– Fixtures and fittings
– Patents and trademarks
– Inventory
– Trade receivables

• Assets are divided into non-


current (fixed) and current
assets.
11
Non- current assets
• Held for long-term operations
(more than 1 year)
• May be tangible, intangible, or
investments.

Current assets
• Held for the short-term (< 1 year)
• Used as part of normal business
cycle

12
Circulation of current
assets

Inventories
(stock)

Trade
Cash receivables
(debtors)
Valuation of assets
• Usually included at historic cost

• Non-current assets
– depreciated each year, over their
expected useful lives
– Can be revalued to current
market value
• Eg rise in property prices
– If significant drop in value,
reduce figure to recoverable
amount
• Drop in value of shares owned by a
company

14
Equity
• Owner’s claim against the business
• Remember business entity
convention
• Comprises funds paid into the
business by the owners, less funds
taken out by owners plus any
profits made by the business

Liabilities
• Claims of anyone else against the
business, such as:
– Loans
– Trade payables
– Tax due
15
Classification of
liabilities
• Current liabilities
– Due for settlement in the short-
term (<1 year)

• Non-current liabilities
– Due for settlement in the long-
term (>1 year)

16
Brie Manufacturing
Statement of financial position as at 31
December 2008

£000

Non-current assets

Property 45

Plant and equipment 30

Motor vans 19

94

Current assets

Inventories 23

Trade receivables 18

Cash at bank 12

53

Total Assets 147


(continued)

£000

Equity (owner’s capital)

Opening balance 50

Profit 10
60

Non-current liabilities

Long-term borrowings 50

Current liabilities

Trade payables 37

Total equity and liabilities 147


Measuring and reporting
financial performance

• Income statement
• Profit (or loss) = total revenue
for the period minus total
expenses for the period
• Provides information on:
– how effective the business has
been in generating wealth
– how the profit was made

19
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 (1,000)
fittings
Depreciation – motor van (600)
Operating profit 24,600
Interest received from 2,000
investments
Loan interest (1,100)
Profit for the year 25,500
Cost of sales
RETAIL
Opening inventories
+ Purchases
- Closing inventories
= Cost of sales

MANUFACTURING
Opening inventories
+ Raw materials
+ manufacturing wages
+ manufacturing expenses
- closing inventories
= Cost of sales

21
Grouping types of
expenses
• Cost of sales
• Selling and distribution costs
– Selling costs
– Advertising
– Delivery costs
• Administrative expenses
– Telephone
– Electricity
– Insurance
– Legal fees
– Any other expenses that are not
allocated elsewhere
22
Recognising expenses
• Accrued expenses (accruals)
– Arise when the expense for the
period is more than the cash paid
during the period
– Example :
Company A paid £4,000 electricity in
the year to 31 Dec 2010. At the year
end, it had not paid its final
electricity bill which arrived in
January 2011, amounting to £1,500.

Must increase electricity expense by


£1,500, and create a new current
liability called accrued expenses of
£1,500

23
• Prepaid expenses (prepayments)
– Arise when the amount paid for
the period is more than the
expense for the period
– Example :
Company B also has a year end of 31
December 2010. During the year, it
paid £24,000 for an annual
insurance premium, which covers
the period 1 April 2010 until 31
March 2011.

Must reduce insurance expense by


£6,000, and create a new current
asset called prepaid expenses of
£6,000

24
Depreciation
• Spreads the cost of an asset over
its estimated useful life
• Avoids under or over stating
profit
• Example: company usually
makes £10,000 profit each year.
It buys a lorry costing £30,000
in year 4.
15

10

0
1 2 3 4 5 6
-5

-10

-15

-20

-25
25
Calculating depreciation

Car purchased for £10,000.


Estimated useful life 5 years, with
no scrap value anticipated..
Straight Reducing
line Balance (50%)
Cost 10,000 10,000
Depreciation Year 1 (2,000) (5,000)
Net Book Value
(NBV) 8,000 5,000
Depreciation Year 2 (2,000) (2,500)
NBV 6,000 2,500
Depreciation Year 3 (2,000) (1,250)
NBV 4,000 1,250
Depreciation Year 4 (2,000) (625)
NBV 2,000 625
Depreciation Year 5 (2,000) (313)
NBV nil 31226
Effect of depreciation on
accounts
• Each year, the depreciation
charge is included as an expense
in the income statement
• The asset in the statement of
financial position is reduced by
the same amount
• Over several years, the written-
down value of the asset will get
lower and lower

27
• If the asset has a residual
(scrap) value, that should be
deducted from the cost of the
asset (straight-line method only)
• intangible assets are amortised
rather than depreciated –
technique identical
• Selecting a depreciation method
– Each business can choose an
appropriate method
– Best to match depreciation
expense with economic benefits
provided by asset
• Building – straight-line
• Motor vehicle – reducing balance

28
The following balances have been extracted from
the books of Tigger Ltd, at 31 March 2010:
€000
Advertising 3
Cash in bank 11
Trade payables 12
Trade receivables 118
Furniture and fittings – cost 20
Furniture and fittings – depreciation at
31.3.09 9
Directors’ fees 6
Equity 78
Purchases 124
Rent and rates 10
Sales 270
Inventories at 31.3.09 16
Telephone and stationery expense 5
Travelling expenses 2
Delivery vehicles – cost 40
Delivery vehicles - depreciation at
31.3.09 10
Wages and salaries 2429
Additional information:
• Inventories at 31 March 2010 were
valued at €14,000
• Furniture and fittings and the vehicles
are to be depreciated at the rate of 15%
and 25% respectively, on cost
• Wages and salaries are to be split
equally between selling and distribution ,
and administration expenses
• Tax based on the year’s profits is
estimated at €25,000

• Issued share capital comprises 70


shares of 1 Euro each

Required
Prepare an income statement and
statement of financial position for Tigger
Ltd for the year ended 31 March 2010 30

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