Purpose of Financial Statement

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Relationships among the Financial Statements  Profit and Loss Statement  Statement of owners’ equity  Balance Sheet  Cash Flow Statement

Transcript of Purpose of Financial Statement

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Relationships among theFinancial Statements

 – Profit and Loss Statement

 – Statement of owners’ equity

 – Balance Sheet

 – Cash Flow Statement

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Ms JonesProfit and Loss Statement

Month Ended 30 June, 2001

RevenuesFees Earned $1,800

Expenses

Wages Expense $ 600

Utilities And Telephone Expense 300

Equipment Rental Expense 200

Office Maintenance Expense 100 -1,200

 Net Profit $ 600

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Ms JonesStatement Of Owners’ Equity Month Ended 30 June, 2001

J. Jones, Capital, 1 June, 2001 $ 0

Contribution Of Capital 95,000

 Net Income 600

Cash Distributions (500)

J. Jones, Capital, 30 June, 2001 $95,100

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Ms JonesBalance Sheet

as at 30 June, 2001

Assets

Cash $34,500

Accounts Receivable 200Supplies 600

Land 60,000

Total Assets $95,300

Note: The cash balance on the balance sheet = ending cash balance

in the cash flow statement.

Liabilities

Accounts Payable $ 200

Owners’ Equity 

J. Jones, Capital 95,100

Total Liabilities and

Owners’ Equity  $95,300

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Ms JonesBalance Sheet

as at 30 June, 2001

Assets

Cash $34,500

Accounts Receivable 200

Supplies 600

Land 60,000

Total Assets $95,300

Liabilities

Accounts Payable $ 200

Owners’ Equity Contribution Of Capital 95,000

Net Income 600

Cash Distributions (500)

Total Liabilities

& Owners’ Equity  $95,300

Note: The cash balance on the balance sheet = ending cash balance in the cash

flow statement.

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Ms JonesStatement of Cash Flows

Month Ended 30 June, 2001

Net Cash Flows from Operating Activities -0-

Cash Flows from Investing Activities -60,000

Net Cash Flows from Financing Activities 94,500Cash at Beginning of Month 0

Cash at End of the Month $34,500

Note: The cash balance on the balance sheet = endingcash balance on the cash flow statement.

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FINANCIALSTATEMENTFORMAT

Homework: students are to research for real examples ofdifferent business

•Limited company

•Corporation with at least one subsidiary

•Partnership

•Sole trader

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Trading and Profit & Loss Account

(In $)

Sales xxx

Less: Cost of Goods Sold 

Opening Stock  xxx

 Add: Purchase  xxx

Less: Purchase Returns  x

 Add: Carriage Inwards  xx

Less: Closing Stock  xx xxxGross Profit  Xxx

Add: Other Incomes xxx

xxx

Less: Other Expenses xx

Operating Profit xxx

Less Interest xxx

Less Tax xxx

Net Profit xxx

Less Dividend xxx

Retained Profit xxx

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The Income Statement

1. Statement of operations or a statement of (accrual)performance over a given period of time.

2. Revenues, expenses, gains and losses.

3. Basic relationship:

Sales – COGS – Operating Expenses

± Non-operating Income (Expense) – Income Tax

= Net Earnings

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Statement Of Owners’ Equity 

Beginning Capital $ 0

Contribution Of Capital 95,000

 Net Income 600

Cash Distributions (500)

Ending Capital $95,100

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(In $) (In $) (In $)

Fixed Assets:  Cost Acc. Dep Net Book Value

Plant & Machinery xxx x xxOffice Equipment xxx x xx

xxx

Add: Working Capital 

Current Assets xx

xx xxx

Less: Current Liabilities xx xxx

xxx

Financed by:

Long Term Liability xx xxx

Capital xxx

Add: Net Profit xx

Less: Drawing xx xxxxxx

BALANCE SHEET

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The Balance Sheet

1. Snapshot at a given point in time.

2. Three categories:

a. Assets

b. Liabilitiesc. Equity

3. Basic equation:

 Assets = Liabilities + Shareholder Equity

4. Differentiate between current and noncurrent: 1-yearthreshold

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Cash Flow Statement

Cash collections $2,675,000

Less: Cash inputs $(1,750,000)Cash expenses (rent, operating) (430,000)

Cash interest (125,000) (2,305,000)

Cash flow from operations  $370,000 

Capital expenditures (500,000)

Investment in affiliate (710,000)

Cash flow from investments  (1,210,000)

Short-term borrowing 500,000

Dividends paid (35,000)

Cash flow from financing  465,000 

Net cash flow  $(375,000)

Ending Cash balance, $3,625,000

Beginning Cash Balance 4,000,000

Net change  $(375,000)

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The Statement of Cash Flows

1. Explanation of the change in cash from the beginningto the end of an accounting time period.

2. Categories include:

a. Operating (activities)

b. Investing (activities)

c. Financing (activities)

The Need to Compare Earnings and Cash-Flow Information

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FINANCIAL STATEMENTof DIFFERENT BUSINESS

Homework: students are to research for real examples ofdifferent business

•Limited company

•Corporation with at least one subsidiary

•Partnership

•Sole trader

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Sole trader

Basis: Sole Trader has unlimited liability.Statement:Net profit / loss = Capital at the end of the period +

Drawings for the period – Opening Capital – Additionalcapital introduced during the period

Capital = Assets – LiabilitiesGoodwill: Usually this item is not applicable. Where

Goodwill appear in the Balance Sheet, it is assumedthat the sole trader has bought the business fromsomeone previously and was not himself the founder ofthe business

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Partnerships• Where no agreement, Patnership Ac t 1890 states: :

• Partners share profit and losses equally• Partners are not entitled to receive salaries• Partners are not entitled to interest on their capital account

balances• Where a partner put in an amount in excess of the capital he

has agreed to subscribe, he is entitled to 5% per annum onsuch an advanced• No interest to be charged on drawing•  A new partner may not be introduced without consent of all

existing partners

• Upon dissolution, the assets must be distributed in the followingorder: – repay outside creditors – repay partners’ advances  – repay partners’ capital account balances  – residue distributed according to profit sharing ratio

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Partnerships

• Statement• i)It is same as sole trader except :

 –  the P& L includes a section usually after the

calculation of net profit to show the dis tribution ofprofit among the partners. It is called the profit andloss appropriation account

 – the balance sheet includes a current account ( anaccount similar to capital account)

APPROPRIATION ACCOUNT

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 APPROPRIATION ACCOUNTfor Partnership Business

Net Profit 5000

add Charged for interest on drawingsTaylor 50

Clark 100 150

5150

less: Salary Clark 500

Interest on Capital:

Taylor 100

Clark 300 400 900

4250

Balance of Profits

Shared:

Taylor 3/5ths 2550

Clark 2/5ths 1700 4250

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the appropriation account show howthe 5000 net profits are shared

between partners

Curent Account Taylor Clark

Share of profits 2550 1700

Interest on Capital 100 300

Salary 500

2650 2500

less:interest on drawings 50 100

2600 2400

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Current Account in Balance Sheetfor Partnership

Capital Taylor 2000

Clark 6000 8000

Taylor ClarkInterest on Capital 100 300

Share of profits 2550 1700

Salary 500

2650 2500

less drawings 2000 2000

less:interest on drawings 50 100

600 400 1000