Post on 04-Jun-2018
8/13/2019 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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8/13/2019 Purpose of Financial Statement
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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