Finance for Non- Finance People1

7/28/2019 Finance for Non- Finance People1

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Financial Awareness


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Financial Statements

At the end of an accounting period, the business accounts for its

activities by producing three main financial statements:

Profit & Loss Statement

Cash Flow Statement

Balance Sheet Statement


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Profit and Loss Statement

The Profit and Loss Statement reports sales and expenses of the

business over a period of time.

SalesCosts and Expenses

It reports the sales made during the period and the costs andexpenses relating to those sales


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The Profit and Loss Statement starts with Sales

Sales

$100

The Sales account records the amount charged tocustomers for goods or service supplied

Various costs and expenses are then deducted from

sales to reveal profit or loss

Costs and expenses refer to the amount of money

incurred in running the business during the relevantperiod


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The Profit and Loss Statement starts with Sales

Sales

$100 Gross

Profit

$60

The first costs deducted are Cost of Sales. These

are costs directly associated with the

manufacture of products, the purchase ofproducts for resale, or the cost of providing a

service to a customer

Deducting Cost of Sales from Sales leaves us

with Gross Profit

Costsof

Sales

$40


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Sales

$100 Gross

Profit$60

Expenses

$30

The next costs deducted are other Expenses.

These are costs which are incurred in the

daily running of the company such as Sales

Expenses, Marketing Expenses, Advertising

Expenses, Administrative Expenses...

Costs

Sales

$40

of


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Sales

$100 Gross

Profit$60

Expenses

$30

Operating

Profit

$30

Deducting Expenses from Gross Profit

leaves us with Operating Profit

Gross Profit and Operating Profit reflect

the results achieved in managing the

business

Costs

Sales

$40

of


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Sales

$100 Gross

Profit$60

Expenses

$30

Operating

Profit

$30

Costs

Sales

$40

of

PBT

$25

The next costs deducted are other

expensesTaking other expense/income

from operating profit leaves us

with Profit Before Tax (PBT)

OtherExpense $5


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Sales

$100 Gross

Profit$60

Expenses

$30

Operating

Profit

$30

Costs

Sales

$40

of

PBT

$25

OtherExpense $5

Tax$7

PAT

$18

PBT minus CorporateIncome Tax shall be

equal to Profit After Tax

(PAT)


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Sales

$100 Gross

Profit$60

Expenses

$30

Operating

Profit

$30

Costs

Sales

$40

of

PBT

$25

Other

Expenses $5

Dividends-$12

Finally, dividends paid

to shareholders of the

company are deducted

from Profit after Tax

to leave Retained

Earnings

Retained

Earnings $6

Tax

$7

PAT

$18


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Profit & Loss StatementFor the Year Ended 31/12/200x

Sales $100

Cost of Sales 40

Gross Profit 60Expenses 30

Operating Profit 30

Other Expense/(Income) 5

Profit Before Tax 25

Dividends 12

Retained Earnings 6

Corporate Income Tax 7Profit After Tax 18


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The Balance Sheet Statement shows the assets, liabilities and

equity of a business at a point in time


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Assets:

There are two main types of assets

Fixed Assets

Current Assets

Total Assets+


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F ixed Assets:

Fixed assets are assets held permanently in the business and not

intended for resale, such as

Vehicles Building

Plant and Equipment


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Current Assets:

Current assets are cash or other assets that will be

converted into cash in the normal course of business

within 12 months such as

DebtorsStock

Cash


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Total Assets - Summary:

Land

Buildings

Plant & MachineryFixtures & Fittings

Vehicles

Raw Materials

Work in Progress

Finished Goods

Debtors

Cash

Fixed Assets

Current Assets

Total Assets


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LiabilitiesThere are two main types of liabilities

Long-Term Liabilities

Short-Term Liabilities

Total Liabilities


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Long Term L iabi l i ties

Long-term liabilities are debts to berepaid after one year


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Short Term Liabil i ties

Short-term liabilities are debts to be

repaid within one year


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Short-Term Liabi l i ties - Trade Creditors

Trade creditors are amounts owing to suppliers for products and

services bought but not yet paid for.

For example:

Suppli ers of raw mater ialsTelephone bil l


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Short-Term L iabi l i ties - Other Creditors

Other creditors are amounts owing to others.

For example:

Government Authorities:

(VAT, PIT)

Owners:

(Dividends)


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EquityEquity has two components

Contributed Capital

Retained Earnings

+ Equity

Contributed Capital is the money the owners have injectedinto the business

Retained Earnings are the cumulative profits that have not

been paid as dividends to the owners


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Assets

Fixed Assets - Net Book Value $200

L iabil ities & Equity

Long-term Liabilities $200

Balance Sheet Statement31-12-200x

Current Assets 150

Total Assets $350

Short-Term Liabilities 50

Equity 100

Total $350


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Cash Flow Statement

The Cash Flow Statement reports the cash inflows and

outflows of a business during an accounting period.

Cash flow from

operating activities

Cash flow from

investing activities

Cash flow from

financing activities

It is designed to provide cash flow information about 3

activities of a business:


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Cash Flow Statement

Cash f low from operating activities

-

Net cash flows from operating activities

Inflows

- Collection from customers

- RecU&NIpts of interest and dividends

- Tax refunds- Other operating cash recU&NIpts

- Payments to suppliers

Outflows

- Payments to employees

- Payment of income tax

- Other operating cash payments

- Interest payments


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Cash Flow Statement

Cash flow from I nvesting activities

-

Net cash flows from investing activities

Inflows

- Sales of Investments

- Collection on loans

- Sales of fixed assets

Outflows

- Purchase of fixed assets

- Investments

- Making loans


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Cash Flow Statement

Cash f low from financing activities

-

Net cash flows from financing activities

Inflows: Outflows:

- Issuance of equity securities

- Issuance of long-term debt

- Payment of dividends

- Payment of long-term debt

- Repayment of amount borrowed- Borrowings


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Cash Flow Statement

Cash flows Statement

- Net Cash Flows from Operating Activities $100

- Net Cash Flows from Investing Activities (200)

- Net Cash Flows from Financing Activities 30

For the Year Ended 31-12-200x

Net Increase/(Decrease) in Cash (70)

Cash at beginning of the year 120

Cash at end of year 50


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Finance for Non- Finance People1

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