Week 5 - preparation of classified financial reports Flashcards
define and explain an income statement
A financial statement that reports a business’s financial performanceover a “specific accounting period”:
Financial performance is assessed summarising how the business earns its revenues; and incurs its expenses; calculating net profit or loss over the period
from operating and non-operating activities.
Used to calculate financial ratios such as gross profit margin, profit margin, etc.
how is the income statement calculated
Revenue minus Expenses
= Net Profit /(Loss
revenue = are the prices customers pay to purchase a business’s goods or services.
Revenues eventually result in a cash inflow
expenses = are the costs of acquiring goods and services which will be used to generate revenue.
Expenses eventually result in a cash outflow
explain costs of goods sold and cost of profit
Retail businesses purchase goods to resell them at a profit.
Cost of Goods Sold (Cost of Sales)
the cost of acquiring the goods which were sold during the accounting period; is deducted from sales revenue; to
calculate gross profit.
Sales Revenue – Cost of Goods Sold (CoGS) = Gross Profit
how is ‘gross’ profit calculated
Sales Revenue – Cost of Goods Sold (CoGS) = Gross Profit
explain net profit
Net Profit (Net Loss): the “bottom line” of the business; is a calculation; that reflects the profitability of a business; after all expenses; are “matched” with revenue for the period Retail businesses
formula for net profit
Gross Profit – Operating Expenses = Net Profit
Income Statement - Classification of expenses
Expenses are often subdivided into the following categories as per their function:
1.) Selling expenses
2.) Administrative expenses
3.) Finance expenses
Assists internal managers to make more informed decisions on “cost control”
what is a balance sheet
‘Statement of Financial Position’ (Balance Sheet)
A balance sheet is a financial statement that summarises a business’s “financial position”:
Assets
what the business ownsand controls
Liabilities
amounts owed to creditors
Owner’s Equity
value of owner’s investment
at a “specific point in time”
how is a balance sheet calculated
Assets = Liabilities + Owner’s Equity
explain current assets
resources the business expects to convert into cash, sell or use up within one year
provide the resources to pay a business’ current liabilities
Future benefit of Current Assets
provide the resources (usually cash) for the business to maintain operations.
examples:
Current assets are listed in their order of liquidity
how quickly expected to be converted into cash
Cash at bank
Accounts receivable– amounts owing from credit sales to customers
Inventory– on hand (unsold) to be sold to customers
Accrued revenue
Prepaid expenses
Office supplies
GST paid
cash at bank
CA
accounts receivable
CA
Inventory
ca
accused revenue
CA
Prepaid expenses
CA
Office supplies
CA
GST paid
CA
explain non current assets
Non-current assets are resources the business expects to will have a useful life greater than one year.
Land and buildings are listed on the Balance Sheet at their original cost.
Plant and equipment are the physical, long-term assets used in the operations of a business
sometimes referred to as “fixed assets”
are “depreciated” (converted to expenses) over their “useful life”
are listed at their book values.
e.g. equipment land machinery Accumulated dep = contra asset
equipment
NCA
land
NCA
machinery
NCA
accumulated depreciation
NCA
explain current liabilities
Obligations (or debts)
reasonably expected to be paid from existing current assets; or
through the creation of other current liabilities
within one year or the operating cycle, whichever is longer.
Liquidity
the ability of a company to pay obligations that are expected to become due;
within the next year (or operating cycle).
Current liabilities are listed in their order of liquidity
how soon the debt or obligation is due to be paid
Bank overdraft
Accounts payable
– amounts owing from credit purchases from suppliers
Accrued expenses
Wages payable
Interest payable
Unearned revenue
GST collected
accounts payable
CL
GST collected
CL
Wages payable
CL
unearned revenue
CL
Bank loan (>12 months)
CL
mortgages payable
NCL
long term lease
NCL
lease liability
NCL
purpose of ‘statement of cash flows’
Measures “flows” of cash
ability to generate cash from operations; and
liquidity (i.e. ability to pay debts in the short term)
Summarises information about
cash inflows (receipts); and
cash outflows (payments); for a
specific period of time.
what are the cash flow statement elements
Operations:
Cash flows from conducting the daily operations of the business
typically cash flows related to revenue and expenses and current assets and current liabilities
Investing activities:
Cash flows from purchasing or selling revenue generating assets
typically cash flows related to non-current assets
Financing activities: Cash flows related to raising or servicing sources of finance typically cash flows related to non-current liabilities; and owner’s equity.
what is a ‘statement of change in equity’
Statement of Changes in Equity:
separate report -
new feature of reporting according to International Accounting Standards
summarises the transactions that affected owner’s equity during the accounting period
Increase Decrease
Capital contributions Withdrawals (drawings)
Net profit Net loss
service revenue
interest revenue
sales revenue
other revenue
rev
costs of goods sold
expense
depreciation expense
expense
wages expense
expense
rent expense
expense
supplies expense
expense
credit sales
asset (account receivable)
credit purchases
Liability (accounts payable)
prepaid expense
ASSET
unearned revenue
CL
