INTRODUCTION TO
FINANCIAL STATEMENTS
7-1
PREPARED BY
MR R. VUDZIJENA
7-2
INTRODUCTION TO
FINANCIAL STATEMENTS
UNDERSTAND FINANCIAL STATEMENTS AND CLEAR ALL THESE QUESTIONS
7-3
THE INCOME STATEMENT
7-4
INCOME STATEMENT
• Shows the results of a company’s operations over
a period of time.
• What goods were sold or services performed that
provided revenue for the company?
• What costs were incurred in normal operations to
generate these revenues?
• What are the earnings or company profit?
7-5
REVENUE & EXPENSES
Revenues: refer to the amounts earned from the
company’s ordinary course of business such as
professional fees or service revenue for service
companies and sales for merchandising and
manufacturing concerns.
Expenses: are monies paid for costs incurred in
day to day running of the business. Expenses can
be classified as Cost of Sales, Distribution
Expense and Administration Expense
7-6
INCOME TAX
• Income tax is a tax that governments impose on
income generated by businesses and individuals
within their jurisdiction. By law, taxpayers must
file an income tax return annually to determine
their tax obligations. Income taxes are a source
of revenue for governments.
• Net Income – Your total income without income
taxes.
7-7
7-8
DEFINITION
A cash flow statement shows the money
that entered and exited a business during a
specific period of time. It generally covers
four main categories: operating activities,
investing activities, financing activities
and supplemental information
7-9
CASHFLOW FROM OPERATING
ACTIVITIES
Operating activities are earnings-related activities. Generally
these relate to Income Statement activities, and items
included in working capital. Included are
Cash Outflow
Cash Inflow
• Inventory payments
• Sale of goods or
services • Interest payments
• Sale of investments • Wages
in trading securities • Utilities, rent
• Interest revenue • Taxes
• Dividend revenue
7-10
CASH FROM INVESTING
ACTIVITIES
Investing activities relate to the acquisition and disposal
of noncash assets: These include lending funds and
collecting on these loans. Cash Outflow
Cash Inflow • Purchase of plant assets
• Sale of plant assets • Purchase of securities,
• Sale of securities other than trading
• Collection of principal on loans securities
• Making of loans to other
entities
7-11
CASHLOW FROM
FINANCING ACTIVITIES
Financing activities relate to the contribution,
withdrawing and servicing of funds to support
business activities. Cash Inflow
• Issuance of own stock
Cash Outflow • Borrowing
Dividend payments
Repaying principal on borrowing
Treasury stock purchase
7-12
THE BALANCE SHEET
Unlike
Income Statements, Balance Sheets lists
ASSETS and LIABILITIES
Examples of Assets include:
Land and Capital Equipment, Intellectual Property
(if purchased)
Cash on Hand, Accounts Receivables and Inventory
7-13
THE BALANCE SHEET
7-14
EQUITY
This represents the amount of capital that remains in the
business after its assets are used to pay off its outstanding
liabilities. Equity therefore represents the difference between
the assets and liabilities
Equity can also consist of private or public stock, or else an
initial investment from your company’s founders.
For instance, suppose you started an online store, and put
$1,000 in its bank account as operating capital (to pay web
hosting costs and other expenses). Before you even made a sale,
that $1,000 would be listed as equity on your balance sheet.
7-15
ASSETS
Assets are resources owned or controlled by a
business that are expected to have current or future
economic benefit.
e.g. cash, inventory, plant and machinery, etc
Assets are often split into two sub classifications:
1) current assets
2) non-current assets.
7-16
CURRENT ASSETS
Current assets are those assets to be converted into
cash or used within the next accounting period, or
12 months.
These assets include cash, inventory, accounts
receivables (amounts owing from customers or
debtors) and short term investments
7-17
NON CURRENT ASSETS
Non-current assets are expected to remain in use for more
than 12 months.
These assets include
Equipment,
Land,
Buildings
Motor vehicles.
7-18
7-19
TANGIBLE AND INTANGIBLE
ASSETS
Tangible assets are physical; they
include cash, inventory, vehicles,
equipment, buildings and investments.
Intangible assets do not exist in
physical form and include things like
accounts receivable, pre-paid expenses,
and patents and goodwill.
7-20
LIABILITIES
Liabilities are the economic obligations of an
enterprise and represent the obligations of a business
to transfer assets or provide services in the future as a
result of past transactions or events.
Eg) amounts owed to creditors, employees, bank
loans , taxes and government
A liability may also include an obligation to
undertake a service eg an annual magazine
subscription paid in advance creates a liability to the
publisher to post issues to the customer for the next
12 months.
7-21
CURRENT LIABILITIES
A liability is considered current if it is due within
12 months after the end of the balance sheet date.
In other words, they are expected to be paid in
the next year.
Example :Trade and other payables – such as
Accounts Payable, Notes Payable, Interest
Payable, Rent Payable, Accrued Expenses, etc.
Short-term borrowings – financing arrangements,
credit arrangements or loans that are short-term
in nature
7-22
NON CURRENT LIABILITY
Liabilitiesare considered non-current if they are
not currently payable, i.e. they are not due
within the next 12 months after the end of the
accounting period or the company's normal
operating cycle, whichever is shorter.
Non-current liabilities include:
1) Long-term notes,2) bonds, 3) mortgage
payables
4) . Deferred tax liabilities 5) Other long-term
7-23 obligations
7-24
DEBTORS AND CREDITORS
Debtors / Accounts Receivables
is one party who owes the business money. Money is
repaid over a defined period of time, usually involving
additional interest payments as an incentive to loan
money.
Creditors / Accounts Payable
Creditors represents one party who is owed money by
the business. The parties who have loaned money, stock
7-25 or other such items to an individual or business
FIXED COSTS
Fixed costs are costs that are
independent of output. These remain
constant throughout the relevant range
and are usually considered sunk for the
relevant range (not relevant to output
decisions). Fixed costs often include
rent, buildings, machinery, etc.
7-26
VARIABLE COSTS
Variable costs are costs that vary with
output. Generally variable costs
increase at a constant rate relative to
labour and capital. Variable costs may
include wages, utilities, materials used
in production, etc.
7-27
INVENTORY / STOCK
Inventory is the term for the goods available for sale
and raw materials used to produce goods available for
sale. Inventory represents one of the most important
assets of a business because the turnover of inventory
represents one of the primary sources of revenue
generation and subsequent earnings for the company's
shareholders. Inventory is generally categorized as raw
materials, work-in-progress, and finished goods.
7-28
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents refer to the
line item on the balance sheet that
reports the value of a company's assets
that are cash or can be converted into
cash immediately.
7-29
……
Examples of cash are: Coins, Currency,
Cash in checking accounts, Cash in savings
accounts, Bank drafts, Money orders and
Petty cash
Examples
of cash equivalents are:
Commercial paper, Marketable securities,
Money market funds, Short-term
government bonds and Treasury bills
7-30
The end
7-31