Introduction to Financial Statements: Profit and Loss Account
Primary Financial Statements
Balance Sheet:
Summary of firm’s financial position at specific point of time.
The date shows what time the balance sheet is accurate.
your balance sheet tells you what you have (and where it came from) at a specific point in time.
Assets: Resource from which a business expects to gain some future benefit.
liabilities: the debts that it owes
to outside individuals or organizations.
owner’s equity: the amount that has been invested by its owners and that owners can claim from its assets
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Primary Financial Statements
Balance Sheet:
a company’s assets were either from borrowing (liabilities) or from investments made by owners (owner’s equity).
The asset section of the balance sheet on the one hand and the liability and owner’s- equity section on the other must balance.
The accounting equation:
• Assets = Liabilities + Owner’s equity
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Balance Sheet
Assets Section:
Assets are listed in order of liquidity—how quickly they can be converted into cash.
Current assets: asset that a business intends to convert into cash within a year.
Long-term assets: asset that a business intends to hold for more than a year before converting it to cash.
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Balance Sheet
Assets Section:
Assets are listed in order of liquidity — how quickly they can be converted into cash.
Supper market, insurance company…. • Warren Buffett
Insurance float
Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value
Industry investment
Stock investment
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Balance Sheet
Liabilities Section:
Current liabilities: Liability that a business intends to pay off within a year.
Long-term liabilities: Liability that a business need not pay off within the following year.
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Balance Sheet
Accrual accounting:
a system in which the accountant records a transaction when it occurs, without waiting until cash is paid out or received.
Customers don’t always pay in cash; they often buy something and pay later. When this happens, the seller is owed money and has an account receivable (it
will receive something later).
Companies don’t generally pay cash for materials and other expenses—they often pay later. If this is the case, a company has an account payable (it will pay something later).
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Balance Sheet
Going concern:
A long-term asset that will be used for several years appears on the balance sheet. Its cost is spread over its useful life (the number of years that it will be used). Its annual allocated cost appears on the income statement as a depreciation expense.
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Primary Financial Statements
These financial statements answer basic questions:
Balance Sheet.
What is the company’s current financial status on a given day?
Income statement/profit and loss account.
What were the company’s operating results for the period?
Cash flow Statement
How did the company obtain and use cash during the period?
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Primary Financial Statements
Income statement/profit and loss account:
Summary of financial performance over given period of time.
A quarterly basis/a annually basis
It summarise a business’s revenues,
expenses, and net income.
Basic structure of income statement.
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Our Business…
Export company.
• Agency of European products • B2B
• 2 founders (70%, 30%)
• Debt £150,000
Income statement/profit and loss account
Basic structure of income statement: revenues, expenses, and net income.
Revenue – Amount of money earned by selling products/services to customers.
The number of quantity of goods/services sold*selling price
Received your goods but haven’t paid.
Paid but haven’t received your good.
Accrual based accounting – account receivable
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Income statement/profit and loss account
Basic structure of income statement: revenues, expenses, and net income.
Expenses – Costs incurred by selling products/services to customers.
Cost of goods sold: cost of item sold directly associated with producing or selling goods/services.
It is different for different types of organization.
Direct labor – employees directly involved to
producing products.
Goss profit: if we earn anything on simply selling the goods/services.
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Income statement/profit and loss account
Operating expenses: Some indirect cost.
Selling expenses –
expenditures of advertising,
expenditures of sales staff.
Administration expenses: expenses of general management.
Interest expense: generated from the debt.
Net Income – – difference between revenue and total expenses.
Taxes
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Income statement/profit and loss account
What to do with the net income?
Dividend – payment made to
shareholders, per share basis.
You have no better use of the money to yourself, so you pay it out.
Retained earning: money company keeps to reinvest the company.
MBO (Management Buyout)
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Income statement/profit and loss account
What to do to make more money?
vReduce your cost of goods sold.
vReduce some of your operating costs (salaries, advertising).
vIncrease the quantity of units sold.
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