Income Statement Statement of Financial PositionWeek commencing 20 October 2014Atrill & McLaney Chapters 2 p31 – 47 and Chapter 3 p67 – 77

Dhru Shah

Session learning outcomes

By the end of the this lecture, you should be able to:

1.Distinguish between financial and management accounting2.Identify the links between the two3.The objectives of the main financial statements4.Worked examples of Income Statement & Statement of Financial Position (Erin Gobragh 2)

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ACCOUNTING

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTINGFor External Users Management

Three Financial StatementsIncome Statement Budgets/ Forecasts,(previously Profit and Loss Account) Monthly reports Statement of Financial Position (actual £ vs budget)

(previously Balance Sheet) Statement of Cash Flow

What do the Financial Statements show?

When making decisions about a business, we need to know:-

1. How much wealth was generated during the time period?Income Statement

2. What is the value (wealth) of the business at the end of the time period?

Statement of Financial Position3. What were the cash movements during the time period?

Cash flow statement

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Income Statement

Measures how much profit (wealth) has been generated during the time period

Income Less Expenses = Profite.g. Sales e.g. purchases, wages,Revenue rent. Can be both cash

and non–cash expenses

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Sales...£££Also called Revenue/ turnover/ income...

• Comprises all sales from trading made during the time period (regardless of whether or not all cash due has been received)

(The cash budget only shows cash actually received. It also includes other cash receipts such as money from loans or share capital – this is NOT income.)

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Erin Gobragh

You may want to refer to your calculations last week….

(see page 26 of the yellow Study Guide)

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Erin GobraghYou can work out the sales figure....

6.00

Sales Units Price ($) Sales Value

Jan 6,000 6.00 36,000

Feb 8,000 6.00 48,000

Mar 9,000 6.00 54,000

Apr 10,000 6.00 60,000

May 11,000 6.00 66,000

Jun 11,000 6.00 66,000

Total 55,000 330,000

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Erin Gobragh

• ...Or you can lift this sales figure straight from your cash budget calculations from last week!

• You may do this for your formal assignment.

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Erin GobraghBudgeted Income Statement for the 6 months to 30 June 2015

Sales Revenue 330,000Less Cost of Goods Sold:Opening Inventories

add Purchases

Less Closing Inventories

Gross Profit

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PurchasesYou can work this out...

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Purchases Units Price ($)Purchases

Value

Jan 10000 3.50 35000

Feb 8000 3.50 28000

Mar 9000 3.50 31500

Apr 11000 3.50 38500

May 8000 3.50 28000

Jun 12000 3.50 42000

Total 58000 203000

Purchases

• Or you can lift the Purchases from your cash budget calculations• You may do this for your assignment!

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Closing Inventory

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• This can be worked out from your calculations last week• Add all your total units purchased = 58,000• Take away total units sold = 55,000• Multiply by the cost price = 3,000*3.5. This = £10,500.

Erin GobraghBudgeted Income Statement for the 6 months to 30 June 2014

Sales Revenue 330,000

Less Cost of Goods Sold:Opening Inventories 0

add Purchases 203,000203,000

Less Closing Inventories (10,500) 192,500

Gross Profit 137,500

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Erin Gobragh:The rest of the Income Statement

Gross Profit 137500

less Expenses:WagesGeneral Expenses

Rent

Depreciation

Motor Van

Equipment

Net Profit

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Other expenses

• All other expenses are deducted from the Gross Profit• For example:

– rent– insurance– salaries– depreciation

• Some expenses are cash-based. In simple cases, these can be lifted from your cash budget (but ensure it applies to the time period)

• Others are not cash-based, for example Depreciation (the loss in value of a non-current asset in the time period).

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Expenses...in a simple case, can usually be lifted from the cash budget

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Erin Gobragh…The rest of the Income Statement

Gross Profit 137500

less Expenses:

Wages 30,240

General Expenses 5,700

Rent 3,500

Depreciation:

Net Profit

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4 ees x 140hrs x 6months x$9

950 x 6

7000/2

Machine purchase: cash payments vs expenses

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Expenses relate to a time period regardless of whether or not they are actually paid in that time period.

When a machine is purchased, the full cash payment is recorded in the cash budget at the point when payment is made.

However this full cost is NOT recorded as an expense in that time period.

Instead the payment is spread over the life of the asset i.e. It depreciates. This amount is written off each year an expense in the Income Statement.

Income Statement: Cash Budget:

Erin Gobragh

For the non-current assets bought:• The van purchased for $14,000 loses $2000 in value• The storage equipment bought for $8000 loses

$1000 in value.

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Erin Gobragh…The rest of the Income Statement

Gross Profit 137500

less Expenses:

Wages 30,240

General Expenses 5,700

Rent 3,500

Depreciation:

Motor Van 2,000

Equipment 1,000 42,440

Net Profit 95,060

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14,000 – 12,000

8,000 – 7,000

Statement of Financial Position

Shows:• Assets - owned by the businessMay be:Non-current – held for over a year e.g. plant and equipmentCurrent - used within a year e.g. inventory, trade receivables• Liabilities – what is owed by the businessMay be:Non-current – payable after a year e.g. Long term loansCurrent – payable within a year e.g. trade payables• Equity – what the owner has invested in the businessMoney invested plus retained profits

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The accounting equation

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Nb: Equity is also known as shareholders’ funds or capital

Assets Liabilities

=+

Equity

Erin GobraghStatement of Financial PositionAs at 30 June 2015

Non-Current Assets ($)Motor Van 12,000Equipment 7,000

19,000Current AssetsInventoriesTrade ReceivablesBank & Cash

Total Assets

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Trade receivables (last week!)

Trade receivables are customers who owe you money at the end of the financial period

May sales 50% x 11,000 x 6 =33,000 received in June Remaining 50% =33,000 received in July

June sales 50% x 11,000 x 6 = 33,000 received in July Remaining 50% = 33,000 received in August

Owing at the end of June = £99,000

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Trade receivables from last week...

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Cash Balance at the end of June...

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Erin GobraghStatement of Financial PositionAs at 30 June 2015

Non-Current Assets ($)Motor Van 12,000Equipment 7,000

19,000Current AssetsInventories 10,500Trade Receivables 99,000Bank & Cash 13,560

123,060Total Assets

142,060

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Trade payables from last week...Suppliers to whom you owe money at the end of the financial period

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Erin GobraghStatement of Financial Position (remaining extract)As at 30 June 2015

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Equity

Capital 5,000

add Profit For Period 95,060

Total Equity 100,060

Non-current liabilities (None in this example)

Current LiabilitiesTrade Payables 42,000

42,000

Total Equity and Liabilities 142,060

Erin GobraghStatement of Financial Position (full view)As at 30 June 2015

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Non-Current Assets

Motor Van 12,000

Equipment 7,000

19,000Current AssetsInventory 10,300Trade Receivables 99,000Bank & Cash 13,560

123,060142,060

Equity

Capital 5,000

add Profit For Period 95,060Total Equity 100,060Non-current liabilities (None in this example)

Current LiabilitiesTrade Payables 42,000

42,000

Total Equity and Liabilities 142,060

Statement of Cash Flows

This shows the cash inflows and cash outflows during the time period.

Like cash budgets, this Statement picks up actual cash flows during the period.

In this module we will be looking at and analysing cash flow statements, to assist management decision-making.

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Session learning outcomes

You should now be able to:

1.Distinguish between financial and management accounting2.Identify the links between the two3.The objectives of the main financial statements4.Worked examples of Income Statement & Statement of Financial Position (Erin Gobragh 2)

Reading

• Atrill & McLaney Chapter 2 p31 – 47, 61/62 and Chapter 3 p67 – 77

• Complete Seminar 4 (Rocking Roll Suicide Ltd) and be ready to do Seminar 5 (Ashers 2 Ashers) for next week’s workshop

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Reminder

• AFM coursework assessment (30% of your final mark)• By 31st October 2014 – agree business idea with your seminar tutor• By 5th December 2014 – coursework submission• Optional Drop-in sessions on Wednesday afternoons, if you want to

discuss any aspect of AFM teaching & learning

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