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Chapter 3

Chapter 3. Financial statements from the accounting equation. Primary financial statements. Preparing financial statements. TRANSACTIONS AND EVENTS ↓ practice of bookkeeping ↓ ACCOUNTING RECORDS ↓

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Chapter 3

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  1. Chapter 3 Financial statements fromthe accounting equation

  2. Primary financial statements

  3. Preparing financial statements • TRANSACTIONS AND EVENTS ↓ • practice of bookkeeping ↓ • ACCOUNTING RECORDS ↓ • rules of measurement and disclosure ↓ • FINANCIAL STATEMENTS

  4. Statement of financial position (balance sheet) • The statement of financial position (balance sheet) reflects the accounting equation in the form: • Assets minus Liabilities equals Ownership interest

  5. Statement of financial position is usually presented

  6. Subdivisions • Assets are subdivided into non-current (fixed) assets and current assets. • Liabilities are subdivided into current liabilities (due within one year) and longer-term liabilities (due after one year). • Ownership interest may also be subdivided. • Current assets and current liabilities are grouped close to each other.

  7. Structure Table 3.1 Structure of a statement of financial position (balance sheet)

  8. Other forms of statement – horizontal

  9. Other forms of statement – vertical

  10. Income statement(profit and loss account) The income statement (profit and loss account) reflects that part of the accounting equation which defines profit. Profit equals Revenue minus Expenses

  11. Income statement (profit and loss account) (Continued)

  12. Statement of cash flows Liquidity is measured by the cash and near-cash assets and the change in those assets, so a financial statement which explains cash flows should be of general interest to user groups. Cash flow = • cash inflows to the enterprise minus • cash outflows from the enterprise

  13. Cash inflows minus Cash outflows equals Change in cash and similar liquid assets Statement of cash flows (Continued)

  14. Subdivisions of cash flow • Operating activities: Provision of services, and the manufacturing, buying and selling of goods for resale. • Investing activities: Buying and selling non-current (fixed) assets for long-term purposes. • Financing activities: Raising and repaying the long-term finance of the business.

  15. Statement of cash flows Table 3.6 Structure of a statement of cash flows

  16. Profit does not equal cash Working capital • Some sales are made on credit, customers pay later. • Some purchases are made on credit, pay suppliers later. • Cash is used to buy inventory (stock) which is sold later.

  17. Inventory Receivables (debtors) Payables (creditors) Cash

  18. Profit does not equal cash (Continued) • Cash is used to buy more non-current (fixed) assets. • Cash is used to buy investments. • Cash is used to repay loans. • Cash is raised from issuing shares. • Cash is raised from borrowing.

  19. Practical illustration See P. Mason illustration in Chapter 3 for • Statement of financial position. • Income statement. • Statement of cash flows. • Comparison of profit and cash flow.

  20. Chapter 3 Bookkeeping Supplement

  21. Debit and Credit recording Table 3.9 Rules for debit and credit recording

  22. Analysis of transaction

  23. No accounting recognition takes place until the payment has occurred. It is the expense of the past which is recognised, rather than the asset of benefit for the future

  24. Analysis of transaction (Continued)

  25. TRIAL BALANCE Table 3.11 Summary of debit and credit entries for each category of asset, liability and ownership interest

  26. TRIAL BALANCE (Continued) Table 3.11 Summary of debit and credit entries for each category of asset, liability and ownership interest (Continued)

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