2. Learning outcomes
By the end of this session you should be able to:
• Explain the key components of financial statements
• Evaluate the role of the financial statements for
different stakeholders
• Understand the accounting equation
• Calculate profit and understand how it can be
manipulated
2
3. 3
Financial statements
• Legally required for all companies in most jurisdictions around the world
• Used by a variety of different stakeholders
• Measure Performance (Income statement)
• Measure Position (Balance sheet)
• Measure Cashflows (cashflow statement)
6. 6
Income Statement
• Measures financial performance (profit)
Elements of an income statement:
• Revenue (price x quantity)
• Cost of sales (Direct costs)
• Gross profit = revenue less cost of sales
• Operating expenses (administrative and distribution costs)
• Finance expenses
• Income tax expense
7. 7
Cash versus Profit
Profit = Revenue - Expenses
• Revenue = The gross inflow of economic benefit from the ordinary course of
trading.
• Expense = cost incurred in acquiring a product or service
Cash = Money or legal tender
9. Balance sheet / Statement of Financial
9
Position
• Measures financial position
• Comprises of three elements:
- Assets
- Liabilities
- Equity
• The accounting equation will always hold true on a balance sheet:
ASSETS = LIABILITIES + EQUITY
10. 10
Assets
A resource that is controlled by a business as a result of past events,
is expected to generate an inflow of future economic benefit.
11. 11
Liabilities
A present obligation arising from past events, which is expected to result in the
outflow of economic benefits
12. 12
Equity
Owner’s capital in the business ie, the residue of assets less all liabilities.
In everyday terms, this means:
13. 13
Cash flow statements
• Show actual cash going in and out of the business
• Internal and external cashflows are very different!
• External cash flow statements reconcile to the balance sheet and
income statement and show cash movements in the business in three
sections:
• Cashflow from operations
• Cashflows from investing activities
• Cashflows from financing activities
14. 14
Financial statements
What are they?
• A set of principles and standards that are used by organisations to prepare
financial statements.
Commonly used sets of standards:
- International Financial Reporting Standards (IFRSs)
- UK Generally Accepted Accounting Practice (UK GAAP)
Which standards should an organisation use?
• The appropriate framework to use generally depends on the location, type
and nature of the organisation concerned.
• E.g. All companies listed in EU markets must report under IFRSs.
16. Seminar 1: Evaluating sources of financing
- Read chapter 1 and 15 of core text book (Atrill & McClaney).
Attempt the questions at the end of these chapters.
- Research realistic sources of finance, and costs, for a brand
new start up business
Seminar 2: Working capital management
- Read Chapter 16 of core text book (Atrill & McClaney)
- Consider the following question:
“Suggest practical ways for a business to keep cash in it’s
buisness for as long as possible”
16
17. Seminar 3: What do financial statements do?
- Read chapters 2,3,6 of the core textbook (Atrill & McClaney)
- Review Pearson Plc’s 2013 annual report
(https://www.pearson.com/content/dam/corporate/global/pearson-dot-
com/files/annual-reports/ar2013/2013--annual-report-accounts.
pdf)
Seminar 4: Managing costs in a business
- Read chapter 8 of core textbook and attempt questions at
back of chapter
17
Hinweis der Redaktion
Make the point that consideration for expenses is usually cash, but that cash may not be paid when the product or service is acquired (eg if trading on credit). Therefore cash and profit are different. You should also mention at this point that some expenses recognised by businesses do not involve cash at all (eg, depreciation, amortisation)
People are not assets (they are a cost) in an accounting sense as they are not controlled by a company ie. There is nothing to stop an individual from joining another company
Might be worth asking the students if they have heard of any others at this point, and going through their answers. Please make the point that retained earnings are not a source of financing (they should know why now – ie profit and cash are different)
Might be worth asking the students if they have heard of any others at this point, and going through their answers. Please make the point that retained earnings are not a source of financing (they should know why now – ie profit and cash are different)
Might be worth asking the students if they have heard of any others at this point, and going through their answers. Please make the point that retained earnings are not a source of financing (they should know why now – ie profit and cash are different)
Might be worth asking the students if they have heard of any others at this point, and going through their answers. Please make the point that retained earnings are not a source of financing (they should know why now – ie profit and cash are different)
Might be worth asking the students if they have heard of any others at this point, and going through their answers. Please make the point that retained earnings are not a source of financing (they should know why now – ie profit and cash are different)