Financial Accounting (MBA 1)

My Contact Details: AJ Ramgoon [B.Comm, UHDE, MBA, Pastel (Advanced), MYOB, ADR (SA), PG Dip (Advanced Taxation) Contact Number : 083 775 6211 (Mobile) Email address : ajith.ramgoon@hotmail.com

Chapter 1: The Purpose of Financial Statements To provide users with a snapshot of the businesses performance for a specific period. An expression of financial health To determine whether the business has achieved its objectives.

Assets Classification of Accounts Balance Sheet Accounts “B” (Statement of Financial Position) Assets Tangible Assets (Types, lifespan, examples) Financial Assets (Types, lifespan, examples) Current Assets (Types, lifespan, examples)

Classification of Accounts Balance Sheet Accounts “B” (Statement of Financial Position) Equity Capital accounts: Capital and Drawings Share premium Retained income

Classification of Accounts Balance Sheet Accounts “B” (Statement of Financial Position) Liabilities Current (Lifespan, examples) Non current (Lifespan, examples)

Classification of Accounts Nominal Accounts “N” (Statement of Comprehensive Income) Income (profits increase; examples) Expenses(profits decrease; examples)

Classification of Accounts Final Accounts “F” F1: Trading account (GP) F2: Profit and loss account (NP) F3: Appropriation (Tax, dividends, Share of profits)

Income Statement Concepts Turnover Cost of Sales Gross Profit Depreciation/Asset impairment Credit Losses/Write offs/Bad Debts Net Profit before Tax  

Ordinary share dividends Preference share dividends Retained income Income Statement Concepts Taxation Net Profit after Tax Dividends Ordinary share dividends Preference share dividends Retained income  

Tangible Assets (vs Intangible Assets) Accumulated depreciation Balance Sheet Concepts Tangible Assets (vs Intangible Assets) Accumulated depreciation Financial Assets Investments Current Assets Inventory Trade and other Receivables Cash (and Cash equivalents)  

Share capital: Authorised and Issued Share Premium Retained Income Balance Sheet Concepts Shareholders’ Equity Share capital: Authorised and Issued Share Premium Retained Income Non Current Liabilities Mortgage Loan Current Liabilities Trade and other Payables SARS Accounts Shareholders for Dividends  

Debtors collection period Creditors payment period Debt ratio Key Ratios The current ratio Acid Test ratio Stock turnover ratio Debtors collection period Creditors payment period Debt ratio Debt equity ratio Interest cover

The Accounting Equation A = O + L

CASH FLOW STATEMENTS A cash flow statement reveals from where the business has received its cash (funds) and the way the cash (funds) was used within a financial period. The changes in cash flow are determined by comparing one year’s figures with another years figures.

CASH FLOW STATEMENTS The cash flow statement essentially accounts for the change in the bank/cash balance from one year to another as a result of the following activities:

Financing Activities: Information obtained from the CASH FLOW STATEMENTS Operating Activities: Information is obtained from the current income statement and the working capital section of the balance sheet. Investing Activities: Information is obtained from the fixed assets and investment sections of the balance sheet. Financing Activities: Information obtained from the capital employed section (own capital and borrowed capital) of the balance sheet.

WHO ARE THE PRIMARY USERS OF FINANCIAL STATEMENTS Shareholders and potential shareholders The suppliers of short term credit (Creditors) The suppliers of long term credit (Financial Institutions) Management Unions/Staff Auditors SARS

Demystifying Key Ratios Liquidity Ratios The Current ratio Current ratio = Current Assets Current Liabilities Acid Test Ratio = Current assets – Inventory Current liabilities

Efficiency Ratios Rate of stock turnover = Cost of goods sold Average stock Average Collection period = Accounts Receivable X 365 Credit sales 1 Average Payment Period = Accounts Payable X 365 Credit Purchases 1

Interest Cover Ratio

The Debt Equity Ratio

End of Chapter 1