Managing Finance and Budgets Seminar 2

Seminar 2 - Activities During this seminar we will:  Review Chapters 2 & 3 of the set book  Review the key concepts and ideas from the lecture  Review the two forms of financial statement developed in the lecture with some of the associated terminology  Examine Exercises 2.6 & 3.6 from the set book.

Some Starting Points  Explain, and if possible elaborate on the following terms:  Assets  Liabilities  Creditors  Debtors  Capital  Stock  Name and describe the three main types of financial statement, and what you think they might be used for.

Assets Major characteristics A probable future benefit exists The business has an exclusive right to control the benefit The benefit must arise from some past transaction or event The asset must be capable of measurement in monetary terms

Claims Two major types of claim Capital Liabilities

The Balance Sheet  What is the purpose of the Balance Sheet?  Describe the two different ways in which a Balance sheet can be laid out.  Describe the following terms associated Balance Sheets: Fixed Assets, Current Assets, Net Assets, Current Liabilities, Long- Term Liabilities, Creditors, Debtors, Loan, Overdraft.

The balance sheet equation equals Liabilities Assets Capital plus

minus Capital Long-term liabilities Current assets less Current liabilities Fixed assets plus equals The vertical layout for a balance sheet

Cash Trade debtors Stock The circulating nature of current assets

Balance Sheet example  Exercise 2.6  Describe the following conventions associated with a Balance sheet: Money Measurement, Historic Cost, Going Concern, Business Entity, Dual Aspect, Prudence, Stable Monetary Unit, Objectivity.

Accounting conventions and the balance sheet Accounting conventions Business entity Money measurement Historic cost Going concern Dual aspect Prudence Stable monetary unit Objectivity

The Profit & Loss Account  What is the purpose of the Profit & Loss account?  Describe how the Profit and Loss account is laid out.  Describe the following terms associated with Profit & Loss Accounts: Capital Costs, Revenue Costs, Depreciation, Turnover, Cost of Sales, Overheads, Stock, Gross Profit, Net Profit

Calculating profit (loss) for a period Profit (loss) Total expenses incurred in generating the revenue less equals Total revenue

Calculating a depreciation charge Factors to be considered Cost of the asset Useful life of the asset Residual value of the asset Depreciation method

less Residual value equals Cost Depreciable amount Annual depreciation charge Year 1Year 3Year 2 Year 4 and so on Calculating an annual depreciation charge

Written- down value (£000) Asset life (years) Graph of written-down value against time using the straight-line method

Written- down value (£000) Asset life (years) Graph of written-down value against time using the reducing balance method

Stock measurement Three methods First in, first out (FIFO) Last in, first out (LIFO) Weighted average cost (AVCO)

Profit & Loss Account - example  Exercise 3.6  What precisely is the relationship between the Profit & Loss Account and the Balance Sheet?

Extended balance sheet equation equals Profit (Loss) Assets Capital plus (minus) Liabilities plus

Profit and loss account Cash flow statement Balance sheet Profit and loss account Cash flow statement Relationship between the balance sheet, profit and loss account and cash flow statement