1. Understanding Financial Statements
Financial and Management Accounting
Study of Financial Statements
- Balance Sheet Analysis and Profit and Loss(Income Statement)

2. Understanding Financial Statements
Balance Sheet
Shows what the entity owns and owes (the difference being the owners’ residual interest) at a particular date.
ASSETS, LIABILITIES, AND CAPITAL The properties owned by a business enterprise are referred to as assets and the rights or claims to the properties are referred to as liabilities and equities. If the assets owned by the business amount to K1,000,000, the liabilities and equities on the assets must also amount to K1,000,000. The relation between the two may be stated in the form of an equation, as follows: Assets =Liabilities + Equities

3. BALANCE SHEET ANALYSIS
Equity and Liabilities are sources of funds
Sources of Funds
Capital
2)Reserves & Surplus-
3) Term Liabilities
4) Current Liabilities

4. BALANCE SHEET ANALYSIS
Assets-what we own (they are ours)
Uses of Funds
1) Fixed Assets-(Motor vehicle, cooking Equip
2) Intangible Assets
3) Non Current Assets
4) Current Assets- (cash, inventory, debtors etc)

5. BALANCE SHEET ANALYSIS
Part of Equity (Capital)
Reserves
1) Subsidy Received From The Govt
2) Development Rebate reserve
3) Revaluation of fixed assets
4) Issue of Shares at Premium
5) General Reserves
Surplus
The credit balance in profit and loss account

6. BALANCE SHEET ANALYSIS
Tangible Net Worth
This refers to the total funds arrived by paid-up capital , Reserves and P&L Surplus
Less
Intagible Assets

7. BALANCE SHEET ANALYSIS
Term Liabilities-Loan
Redeemable preference shares
Debentures (Secured loan by property)
Deferred payments guarantees
Term loans and unsecured loans from friends, relatives, directors repayable over a period of time
Note: Repayment is more than one year

8. BALANCE SHEET ANALYSIS
Current Liabilities
Working capital bank borrowings (overdraft)
Trade creditors
unsecured loans, unless the repayment is on deferred terms
sundry creditors
advances from dealers and customers
interest accrued but not paid
tax provisions
Dividend declared and payable

9. BALANCE SHEET ANALYSIS
Contingent Liabilities
Tax disputes
Legal litigations
Bills and cheques discounted with banks
Claims against the company not acknowledged

10. BALANCE SHEET ANALYSIS
What we own
Fixed Assets
Infrastructure like land & building
plant & machinery
Vehicles, Cooking equipment
Furniture & fixtures
Computers
Depreciation-They lose their usefulness with time
Straight line method
Written down Value Method

11. BALANCE SHEET ANALYSIS
Non Current Assets
Deferred recievables/Overdue recievables(like disputed amounts and Over Due > 6 mths)
Non moving stocks/inventory/un usable spares
Investment/Lending to associate concern
Borrowing of the directors from the company

12. BALANCE SHEET ANALYSIS
Intangible Assets
Deferred Revenue Expenditure
Goodwill
Trade mark
Patents

13. BALANCE SHEET ANALYSIS
Current Assets
Raw materials, work-in-progress, finished goods, spares and consumables
Trade debtors
Sundry debtors and recievables < 6 mths
Advances paid to suppliers of raw materials and others
Cash and bank balances
Interest receivables
Other current assets such as Government securities, Bank deposits ..etc

14. Profit & Loss Account
It is a summary of revenue earned and expenses incurred which ultimately results in profit or loss of to the company
Operating revenue = Sales revenue
Non_operating revenue = Other income ( out of sale of investments, interest, commission and discount etc)
Hence operating profit is a yard stick for operating profit of the company
Operating profit = Sales Revenue- Operating Cost

15. Profit and Loss account Measuring profit
Income
Expenses
The profit and loss statement shows the trading performance of the business and the distribution of profit.
Net Profit
Drawings or
dividends
Increase in assets goes to B/S as surplus
Retained
profit

16. Or measuring loss Turnover Costs Net Loss Drawings or dividends
Decrease in assets
Retained
loss

17. Profit & Loss Account Gross Sales
Gross sales includes excise duty to be charged to the customer, central sales tax applicable, state sales tax applicable, the discount o be allowed to distributors/dealers/customers. The gross sales appears in the P&L account comprises of all the above part from the basic unit price.
Net Sales
The sales figure excluding all the factors explained above are the net sales.

18. Profit & Loss Account Cost of production
This is the cost incurred right from the procurement of raw material to the finished good.
For ex in a garment firm following cost is incurred while production
1) cost of raw material cloth, buttons, canvas, hooks, zips etc
2) Maintenace of sewing machines
3) payment of wages to workers
4) power
5) washing, ironing,packing etc.
Cost of Prod exclu selling & admn exp & int cost

19. Profit & Loss Account Selling And General Administarative Expenses
Maintaining office staff for admn & acctg
marketing effort
payment of salaries/Tr All to marktg personnel
All the expenses which are not directly connected to manufacturing are classifed as selling and/or general expenses

20. Profit & Loss Account Cost of goods sold
Cost of goods sold includes all manufacturing expenses and the adjustments for opening and closing stock
Cost of Goods sold = Opening stock + Purchases + Manufacturing expenses - Closing stock
Gross Profit is arrived deducting figure of cost of goods sold from the sales figure
ie Gross profit = Sales - Cost of goods sold.

21. Cost of sales (Direct costs)
£ £
Production wages ,000
Material costs
Opening stock XX 110,000
Plus purchases during the year ,000
610,000
Less closing stock XX ,000
415, ,000
Cost of Sales ,000

22. Profit & Loss Account
Operating Profit is arrived deducting selling, administrative and general expenses , provision for bad debts, interest and miscellaneous expenses from the gross profit.
ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis exp )
Profit Before Tax When other income is added and other expenses are deducted from the operating profit we get profit before Tax
ie PBT = Op Profit + oth Inc - oth exp
Net Profit When provision for taxes is deducted from the Profit Before Tax we get Net profit
ie Net Profit = PBT - taxes

23. Expenses (overheads) Other Costs Wages and salaries (admin)
Heating and lighting
Rent and rates
Telephone
Advertising
Car expenses
Printing and stationery
Accountant fee
Insurances
Provision for bad debts
Other Costs
Depreciation

24. Profit & Loss Account Non Operating Income/Expenses
The income earned by the unit from other than manufacturing and seling operations is classified under this head . i.e
a) Interest earned on fixed deposits
b) Dividends and profit earned by sale of assets and share.
All those expenses which are not directly connected with operations of the unit are classified under this head. i.e
a) Preliminary expenses written off
b) Loss suffered due to sale of assets & share

25. Profit and Loss Account
SIMPLE COMPANY LTD - Profit and loss account for year ending XXXX
Turnover ,000
Cost of sales (Direct costs) 525,000
Gross profit ,000
Expenses (Overheads) 325,000
Other Costs (Depreciation) 10,000
Operating profit ,000
Non-operating income ,000
Interest payable ,000
Profit on ordinary activities before taxation/Net profit ,000
Corporation tax ,500
Profit after tax ,500
Dividends ,000
Retained profit for the period 46,500
Trading account
Profit and Loss Account
Appropriation Account

26. Further Reading Dyson, J.R. ; Accounting for Non-accounting Students
Chapter 3 (Covers book-keeping)
Chapter 4 (Covers Profit and Loss and Balance Sheet)
Chapter 5 (Covers adjustments)
Chapter 6 (covers all of these in a company context)
A substantial amount of reading is necessary.