Kimmel 3e Chap 1

BAO6504Accounting for Management Lecture 2Financial Statements

Reference: Chapters 1 & 42FINANCIAL STATEMENTSIncome Statement(Statement of Financial Performance)Reports revenues less expenses for a particular period of timeBalance Sheet (Statement of Financial Position)Reports assets and claims to those assets at a particular point in time

3FINANCIAL STATEMENTS continuedStatement of Changes in EquityReports amount of profit for the period and the changes in equityCash Flow StatementReports information regarding cash receipts and cash payments for a particular period of time4Income statementPurpose is to report success or failure of the entitys operations for a period of timeManagers are interested in the bottom line because they allocate resources based on their beliefs about an entitys future performance5Income statement continuedWONG PTY LTDIncome Statementfor the month ended 31 October 2010Service revenues$10 600ExpensesSalaries expense$3 200Supplies expense 1 500Rent expense 900Insurance expense 50Interest expense 50Depreciation expense 40 5 740Profit before tax 4 860Tax expense 2 000Profit after tax$ 2 8606

67MERCHANDISING OPERATIONSMerchandising businesses buy and resell inventoryRevenues are referred to as sales revenueExpenses are divided into two categories:Cost of goods soldOperating expenses8MERCHANDISING OPERATIONSProfit measurement process for a merchandising businessSales revenueCost of goods soldGross profitOperating expensesProfit (loss)EqualsLessLessEquals9Cost of goods soldInventory, 1 July 2010 $ 36 000Purchases $325 000Less: Purchase ret. & allow. 17 200Net purchases 307 800Add: Freight-in 12 200Cost of goods purchased 320 000Cost of goods available for sale 356 000Inventory, 30 June 2011 40 000Cost of goods sold 316 000Cost of goods sold10Operating expensesSelling expensescost of making the sale e.g. advertising, delivery expensesAdministration expensescost of operating activities of the general, accounting and personnel offices e.g. salaries, rentFinancial expensescosts of financing the business e.g. interest expense, discounts allowed11PW AUDIO SUPPLY LTDIncome Statementfor the year ended 30 June 2011 Operating revenueSales revenue Gross sales revenue $480 000 Less: Sales returns and allowances (20 000) Net sales revenue 460 000Less: Cost of goods sold (316 000)Gross profit 144 000Other operating revenue Rent revenue $15 000 Interest revenue 9 000 168 000Operating expenses ... Continued on next slide12Operating expensesSelling expenses Sales salaries & commission expense $45 000 Advertising expense 16 000 Freight-out 8 000 Rent expense store space 7 000 Depn expense store equipment 5 000 $81 000Administration expenses Office salaries expense 19 000 Electricity expense 4 000 Rent expense office space 10 000 Depn expense office equipment 3 000 Insurance expense 2 000 38 000Financial expenses Interest expense 2 000 Discount allowed 4 000 6 000 (125 000)Profit before income tax 43 000Less: Income tax expense (12 900)Profit after tax $ 30 10013

1314Balance sheetReports assets and claims to those assets at a specific point in timeBased on the basic accounting equationASSETS = LIABILITIES + EQUITY 15Balance sheet continuedWONG PTY LTDBalance Sheetas at 31 October 2010AssetsCash$15 200Accounts receivable 200Advertising supplies 1 000Prepaid insurance 550Office equipment 4 960Total assets$21 910Liabilities and equityLiabilitiesAccounts payable$ 2 500Interest payable 50Revenue received in advance 800Salaries payable 1 200Bank loan 5 000Total liabilities$ 9 550EquityShare capital 10 000Retained earnings 31/10/08 2 360Total equity 12 360$21 91016Statement of changes in equityReports amount of profit for period and other changes in equity such as adjustments to retained earnings for Changes in accounting standardsChanges in accounting policiesCorrection of errorsGains recognised directly in equityRetained earnings refers to accumulated profit which has not been distributed to shareholders17Statement of changes in equity continuedWONG PTY LTDStatement of Changes in Equity (extract)as at 31 October 2010

Profit$ 2 860Retained earnings 1/10/10 0Dividends (500)Retained earnings 31/10/10$ 2 36018The classified balance sheetMinimum disclosures:AssetsCash assetsTrade and other receivablesOther financial assetsInventoriesInvestments in propertyProperty, plant and equipmentTax assetsIntangible assetsLiabilitiesTrade and other payablesFinancial liabilitiesTax liabilitiesProvisionsEquityCapital and reservesRetained earnings or accumulated losses19The classified balance sheet continuedCurrent assetsAssets that are cash, held for the purpose of being traded, or expected to be converted to cash or used in the business within one year Non-current assetsAssets that are not expected to be sold or consumed within one year20The classified balance sheet continuedCurrent liabilitiesObligations that are to be paid within one yearNon-current liabilitiesObligations that are not classified as current