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.

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 AccountsBalance Sheet Accounts “B” (Statement of Financial Position)

Equity Capital accounts: Capital and Drawings

Share premium

Retained income

Classification of AccountsBalance Sheet Accounts “B” (Statement of Financial Position)

LiabilitiesCurrent (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 

Income Statement Concepts

Taxation

Net Profit after Tax

Dividends

Ordinary share dividends

Preference share dividends

Retained income 

Balance Sheet Concepts

Tangible Assets (vs Intangible Assets)

Accumulated depreciation

Financial Assets

• Investments

Current Assets

• Inventory

• Trade and other Receivables

• Cash (and Cash equivalents)  

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  

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:

CASH FLOW STATEMENTS

1. Operating Activities: Information is obtained from the current income statement and the working capital section of the balance sheet.

2. Investing Activities: Information is obtained from the fixed assets and investment sections of the balance sheet.

3. 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 shareholdersThe suppliers of short term credit

(Creditors)The suppliers of long term credit

(Financial Institutions)ManagementUnions/StaffAuditorsSARS

Demystifying Key Ratios

Liquidity Ratios 1. The Current ratio

Current ratio = Current AssetsCurrent 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