Académique Documents
Professionnel Documents
Culture Documents
TOPIC 2
Financial Statements & Decision
Making
1
Introduction
A. Types of business structures
B. Basic Financial Statements
C. Assumptions made and characteristics of
information
D. Basic effects of transactions
Types of Business Entities
Single proprietorship or sole trader
Owned by one person
Partnership
Owned by two or more partners
Company of corporation
Owned by shareholders
Separate legal entity
Sole Trader
A. One person who IS the business.
B. Easiest of all business structures to set
up.
C. Limited access to capital.
D. Business ceases when owner dies or
decides to get out.
E. Tax system- treated as PAYG same as an
employee.
F. Limited level of expertise available.
Partnership
Similar to Sole trader (where not incorporated)
except obviously greater access to capital by
virtue of more owners (normally up to 20) though
is different for accounting and for legal
partnerships.
PLANNING
What to do
How to do it
CONTROLLING ORGANISING
Evaluating actual vs DECISION Developing the
planned performance MAKING organisational structure
DIRECTING
Performing
according to plan
Basic Financial Statements
Financial performance (Income Statement)
Operating efficiency
Financial position (Balance Sheet)
Economic condition
Cash flows
Operating activities
Investing activities
Financing activities
The Income Statement
DONS AUTO REPAIRS
Income Statement
For the year ended 30 June 2015
REVENUE:
Repair revenue $442,500
EXPENSES:
Advertising expense $ 20,250
Repair supplies expense 91,710
Salaries and wages expense 127,800
Rent expense 40,260
Telephone expense 20,190
Light and Power expense 47,940 348,150
PROFIT $ 94,350
The Income Statement (cont.)
Income
Inflows of or savings in outflows of economic
benefits that result in an increase in equity during
the reporting period. Recognises the event
generally, not the receival (e.g. recognises
revenue when earned)
Expenses
Decreases in equity representing the consumption
or loss of economic benefits in the form of
reductions in assets or increases in liabilities
other than distributions to owners (again
recognises when expensed, not always when
paid)
Most larger businesses apply the accrual method
The Statement of Changes in Equity
2
1
4
Statement of owners equity
for the period
E1 + Profit Drawings = E2
3
The Balance Sheet
DONS AUTO REPAIRS
Balance Sheet
as at 30 June 2015
ASSETS LIABILITIES
Cash at Bank $ 50,340 Accounts payable $ 20,760
Accounts receivable 17,790 Mortgage payable 201,000
Repair supplies 14,610 221,760
Repair equipment 110,700
Land 60,000 EQUITY
Building 255,000 Don Brady, Capital 286,680
$508,440 $508,440
or
Assumptions
Accounting entity assumption
Need to identify boundaries
Accrual basis assumption
Transactions and events recorded when they
occur
Going concern assumption
Entity will continue indefinitely
Period assumption
Profit determined for a period of time
Assumptions made & Characteristics of Information (cont.)
Characteristics
Relevance
Reliability
Comparability and consistency
Understandability
Materiality
Benefits and costs
Income is costly to produce
Effects of Transactions on the Accounting Equation &
Financial Statements
$35,000
Example (cont.)
3. Darren purchases fuel supplies for $2,500
on credit.
Assets = Liabilities + Equity
Cash at bank Equipment Vehicle Fuel supplies Accounts payable Darren Jones, Capital
(1) $35,000 = $35,000
(2) -30,000 + 9,000 + 21,000
5,000 + 9,000 + 21,000 = 35,000
(3) +2,500 +2,500
5,000 + 9,000 + 21,000 + 2,500 = 2,500 + 35,000
$37,500 = $37,500
In-class Exercise
The Party Shop commenced on 1/1/2014
Owner, Claire Damico invested $150,000 for YE 31/12/14.
Received $420,000 cash for party-hire services.
Paid cash expenses $300,000 (wages & office supplies)
Purchased vehicle ($48,000) & computer system ($75,000)
Paid Rent in the amount of $49,500
Purchased land ($120,000) to build an office in new year.
Business borrowed $45,000 on land from bank.
Required.
1. Prepare Income Statement for YE 31/12/2014
2. Prepare Statement of Cash Flow for YE 31/12/2014
3. Can the business operate profitably & still have net
cash outflow for the year? Better indicator-profit/cash-
flow?
Solution Income Statement
The Party Shop
Income Statement
for YE 31/12/2014
Income
Revenue $420,000
Expenses
Wages & Office supplies $300,000
Rent 49,500 349,500
Profit/Loss $ 70,500
Solution Statement of Cash Flow
The Party Shop
Statement of Cash Flows
for YE 31/12/2014
Cash-flows from operating activities
Cash received from customers 420,000
Cash paid to suppliers and employees (300,000)
Rent (49,500)
Net cash from Operating 70,500
Cash-flows from investing activities
Purchase of land (120,000)
Purchase of vehicle (48,000)
Purchase of computer system (75,000)
Net cash from Investing (243,000)
Cash-flows from financing activities
Investment by owner 150,000
Mortgage (Land) (45,000)
Net cash from Financing 105,000
Net Cash-flow at end of year (67,500)
Tutorial
Questions:
Hoggett & Edwards Discussion Question 5
Exercises 2.10
Problems 2.5, 2.9 & 2.12
Decision Case
Communication/Group Activity
Ethical Issues: Ethical practices among friends
The END
31