Financial Statements
Lesson objective
At the end of this lesson students should be able to
described elements of the different financial statements
Types of Financial
Statements
Financial statements are drawn from the trial
balance and are presented in the following
forms :
1. Income statements / statement of
comprehensive Income
2. Balance sheet / Statements of financial
position.
3. Cash Flow Statements
Importance of Financial
Information in Venture Decision
making
Manager and small business owners require
accurate information to make key decision
since most decision have financial
consequences for business.
Financial information is important in tracking a
venture's profitability .
The statements provides information that is
useful to present to prospective creditors and
investors and others who may be involved in
decisions relating to investments.
Statement of
financial
Position
Balance sheet
Balance Sheet/Statement of
Financial position
The Balance sheet is a financial statements that
gives a summary of assets , liabilities and
equity of a business entity . This is prepared at
a specific date. The basic aim is to facilitate
decision making .
It provides information on the financial
position of an entity and its ability to meet it
debt and obligations.
The balance sheet adheres to an equation that
equates assets with the sum of liabilities and
shareholder equity. Assets = Liability + Equity
Components/Elements of
balance sheet
The balance sheet has three components .
1. Assets
2. Liabilities
3. Net worth / Equity / capital .
Assets : Assets are all the resources that are owned
or controlled by a business. They are economic
resources that are in a state of value or that will
produce future value..
OR
Anything of value that provides services to a business.
Components/Elements of
balance sheet
1. ASSET
There are two classes of assets
● Fixed Assets ( Non-current Assets
● Current assets
● Non current assets (Fixed) -
Fixed assets are assets that are of long-term
nature. These assets were not bought to be used
as items for trade. They are normally expected to
be used in the business for a long time and they
enable the production of goods and services .
These assets appear on the balance sheet in order
of permanency. Example: Premises ,fixtures
and fittings , equipment , motor
van,Computer etc..
Components/Elements of
balance sheet
Current assets : Current assets are those
resources of the business that are of short
term nature. These assets can easily be
converted into cash, sold or consumed within
one year period. These assets appear in the
balance sheet in the order of liquidity.
Example: Inventory, Accounts receivables(trade
debtor) , cash at bank, cash in hand .
Expenses prepaid, and revenue owning is
also current assets.
2.Liabilities : are resources in the business
that are supplied by persons other than
the owner. They are amounts owing for
assets/ services that are supplied / rendered
to the business.
Liabilities consist of current liabilities plus
non -current liabilities ( long-term
liabilities).
Long-term liabilities: are amounts that are
owed by the firms that are expected to be
repaid after one year of the balance sheet
date. Some examples of long-term liabilities
are long-term Bank, Debentures , bonds payable
and mortgages .
Current liabilities : Current liabilities are
amount that are owed by the firm that must be
repaid with the short term(within up to one year
of the balance sheet date)Some examples are
trade creditors(account payable),short term
loans, bank overdraft. Expenses owing and
revenue prepaid.
See spreadsheet for format
Components of the Balance
Sheet
3. Capital/ Owners Equity :
This is the funds/ share capital invested
in the business by its owners plus the
profit retained for use in the business
less any share of the profits paid out
of the business to the owners.
Statement of
comprehensive
Income
Income statement
The Income Statement
The income statements is sometimes
referred to as the “ statement of
comprehensive income.
The income statement is a financial
statement that assesses the firms' financial
performance over an accounting period(
usually a year ).
It shows how revenues are earned and
expenses incurred by the business .
Components of the Income
Statement
The income statements is divided into the
following sections:
1.Trading account : This shows the
calculations of gross profit from trading.
Gross profit is calculated as :
‘Sales - Cost of sales
The gross profit gives an indication of
the level of efficiency with which
material and labour cost were used to
produce goods and services .
Cost of sales is calculated as :
Opening stock + purchases - closing inventory .
This section reveals the cost of merchandise
sold during the accounting period.
Break down of cost of sales :
Sales represents the total amount of money
earned from the provision of goods and
services
Opening inventory is the cost of the inventory
at the beginning of the accounting period.
Purchases: this represents goods that are
bought with the intention of reselling.
Closing inventory :is the cost of the
inventory at the end of the accounting
period.
2. Profit and loss account :
This shows the calculation of net profit , by adding
any additional income to gross profit then subtracting
all the expenses.
Profit (Difference between business income and
expenditures )
❖ Revenues: this represents income earned by the
firm outside of its regular trading activities. These
may include rent received , commission received,
and discount received.
❖ Expenses are known as overheads and represents
cost that are incurred for the purpose of earning
income/the running cost of a business.. Example
include , wages , salaries, utilities payments,rent
,telephone charges.. Ect .
Class Activity
Exercise 1
The following relates to the used car business
Motor Ltd . State the classification of each item.
Classification( Fixed assets,current
assets,capital,long term liability,and current
liability
a). Office Machinery
b) Loan from the bank(6 months).
c)Fixtures and fittings
d)Motor Ltd owes for good
e) Cash in hand
d) Paid rent in advance
e)The owner places his personal cash into the
business
Exercise 2
The following items relate to Trumps Ltd.
Tick the items that are under the wrong
headings
Assets Liabilities
Loan from Pam Stock of Goods
Cash in hand Debtors
Creditors Machinery
motor Vehicles Plant and Machinery
Money owing to bank Bank overdraft
Exercise 3
Tip : Accounting Equation A=L+C
Fill in the gaps
Assets Liabilities Capital
15600 1200 ?
58000 4300 ?
36800 ? 10500
29000 ? 16100
? 5200 17200
? 1350 55750
The following information is available for NARK’S
Multitasker Ink Masters on February 1 , 2023.
Premises $ 200,000 Step 1 : Calculate the total
value of all assets
furnitures $100,000 Step 2 : Calculate the total
value of all liabilities
Vehicle $80,000 Step 3: Use the
Accounting equation to find
missing capital figures
Debtors $5000 Step 4 : Prepare the
balance sheet , starting
with the name and the
date of the statement
cash in hand $3000
cash at bank $10,000
bank loans 2 years $40,000
Creditors $7000
Exercise 1B
Todd provides a list of the amounts it owes and owns on February
28,2008.
Inventory. $6500
5 year bank loan -$3890
Debtor:Pliers. $1470
Bank overdraft. $1840
Cash. $2450
Owners equity;$16950
Prepaid rent :$410
Creditor :Screwdriver :$1620
Machinery. :$8250
Wages owing:$80
Delivery van:$5300
Prepare a Balance sheet
