PRACTICAL ACCOUNTING

PREPARING FINANCIAL
STATEMENTS

CHRISTOPHER MONGROO
 Financial Statements
What are financial statements?

Financial statements are written records that

convey the business activity and the financial
performance of a company

Financial statements are often audited by

government agencies, accountants, firms etc.
to ensure accuracy and for tax, financing and
investing purposes
 Financial Statements

Financial Statements include:

• Statement of Comprehensive Income

• Statement of Financial Position
• Statement of Cash Flows
• Statement of Changes in Equity
 Financial Statements
Statement of Comprehensive Income [SOCI]

 Also know as “Trading and Profit & Loss

Account” or the “Income Statement”

 Contains information relating to income

earned and expenses incurred over the
accounting period

 Attempts to determine the company’s

financial performance i.e. profit or loss
 Financial Statements
Statement of Comprehensive Income

Revenue/Income – money earned from

normal business activities, usually the sale of
goods and services to customers. It is the
money received and receivable from
business activities

COGS – cost of goods sold to customers

during an accounting period
 Financial Statements
Statement of Comprehensive Income

Expenses – monies spent or costs incurred

by a company in an attempt to generate
income

Gross profit – sales less cost of goods sold

Net profit – gross profit less expenses

Net loss – where expenses > revenue

 Financial Statements
Cost of Goods Sold (extract)

Opening Stock xxx

Add: Purchases xxx

Less: Purchases returns (xxx)
Net Purchases xxx

Cost of goods available for sale xxx

Less Closing Stock (xxx)
Cost of Goods Sold xxx
 Financial Statements
Scenario

ABC Ltd has asked you to calculate their cost

of goods sold for the month ending July 31st
2019.
Opening stock as at July 1st 2019 – $10,000
Closing stock as at July 31st 2019 – $6,000
Total purchases in July month – $27,500
Return outwards for the month – $1,500
 Financial Statements
Cost of Goods Sold (extract)
$ $
Opening Stock 10,000

Add: Purchases 27,500

Less: Purchases returns (1,500)
Net Purchases 26,000

Cost of goods available for sale 36,000

Less Closing Stock (6,000)
Cost of Goods Sold 30,000
ABC Ltd
Income Statement
For the period ended 31 December 2019
$ $
Sales 90,000
Less Cost of goods sold:
Opening stock 14,000
Add purchases 38,000
52,000
Less Closing stock (17,000) (35,000)
Gross profit 55,000
Less Expenses:
Salaries (15,000)
Rent (4,500)
Bad debts expense (2,500)
Depreciation expense (7,000)
Office expenses (1,000) (30,000)
Net profit/(loss) 25,000
 Financial Statements
Statement of Financial Position [SOFP]

 Also know as the “Balance Sheet”

 Contains information relating to the

existing assets and liabilities

 Attempts to determine the company’s

financial position i.e. net worth
 Financial Statements
Statement of Financial Position
Assets – resource controlled by the business,
as a result of past events, from which future
economic benefits are expected to flow to the
entity

Tangible assets have physical substance e.g.

buildings, machinery, motor vehicles, fixtures
and fittings etc.

Intangible assets – copyrights, trademarks etc.

 Financial Statements
Statement of Financial Position
Liabilities – a present obligation resulting
from a past event of which settlement is
expected to result in an outflow of resources

Capital – the amount invested by the owner is

referred to as capital or equity
Companies issue shares, which form the
equity of the business
The owners of these shares are called
‘shareholders’
 Financial Statements
Statement of Financial Position
Non-current – those assets and liabilities that
are permanent or will exist beyond 12 months
e.g. building, vehicles, mortgages etc.

Current – those assets and liabilities that are

within 12 months and therefore not long-term

• Current Assets – stock, debtors, cash/bank

• Current Liabilities – creditors, bank
overdraft, salaries payable etc.
ABC Ltd Current Liabilities $ $
Statement of Financial Position Accounts Payable (Creditors) 6,000
As at 31 December 2019 Rent payable 2,000 8,000
$ $
Non-Current Assets Long-term liabilities
Property, Plant and Equipment 115,000 Loan from Bank 120,000
Motor Vehicle 47,000 162,000
TOTAL LIABILITIES 128,000

Current assets Financed by:

Inventory 17,000 Capital/Equity
Accounts Receivable (Debtors) 1,800 Balance as at 1 January 2019 68,000
Cash at Bank 33,000 Add: Net profit for the year 25,000
Cash in Hand 1,200 53,000 Less: Drawings (6,000)
Balance as at 31 December 2019 87,000

TOTAL ASSETS 215,000 TOTAL EQUITY AND LIABILITIES 215,000

 Financial Statements
Statement of Cash Flows [SOCF]

 Report shows the movement of inflows

and outflows of cash during the period

 Report prepared according to the cash

basis instead of accrual basis

 Inflows and outflows by category i.e.

operating, investing and financing
activities
ABC Ltd
Statement of Cash Flows
As at 31 December 2019
$
Cash flows from operating activities
Profit before taxation XXX
Adjustment for:
Depreciation of PPE XXX
Gain on disposal of PPE XXX
XXX

(Increase)/Decrease in inventory XXX

(Increase)/Decrease in trade and other receivables XXX
Increase/(Decrease) in trade and other payables XXX
Taxes paid XXX
Net cash generated by operating activities XXX

Cash flows from investing activities

Purchase of PPE XXX
Net cash used in investing activities XXX

Cash flows from financing activities

Loan amount received XXX
Loan repayments XXX
Net cash used in financing activities XXX

(Decrease)/increase in cash and cash equivalents XXX

Cash and cash equivalents
- beginning of year XXX
- end of year XXX
 Financial Statements
Statement of Changes in Equity [SOCIE]

 Report shows movement and capital

position of the entity i.e. capital injection
including retained earnings
(accumulated profit or loss) over the
accounting period

 Opening Capital + Profit – Drawings

= Closing Capital
 Other Accounting terminology
 Accruals/Matching concept – income and
expenses must be recognized in the
accounting period to which they relate rather
than on cash basis

 Prudence concept – cannot overestimate

revenue and/or underestimate expenses

 Going concern concept – assumes business will

continue for the foreseeable future
 Summary

• Financial Statements – definition, types

and format

• Examples – financial reports (extract)

• Other key accounting terminology –

Principles of Accounting