Introduction to Accounting and Finance & Financial Statements Basics

Introduction to
Accounting and
Finance & Financial
Statements Basics
Week 2
Week 1 Revision questions
To summarize, which are the main types of business?
–Sole trader, Partnership, Limited Company
–Give one example for each type of business
How do we categorize the various sources of finance?
–Internal
–External
• Short term
• Medium term
• Long term
Any examples of sources of finance available to businesses?
Learning Outcomes
•To define of Accounting and Finance departments
•To understand the role of the main Accounting and Finance
functions
•To identify the main types of financial statements and their
main difference
•To identify the main contents and the purpose of the Income
Statement
•To identify the main contents and the purpose of the Balance
Sheet
Accounting and Finance
Accounting is concerned with collecting, analyzing and
communicating financial information. The ultimate aim is
to help those using this information to make more
informed decisions.
Finance is concerned with the ways in which funds for a
business are raised and invested.
Main Accounting functions
Financial Accounting: it is the process of preparing financial
statements that companies use to show their financial performance
and position to anyone outside the company.
Management Accounting: it is the process that includes planning and
controlling of business operations for internal purposes.
Tax: it focuses on preparing, submitting and managing tax statements
and returns.
Auditing: it focuses on company processes and controls in order to
identify potential weaknesses, fraud and mismanagement.
Main Finance functions
Investment: it involves the allocation of capital to long-term assets
and decisions of using funds which are obtained by selling the less
profitable and less productive assets.
Financing: It focuses on making wise decisions about when, where
and how should a business obtains the funds.
Dividend: it focuses on deciding whether to distribute all the profits
to the shareholders or retain all the profits or distribute part of the
profits to the shareholders and retain the rest for the business.
Working capital: it focuses on working capital management, which is
to maintain a liquidity position of a company to avoid insolvency.
Financial Statements – Types
The Income Statement (Profit and Loss Account) summarizes the
revenues and expenses of a business in an accounting period
The Statement of Financial Position (Balance Sheet) shows the
assets, liabilities and capital of a business at a certain date
The Cash Flow Statement shows an overall view of money flowing
in and out of the business during the accounting period
Income Statement
The income statement is a historical record of the trading of a
business over a specific period (normally one year). It shows
the profit or loss made by the business – which is the difference
between the firm’s total income and its total costs.
Main contents of Income Statement are;
–Sales (Revenue)
–Cost of Sales (Opening Stock, Purchases, Closing Stock)
–Expenses (Expenses to run the business)
Purpose of Income Statement
The income statement serves several important purposes:
–Allows shareholders/owners to see how the business has performed and
whether it has made an acceptable profit (return)
–Helps identify whether the profit earned by the business is sustainable (“profit
quality”)
–Enables comparison with other similar businesses (e.g. competitors) and the
industry as a whole
–Allows providers of finance to see whether the business is able to generate
sufficient profits to remain viable (in conjunction with the cash flow statement)
–Allows the directors of a company to satisfy their legal requirements to report on
the financial record of the business
Income Statement – Example
Income Statement – Example
Income Statement – Example
Income Statement:
Practice Question 1
Relevant trading period is 01.01.2021 till 31.12.2021
– Purchases – £10,000
– Stock at 01.01.2021 – £4,500
– Sales – £80,000
– Taxation – £5,000
– Administration Expenses – £20,000
– Stock at 31.12.2021 – £2,000
– Operating Expenses – £12,000
– Finance Cost – £3,000
Solution
Income Statement:
Practice Question 2
XYZ Ltd sold 60,000 units from Jan 2021 till Dec 2021. Selling price of each unit is £2.00
Stock value in the company on 01.01.2020 is 7,000 and closing stock is valued at £5,000
Company purchased units valued £70,000
Breakdown of expenses are;
– Wages and Salaries: £5,000
– Stationary: £1,000
– Rent and Rates: £5,000
– Insurance: £1,000
– Telephone: £1,500
Calculate Gross and Net profit for the company for the period ended 31.12.2021.

AssignmentTutorOnline

Solution
Income Statement: Quiz Q1
Income Statement: Quiz Q2
Balance sheets provide a snapshot of the assets and liabilities of a business at
a point of time.
It shows what the business owns, is owed and owes:
–Owns – assets such as buildings, stock and cash.
–Is owed – money from debtors.
–Owes – money to creditors and the bank.
–Owes to the investors and owners of the business (they own the profit).
Balance Sheet
Balance Sheet
Notes:
• Assets – Liabilities = Net Assets (which is the total of fixed
and current assets minus current and long-term liabilities).
• The Net Assets are financed by the owner(s) of the
business, in the form of capital and reserves. The total
capital and reserves can be also called as Total Owner’s
Equity (or total equity)
• Based on the above, we can also define the accounting
equation (or basic accounting equation) which offers us a
simple way to understand how assets, liabilities and equity
are linked together. The accounting equation is:
Assets = Liabilities + Total Owner’s Equity
Balance Sheet
Balance Sheet
Current Assets –
Current Liabilities
= Working Capital
Balance Sheet: Example

Calculate the working capital, the net assets and the total owner’s equity
Balance Sheet: Solution
Net Assets:
Fixed Assets + Current Assets –
Current Liabilities =
40,000 + 16,000 – 6,000 = 50,000
Working Capital:
Current Assets – Current Liabilities =
16,000 – 6,000 = 10,000
Total owner’s equity is equal to
the net assets, as a result it is
50,000
Balance Sheet of Peter Simpson, trading as “Wyvern Stationery”
Activity
Thank You
Any Questions?