Transcript LECTURE 2

LECTURE 2 - INTRODUCTION

General Accounting
 Cash flow
 Profit and Loss Statement
 Balance Sheet

Depreciation
 Concept
 Methods to account for depreciation
 Relation between depreciation and taxation
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CASH FLOW STATEMENTS
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Statement of receipts and disbursements
Reflect actual movements of cash only
Time shifted from commitments and orders
Link to Profit and Loss and Balance Sheet documents
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Cash inflow - the amount of case received in a defined time period
(week, month, quarter, year)
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Cash outflow - the amount of case paid (disbursed) in a defined time
period (week, month, quarter, year) - same time period!
Net Cash Flow - total cash inflow less total cash outflow
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PRODUCING A CASH FLOW
1.
2.
3.
4.
5.
6.
7.
8.
List all the cash inflows by amount and time
List all the cash outflows by amount and time
Select the time period and overall duration of the statement
Arrange the inflows and outflows in time order and divide into time
periods
Sum the cash inflows in each period
Sum the cash outflows in each period
Determine periodic Net Cash Flow
Calculate the cumulative cash flow for each time period
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CASH FLOW FORECAST - PROBLEM
Clear Air Ventilation Systems
1.
Produce a cash flow forecast for the first 6 months of trading
4
TRADING RULES AND REGULATIONS
In the UK - Companies Act of 1985.
This act specifies the minimum information that must be included in the
accounts that are filed at Companies House.
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Statutory obligation to prepare annual accounts
Accounts must be 'true and fair' representation
Audited by an independent, practicing accountant.
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SOME ACCOUNTING PRINCIPLES
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Matching or Accruals Principle
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Revenues and Costs are recognised as they are earned rather
than as cash is received or paid.
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Applies to all Limited Companies
Now a statutory requirement (SSAP 2) resulting from Companies
Act 1985 Prudence
Materiality
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Only items that are financially significant need be considered
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Accounts need to be practical in size
Absurdity is not mandatory
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GENERAL ACCOUNTING
Profit and Loss Statement
Profit and Loss Statement
Balance
sheet
Balance
sheet
Balance
sheet
March 31st
2003
March 31st
2004
March 31st
2005
The purpose of accounting is to record the financial activity of an
enterprise.
For Registered Organizations periodic formal reporting is mandatory.
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PROFIT AND LOSS STATEMENT
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How worth has changed over a period of time
The Profit and Loss Statement is a dynamic measure of the
financial performance of the organization. It shows revenues and
expenses for the period of time covered by the statement
Fundamental profit and loss equation:
Revenues - Expenses = Net Profit
Net Profit - Interest due - Taxation = Retained Profits
The Retained Profit is the measure of how much the activity within the
organization has contributed to the growth of the Net Worth of the
organization.
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PROFIT AND LOSS ACCOUNT
Direct Expenses:
•Production
Labour
•Materials
Income
Expenses
Sales Revenue
Turnover
Trading Income
Net Profit
Indirect Expenses:
•Sales Marketing
•Development &
Engineering
•Management
Interest & Tax
Interest on Capital
Loans +
Taxation !
OWNERS MONEY
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PROFIT AND LOSS ILLUSTRATION
Sales Revenue
Cost of Sales
Gross Profit
Overheads
Net Profit (PBIT)
Interest
Profit Before Taxation (PBT)
Taxation
Profit After Taxation (PAT)
m.u.
(000,000)
25.5
13.3
12.2
6.0
6.2
2.4
3.8
1.6
2.2
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CASH FLOW FORECAST - PROBLEM
Clear Air Ventilation Systems
1.
Produce a cash flow forecast for the first 6 months of trading
2.
Produce a Profit and Loss Statement for the first 6 months trading
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GENERAL ACCOUNTING
Profit and Loss Statement
Profit and Loss Statement
Balance
sheet
Balance
sheet
Balance
sheet
March 31st
2003
March 31st
2004
March 31st
2005
The purpose of accounting is to record the financial activity of an
enterprise.
For Registered Organizations periodic formal reporting is mandatory.
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BALANCE SHEET
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Statement of worth of an organization at a specific point in time.
Sets out assets, liabilities and net worth of the organization at that
point in time.
The Balance Sheet is a static measure of the financial performance
of the organization. It is a snap-shot of the financial condition of the
organization.
Fundamental accounting equation:
Assets = Liabilities + Net Worth
[Organizational perspective]
Net Worth = Assets - Liabilities
[Shareholder’s perspective]
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ASSETS
Fixed Assets
“A fixed asset in an asset that is
acquired for the purposes of use
within the business and is likely to
be used by the business for a
considerable period of time”
Current Assets
“A current asset is one which is either
part of the operating cycle of the
enterprise or is likely to be
realized in the form of cash within
one accounting period”
i.e.: greater than a single accounting
period
Fixed or Current Asset?
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FIXED AND CURRENT ASSETS
Fixed Assets
“A fixed asset in an asset that is
acquired for the purposes of use
within the business and is likely to be
used by the business for a
considerable period of time”
Current Assets
“A current asset is one which is either
part of the operating cycle of the
enterprise or is likely to be realized in
the form of cash within one
accounting period”
i.e.: greater than a single accounting
period
Helicopter user
(e.g. Oil Company)
Used to move things
for purposes of
trading
Fixed or Current Asset?
Helicopter producer
(e.g. Augusta)
Stock item?
Current Asset
Finished goods stock
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BENEFITS FROM A FIXED ASSET
Purchase
Disposal
Fixed Asset
Asset exists within the organization
Benefit Gained
Accounting
Period
0
1
2
3
4
5
99/00
00/01
01/02
02/03
03/04
04/05
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FIXED ASSETS
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Tangible fixed assets
 Material Objects
 Buildings, plant, equipment, computers
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Financial fixed assets
 Titles to cash
 Investments in subsidiaries
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Intangible fixed assets
 Non-material things of value
 ?
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INTANGIBLE FIXED ASSETS
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Patents
Brand-names
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Trademarks
Image
Rowntree Nestle
Kit Kat
Black Magic
Toffo
Smarties
Dairy Box
Walnut Whips
Quality Street
Drifter
Fox’s Glacier mints
Rolo
Matchmakers
Blue Riband
Lion Bar
Caramac
Rowntree’s Fruit Gums
Polo
Golden Cup
Tooty Frooties
Aero
Mintola
Lean Cuisine
Milky Bar
Munchies
Coffee
After Eight
Yorkie
Branston Pickle
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CURRENT ASSETS
Working Capital components
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Financial components
Cash in hand and at bank
Stock
Debtors
Credit Purchases
Creditors

Manufacturing
Process
Stocks
Purchases
Payment to Suppliers
Short-term investments
Wages
CASH
Credit Sales
Debtors
Payment by Customers
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LIQUIDITY OF BUSINESS ASSETS
Current Assets
Circulating Assets
Liquid Capital
Fixed Assets
Fixed Capital
Totally Liquid
Assets
Least Liquid
Assets
Cash in Cash in
Savings
Short
Hand
Account
Term
Bank
Deposits
Debtors
Stock
Investments
Motor
Office Machinery
Vehicles Equip.
Land
Special
&
Plant
Buildings
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LIABILITIES
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Current liabilities – amounts falling due within the current financial
year
 Basically short term debts
Short term
Source of
finance

Current Assets
Creditors
Long term liabilities – amounts falling due longer than the current
financial year
Long term
Source of
finance
Fixed Assets
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BALANCE SHEET
Assets - Liabilities
Fixed Assets
Tangible fixed assets
Financial fixed assets
Current Assets
Cash in hand & at bank
Stock
Debtors
Current Liabilities
Creditors
Long term liabilities
Net Assets
Net Worth
=
Shareholders funds
Retained profit
Net Assets
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CASH FLOW FORECAST - PROBLEM
Clear Air Ventilation Systems
1.
Produce a cash flow forecast for the first 6 months of trading
2.
Produce a Profit and Loss Statement for the first 6 months trading
3.
Produce a Balance Sheet as at the end of the first 6 months trading
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