This document explains the starting points to understand financial statements. Learnt in Year 1 of Marketing University course this covers definitions, equations, and categories of key components of financial statements. This includes, profit or loss, income, category’s of assets and liabilities ...
L2- Financial Statements
Financial Management for Managers
Accounting Periods:
Financial statements typically cover a period of 12 months
The 12 month period can start at any time of the year
The statement of profit or loss would show whether the company made a profit
or loss between 1 Jan 2022 and 31 Dec 2022
The statement of profit or loss:
Income- money the business has earned during the financial year
Expenses- the running costs of the business during the financial year
Total income- total expenses = net profit
Income:
. Main type of income is money earned from selling goods or services, known as
revenue
. Revenue sits at the top of the statement of profit or loss
. Other forms of income include: rental income or interest income
5 main categories of expenses:
1. Costs of sales- directly associated with producing the products, or providing
the services that the company sells
2. Administrative expenses- costs incurred which are necessary in order to
operate, not directly associated with providing the product or service
3. Distribution costs- costs incurred selling or delivering products or services
4. Interest expense- interest that the business must pay to the bank
5. Tax expense- corporation tax that companies pay each year on their taxable
profits
The Accurals Basis:
Companies must use the accruals basis to prepare their financial statements
Income- should be recorded when it is earned, regardless of if the cash is
received
- the money owed by the customer is called a trade receivable
Expenses- should be recorded when they are incurred, regardless of if the cash is
paid
- the money owed to the supplier is called a trade payable
The Statement of Financial Position:
Assets- resources which the business has which can be used to create future
economic benefits (items the business owns)
Liabilities- an obligation to transfer money or other economic resources to a third
party (items the business owes)
Equity- the money that the company’s owners have invested in the business
Categories of Assets:
Non-current assets- assets that the company would typically own for more than
one year e.g land and buildings, motor vehicles, plant and machinery
Current assets- assets that the company would typically own for less than one
year e.g cash in hand and at bank, trade receivables (Money owed by
credit customers), inventories (stock)
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