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• Financial Statements


  Provide a summary of financial activities and the financial position of a business
• Stakeholders who use financial statements

  • Owners
  • Managers
  • Investors
• Why Keep Financial Records

  Essential for tracking every transaction within the business
• Tracking Transactions is not a part of the business course
• Why is it necessary to keep financial records

  Outlines some of the questions that cannot be answered if accurate and detailed records of the financial statements were not kept
• Key Financial Insights


  • Did the business make a profit or loss last year?
  • How much do we owe our suppliers?
  • How much do our customers owe the business?
  • Is the business able to repay the bank loan?
  • Did the business pay wages to the workers last week?
  • Is the business able to finance a dividend payment to shareholders?
• At the end of each accounting period (usually one year), the finance department prepares the financial statements of a business
• For limited companies, these statements are included in the annual report sent to every shareholder
• Statement of Profit or Loss

  A statement that records the revenue, costs, and profit (or loss) of a business over a given period of time
• What the Statement of Profit or Loss Shows

  • Gross Profit: Total revenue minus the cost of goods sold (COGS)
  • Profit from Operations: Operating income, which includes gross profit minus operating expenses (e.g., salaries, rent, utilities)
  • Details of Profit Distribution: Dividends to Shareholders, Retained Earnings
• Statement of Financial Position (Balance Sheet)

  A statement that records the values of a business's assets, liabilities, and shareholders' equity at one point in time
• What the Statement of Financial Position Shows

  • Net Worth or Equity of the Company: The residual interest in the assets of the company after deducting liabilities
  • Assets: Everything the company owns, which can include cash, inventory, property, and equipment
  • Liabilities: Everything the company owes, such as loans, accounts payable, and mortgages
  • Equity: The difference between assets and liabilities, representing the shareholders' claim on the company's assets
• Financial statements are prepared at the end of each accounting period (typically one year)
• For limited companies, these statements are part of the annual report sent to shareholders
• Components of Financial Statements

  • Statement of Profit or Loss
  • Statement of Financial Position
• Statement of Financial Position

  A statement that records the values of a business's assets, liabilities, and shareholders' equity at one point in time
• Asset


  An item of monetary value that is owned by a business
• Liability


  A financial obligation of a business that it is required to pay in the future
• Statement of Profit or Loss (Alternate Names)

  Income Statement<|>Profit or Loss Account
• Purpose of Statement of Profit or Loss

  • Internal Use: Detailed versions provide extensive financial information to managers, aiding in decision-making
  • External Use: Summary versions are included in the published accounts of companies for shareholders and other external users
• Content requirements for the Statement of Profit or Loss are determined by each country's legislation on companies
• The statement of profit or loss is divided into three sections: the trading account, the profit or loss section, and the appropriation account
• Revenue


  Total income from sales of goods or services
• Gross Profit


  The profit made from trading activities before deducting operating expenses, interest, and taxes
• Cost of Sales


  The direct costs attributed to the production of the goods sold by a company, including the cost of materials and direct labor
• Calculating Cost of Sales


  Opening Inventories + Purchases - Closing Inventories
• Profit from Operations (Operating Profit)

  The profit generated from the core business operations, calculated as Gross Profit - Overhead Expenses
• Profit Before Tax


  The profit after deducting interest expenses on any borrowed funds from the operating profit
• Profit for the Year (Profit After Tax)


  The net profit after subtracting corporation tax from the profit before tax, representing the final profit available to shareholders and for reinvestment
• Dividends


  The portion of profits distributed to shareholders as a return on their investment in the company
• Retained Earnings


  The portion of profit kept in the company after dividends are paid, for reinvestment or to pay off debt
• Low-Quality Profit


  One-off profit that is unlikely to be repeated or sustained
• High-Quality Profit


  Profit that is likely to be repeated and sustained over time
• When preparing revised statements, accountants should use the same format for presenting the statement of profit or loss as shown in the case study to ensure consistency and comparability
• Changes in the number of units produced and sold will affect both revenue and the cost of sales
• Some overhead costs may change with variations in the level of sales, such as promotion costs and transport costs
• Statement of Profit or Loss


  Accounting statement that reflects financial data and changes in key variables
• Guidelines for preparing revised statements

  • Use consistent format
  • Reflect changes in units produced and sold
  • Account for overhead variations
• Steps for adjusting statements


  1. Identify changes

  2. Calculate adjustments

  3. Revise the statement
• Impact of changes on Statement of Profit or Loss

  Increase in price (inelastic demand)<|>Increase in direct cost per unit<|>Increase in expenses<|>Reduction in profit tax rate<|>Increase in dividends