ACT FinStatement

7/30/2019 ACT FinStatement

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Financial Statements

Course Instructor

Dewan Muktadir-Al-Mukit

Eastern University


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Financial Statements: A set of financial statements is a structured

representation of the financial performance andfinancial position of a business and how itsfinancial position changed over time.

Major types of financial statements:1) Income Statement / Profit and Loss account2) Balance Sheet3) Statement of Cash Flows

4) Statement of Changes in Equity


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Following the time-period principle, financial

statements are prepared after a specified period;say a quarter, year, etc.

Financial statements prepared for a period of one

year are called annual financial statements/Annual Report

Quarterly and semiannual financial statementsare called interim financial statements and arenormally prepared in a condensed form.


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1) Income Statement:It shows the company's revenues andexpenses during a particular period.

i) Single-Step Income Statementii) Multi-Step Income Statement

i) Single-Step Income Statement: A single step incomestatement uses just one subtraction. This is done bysubtotaling all the revenues and gains together at the top

of income statement and subtotaling all the expenses andlosses together below revenues. The sum of expensesand losses is then subtracted from the sum of revenuesand gains to arrive at net income.

Thus:

(Revenues + Gains) (Expenses + Losses) = Net Income


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ii) Multi-Step Income Statement: Multiple-step incomestatement uses multiple subtractions in computing thenet income. It comprises of a series of steps in which

costs and expenses are deducted from revenue. Theincome statement is divided into four major sections :

(1) Revenue

(2) Cost of goods sold

(3) Operating expenses

(4) Non operating items/ others income & expense, and

(5) Income Tax


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(1) Revenue:

Example: Total sale for the year is 20,000units of pen. Per price of pen is Tk 10. Total

Sales Discount for the year is Tk 1,000.Customers returned the goods of 200 units.

Net Sales Revenue

Total Sales (Price x Quantity)

less: Sales Returns

less: Sales discounts


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Sales Revenue:

Total Sales (Price x Quantity) 200,000

less: Sales Returns 2,000less: Sales discounts 1,000

Net Sales Revenue 197,000


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(2)Cost of goods sold:

On January-1 the beginning stock of raw material is

Tk 7,000. Over the year, purchases of raw materialwere Tk 1,500. The inventory at the end of Decembershows Tk 2000. During the year raw materialreturned of Tk 1,000. Direct variable cost was Tk2,500 and direct labor cost was Tk 3,000.

Cost of goods sold

Beginning Stock of Raw Materials/ Beginning Inventory

(+) Purchase of Raw Materials

(-)Purchase Returns

(+) Direct Variables Cost(+) Direct Fixed Cost

(-) Ending Stock of Raw Materials/ Ending Inventory


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Cost of goods soldBeginning Stock of Raw Materials/Beginning Inventory

7,000

(+) Purchase of Raw Materials 1,500

(-)Purchase Returns 1,000

(+) Direct Variables Cost 2,500

(+) Direct Fixed Cost 3,000

(-) Ending Stock of Raw Materials/Ending Inventory 2000

Cost of goods sold 11,000


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(3)Operating Expenses:

General & Administrative

Expenses

Selling Expenses

Office Salary Salesmen's salaries & wagesOffice Rent Advertising

Office supplies Commissions

Utilities Rent of Shop

Depreciation & Amortization expenses

Legal expenses


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(4)Non operating items/ others income& expense:

Net Others Income and Expenses

(+) Gain of sale of investment/equipment

(-) Loss on sale of investment/equipment

(+) Interest receipt

(-) Interest Expense/Financial Cost

(-) Contribution to Workers' profit

Participation/Welfare Fund (WPWF)


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How to make Multi-step Income Statement:

Net Sales Revenue xxx

- CGS xxx

Gross Profit/Margin xxxx- Operating Expenses xxx

Operating Profit/ Earning Before Interest & Tax (EBIT) xxxx

- Others Income and Expenses xxx

Net Income Before Tax/ Earnings Before Tax (EBT) xxxx

- Income Tax (% of EBT) xxx

Earnings or Income After Tax (EAT)/ Net Income xxxx

====


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2) BALANCE SHEET:

A balance sheet tells about the assets,

liabilities and equity of a business at aspecific point of time. A balance sheet is anextended form of the accounting equation. An

accounting equation is:Assets = Liabilities + Equity

Total Asset Total Liability and Equity

Current Asset/Short Term Asset

+

Net Fixed Asset/Long Term Asset

Current Liability/ Short Term Liability

+

Fixed Liability/Long Term Liability+

Total Equity


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Total Asset: Current Asset: These assets are composed of items

that are either in cash terms already or can be easilyconverted into cash terms within a year. Current assetsare expected to be used (sold or consumed) within 12months.

Current Asset: $

Cash 2000

Savings Accounts 5000

Treasury bills 4000

Other short term investments 1000

Accounts Receivables 8000

Inventory 1500

Prepaid Expenses 2500

TOTAL CURRENT ASSETS 24000


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Fixed Asset/Non Current Asset: Non Current Assetsare those whose benefits are expected to last morethan one year from the reporting date. Long-termassets are non-liquid assets which are generallyrequired for the day-to-day operations of a companyand which cannot be easily converted into cash. It hastwo types:

1. Tangible fixed assets: These assets have physical

existence.

Like, Land, buildings, machinery, vehicles, equipment,and furniture.

2. Intangible fixed assets: These assets are characterized

by Non physical existence. Like, goodwill, patents,copyrights and trademarks.

Net Fixed Asset = Total Tangible Fixed Asset Accumulated Depreciation + Intangible Fixed Asset


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Fixed/Non Current Assets $Land & Buildings 9000

Machinery and Equipments 8000

Furniture and Fixtures 7000

Vehicles 6000

Gross 30000

Less-Accumulated Depreciation 2000

Net Property, Plant & Equipments 28000

Others Long Term Investments 6000Intangible Assets 22000

TOTAL FIXED ASSETS 56,000


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Total Liability : Current Liability: Current liabilities are obligations

which a business is expected to pay within one year.

Current Liabilities: $

Accounts Payable 1000

Notes Payable 2000

Taxes Payable 1000

Accrued Salaries Payable 3000

Employer Provided Benefits Payable 8000

Unearned Revenues 1000

Current Portion of Long Term Debt 3000

Others Accrued Expenses (Accruals) 7000

TOTAL CURRENT LIABILITIES 26,000


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Fixed /Non Current Liability: Fixed liabilities areobligations which a business is expected to pay overone year.

Fixed/Non Current Liabilities $Long Term Debt/Bond/Debenture 10000

Mortgage Note 7000

10 years bank loan 6000

Deferred Income Tax 2000Others long term liabilities 3000

TOTAL FIXED LIABILITIES

or, TOTAL LONG TERM DEBT 28000


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Shareholders' or owners' Equity:Shareholders' equity represents the interest of a

company's shareholders in the net assets of the

company. Two major parts: Common Stock value

Retained Earnings

Common stock represents the legal capital of thecompany.

Retained earnings represent the total earnings of thecompany retained by the company for reinvestment.

Retained Earnings = Net Income Cash dividends +Beginning Retained Earnings


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Shareholders' or owners' Equity: $Common Stock

[At $ 10, total 2,000 shares issued,

20000

[$10 x 2000]

Retained Earnings 6000

TOTAL STOCKHOLDERS' EQUITY 26,000

Link: BS & I/S


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3) Cash flow Statement: The statement of cash flows is prepared to measure the

cash in-flows and cash out-flows from the operating,investing and financing activities of a business duringa period.

A Statement of Cash Flows comprises of three sections: Cash Flows from Operating Activities:This section includes cash flows from the principal revenue generation

activities such as sale and purchase of goods and services. Cash flows

from operating activities can be computed by two methods. One is theDirect Method and the other Indirect Method.

Cash Flows from Investing Activities:Cash flows from investing activities are in-flows and out-flows related to

activities that are intended to generate income and cash flows in future.This includes cash in-flows and out-flows from sale and purchase oflong-term assets.

Cash Flows from Financing Activities:Cash flows from financing activities are the cash flows related to

transactions with stockholders and creditor such is issuance of sharecapital, purchase of treasury stock, dividend payments etc.


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4) Statement of Changes in Equity:

A statement of changes in equity summarizes themovement in the equity accounts during the year.

Typical information we can get from a statement of

changes in equity include:- The amount of new share capital issued

- The amount of dividend paid during the year toshareholders

- The amount of net income earned during the year- The amount of Retained Earning

- The amount of Revaluation of Asset

ACT FinStatement

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