Introduction to Financial Statements Accounting is the process of: identifying measuring, and communicating economic information To permit: informed judgements and decisions by the users of the information
Jan 12, 2016
Introduction to Financial Statements
Accounting is the process of:identifyingmeasuring, andcommunicating economic information
To permit:informed judgements and decisions by the users of the information
Introduction to Financial Statements
What are the Financial Statements?Statement of financial position (balance
sheet)Statement of financial performance
(profit and loss statement)Statement of cash flowsNotes to the accounts
And attached …
Auditor’s ReportDirector’s ReportDirector’s Declaration
Changes to Financial Statements
Profit and loss statementStatement of financial performance
• structural changes• some items are in Notes, e.g. individual significant items• More disclosure, e.g. cost of sales
Introduction to Financial Statements
Balance sheetStatement of financial position• optional structural changes• concepts redefined
Introduction to Financial Statements
The statement of financial position
we own – we owe = our wealthassets – liabilities = net assets, or
shareholders equity/funds
Issues for Directors – Solvency and liquidityCapital structure Is the risk profile appropriate?Accuracy of the dataHow can we increase net wealth?
Introduction to Financial Statements
Current assetsCashReceivables
InventoriesOther
Total current assets
Non-current assetsReceivablesInvestmentsProperty, plant and equipmentIntangibles
Total non-current liabilities
Total assets
Statement of financial position – Assets
Some issues:•valuation of assets•composition – the right assets•earning capacity•movements in assets
Introduction to Financial Statements
Current liabilitiesAccounts payableInterest-bearing liabilitiesProvisionsOther
Total current liabilities
Non-current liabilitiesAccounts payableInterest-bearing liabilitiesProvisionsOther
Total non-current liabilities
Total liabilities
Some issues:•timing of repayments•cost of borrowing•contingent liabilities•any special feature of liabilities?
Statement of financial position – Liabilities
Introduction to Financial Statements
Watch contingent liabilities !
Contingent liabilities are potential expenses which may or may not arise, depending upon future events.
Typically these relate to the provision of guarantees, but can also arise from tax and legal claims.
Pacific Dunlop had a vast contingent liability as a result of law suits in the US following the failure of its pacemaker leads.
Introduction to Financial Statements
Share capital
ReservesAsset revaluationsAsset realisationGeneralForeign exchange
Retained earnings
Total equity
Statement of financial position – equity
Some issues:•movements•level of reserves•dividend payouts•Is equity increasing?
Introduction to Financial Statements
Statement of financial performance
revenue – expenses = OPBT
OPBT – tax = OPAT
OPAT – dividends = retained earnings for year
Statement of financial position
assets – liabilities = equity
Introduction to Financial Statements
Issues for Directors –
Statement of financial performance
Quality / strength of revenue / profits Future maintainable earnings Profit margins Depreciation, amortisation Taxation (yes!) Significant items –
size and effect positive (revenue) negative (loss, write-down)
Introduction to Financial Statements
opening bank balances
operatingactivities
investingactivities
financingactivities
add or subtractcash flows from
Introduction to Financial Statements
Directors’ duties re financial statements
These are mandatory under the Corporations Act:
Keep accounting recordsHave financial reports made outHave accounts auditedDirectors’ reportDirectors’ declarationApply accounting standards
Introduction to Financial Statements
Insolvent Trading
Insolvency …unable to pay debts as and when they fall due
• Duties• Defences• What incurring a debt means• Joint and several liability
ProfitProfit = Revenue – Expenses
Profit MarginProfit Margin = Profit
Revenue
(Indicates financial performance relative to total revenue)
Typical Expense Categories
• Cost of Goods Sold– Plant– Labour – Materials– Subcontractor– Administration
• Overheads• Interest Expense• Taxation Expense
Gross Contribution
Gross Contrbibution = Revenue – COGS
(Indicates the return of Business Operations)
Earning Before Interest & Taxation
EBIT = Revenue – COGS – Overheads
(Indicates the performance of the business before capital structure and tax effect)
Earning Before Tax
EBT = Revenue – COGS – Overheads – Interest Expense
(Indicates the financial performance reported to Tax Office)
Net Contribution
Net Contribution = EBT – Income Tax
Indicates the overall financial performance of the business after all expenses)
How do Business Owners measure financial
return…..?
• Return on Revenue• Return on Assets• Return on Equity
Business Owners want to know what return are they getting for their investment….?
Return on Revenue (ROR)
ROR = Net ContributionRevenue
Return on Assets (ROA)
ROA = Net ContributionTotal Assets
Return on Equity (ROE)
ROR = Net ContributionTotal Equity
Debt to Equity Ratio
Debt to Equity = Total Debt Total
Equity