Accounting & Finance

MEASURING AND REPORTING FINANCIAL PERFORMANCE

Financial Health
Financial Health
INCOME STATEMENT
Income Statement reflects the
performance/efficiency of the
business

In other words . . . . ,

Income Statement reflects the

profit making ability of the
business
INCOME STATEMENT
Revenue
The inflow of economic ASSETS LIABILITIE
benefits arising from the S
ordinary activities of a business

Profit

Transactions made on
both cash & credit terms
reflect in the profit figure.

Debtors

Cash
INCOME STATEMENT
Expenses
The outflow of economic ASSETS LIABILITIE
benefits arising from the S
ordinary activities of a business

For eg :
Cost of Goods Sold Profit

Salaries & Rent

Creditors
Cash
INCOME STATEMENT
Revenue ASSETS LIABILITIE
S
Expenses

Profit
INCOME STATEMENT
INCOME STATEME
NT

ASSETS LIABILITIE
S

Profit
INCOME STATEMENT
st
Income statement for the period ended 31 Dec 2018

Sales Revenue

Less : Cost of Goods Sold

Gross Profit
Add : Interest received from investments

Less : Salaries and Wages

Rent

Electricity Overheads

Depreciation

Bank interest

Net Profit Wealth generated during the period

FLOW OF WEALTH
Income statement
Profit or Cash

Stock of wealth

Balance
sheet
ASSETS LIABILITIES

Profit
 Accruals or Accrued Expenses

An outstanding liability
which should have been paid
within the period of the
income statement.
Eg: Electricity
Prepayments – Rent paid in advance

Accruals - Electricity
Prepayments or Prepaid Expenses
A payment relevant to the
upcoming financial period
made in the current financial
period.
Eg: Rent for next quarter
ACCRUALS & PREPAYMENTS
ACCRUALS ACCOUNTING
Balance Sheet and Income
Statement are both prepared on the basis of accruals
accounting.
For eg: Sales revenue, Accruals, Prepayments

PROFIT vs LIQUIDITY
Profit is the excess of revenue over expenses for a period, not the excess of
cash receipts over cash payments.

Liquidity is the ease with which an asset can be converted from an

investment to cash .
Video: Investopedia Liquidity
DEPRECIATION
st
Income statement for the period ended 31 Dec 2018 Depreciation
Sales Revenue Non -current assets are used up
in the process of generating
Less : Cost of Goods Sold revenue for the business.

Gross Profit Depreciation is an attempt to

measure that portion of cost of
Add : Interest received from investments a non -current asset that has
been used up in generating the
revenue .

Less : Salaries and Wages

Rent Factors taken into
consideration when calculating
Electricity depreciation:
1. Cost of the asset
Depreciation 2. Useful life of the asset
(physical life vs economic life )
3. Residual value
4. Depreciation method
Net Profit
Bank interest
STOCK COSTING
st
Income statement for the period ended 31 Dec 2018 Stock costing
Sales Revenue The way in which we measure
the cost of inventories is
Less : Cost of Goods Sold important as the cost of
inventories sold during the
Gross Profit period will affect the
calculation of the net profit.
Add : Interest received from investments

Stock costing methods:

1. FIFO(the earliest inventories
Less : Salaries and Wages held are first to be sold)

Rent 2. AVCO (weighted average

cost)
Electricity

Depreciation

Net Profit
Bank interest
BAD & DOUBTFUL DEBTS
st
Income statement for the period ended 31 Dec 2018 Bad & Doubtful debts
Sales Revenue When credit sales are made
the revenue is usually
Less : Cost of Goods Sold recognized as soon as the
goods are accepted by the
Gross Profit customer .

Add : Interest received from investments

When it becomes reasonably

certain that the customer will
Less : Salaries and Wages never pay, the debt is
considered to be ‘bad’ and
Rent must be written-off.
Method:
Electricity • Decrease receivables
• Increase expenses (bad
Depreciation
debts written -off)

Net Profit
Bank interest