Finanacial Statements

Balance Sheet & Profit and Loss Account

• A financial statement is a collection of data organised according to logical and consistent accounting procedures.

Four Basic Financial statements: • • • • Balance Sheet Income Statement Statement of Cash Flows and a newer one -.Statement of Owner Equity .

Balance Sheet Purpose • Determines solvency of businessability to meet both long term and short term obligations • Gives concise summary of firm’s resources and obligations • Gives a measure of firm’s liquidity .

whichever is lower (conservative concept) • Assets are equal to liabilities (dual aspect concept) .Balance Sheet basic Principles • The balance sheet is regarded as a separate accounting entity( entity concept) • The figures are expressed in monetary units (monetary concept) • The balance sheet assumes that the company is a going concern (going concern concept) • The fixed assets are stated at cost less depreciation ( cost concept) • The current assets are stated at cost or market value.

This is as of what date? (Snap Shot) • Listing of all assets and all liabilities • Balances at the bottom of form • Assets .What does this represent? – Partnership. combined – Needs to be consistent over time • Date -.Liabilities = Equity .The Balance Sheet • Name -. individual.

Inventories .Cash .2011 Liabilities Current Liabilities .Salary payable Long Term Liabilities Equity Assets Current assets .3.Accounts payable .Debtors Fixed assets Investments .XYZ Co As on 31.Interest payable .

cash. land. buildings. stocks – Selling would typically decrease volume or size of business .g. savings • Long Term or Fixed assets – e. prepaid expenses.g. Inventory.Balance Sheet Asset Types • Current assets – Consumed or converted to cash in 12 months e.

Asset Value Determination • Book Value (cost basis) – Useful for trend analysis • Fair Market Value – Useful to determine liquidation value .

accrued interest. house payments .g. land debt. taxes • Long Term – Scheduled originally to be paid in more than one year e.Balance Sheet Debt Types • Current liabilities – To pay in the next 12 months e.g. bills.

property taxes – Operating loans – Principal payments on term debts to be made in the next 12 months . accrued interest.Parts of the Balance Sheet (Current) Liabilities -.What you owe someone else (against what you own) • Current Liabilities – What you are scheduled to pay in the next 12 months – Unpaid bills.

house payments – Match up to the long term assets .Parts of the Balance Sheet (Long Term) Liabilities -.What you owe to someone else (against what you own) • Long Term Liabilities – What was scheduled originally as more than one years – Land debt.

cumulative convertible) • Common Stock or ordinary shares • Contributed capital in excess of par • Retained earning Revenue reserve: from profit of normal business operations Capital reserve: Premium on issue of shares or gains on revaluation of assets . convertible. Non cumulative.Equity • Preferred Stock (cumulative.

Debentures • Convertible • Non convertible .

2) 2) Rupee Prices for each of the above.How to Build a Balance Sheet 1) Do a count: Current. Recommend both cost and market value for term assets . Long Term.

How to Build a Balance Sheet 3) Machinery list (depreciation schedule? Straight line or WDV) Cost less depreciation = book value 4) Assemble the above into the format 5) Add up the assets 6) Add up the debts 7) Assets minus debts = net worth or equity .

Take out a Piece of Paper Draw some lines and label like this: Assets Current Liabilities Current Investments Equity Long Term Long Term .

as in 31.a specific point.20XX. • Shows financial position--ability to handle risk • Net result of past • Very important component to track and monitor financial progress • Basic building block for financial analysis .What is the Balance Sheet? • Picture in time -.3.

What a Balance Sheet is NOT • Does NOT necessarily tell you if the business is making money • Does NOT tell you where net worth came from .

Change in Net Worth due to: • Retained Earnings – from profits earned and retained in business • Market Valuation Equity – from change in market value of assets .

Total Liabilities inc.Valuation Equity Rupee of asset value that are created because the market value of term assets is greater than the book value Calculated by: + Total assets @ Market Value basis . Contingent Liabilities .Retained Earnings (contributed Capital) .

the effect of interest and tax.Profit and Loss Account • It is a report of a firm’s activities during a given period of time • It shows revenue and expenses of the firm. and the net income for the period .

Functions of P& L Account • Gives concise summary of firm’s revenue and expenses • Measures firm’s profitability .

Measuring Earning • Accrual accounting: .Identify revenue .Matching the corresponding cost to revenue • Revenue occurs when the earning process is complete and an exchange has taken place .

Method of allocation (straight line.Its salvage value . • Three estimate are required to calculate depreciation: .Assets useful life . WDV) .Depreciation • It is a non cash charge used to match expenditure of creating asset with resulting revenue.

Expense Recognition • Principle of associating cause and effect • Principle of systematic and rational allocation (depreciation) • Immediate recognition principle (selling and administrative expenses and all losses .

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