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Introduction To Accounting Statements: AAF001-6 Financial Analysis Session 1

This document provides an overview of accounting statements and financial analysis. It discusses the three main accounting statements - the income statement, statement of financial position, and cash flow statement. The income statement shows profit over a period. The statement of financial position presents accumulated wealth and assets/claims at a point in time. The cash flow statement shows cash movements. Key accounting conventions and challenges with valuation are also outlined.

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Dang Minh Ha
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© Attribution Non-Commercial (BY-NC)
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50 views

Introduction To Accounting Statements: AAF001-6 Financial Analysis Session 1

This document provides an overview of accounting statements and financial analysis. It discusses the three main accounting statements - the income statement, statement of financial position, and cash flow statement. The income statement shows profit over a period. The statement of financial position presents accumulated wealth and assets/claims at a point in time. The cash flow statement shows cash movements. Key accounting conventions and challenges with valuation are also outlined.

Uploaded by

Dang Minh Ha
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Introduction to Accounting Statements

AAF001-6 Financial Analysis Session 1


1

Lecture objectives
overview of module nature and purpose of accounting the three accounting statements conventions underlying statements valuation problems

Introduction - 1
Accounting

is;

The process of identifying, measuring and communicating information to permit informed judgements and decisions by users of the information - American Accounting Association
The

users of accounting information


Owners - Managers - Lenders - Customers and Suppliers - Competitors - Employees - GovernmentCommunity - Investment analysts

Conflict

between users Usefulness of accounting information


3

Introduction - 2

Characteristics of useful information


relevance

- reliability - comparability understandability - timeliness

Costs and benefits of information Divisions of Accounting

Financial

Accounting Management Accounting Financial Management


4

The three accounting statements

The Income Statement (or Profit and Loss Account)


how

much wealth was generated over the period?

The Statement of Financial Position (or Balance Sheet)


what

is the accumulated wealth of the business at the end of the period? cash movements took place over the period?
5

The Cash Flow statement


what

The Statement of Financial Position


Assets

A probable future benefit exists The organisation can control the benefit The benefit must arise from a past transaction The asset must be capable of measurement in monetary terms Fixed assets and current assets
Claims

An obligation on the part of the business to provide a benefit to an outside party Capital and liabilities - Long term liabilities and current liabilities
6

The Statement of Financial Position and accounting conventions


Money

measurement Historic cost Going concern Business entity Dual aspect Prudence Stable monetary unit Periodicity Objectivity
7

Balance sheet valuation problems

Current assets
Stocks Investments

Debtors

Fixed assets
Tangibles

- depreciation and appreciation Intangibles - amortisation and appreciation, and how to recognise

Balance Sheet interpretation


The liquidity The mix of assets held The financial structure

The Income Statement


To

measure how much profit or wealth has been created over the period Revenues from
sales of goods fees for services, subscriptions, interest received
less

expenses (= outflows of assets)


costs of goods sold - trading or manufacturing cost salaries and labour costs occupancy costs - rent, heating lighting administration costs - office stationery, printing marketing and advertising falls in asset values

10

The format of the Income Statement


For

a service organisation
revenues less expenses = net profit

For

a trading organisation
revenues less cost of sales = gross profit gross profit less other expenses = net profit

For

a manufacturing organisation
a manufacturing account assesses manufacturing cost revenues less manufacturing cost = gross profit gross profit less expenses = net profit

11

The Income Statement and accounting conventions


Matching convention Realisation convention Materiality convention Consistency convention (profits and asset use)

12

Cash Flow

Importance of cash flow reporting


profit

is not the same as cash


sales and purchases are included when invoiced expenses are related to the time of consumption payments for fixed assets are excluded from the profit and loss account payments for drawings and dividends are excluded

the

need to emphasise liquidity - the ability to settle claims cash is the pre-eminent business asset
13

The standard layout of cash flow statements


Net

cash flow from operating activities


plus or minus

Returns

from investments/ servicing of finance

plus or minus
Taxation

plus or minus
Dividends

paid

plus or minus
Management
Financing

of liquid resources

plus or minus

equals
Increase

or decrease in cash balances

14

Problems of contemporary accounting


the

realisation that accounting information is only part of that necessary to make effective decisions
marketing, production information

accounting

valuation is an inexact science and depends on a number of judgements and estimates


brands and human resources

the

end results of the accounting process can only be as good as the inputs
in times of inflation

accounting

systems can be counter productive

the maximisation of annual profit may not ensure the maximisation of longer term profit 15

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