Chapter 6

Basic Financial
Reports
Slide
3-1
 Reading Material
Chapter 8 – Business Accounting 1, Frank Wood, 2016
Chapter 9 – Business Accounting 1, Frank Wood, 2016

Slide
3-2
 Study Objectives
1. Identify 4 types of financial statements
2. Prepare Trading account to calculate Gross Profit
3. Prepare Profit and Loss account to calculate Net Profit
4. Prepare the Statement of Profit or Loss
5. Prepare the Statement of Financial Position
6. Understand the format of Statement of Cash flows

Slide
3-3
 Overview of Accounting Process

Slide
3-4
p5ter 1
Financial Statements
The accounting reports providing information for users
are called financial statements.
Order Financial Description of Statement
prepare Statement
d
1 Statement of A summary of the revenue and expenses for a
Profit or Loss specific period of time, such as a month or a year.

2 Statement of A summary of the changes in the owner’s equity

owner’s equity that have occurred during a specific period of time,
such as a month or a year.

3 Statement of A list of the assets, liabilities, and owner’s

Financial Position equity as of a specific date, usually at the close of
the last day of a month or a year.

4 Statement of cash A summary of the cash receipts and cash

flows payments for a specific period of time, such as a
Slide month or a year.
3-5
 Statement of Profit or Loss

The income statement reports the revenues and expenses for a period
of time, based on the matching concept.

Revenue - Expenses = Net Income/Net profit/ Earnings

penses > Revenue Negative earnings Net loss

Slide
3-6
 Statement of Profit or Loss

Gross Profit
Gross profit is the excess of sales revenue over the cost
of goods sold in the period.

Note – where the cost of goods sold is greater than the

sales revenue, the result is a gross loss.

The formula is
Sales – Cost of goods sold = Gross profit

Slide
3-7
 Statement of Profit or Loss

Net Profit
Net profit is what is left of the gross profit after all other
expenses have been deducted.

Note – where the costs used up exceed the gross profit

plus other revenue, the result is a net loss.

The formula is
Gross profit + Any other income – Expenses
= Net profit

Slide
3-8
 Statement of Profit or Loss
Trading account: is prepared in order to arrive at a figure for
gross profit
Step 1 – Identify the balance on all accounts and draw up the trial
balance.
Step 2 – Obtain the closing inventory figure by valuing the inventory at the
end of the year.
Step 3 – Calculate the cost of goods sold using the formula:
Opening inventory
+ Purchases
– Closing inventory
= Cost of goods sold
Step 4 – Calculate the Gross profit using the formula:
Sales
– Cost of goods sold
= Gross profit
Step 5 – Close the accounts that should appear in the Trading account by
Slide
3-9transferring their balances to that account.
 Statement of Profit or Loss
Example for Trading account
Step 1 – Identify the balance on all accounts and draw up the trial
balance.

Step 2 – Obtain the closing inventory figure by valuing the inventory at

the end of the year.
Slide
3-10Let's assume that closing inventory is £3,000.
 Statement of Profit or Loss
Example for Trading account
Step 3 – Calculate the cost of goods sold
The cost of goods sold figure will be:

Purchases 29,000

Less Closing inventory (3,000)

Cost of goods sold 26,000

Step 4 – Calculate the Gross profit

Sales - Cost of goods sold = Gross profit

Slide
3-11 £38,500 - £26,000 = £12,500
 Statement of Profit or Loss
Example for Trading account (cont.)
Step 5 – Close the accounts that should appear in the Trading account by
transferring their balances to that account.

(A) The balance of the sales account is transferred to the trading

account by:
1 Debiting the sales account (thus closing it).
2 Crediting the trading account.
(B) The balance of the purchases account is transferred to the
trading account by:
1 Debiting the trading account.
2 Crediting the purchases account (thus closing it).
(C) There is, as yet, no entry for the closing inventory in the double
entry accounts. This is achieved as follows:
1 Debit a closing inventory account with the value of the closing inventory.
2 Credit the trading account (thus completing the double entry).
Slide
3-12
 Statement of Profit or Loss
Example for Trading account (cont.)

Slide
3-13
 Statement of Profit or Loss
Profit and Loss account: is prepared in order to arrive at a
figure for net profit/ net loss

Step 1 – Open a profit and loss account

Step 2 – Close the expense accounts and debit the

profit and loss account with any amounts.

Step 3 – Transfer gross profit from Trading account by

crediting Profit and Loss account

Step 4 – Calculate the balance figure (Net Profit/ Net

loss) and debit Profit and Loss account
Slide
3-14
 Statement of Profit or Loss
Example for Profit and Loss account

Slide
3-15
16
Statement of Profit or Loss
Statement of Profit or Loss
for the year ending 31 December 2012
£ £
Sales X
Less Cost of goods sold (X)
Opening inventory X
Plus Purchases X
Less Closing inventory (X)

Gross profit X
Less expenses (X)
Net profit X

Slide
3-16
 Statement of Profit or Loss

Slide
3-17
 Statement of Profit or Loss
Effect on Capital account
We have a debit on the profit and loss account of
£8,000 and this is credited to the capital account, to increase
the capital figure in the business.
In the same way, the drawings are also transferred in to
the capital account to reduce the capital figure in the business.

Note – in the case of a net loss, the capital figure is

decreased.

Slide
3-18
 Statement of Financial Position

• The statement of financial position used to be called

the balance sheet
• The statement of financial position contains details of
assets, liabilities and capital – all those accounts with
balances that were not included in the income
statement.
• The statement of financial position is not part of the
double entry system.

Slide
3-19
 Statement of Financial Position
Layout
Assets
Non-current assets Current assets
• Not bought primarily to be • Likely to change in the short
sold. term and certainly within 12
• Bought to be used in the months.
business. • Include: items held for resale,
• Are expected to be of use accounts receivable, cash in
in the business for a long the bank and in hand. These
time. are listed in increasing order
of liquidity.

Slide
3-20
 Statement of Financial Position
Layout
Liabilities
Non-current liabilities Current liabilities
• Non-current liabilities are • Liabilities that have to be paid
items that have to be paid within a year of the date of the
more than a year after the statement of financial position.
date of the statement of • Examples include bank
financial position overdrafts and accounts
• Examples include bank payable.
loans and loans from other
businesses.

Slide
3-21
 Statement of Financial Position
Layout
Capital

Capital Drawings Net Profit/ Net Loss

Slide
3-22
 Statement of Financial Position

Slide
3-23
 Financial Statement – Further consideration

(Sales less Returns inwards) (Cost of goods sold less

Returns outwards) = Gross profit

Slide
3-24
 Statement of Cash flows

Slide
3-25
 Short Question 2 (Final Exam)
Type 1: Show the ledger account Trading account at the end of
the first-year accounting period. You have the following
information:

Type 2: Show the ledger account for Profit and Loss account based
Slide
3-26on the above information
 Homework
Below is the trial balance of G. Foot after his first year's
trading as at 30 June 2016

Slide
3-27
 Homework

Requirements:
1. Show the ledger account Trading account at the end of
the first-year accounting period. You have the following
information:
2. Show the ledger account for Profit and Loss account
based on the above information
3. Prepare the Statement of Profit or Loss for the year
ended 30 June 2016
4. Prepare the Statement of Financial Position as at 30
June 2016

Slide
3-28