Financial Statements

Course Instructor Dewan Muktadir-Al-Mukit

Eastern University

 Financial Statements: A set of financial statements is a structured representation of the financial performance and financial position of a business and how its financial position changed over time.
Major types of financial statements: 1) Income Statement / Profit and Loss account 2) Balance Sheet 3) Statement of Cash Flows 4) Statement of Changes in Equity

 Following the time-period principle, financial statements are prepared after a specified period; say a quarter, year, etc. Financial statements prepared for a period of one year are called annual financial statements/ Annual Report Quarterly and semiannual financial statements are called interim financial statements and are normally prepared in a condensed form.

1) Income Statement: It shows the company's revenues and expenses during a particular period. i) Single-Step Income Statement ii) Multi-Step Income Statement i) Single-Step Income Statement: A single step income statement uses just one subtraction. This is done by subtotaling all the revenues and gains together at the top of income statement and subtotaling all the expenses and losses together below revenues. The sum of expenses and losses is then subtracted from the sum of revenues and gains to arrive at net income. Thus: (Revenues + Gains) (Expenses + Losses) = Net Income

ii) Multi-Step Income Statement: Multiple-step income statement uses multiple subtractions in computing the net income. It comprises of a series of steps in which costs and expenses are deducted from revenue. The income statement is divided into four major sections :
(1) Revenue (2) Cost of goods sold (3) Operating expenses (4) Non operating items/ others income & expense, and (5) Income Tax

 (1) Revenue:
Net Sales Revenue Total Sales (Price x Quantity) less: Sales Returns less: Sales discounts

Example: Total sale for the year is 20,000

units of pen. Per price of pen is Tk 10. Total Sales Discount for the year is Tk 1,000. Customers returned the goods of 200 units.

Sales Revenue: Total Sales (Price x Quantity) 200,000

less: Sales Returns

less: Sales discounts

2,000
1,000 Net Sales Revenue 197,000

 (2) Cost of goods sold: Cost of goods sold Beginning Stock of Raw Materials/ Beginning Inventory (+) Purchase of Raw Materials (-) Purchase Returns (+) Direct Variables Cost (+) Direct Fixed Cost (-) Ending Stock of Raw Materials/ Ending Inventory On January-1 the beginning stock of raw material is Tk 7,000. Over the year, purchases of raw material were Tk 1,500. The inventory at the end of December shows Tk 2000. During the year raw material returned of Tk 1,000. Direct variable cost was Tk 2,500 and direct labor cost was Tk 3,000.

Cost of goods sold

Beginning Stock of Raw Materials/ Beginning Inventory (+) Purchase of Raw Materials
(-) Purchase Returns (+) Direct Variables Cost (+) Direct Fixed Cost (-) Ending Stock of Raw Materials/ Ending Inventory
Cost of goods sold

7,000
1,500 1,000 2,500 3,000 2000 11,000

 (3) Operating Expenses:

General & Administrative Expenses Selling Expenses

Office Salary
Office Rent Office supplies Utilities Depreciation & Amortization expenses

Salesmen's salaries & wages

Advertising Commissions Rent of Shop

Legal expenses

 (4) Non operating items/ others income & expense:

Net Others Income and Expenses
(+) Gain of sale of investment/equipment (-) Loss on sale of investment/equipment

(+) Interest receipt

(-) Interest Expense/Financial Cost

(-) Contribution to Workers' profit Participation/Welfare Fund (WPWF)

How to make Multi-step Income Statement:

Net Sales Revenue - CGS xxx xxx

Gross Profit/Margin
- Operating Expenses

xxxx
xxx

Operating Profit/ Earning Before Interest & Tax (EBIT) xxxx

- Others Income and Expenses xxx

Net Income Before Tax/ Earnings Before Tax (EBT)

- Income Tax (% of EBT)

xxxx
xxx

Earnings or Income After Tax (EAT)/ Net Income

xxxx ====

2) BALANCE SHEET:

A balance sheet tells about the assets, liabilities and equity of a business at a specific point of time. A balance sheet is an extended form of the accounting equation. An accounting equation is: Assets = Liabilities + Equity
Total Asset
Current Asset/Short Term Asset + Net Fixed Asset/Long Term Asset

Total Liability and Equity

Current Liability/ Short Term Liability + Fixed Liability/Long Term Liability
+

Total Equity

Total Asset:
Current Asset: These assets are composed of items that are either in cash terms already or can be easily converted into cash terms within a year. Current assets are expected to be used (sold or consumed) within 12 months. Current Asset:
Cash Savings Accounts Treasury bills Other short term investments

$
2000 5000 4000 1000

Accounts Receivables
Inventory Prepaid Expenses
TOTAL CURRENT ASSETS

8000
1500 2500

24000

Fixed Asset/Non Current Asset: Non Current Assets are those whose benefits are expected to last more than one year from the reporting date. Long-term assets are non-liquid assets which are generally required for the day-to-day operations of a company and which cannot be easily converted into cash. It has two types: 1. Tangible fixed assets: These assets have physical existence. Like, Land, buildings, machinery, vehicles, equipment, and furniture. 2. Intangible fixed assets: These assets are characterized by Non physical existence. Like, goodwill, patents, copyrights and trademarks. Net Fixed Asset = Total Tangible Fixed Asset Accumulated Depreciation + Intangible Fixed Asset

Fixed/Non Current Assets

Land & Buildings Machinery and Equipments Furniture and Fixtures Vehicles Gross Less-Accumulated Depreciation Net Property, Plant & Equipments Others Long Term Investments Intangible Assets TOTAL FIXED ASSETS

$
9000 8000 7000 6000 30000 2000 28000 6000 22000 56,000

Total Liability :
Current Liability: Current liabilities are obligations which a business is expected to pay within one year.
Current Liabilities:
Accounts Payable Notes Payable Taxes Payable Accrued Salaries Payable Employer Provided Benefits Payable Unearned Revenues Current Portion of Long Term Debt Others Accrued Expenses (Accruals) TOTAL CURRENT LIABILITIES

$
1000 2000 1000 3000 8000 1000 3000 7000 26,000

 Fixed /Non Current Liability: Fixed liabilities are obligations which a business is expected to pay over one year.

Fixed/Non Current Liabilities

Long Term Debt/Bond/Debenture Mortgage Note
10 years bank loan Deferred Income Tax Others long term liabilities TOTAL FIXED LIABILITIES or, TOTAL LONG TERM DEBT

$
10000 7000
6000 2000 3000 28000

Shareholders' or owners' Equity:

Shareholders' equity represents the interest of a company's shareholders in the net assets of the company. Two major parts: Common Stock value Retained Earnings Common stock represents the legal capital of the company. Retained earnings represent the total earnings of the company retained by the company for reinvestment. Retained Earnings = Net Income Cash dividends + Beginning Retained Earnings

Shareholders' or owners' Equity:

Common Stock [At $ 10, total 2,000 shares issued, Retained Earnings

$
20000 [$10 x 2000] 6000

TOTAL STOCKHOLDERS' EQUITY

26,000

Link: BS & I/S

3) Cash flow Statement:

The statement of cash flows is prepared to measure the cash in-flows and cash out-flows from the operating, investing and financing activities of a business during a period. A Statement of Cash Flows comprises of three sections: Cash Flows from Operating Activities:
This section includes cash flows from the principal revenue generation activities such as sale and purchase of goods and services. Cash flows from operating activities can be computed by two methods. One is the Direct Method and the other Indirect Method.

Cash Flows from Investing Activities:

Cash flows from investing activities are in-flows and out-flows related to activities that are intended to generate income and cash flows in future. This includes cash in-flows and out-flows from sale and purchase of long-term assets.

Cash Flows from Financing Activities:

Cash flows from financing activities are the cash flows related to transactions with stockholders and creditor such is issuance of share capital, purchase of treasury stock, dividend payments etc.

4) Statement of Changes in Equity:

A statement of changes in equity summarizes the movement in the equity accounts during the year. Typical information we can get from a statement of changes in equity include: - The amount of new share capital issued - The amount of dividend paid during the year to shareholders - The amount of net income earned during the year - The amount of Retained Earning - The amount of Revaluation of Asset