1. Understanding the Financials Ebrahim Mohamed

2. © Ebrahim Mohamed 2006 The Business Cycle Initial capital Debt & Equity Sales Net ProfitAssets New Debt Dividends

3. © Ebrahim Mohamed 2006 Overview of Financial Reporting The Business External Environment Financial Accounting Process Annual Financial Statements Financial Transactions The Balance Sheet A snapshot of the business assets and liabilities The Income Statement Explains change in wealth of an business over a period of time The Cashflow Statement Explains the movement of liquid i.e., money resources over a period of time

4. © Ebrahim Mohamed 2006 Published Financial Statements The Balance Sheet – a snapshot of the organisation’s financial status at a given point in time Income Statement – explains change in wealth of an organisation over a period of time Cashflow Forecast – predicts the movement of liquid i.e. money resources during business set-up

5. © Ebrahim Mohamed 2006 Balance Sheet Gives a financial state of affairs i.e., a ‘Snapshot’ at a given point in time Informs reader of the organisations financial status

6. © Ebrahim Mohamed 2006 Key Components of Balance Sheet Assets, otherwise known as resources are things owned by the business that will have a probable future economic value

7. © Ebrahim Mohamed 2006 Classification of Assets Fixed assets have over twelve months of future use Current assets have less than twelve months of future use Tangible assets are physical such as land, buildings and equipment Intangible assets are non physical and examples include goodwill, brands, patents and copyrights

8. © Ebrahim Mohamed 2006 Key Components of Balance Sheet Liabilities otherwise known as claims, normally arise on behalf of suppliers of goods, services and loans, but they may include an obligation to provide a service that has been paid for in advance

9. © Ebrahim Mohamed 2006 Key Components of Balance Sheet Equity is the ownership interest. This is normally in the form of investment in shares of a business The Accounting concept of entity stipulates that the owners of the business are a separate legal entity from the business itself

10. © Ebrahim Mohamed 2006 The Accounting Equation Assets = Liabilities + Equity Assets – Liabilities = Equity Assets – Equity = Liabilities

11. © Ebrahim Mohamed 2006 Working Capital The amount of liquid (cash) resources a business has to pay for its day to day operation Working Capital = Current Assets – Current Liabilities

12. © Ebrahim Mohamed 2006 The Trading Account Income Statement = Trading Account, Profit & Loss Account and Appropriation Account First part of the Income Statement Net Sales – Cost of Goods Sold (COGS)

13. © Ebrahim Mohamed 2006 The Trading Account Trading Account £ Net Sales120,000 Less Cost of Goods Sold (80,000) Gross Profit 40,000

14. © Ebrahim Mohamed 2006 Cost of Goods Sold (COGS) Opening Stock + Purchases – Closing Stock COGS£ Opening Stock 15,000 + Purchases 90,000 Available for Sale105,000 -Closing Stock(25,000) COGS 80,000

15. © Ebrahim Mohamed 2006 Cost of Goods Sold (COGS) COGS £ Opening Stock 10,000 + Purchases 5,000 Available for Sale 15,000 -Closing Stock (4,500) COGS 10,500

16. © Ebrahim Mohamed 2006 Gross Profit £ Net Sales 14,000 - COGS Opening Stock10,000 + Purchases 5,000 Available for Sale15,000 -Closing Stock(4,500) COGS (10,500) Gross Profit 3,500

17. © Ebrahim Mohamed 2006 Gross Margin Ratio Gross Profit to Sales Ratio GP Margin% = GP Margin% = 25% Gross Profit Sales £3,500 £14,000 * 100

18. © Ebrahim Mohamed 2006 The Profit & Loss Account Income Statement = Trading Account, Profit & Loss Account and Appropriation a/c Second part of the Income Statement Gross Profit – Operating Expenses = Net Profit (NP)

19. © Ebrahim Mohamed 2006 The Profit & Loss Account Income Statement £ Net Sales 120,000 Less Cost of Goods Sold (80,000) Gross Profit 40,000 -Operating Expenses(25,000) Net Profit 15,000

20. © Ebrahim Mohamed 2006 The Appropriation Account Income Statement = Trading Account and Profit & Loss Account and Appropriation a/c Third part of the Income Statement Keeps track of profit (Payment of Dividends and Transfer to Reserves) Accumulated Profit & Loss reserve

21. © Ebrahim Mohamed 2006 The Appropriation a/c Income Statement £ –Net Sales 120,000 Less Cost of Goods Sold (80,000) Gross Profit 40,000 -Operating Expenses (25,000) Net Profit 15,000 -Dividends (10,000) Retained Profit 5,000

22. © Ebrahim Mohamed 2006 Net Margin Ratio Net Profit to Sales Ratio. NP Margin% = NP Margin% = 12.5% Net Profit Sales £15,000 £120,000 * 100

23. © Ebrahim Mohamed 2006 Balance Sheet & Income Statement – Optimistic Assets £150 Liabilities £100 Owners’ Equity £50 Assets £175 Liabilities £120 Owners’ Equity £55 Revenues £350 Expenses £340 Profit £10 Retained profit £5 Dividend £5 Balance Sheet 31 December 2002 Balance Sheet 31 December 2003 Profit & Loss Year 2003

24. © Ebrahim Mohamed 2006 Assets £60 Liabilities £10 Owners’ Equity £50 Assets £90 Liabilities £80 Owners’ Equity £10 Revenues £300 Expenses £340 Loss £40 Loss carried forward £40 Dividend £0 Balance Sheet 31 December 2002 Balance Sheet 31 December 2003 Profit & Loss Year 2003 Balance Sheet & Income Statement – Most Likely

25. © Ebrahim Mohamed 2006 Cashflow - Working Capital Current Assets – things that are owned by the business that have a probable future economic value <12 months duration Liabilities otherwise known as claims, normally arise on behalf of suppliers of goods, services and loans, but they may include an obligation to provide a service that has been paid for in advance <12 months duration

26. © Ebrahim Mohamed 2006 Working Capital (Trading) Cycle Debtors – uncollected credit sales Creditors – unpaid credit purchases Liquidity – flow of cash resources Overtrading!

27. © Ebrahim Mohamed 2006 Cashflow projections Capital revenues and expenses Revenues Expenses Contribution Sensitivity Analysis Assumptions