1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 1 Chapter 3 Financial accounting reports

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 2 Objectives Describe the purpose and format of a Statement of Financial Performance. Explain the difference between gross profit and net profit. Differentiate between cash and accrual accounting systems. Explain the matching principle and the need for balance day adjustments.

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 3 Objectives (continued) Define depreciation, closing inventory, prepayments, accruals and doubtful debts. Describe the purpose and format of a Statement of Financial Position. Prepare a classified Statement of Financial Performance and a classified Statement of Financial Position from the Trial Balance of a sole trader, with no balance day adjustments.

4. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 4 Objectives (continued): Explain the use of an Appropriation Statement for a partnership and a company. Describe the purpose and format of a Statement of Cash Flows. Explain the differences between company financial reports prepared for internal purposes, and those prepared to meet statutory requirements.

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 5 Statement of Financial Performance aims to match the revenue of the business with the expenses associated with earning that revenue for the relevant period of time is produced for a particular Period of time is generally produced for a year at 30 June (end of the Financial year) can be produced at more frequent intervals determines the profit or loss of the business.

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 6 Statement of Financial Performance (continued) Two types of businesses Service firms – less complicated statements Trading/manufacturing firms – more complicated statements.

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 7 Statement of Financial Performance (continued) Service Firms

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 8 Statement of Financial Performance (continued) Trading firms COGS – Beg Inv + Purchases + buying exp – (Closing Inv + Purch returns) Gross profit – Net sales less COGS

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 9 Statement of Financial Performance (continued)

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 10 Statement of Financial Performance (continued) Trading firm Other revenue – all other revenue not from the sale of inventory – e.g. rent, interest Selling expenses – all expenses related to the sale of inventory – e.g. advertising, salesperson salaries.

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 11 Statement of Financial Performance (continued) Admin expenses – all expenses related to the running of the business – e.g. office wages, rent, electricity Financial expenses – all finance expenses – e.g. discount allowed, bad debts.

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 12 Statement of Financial Performance (continued) Net profit – Gross profit + other revenues less all other expenses

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 13 Statement of Financial Performance (continued) Abnormal revenues and expenses – Items that normally appear on the Statement of Financial Performance. – Due to some abnormality such as the magnitude of the items, they are not typical of the average operations of the business. – They are reported separately.

14. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 14 Statement of Financial Performance (continued)

15. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 15 Statement of Financial Performance (continued) Gross profit – only applies to a business involved in the trading of stock – shows the difference between sales revenue and the direct costs that are associated with purchasing the stock of goods that have been sold. Net profit – is the difference between all revenues and all expenses for the period.

16. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 16 Cash and accrual accounting Cash accounting systems – involve recording transactions when the flow of cash occurs. Accrual accounting – records both revenue and expenses as they occur regardless of whether the flow of cash accompanies the transaction – e.g. credit sales are recorded as revenue and credit purchases as an expense.

17. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 17 Balance day adjustments Matching principle – involves dividing the continuous life of a business into set periods – enables revenues earned and the expenses incurred can be matched within each period – causes adjustments to be needed at the end of the period to determine profit correctly.

18. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 18 Definitions Depreciation Closing inventory Prepayments Accruals Doubtful debts

19. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 19 Depreciation Depreciation is the annual allocation of the cost of a non-current asset over its useful life. Expense – is the purchase cost. Accumulated depreciation – appears in the Statement of Financial Position as a ‘contra’ account or negative asset.

20. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 20 Depreciation (Continued) General Journal entry Depreciation expenseDebit Accumulated depreciation Credit Straight-line Cost allocated evenly over it’s useful life.

21. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 21 Depreciation (continued) Reducing balance – the cost of the asset is depreciated more in the earlier years of the asset using a percentage to reduce the book value annually.

22. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 22 Depreciation (continued) Units of use method – the use of the asset is allocated relative to its life.

23. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 23 Closing inventory Inventory balance at the end of the year is: determined by a stock-take shown in the Statement of Financial Position as a current asset.

24. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 24 Prepayments Where an expense is paid before it is incurred: the un-incurred portion of the prepayment is treated as an asset and recorded in the Statement of Financial Position the incurred portion is recorded in the Statement of Performance as an expense.

25. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 25 Accruals Where an expense has been incurred but is yet to be recorded for the accounting period, the expense needs to be increased to reflect the true amount of the expense. An expense is recorded in the Statement of Financial Performance and a current liability in the Statement of Financial Position.

26. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 26 Doubtful debts Where a portion of debtors turn out to be non-payers, a Provision for doubtful debts account will need to be created in the Statement of Financial Position. Doubtful debts are recorded in the Statement of Financial Performance as an expense.

27. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 27 Statement of Financial Position Prepared at the end of the financial year, 30 June XXXX includes Assets, Liabilities and Owners Equity reflects the financial position of a business on the last day of the period.

28. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 28 Presentation of Statement of Financial Position: T-Format

29. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 29 Statement of Financial Position: Narrative-Format

30. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 30 Appropriation Statement An Appropriation Statement: details how the profit of a partnership is company are distributed provides owners with an explanation of how the net profit of the business is distributed.

31. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 31 Appropriation Statement (continued) In an Appropriation Statement for Partnerships: net profit is divided between partners partners’ entitlements need to be calculated beforehand entitlements include interest on capital, and interest on loans taxation of partnerships is done at individual partners’ level.

32. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 32 Appropriation Statement (continued) An Appropriation Statement for Companies shows the amount of: company tax payable dividends for shareholders retained profits.

33. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 33 Cash Flow Statement A Cash Flow Statement: is prepared at the end of the financial year enables interested parties in the business to assess the sources of cash for the business shows inflows and outflows of cash for the business.

34. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 34 Cash Flow Statement Example

35. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 35 Financial reports Companies prepare the following statements and reports: Statement of Financial Performance Statement of Financial Position Statement of Cash Flow Director’s Report Auditor’s Report Notes to accounts.

36. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 36 Financial Reports: Statement of Financial Performance

37. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 3- 37 Financial Reports: Statement of Financial Position