Kardan Institute of Higher Education CHAPTER NO.03 FINANCIAL STATEMENTS Kardan Institute of Higher Education Sayeed Najeeb ProGen training 15 Sep 05 15 hours

Financial Statement Analysis October 2000 Financial Statements Financial statements are those statements which are prepared to know the financial position and performance of an entity. These are the major financial statements: Balance Sheet Income Statement  Balance Sheet Statement of financial position at specific point in time  Income Statement Summarizes revenues and expenses over an accounting period Statement of Cash Flows Amount of cash generated during period is not what is shown on balance sheet Tells you what happened to cash generated during specified period Categories in Statement of Cash Flows (a) Operating activities (b) Investing activities (c) Financing activities Statement of Retained Earnings Reports how much of earnings retained in business rather than paid out in dividends over the life of the firm   Retained earnings is claim against assets (a) Earnings retained to expand business (b) Do not represent cash C.J. Brown, M.M. Dutton and T.A. Rietz

What is a Balance Sheet It is a statement which is prepared to know the financial position of an organization at a specific date. In other words it gives information about assets, liabilities and capital of an entity at a specific date

Major Balance Sheet Items Financial Statement Analysis October 2000 Major Balance Sheet Items Assets Current assets: Cash & securities Receivables Inventories Fixed assets: Tangible assets Intangible assets Liabilities and Equity Current liabilities: Payables Short-term debt Long-term liabilities Shareholders' equity Balance Sheet Statement of financial position at specific point in time  Shows assets owned by the firm and sources of the money used to purchase those assets. Liquidity Order Assets: length of time typically to convert to cash Liabilities: how soon must be paid Characteristics Cash versus other assets Only cash represents actual money Noncash assets should produce cash in time   Liabilities versus stockholders’ equity Both claims against assets   Breakdown of common equity accounts Common stock Retained earnings Impacted by Inventory accounting Depreciation methods Position at one point in time C.J. Brown, M.M. Dutton and T.A. Rietz

Balance Sheet as on ______ Financial Statement Analysis October 2000 Balance Sheet as on ______ Assets: Current Assets: $7,681.00 Non-Current Assets: $3,790.00 Total Assets: $11,471.00 Liabilities: Current Liabilities: $5,192.00 LT Debt & Other LT Liab.: $971.00 Equity: $5,308.00 Total Liab. and Equity: $11,471.00 Dell’s Balance Sheet: Assets the firm owns total more that $11 billion** , more short-term assets than long-term assets like plant and equipment. Those assets were purchased with money that came mainly from equity and short-term borrowing. Relatively little long-term debt. C.J. Brown, M.M. Dutton and T.A. Rietz

What is income statement It is a statement which is prepared to know about the financial performance of a an entity for a specific period. It is prepared to compare revenues against expenses to know the profitability of an organization.

Major Income Statement Items Financial Statement Analysis October 2000 Major Income Statement Items Sales Sales returns Cost of goods sold Operating expenses: Selling and distribution expenses Administration expenses Interest expenses Taxation Income Statement 1. Summarizes revenues and expenses over an accounting period 2. Information includes (a) Net income available to common stockholders   (b) Earnings per Share – “bottom line”   (c) Usually compared to budget 3. The income statement serves as the basis for determining cashflows. C.J. Brown, M.M. Dutton and T.A. Rietz

XYZ COMPZNY Income Statement For the year ended Dec 31,2010 Financial Statement Analysis October 2000 XYZ COMPZNY Income Statement For the year ended Dec 31,2010 Sales $25,265.00 Costs of Goods Sold -$19,891.00 Gross Profit $5,374.00 Selling & Distribution expenses ($1,761.00) Administrative expenses (1,613.00) Profit from Operations $2,360.00 Interest ($100.00) Profit before tax $2,260.00 Income Taxes ($785.00) Net Income $1,575.00 Dell had more than $25 billion sales during the period. A large part of revenues went to pay for the raw materials that went into production. Depreciation reflects expenditure on a long-term asset which firm must expense over several years for tax purposes. It does not reflect an actual expenditure during this particular accounting period. C.J. Brown, M.M. Dutton and T.A. Rietz

Kardan Institute of Higher Education Inventories for a Manufacturing Concern A manufacturing business has three distinct inventory accounts: Raw Material Inventory: This inventory account (sometimes called Materials and supplies or stores) reflects the cost of raw materials and factory supplies that will be consumed in the manufacturing process. 2. Work in Process Inventory: This account reflects the cost of raw materials, direct labor, and factory overhead on goods on which manufacturing has begun but has not been completed at the end of the specific period 3. Finish Goods Inventory: The Finished Goods Inventory account reflects the cost for goods that have been completed and are ready for sale Kardan Institute of Higher Education Sayeed Najeeb ProGen training 15 Sep 05 15 hours

Kardan Institute of Higher Education Cost of Goods Sold Merchandiser Manufacturer Beginning finished goods inventory Plus cost of goods manufactured Finished goods available for sale Less ending finished goods inventory Cost of good sold Beginning merchandise inventory Plus purchases Merchandise available for sale Less ending merchandise inventory Cost of good sold Kardan Institute of Higher Education Sayeed Najeeb ProGen training 15 Sep 05 15 hours

COST OF GOODS SOLD STATEMENT FOR THE YEAR ENDED DECEMBER, 2012 XYZ COMPANY COST OF GOODS SOLD STATEMENT FOR THE YEAR ENDED DECEMBER, 2012 $ Direct Materials used: Beginning Raw Materials 10,000 Purchases 200,000 Purchases Returns (3,000) Freight in 4,000 Cost of Materials Available for Use 211,000 Ending Raw Materials (12,000) Direct Materials used 410,000 Direct Labour Cost 250,000 Factory overhed 150,000 Total Factory Cost 810,000 Add: Beginning Work in Process 25,000 Total Work Put in to Process 835,000 Less: Ending Work in Process (28,000) Cost of Goods Manufactured 863,000 Add: Beginning Finished Goods 26,000 Cost of goods available for Sale 889,000 Less: Ending Finished Goods (34,000) Cost of Goods Sold 855,000

XYZ COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31,2010 $ SALES 200,000 LESS: SALES RETURNS (5,000) NET SALES 195000 COST OF GOODS SOLD (100,000) GROSS PROFIT 95,000 LESS: OPERATING EXPENSES: SELLING EXPENSES (25,000) ADMIN EXPENSES (45000) NET INCOME 25,000

Exercises 01 The following data is taken from the books of Toyota Manufacturing for the year ended Dec 31, 2005  Purchase of raw materials $50,000 Direct Labor cost 20,000 Factory Overhead 10,000   Inventories opening closing Raw Materials 10,000 20,000 Work in process 15000 10,000 Finished goods 5000 3000  Required :  Total Manufacturing cost Cost of goods manufactured Cost of goods sold

Exercises 02 The following data is taken from the books of Habib Gulzar beverages limited for the year ended Dec 31, 2010   Purchase of Raw Materials $50,000 Direct Labor Cost 40,000 Factory overhead Cost 30,000 Inventories Opening Ending Raw Materials 10,000 15000 Work in process 20,000 10,000 Finished goods 30,000 20,000 Required : Total Manufacturing cost Cost of goods Manufactured Cost of goods sold statement

Exercises 03 The following data relates to the Moon Manufacturing for the year ended Dec 31, 2009   Inventories January 1 December 31 Raw Materials 40,000 20,000 Work in process 30,000 15000 Finished goods 30,000 10,000 Purchase of Raw Materials $ 60,000 Direct Labor cost 50,000 Factory overhead 30,000 Sales for the year 300,000 Sales return and allowance 20,000 Marketing expenses 10,000 Administrative expenses 15000 Income tax expense 5000 Required: Cost of goods sold statement Income statement

Exercises 04 The December 31, 19B trial balance of the Balkwell Company showed: Sales ……………………………… $ 9,000,500 Sales return and allowances …….. $ 25,200 Purchases (net) …………….. 2,400,000 Transportation in …………………….. 32,000 Direct Labor ……………………. 3,204,000 Factory overhead ……………………. 1,885,600 Sales Salaries …………………. 2,00,000 Advertising expense ……………….. 1,55,000 Delivery expenses ……………………. 65,000 Inventories December 31, 19B December 31, 19A Finished goods $467,400 $ 620,000 Work in process 136,800 129,800 Materials 196,000 176,000   Required: Total Manufacturing cost Cost of goods manufactured Cost of goods sold Income statment

Exercises 05 Cost of goods sold statement, income statement The accounting department of the Ruthven Company provided the following data for May ; Sales $72,000; marketing expenses 5 %, administrative expenses 1 %, other expenses 5 % of all sales ; purchases $ 36,000; factory overhead 2/3 of direct labor; direct labor $ 15,000. Beginning inventories: Finished goods ………………………………………………… $ 7,000 Work in process …………………………………………. 8,000 Materials …………………………………………………….. 8,000   Ending inventories: Finished goods …………………………………………… $ 10,200 Work in process …………………………………………. 15,000 Materials…………………………………………………….. 8,500 Required: Cost of goods sold statement Income statement