MODULE UNIT: 3

5 Prepare And Process

Financial Documents
 Prepare Financial/Business
Documents

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
OBJECTIVES
 What is a business document
 Why are documents necessary
 Name and explain the documents used
in trade
 Identify instruments of payment
What is a business document
 A business document is a written record of
a business transaction.

 A transaction is the process of supplying

goods or services from initial enquiry to
eventual payment.
Reasons for business documents
 It reduces the chances of future disputes with
suppliers or customers and to avoid confusion.

 To be able to draw up accurate accounts and

financial records.

 To supply evidence to other institutions.

 More easily detect any fraud by employees.

 It provides detail information about customers,

such as contact details and recent purchases.
Documents used in National Trade
Debit
Note

Letter of Quotation Purchase Advice Delivery

Catalogue
Invoice Statement
enquiry Order Note Note

Credit
Note
 Trade Documents
Letter of enquiry
 The initial document sent to a supplier by a
prospective customer asking for details about a
product.
Quotation/Catalogue
 A formal statement of promise by the potential
supplier to supply goods requested at a given price
and in a given period of time.
 A Catalogue includes pictures which makes it
different from a quotation.
Trade Documents
 Trade Documents
 Purchase Order
A form used to place an order and includes
quantity, product description, product number,
price and payment details.
 Acknowledgement
A letter stating that the order has been received
and the goods will be supplied and date of
expected delivery.
 Advice note
A note sent by the producer ahead of the goods to
advice the buyer that the goods are on its way and
should expect arrival on send date.
Trade Documents
Trade Documents
Trade Documents
Delivery Note
A written document from the supplier to the
customer which accompanies the delivery of the
goods, giving details of quantity and type of goods,
Pro forma invoice
Bill sent by the supplier to the customer when the
supplier requires payment in advance.
Invoice
Bill sent by the supplier to the buyer immediately
after the goods have been dispatched.
Trade Documents
Trade Documents
Debit note
A note issued to adjust the accounts and
increase the amount owed by the customer

Reasons for debit note

 An incorrect price on the invoice.
 More goods than what was ordered was
delivered.
Trade Documents
Trade Documents
Credit Note
 A note used to adjust the accounts and reduce
the amount owed to the customer

Reasons for the credit note

 Incorrect price on invoice
 Faulty or damaged goods
 For additional services rendered
 Discounts left out
 Too much charged for transport
Trade Documents
Trade Documents
Statement of Account
A document that gives the total amount owed
by a customer, usually at the end of the month.

Other Documents
Stock card – A stock inventory control
document that list the available quantity of a
particular product.
Purchase requisition – A document which
identifies the amount of a particular product/s a
department will need.
Trade Documents
 Trade Documents
STOCK CARD No. 5
Item: Copy paper—A4
Maximum : 200 reams
Minimum : 20 reams

Receipts Issues
Date Quantity Invoice Suppliers Quantity Requisition Dept. Bal. in
Receive No. Issued No./Amnt. Stock
d
June 20 50
June 25 5 0620 Admin 45
June 30 10 0625 Records 35
July 15 10 0710 Admin 25
July 25 75 350 Computer 100
Suppliers Ltd
Trade Documents
Bank Cheque
A cheque, or check, is a document that orders
a bank to pay a specific amount of money from
a person's account to the person in whose
name the cheque has been issued. The person
writing the cheque, known as the drawer, has a
transaction banking account where their money
is held.
Trade Documents
International Trade Documents
Bill of Lading
A document representing the title/ownership of goods when
goods are transported by ship.
Airway Bill
A document which represents a receipt for goods carried by
the airline.
Import Licence
Issued by the government of the importing country giving
permission for the import of certain products in certain
quantities.
Export Licence
Issued by the government of the exporting country giving
permission for the export of certain products in certain
quantities.
International Trade Documents
Insurance Certificate
Document which indicates that the goods being
traded are insured.

Certificate of Origin
Document that indicates the country of origin and
the materials the products are made from.
 Introduction to Financial
Statements
Balance Sheet
Three primary
Income Statement
financial
Statement of Cash Flows statements.

We will use a corporation to describe these

statements.
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 Introduction to Financial
Statements
Balance Sheet
Describes
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.

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 Introduction to Financial
Statements
Balance Sheet

Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.

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 Introduction to Financial
Statements
Balance Sheet

Income Statement

Statement of Cash Flows

Depicts the
ways cash has
changed during
a designated
period of time.

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Basic Financial Statements
 Three types of financial statements are mandated
by the accounting and financial regulatory
authorities:
 Income statement – how much money you made last
year?
o Revenue, expense, profits over a year or quarter.
 Balance sheet – What’s your current financial situation?
a snap shot on a specific date of
o Assets (value of what the firm owns),
o Liabilities (value of firm’s debts), and
o Shareholder’s equity (the money invested by
the company owners)
 Cash flow statement – How did the cash come and go?
cash received and cash spent by the firm over a period of
time

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A Starting Point: Statement
of Financial Position
Vagabond Travel Agency
Balance Sheet December
31, 2009
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

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 The Concept of the
Business Entity

A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.

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 The Concept of the
Business Entity

The Accounting
Equation:
Vagabond
Travel Assets =
Agency
Liability + Capital

2-35
 Assets
Vagabond Travel Agency
Balance Sheet December
31, 2009

$ 22,500
Assets
Assets are
Liabilities & Owners' Equity
Cash
Notes receivable 10,000 Liabilities:
Accounts receivable 60,500
economic
Notes payable $ 41,000
Supplies 2,000 Accounts payable
resources that are 36,000
Land 100,000 Salaries payable 3,000
Building 90,000
owned by the
Total liabilities $ 80,000
Office equipment 15,000 business and are
Owners' Equity:
Capital stock 150,000
expected to benefit
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
future operations.
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Assets
These accounting principles support
cost as the basis for asset valuation.

Stable-Dollar Cost Principle

Asssu
umption

Going-Concern
Obje
ectivity Assumption
Princip
ple

2-37
 Liabilities
Vagabond Travel Agency
Balance Sheet December
31, 2009
Assets Liabilities & Owners' Equity
Liabilities are
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
debts that
Accounts receivable 60,500 Accounts payable 36,000
represent
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
negative future
Building 90,000 Owners' Equity:
cash flows for the
Office equipment 15,000 Capital stock
Retained earnings
150,000
70,000
enterprise.
Total $ 300,000 Total $ 300,000

2-38
 Owners’ Equity
Vagabond Travel Agency
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Owners’ equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
represents the
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
owners’ claims
Land 100,000 Total liabilities $ 80,000
on the assets of
Building 90,000 Owners' Equity: 150,000
Office equipment 15,000 Capital stock 70,000
the business. Retained earnings
Total $ 300,000 Total $ 300,000

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 TAssets
he Acc=ouoLiabilities
untinting +EqEOwners’
quatiation
on
Equity

$300,000 = $80,000 + $220,000

Vagabond Travel Agency
Balance Sheet December
31, 2009
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
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An Income Statement
 Sales
 Minus Cost of Goods Sold

 = Gross Profit
 Minus Operating Expenses
 Selling expenses
 General andAdministrative expenses
 Depreciation andAmortization
Expense
 = Operating income (EBIT)
 Minus Interest Expense
 = Earnings before taxes (EBT)
 Minus Income taxes
 = Net income (EAT)
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Sample Income Statement

2-42
The Cash Flow Statement
 The Cash Flow Statement is used by firms to
explain changes in their cash balances over a period
of time by identifying all of the sources and uses of
cash.
 Source of cash is any activity that brings cash
into the firm. For example, sale of equipment
 Use of cash is any activity that causes cash to
leave the firm. For example, payment of taxes.

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Cash Flow Statement
 The format for a traditional cash flow statement is as follows:
 Beginning Cash Balance
Plus: Cash Flow from Operating Activities
Plus: Cash Flow from Investing Activities
Plus: Cash Flow from Financing Activities
Equals: Ending Cash Balance
 Operating activities represent the company’s core business
including sales and expenses. Basically any activity that affects net
income for the period.
 Investing activities include the cash flows that arise out of the
purchase and sale of long-term assets such as plant and
equipment.
 Financing activities represent changes in the firm’s use of debt
and equity such as issue of new shares, payment of dividends.

2-44
 S ta t e m e n t o f C a s h F l ow f o r t h e Y e a r E n d i n g D e c e m b e r 3 1 , 2 0 1 0
( $ m illio n s )

E n d i n g c a s h b a Ja n c e f o r 2 0 0 9 ( b e g in n i n g b a l a n c e ifor 2 0 10 ) $ 9 4 .5 0
O p e r a t i n g A c t :i v i t i e s
....
Net in c o m e $204_75
I n c r e a s e i n a c c o u n ts
r e c e iv a b l e
I ( 2 2 .5 0 )
I n c r e a s e in in v e n to r i e s (148.50)
N o c h a n g e i n o t h e r c u JTe n t - > -
assets
Depreciation expense 1 3 5 _0 0
- 4 _50
I n c r e a s e i n a c c o u n t s p a y a b lle
N o c h a n g e in a c c r u e d e x p e n
ses
- ,. ',
C a s h f l o w fro11'1. o p e r a l ' i n g a c t i v i t i e s $ Z 7 3.2 5
I n v e s t i n g a c tiv i t i e s
Purchases of plant and
e q u i p 1n e n t
,C a s h f l o w f r o n z i n v e s t in g a c t i v i t i e s
17 5 . 5 0 )
----. (.1.75 .5 0 )
L
F i n a n c in g actiiv it i e s I >---
In c r e a se i n s h o r t - t e r m n o te s ( 9 .0 0 )
- - -
I n c r e a se i n lo n g - t e r m d e b t 5 L75
- ,_ ---
C a s h d i v i d e n d s paiid to s h a r e h o l d e r s $ ( 4 5 .0 0 )
C a s h f l o w fro1T1. f i n a n c i n g a c t i v i t ie s ( 2 .2 5 )

I J ,
$ ( 4 -5 0 )
I n c r e a s e ( d e c r e a s e ) i n c a s h . d u r in g t h e y e a r
-
E n d i n g ca s h bal a n c e f o r 2 0 10 $ 9 0 .0 0
 Financial Reporting and Financial
Statements
Financial statements are
just one source of
financial accounting Income
Statement
information.
Balance
Sheet
Statement
of Cash
Flows

Other Information:
•Industry
•Competitors
•National economy

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