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(5) FINANCIAL STATEMENTS

At the end of the session, students are able to: Prepare the classified income statement and balance sheet, Calculate the Cost of Goods Sold in the income statement.

Financial Statements can be prepared directly from a trial balance. A trial balance contains both the income statement accounts (expenses and revenues) and balance sheet accounts (assets, liabilities and owners equity)

BersihMurni Services Trial Balance as at 31 July 2010 Debit (RM) Cash Cleaning equipment Motor vehicle 9,650 26,000 30,000 Credit (RM)

Bank loan Cuci Enterprise


Capital Drawings Cleaning supplies Salaries Cleaning service revenue 73,450 2,500 2,100 3,200

30,000 2,000
35,000

6,450 73,450
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BersihMurni Services Income Statement for the month ended 31 July 2010
RM Revenue Services revenue Less: Expenses Cleaning supplies Salaries Net Profit 2,100 3,200 (5,300) 1,150 6,450 RM

BALANCE SHEET (vertical format)


BersihMurni Services Balance Sheet as at 31 July 2010 RM Assets Motor vehicle Cleaning equipment Cash Liabilities and Owners Equity Liabilities Bank loan Cuci Enterprise Owners Equity 30,000 2,000 30,000 26,000 9,650 65,650 RM

Capital
Add: Net Profit Less: Drawings

35,000
1,150 (2,500)
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33,650 65,650

NOTE
The income statement is prepared from the revenue and expense account. Revenues Expenses = Net profit Net profit is added to owners equity section in the balance sheet; since profits increases owners equity. The balance sheet is then prepared from the asset, liabilities and owners equity. Drawings is deducted from owners equity section since it reduces owners equity.

CLASSIFIED FINANCIAL STATEMENTS


Financial statements should provide more meaningful information to the users. Therefore, items are grouped and arranged in a more systematic manner.

CLASSIFIED BALANCE SHEET


Assets
Non-current assets Current assets

Liabilities and Owners equity


Non-current liabilities Current liabilities

Owners equity

NON-CURRENT ASSETS
Intended to be used in the business. Not intended for resale. More permanent in nature. Examples;

Land and building Machinery and equipment Motor vehicles Furniture and fixtures
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CURRENT ASSETS
Cash. Will be converted into cash within 12month period. Examples;

Cash Inventory/stock/goods ( asset for resale)

Debtors (credit customers)

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NON-CURRENT LIABILITIES
Debt obligations that are expected to be paid after 12-month period. Examples;

Long-term loans
Loans secured by mortgage

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CURRENT LIABILITIES
Debt obligations that are expected to be paid within 12-month period. Examples;

Bank overdraft
Creditors (credit suppliers) Short-term loans

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OWNERS EQUITY

Any changes made to the owners equity are normally shown in this section. Capital add: Net profit less: Drawings xx xx (xx)

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FORMAT: CLASSIFIED BALANCE SHEET

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INCOME STATEMENT OF A TRADING BUSINESS


Pauh Jaya Furniture Income Statement for the year ended 31 December 2010
RM Revenue Sales revenue Less: Cost of Goods Sold Gross profit Less: Operating Expenses 600,000 (350,000) 250,000 (200,000) RM

Net profit

50,000
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NOTE
In trading business, main source of revenue is the sale of goods. Other revenues are derived from non-trading activities such as commission revenue for being an agent, interest revenue from fixed deposit and rent revenue from tenant. Expenses in trading business are classified in to:

Cost of goods sold (COGS) Operating expenses

Sales revenue COGS = Gross profit Gross profit operating expenses = Net profit

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CLASSIFICATION OF OPERATING EXPENSES


Selling and distribution expenses
Administration expenses
Advertising
Salesmans Office

salaries Delivery expenses salaries Telephone Water and electricity Postage Stationery Insurance
Interest

Financial expenses

on loan
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FORMAT: CLASSIFIED INCOME STATEMENT


Name of business Income Statement for the year ended xxxxx RM
Sales revenue

RM
xxx

Less: Cost of Goods Sold


Gross profit

(xxx)
xxx

Add: Other revenue


Less: Operating Expenses Selling and distribution expenses Administrative expenses Financial expenses Net profit xxx xxx xxx
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xxx

(xxx) xxx

DETERMINATION OF COGS
1.

Sale units = Purchase units


Pauh Jaya Furniture Income Statement for the month ended 31 January 2010 RM RM

Revenue Sales revenue (20 units x RM150) Less: Cost of Goods Sold Purchases (20 units x RM100) Gross profit (2,000) 1000 3,000

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DETERMINATION OF COGS
2.

Sale units = 15; Purchase units = 20; unsold units = 5


Pauh Jaya Furniture Income Statement for the month ended 31 January 2010 RM RM

Revenue Sales revenue (15 units x RM150) Less: Cost of Goods Sold Purchases (20 units x RM100) Less: Unsold stock (5 units x RM100) Gross profit
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2,250 2,000 (500) (1,500) 750

NOTE
Unsold units at the end of the period is known as closing stock. Closing stock is shown in the balance sheet under current assets; to show the position of stock in balance. Closing stock will be carried down to the next period as opening stock.

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DETERMINATION OF COGS
3.

Sale units = 28; Purchase units = 30 Opening stock = 5; unsold units = 7


Pauh Jaya Furniture Income Statement for the month ended 28 February 2010 RM RM

Revenue Sales revenue (28 units x RM150) 4,200 500 3,000 (700) (2,800) 1,400
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Less: Cost of Goods Sold


Opening stock (5 units x RM100) Purchases (30 units x RM100) Less: Unsold stock (7units x RM100) Gross profit

OTHER EXPENSES IN COGS

Besides the cost of purchases, the cost involved in putting the goods into a saleable condition should be charged to COGS.
Carriage inwards Import duty

Insurance freight

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RETURNS OF UNSATISFACTORY GOODS

Reasons:
Goods are damaged Faulty goods

Wrong specification in term of color, size or

shape.

If customer returned goods to business


Sales returns or Returns inwards

If business returned goods to supplier


Purchases returns or returns outwards
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Pauh Jaya Furniture Income Statement for the year ended. RM Revenue Sales revenue Less: Sales returns Less: Cost of Goods Sold Opening stock Add: Purchases xxx xxx xxx (xxx) xxx RM RM

Carriage inwards
Import duty Insurance freight Less: Purchases returns

xxx
xxx xxx (xxx) xxx

Cost of Goods Available for sale


Less: Closing stock Gross profit

xxx
(xxx) xxx xxx
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EXERCISES
1.

Classify each of the following items into Non-Current assets, Current assets, Non-current liabilities, Current liabilities and Owners equity; and Revenue, COGS and operating expenses.
debtors bank loan drawings interest income rent received creditors buildings interest on loan sales stock advertising delivery expenses office salaries purchases machinery cash at bank capital insurance expenses carriage inwards vehicle

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2.

From the following trial balance of Perniagaan Adam, prepare the classified Income Statement for the year ended 31/12/2010 and a classified Balance Sheet as at date.

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