FINANCIAL ACCOUNTING

Financial reporting
MBL914N
2015

by Lize Terre

Financial reporting
INTEGRITY
OBJECTIVITY
INDEPENDEN
CE
COMPETENC
E

Financial accounting
generally refers to the
process that results in
the preparation and
reporting of financial
statements for an
entity.
Financial
accounting is
primarily externally
oriented and
concerned with the
historical results of an
entitys performance.
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Accounting equation
Assets =
Owners Equity + Liabilities

BALANCE
Resources of a company
and the claims to those
resources

A = OE + L

Elements
Assets
Liabiliti
es
Equity

Economic resources
Produce future benefits
Present obligations
Result in an outflow of economic benefits
What the business owes to outsiders.
Represents shareholders residual claim to the
entitys assets / What the business owes the
owners / insiders

Income

Increases in economic benefits during an

accounting period

Expens
es

Decreases in economic benefits during an

accounting period

Financial reporting
To DETERMINE YOUR
PERSONAL EQUITY

=
OWNED less OWING

Financial reporting
What you own and what you owe
have lives greater than twelve
months or lives less than twelve
months.
Own = asset
Owe = liability

Long-term

Short-term
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Financial statements

Income
Statement

Statement of
Changes in
Equity

Statement of
Cash Flows

Balance Sheet

BALANCE SHEET
Statement of financial position
reports on assets, liabilities and
stockholders equity (shareholders
equity)

Moment in time

Assets
Future economic benefits
used singly or in combination with
other assets in the production of
goods or services to be sold by
the entity;
exchanged for other assets;
used to settle a liability; or
distributed to the owners of the
entity.

Total assets
Long-term assets = Fixed

Assets

Short-term assetsCurrent
=
Assets
Total
Assets

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Noncurrent / fixed assets

Land
Buildings
Equipment
Intangible Assets
Natural Resources
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Current assets
Current assets include cash and those
assets that are expected to be converted
to cash or used up within one year, or an
operating cycle, whichever is longer.
Prepaid
Expenses

Cash

Receivables

Short-term
Securities

Inventories

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Total assets
NON-CURRENT ASSETS

1 350 000

Property, Plant & Equipment

Patents & trademarks
Investments
180 000

1 120 000
50 000

CURRENT ASSETS
Inventory
160 000
Trade & other debtors
Bank
10 000

TOTAL ASSETS

420 000
250 000

1 770 000

In business we expect what you own is

used productively. Your assets should be
used to provide service delivery.

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Liabilities
Settlement of a present
obligation

payment of cash
transfer of other assets
provision of services
replacement of that obligation with
another obligation
conversion of the obligation to equity
LIABILITI
ES

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Total liabilities

Long-term liabilities =Non-current

liabilities

Short-term liabilities =

Current
liabilities

Total liabilities

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Equity
Defined as a residual
In a for-profit organisation,
funds contributed by shareholders,
retained earnings,
reserves representing appropriations
of retained earnings and
reserves representing capital
maintenance adjustments may be
shown separately.

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Total equity and liabilities

SHAREHOLDERS EQUITY 1 150 000
Issued Share Capital
Accumulated Profits

500 000
650 000

NON-CURRENT LIABILITIES

150 000

Interest bearing borrowings

CURRENT LIABILITIES

470 000

Trade & other creditors

300 000
Dividends proposed
90 000
Bank Overdraft
80 000

TOTAL LIABILITIES 620 000

TOTAL EQUITY and LIABILITIES

1 770

000

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Assets = owners equity +

liabilities
Balance sheet
NON-CURRENT ASSETS
CURRENT ASSETS
TOTAL ASSETS

1350 000
420 000
1770 000

SHAREHOLDERS EQUITY
NON-CURRENT LIABILITIES
CURRENT LIABILITIES
TOTAL LIABILITIES

1150 000
150 000
470 000
620 000

TOTAL EQUITY and LIABILITIES

000

1770

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INCOME
STATEMENT
The statement of comprehensive
income reports revenues and
expenses for the period

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Income statement
Reports two main categories
Revenues and gains
Expenses and losses

Shows the bottom line

Net income or net loss for the period

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Income
Increase in economic benefits during the
accounting period
Inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity, other than those
relating to contributions from equity
participants.

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Income
Various kinds of assets may
be received or enhanced by
income;
cash,
receivables
goods and services received in
exchange for goods and services
supplied.

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Expenses
Decreases in economic benefits
during the accounting period
Outflows or depletions of assets or
incurrences of liabilities that result
in decreases in equity, other than
those relating to distributions to
equity participants.

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Income statement
Revenue
Cost of sales
Gross profit

600 000
GP 480 000

OPERATING EXPENSES
000)
Selling & Admin Expenses
Operating profit
OP
Finance costs
Profit before tax
Income tax expense
PROFIT AFTER TAX

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PBT
PAT

(120 000)
(300
180 000

( 20 000)
160 000
(50 000)
110 000

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Statement of Cash
Flows
The statement of cash flows
provides a summary of the
cash flows over the period of
concern, typically the year just
ended.

This statement not only

provides insight into a
companys investment,
financing and operating
activities, but also ties
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Blanche
together the income

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Business activities

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Statement of cash flow

Statement of Cash Flows
For the year ended December 31, 2010

Cash flows from operating activities

$$$,$$$

Cash flows from investing activities

$$,$$$

Cash flows from financing activities

$$,$$$

Net cash flows

$$,$$$

Cash balance, December 31, 2009

$$,$$$

Cash balance, December 31, 2010

$$,$$$

2 Questions.
Where did the company get its money from?
What did the company spend its money on?

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Cash flow categories

Operati
ng
Create
revenue
,
expense
s, gains
and
losses

Investin
g
Relate
to noncurrent
assets

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Financi
ng
Obtain
cash
from
and pay
cash to
investor
s and
creditor
s
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Examples of cash flow activities

Collections from customers

Receipts of interests &
dividends
Sale of short-term investments
Other operating receipts
Sale of PPE
Sale of long-term investments
Collections of loans from others
Issuance of shares
Sale of treasury shares
Proceeds from loans &
borrowings

Operatin
g
Activitie
s

Payments to employees
Payments of interest & income
tax
Purchase of short-term
investments
Other operating payments

Investin
g
Activitie
s

Acquisition of PPE

Financin
g
Activitie
s

Payment of dividend

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Purchase of long-term
investments
Making loans to others

Repurchase of shares
Purchase of treasury shares
Payment of debt principal
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Operating activities

Indire
ct
Direct

Reconciles from
net income to
cash provided by
operating
activities
Reports all cash
receipts and cash
payments from
operating
activities

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Indirect method

Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
+ Depreciation/depletion/amortization expense
+ Loss on sale of long-term assets
-

Gain on sale of long-term assets

Increases in current assets other than cash

+ Decreases in current assets other than cash

+ Increases in current liabilities
-

Decreases in current liabilities

= Net cash provided by operating activities

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Direct method
Receipts:
Collections from
customers
Interest and dividends
Payments:
To suppliers
To employees
For interest and
income taxes

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Tel: +27 11 652 0214/0000

www.unisa.ac.za/sbl

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