Introduction%20to%20Financial%20Statements

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Introduction to Financial Statements

• Accounting is the process of
• identifying
• measuring, and
• communicating economic information
• To permit
• informed judgements and decisions by the users of
  the information

2
Introduction to Financial Statements

• What are the Financial Statements?
• Statement of financial position (balance sheet)
• Statement of financial performance (profit and
  loss statement)
• Statement of cash flows
• Notes to the accounts
• And attached
• Auditors Report
• Directors Report
• Directors Declaration

3
Changes to Financial Statements
Introduction to Financial Statements

• Profit and loss statement
• Statement of financial performance
• structural changes
• some items are in Notes, e.g. individual
  significant items
• More disclosure, e.g. cost of sales

• Balance sheet
• Statement of financial position
• optional structural changes
• concepts redefined

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Introduction to Financial Statements

• The statement of financial position
• we own we owe our wealth
• assets liabilities net assets, or
• shareholders equity/funds
• Issues for Directors
• Solvency and liquidity
• Capital structure
• Is the risk profile appropriate?
• Accuracy of the data
• How can we increase net wealth?

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Introduction to Financial Statements
Statement of financial position Assets

• Current assets
• Cash
• Receivables
• Inventories
• Other
• Total current assets
• Non-current assets
• Receivables
• Investments
• Property, plant and equipment
• Intangibles
• Total non-current liabilities
• Total assets

• Some issues
• valuation of assets
• composition the right assets
• earning capacity
• movements in assets

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Introduction to Financial Statements
Statement of financial position Liabilities

• Current liabilities
• Accounts payable
• Interest-bearing liabilities
• Provisions
• Other
• Total current liabilities
• Non-current liabilities
• Accounts payable
• Interest-bearing liabilities
• Provisions
• Other
• Total non-current liabilities
• Total liabilities

• Some issues
• timing of repayments
• cost of borrowing
• contingent liabilities
• any special feature of liabilities?

7
Introduction to Financial Statements

• Watch contingent liabilities !
• Contingent liabilities are potential expenses
  which may or may not arise, depending upon future
  events.
• Typically these relate to the provision of
  guarantees, but can also arise from tax and legal
  claims.
• Pacific Dunlop had a vast contingent liability as
  a result of law suits in the US following the
  failure of its pacemaker leads.

8
Introduction to Financial Statements
Statement of financial position equity

• Share capital
• Reserves
• Asset revaluations
• Asset realisation
• General
• Foreign exchange
• Retained earnings
• Total equity

• Some issues
• movements
• level of reserves
• dividend payouts
• Is equity increasing?

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Introduction to Financial Statements

• Statement of financial performance
• revenue expenses OPBT
• OPBT tax OPAT
• OPAT dividends retained earnings for year
• Statement of financial position
• assets liabilities
  equity

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Introduction to Financial Statements

• Issues for Directors
• Statement of financial performance
• Quality / strength of revenue / profits
• Future maintainable earnings
• Profit margins
• Depreciation, amortisation
• Taxation (yes!)
• Significant items
• size and effect
• positive (revenue)
• negative (loss, write-down)

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Introduction to Financial Statements

• opening bank balances

operating activities
add or subtract cash flows from
investing activities
financing activities
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Introduction to Financial Statements

• Directors duties re financial statements
• These are mandatory under the Corporations Act
• Keep accounting records
• Have financial reports made out
• Have accounts audited
• Directors report
• Directors declaration
• Apply accounting standards

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Introduction to Financial Statements

• Insolvent Trading
• Insolvency
• unable to pay debts as and when they fall due
• Duties
• Defences
• What incurring a debt means
• Joint and several liability

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ProfitProfit Revenue Expenses Profit
MarginProfit Margin Profit Revenue(In
dicates financial performance relative to total
revenue)
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Typical Expense Categories

• Cost of Goods Sold
• Plant
• Labour
• Materials
• Subcontractor
• Administration
• Overheads
• Interest Expense
• Taxation Expense

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Gross ContributionGross Contrbibution Revenue
COGS(Indicates the return of Business
Operations)
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Earning Before Interest TaxationEBIT
Revenue COGS Overheads(Indicates the
performance of the business before capital
structure and tax effect)
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Earning Before TaxEBT Revenue COGS
Overheads Interest Expense(Indicates the
financial performance reported to Tax Office)
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Net ContributionNet Contribution EBT Income
TaxIndicates the overall financial performance
of the business after all expenses)
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How do Business Owners measure financial
return..?

• Return on Revenue
• Return on Assets
• Return on Equity

Business Owners want to know what return are they
getting for their investment.?
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Return on Revenue (ROR)ROR Net
Contribution Revenue
Return on Assets (ROA)ROA Net
Contribution Total Assets
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Return on Equity (ROE)ROR Net
Contribution Total Equity
Debt to Equity RatioDebt to Equity Total
Debt Total Equity