Professional Documents
Culture Documents
Student Handout
Lecturer:
Dr. Youngdeok Lim
School of Accounting
UNSW
QUAD 3069
youngdeok.lim@unsw.edu.au
Blackboard: http://telt.unsw.edu.au
Session 1, 2012
Introduction
Every commercial entity engages in transactions with other parties. Woolworths buys
products from suppliers, employs shop assistants, builds new stores, sells groceries and
each individual transaction is recorded and reported in the Balance Sheet. Individual
retail stores would report their profitability and the costs of running each store
categorising their expenses so management are fully informed of the cost involved in
running each service or retail store. They will even have information about the individual
products they sell through internal reporting and cost profit sales analysis. In this lecture
we will examine the communication of financial information in the Income Statement
through to the Balance Sheet.
Learning objectives
At the end of this topic, you should be able to:
Understand the terms, format and function of the Balance Sheet & the Income
Statement
Describe the relationship between the balance sheet and the income statement
Required Reading
Trotman & Gibbons
AASB
Session 1, 2012
2.
Preparation Questions
DQ 2.1,
P2.17, C2A
Tutorial Questions
DQ 2.6, 2.10,
Session 1, 2012
Dr Youngdeok Lim
(Ch
(Ch.
2.
3.
4.
5.
1. Balance Sheet
Historically, the most important financial statement showing an organisations
resources & claims on resources at a particular point in time
Reflects the accountability of managers to owners (shareholders)
a statement
...
statement, at one point in time
time, which shows all the resources controlled by
the enterprise and all the obligations due by the enterprise.
balance
Resources
Claims/Sources
Liabilities
Equities
Assets
snapshotas at
SE
Resources = Sources
Basis of accounting entity assumption
Woolworths Limited
Consolidated
as at
Eg.
g Woolworths as at 24 June 2007
Currency used
$m, $AUD
Assets
Liabilities
Interest-bearing liabilities
Inventories
Tax liabilities
Biological assets
Provisions
Tax assets
Reserves
Retained profits
Investment property
Intangible assets
Shareholders
Shareholder
s Equity
Information on financial
position
Solvency
Liquidity
2.
3
3.
4.
0%
1
0%
0%
0%
4
Assets
Current Assets
Cash
Notes receivable
Accounts receivable
Supplies
Non Current Assets
Land
Building
Office equipment
Total
Total liabilities
$ 80,000
Shareholder's Equity
Contribued capital
150,000
Retained earnings
70,000
Total
$300,000
Assets
The Beach Shack
Balance Sheet
as at December 31,
Current Assets
Cash
Notes receivable
Accounts receivable
Supplies
N
Non
C
Currentt A
Assets
t
Land
Building
Office equipment
$ 22,500
10,000
60,500
2,000
100,000
90,000
15,000
A resource controlled by
the entity as a result of
past events from which
future economic
benefits are expected to
flow to the entity
Assets - Recognition
Definition:
A
Asset
t recognition
iti criteria:
it i
a.
it is probable that the future economic benefits associated with the item
will flow to the entity, and
b.
the item has a cost or value that can be measured with reliability.
Current assets
These are:
cash
assets
assets
Non-current assets
Non-current
Non
current assets (NCA)
are all assets other than
current assets
Examples:
property,
plant and
equipment
long
term investments
Cash
in the bank?
Land
and Buildings?
WHAT IF?
What
What
Is it a cost or value???
What are the possible ways in which an asset could be
measured?
Liabilities
The Beach Shack
Balance Sheet
as att December
D
b 31,
31
Liabilities & Owners' Equity
A present obligation of the
Liabilities:
entity arising from past
Notes payable
$ 41,000
events, the settlement of
Accounts payable
36,000
which is expected to result
Salaries payable
3,000
in an outflow from the
T t l liabilities
Total
li biliti
$ 80,000
80 000
entity of resources
Owners' Equity:
embodying economic
Contributed capital
150,000
benefits
Retained earnings
70,000
Total
$ 300,000
Liabilities Recognition
Definition:
Present obligation
Current liabilities
Non-current liabilities
Non-current
Non
current liabilities
are all liabilities other
than current liabilities
Examples:
debentures
mortgage
payable
loan
Shareholders Equity
Equity
capital
Retained
profits
Net Assets
$80
$80,000
000 +
Assets
Cash
Notes receivable
Accounts receivable
Supplies
L d
Land
Building
Office equipment
$ 22,500
10,000
60,500
2,000
100 000
100,000
90,000
15,000
Total
$ 300,000
$220
$220,000
000
Liabilities & Owners' Equity
Liabilities:
Notes payable
$ 41,000
Accounts payable
36,000
Salaries payable
3,000
T t l liabilities
Total
li biliti
$ 80,000
80 000
Owners' Equity
Share capital
150,000
Retained earnings
70,000
Total
$ 300,000
Example (continued)
A = L + SE
The basic accounting equation can
be expanded to include revenues
and expenses.
expenses
A = L + SE
Share capital
Retained profits
Retained
Net profit -Dividend
profits
beginning =Revenue
expenses
of period
Shareholders equity
A L
= SE
Profit
Revenues
Expenses
Distribution
to owners (Dividend)
Owners:
Contributions
profit
by owners
A = L + SE
Share
Capital
Cash
Revenue
A = L + SE
Owners:
Distributions
to owners, Dividends
loss
A = L + SE
C h
Cash
Interest
Expense
Retained profit
Distributions (Dividends)
Retained Profit
A = L + SE
A = L + SC +RP + R E - D
Where:
CC
RE
R
E
D
=
=
=
=
=
share capital
retained
t i d profits
fit beginning
b i i
revenue
expenses
dividend (declared)
Assets
CURRENT
320
NON CURRENT
3,800
Total Assets
4,120
10 000
30 000
200 000
50 000
40 000
100 000
$40 000
$50 000
$100 000
none of the above
Income Statement
It is sometimes called:
Statement of financial performance
Statement of earnings
g
Profit and loss statement
Statement of operations
profit = revenues expenses
Income Statement
Main Street Store, Inc.
Income Statement
For the Year Ended 30 June 2009
Net Sales
Cost of goods sold
Gross profit
Selling, general, and admin. expenses
Profit from operations
Interest expense
Profit before taxes
Income taxes
Net profit
1,200,000
850,000
350,000
311,000
39,000
9,000
30,000
12,000
18,000
1.80
$
$
$
Revenue
48
Receipt
of cash
Making
purchases
Delivery of
goods to
customers
Receipt of
orders before
production
Receipt of
orders
Commencing
production
Completion
of production
Progressing
through
production
50
$17 000
$18 000
$25 000
none of the above
0%
1
0%
2
0%
0%
Income Statement
Main Street Store, Inc.
Income Statement
For the Year Ended 30 June 2009
Net Sales
Cost of goods sold
Gross profit
Selling, general, and admin. expenses
Profit from operations
Interest expense
Profit before taxes
Income taxes
Net profit
1,200,000
850,000
350,000
311,000
39,000
9,000
30,000
12,000
18 000
18,000
1.80
$
$
$
Expenses
Matching
problems
Expenses
Income Statement
Explanation of income statement accounts:
N t sales
Net
l
Gross profit
Income Statement
Explanation of income statement accounts:
Account
Explanation
Selling general
Selling,
general, and
Represent the operating expenses of the entity
administrative expenses
Profit from operations
Interest expense
Income taxes
Net profit per share of A significant item in evaluating the market value
ordinary share in issue of an ordinary share; Often referred to as
"earnings per share" or EPS
R
Revenue
= iinflows
fl
ffrom ordinary
di
activities
ti iti
57
Income
Revenue
Arises
entity
Include
Gains
No
N
diff
differentt in
i nature
t
f
from
revenues
May
Eg.
Usually
making
Wages
Interest recd
Scholarship
410
Less Expenses
Rent
Food
Electricity & utilities
Phone
340
Profit
70
Income Statement
Balance Sheet
CA + NCA = CL + NCL +
SE
R- E
- D
Income Statement
2.
3.
4.
dividends paid to
shareholders
the opening
balance of
retained profits
total shareholders
equity
net profit after tax
0%
1
0%
2
0%
3
0%
4
6. Capitalise v. expense
An example
Spend $3,000,000 on research to develop a drug to cure hangovers?
Do they Capitalize or expense? Which
A
cash
SE
asset CAPITALISE
v.s.
EXPENSE
cash
expense
No
Unlikely to be an
accounting event
Yes
Is there a benefit
to the business?
No
Yes
No
Yes
Charge as an expense
68
Total sales =
$300 000
$275 000
$175 000
$150 000
0%
1
0%
2
0%
3
0%
4
$300 000
$275 000
$175 000
$150 000
0%
1
0%
2
0%
3
0%
4