Analysis of financial statements. Exercise 2 - Profit and loss account
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1 1 Analysis of financial statements Exercise 2 Profit and loss account
2 Basic financial statements Balance sheet Income statement Statements of cash flow Statements of retained earning Notes (footnotes)
3 EXCERCISE 1 Match each definition with its related term by entering the appropriate letter in the space provided:
4 Decreases in assets or increases in liabilities from ongoing operations (central focus of the business) EXPENSE Increases in assets or decreases in liabilities from ongoing operations (central focus of the business) REVENUE, SALES (net sales), INCOME
5 Increases in assets or settlements of liabilities from peripheral activities (not the main focus of the business) GAINS Decreases in assets or increases in liabilities from peripheral activities (not the main focus of the business) LOSSES
6 Revenues Expenses = Net income (loss) THE INCOME STATEMENT EQUATION
7 Record revenues when earned and expenses when incurred ACCRUAL BASIS ACCOUNTING Record revenues when received and expenses when paid CASH BASIS ACCOUNTING
8 8 CASH BASIS ACCRUAL BASIS REVENUES (=cash receipts) REVENUES = when earned EXPENSES (= cash payments) EXPENSES = when incurred Net income (cash basis) Net income accrual basis ACCRUAL BASIS ACCOUNTING records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments
9 Recognize expenses when they incurred in generating revenue MATCHING PRINCIPLE
10 The time it takes to purchase goods or services from suppliers, sell goods or services to customers and collect cash from customers OPERATING CYCLE
11 The structure of operating expenses depends on the nature of a business. Operating expenses differ in: A) service companies B) merchandising (retail /wholesale companies) C) manufactoring companies Match the structure of operating expenses with the nature of the business.
12 The structure of operating expenses (cost of goods sold)??? 1. OPERATING REVENUES. 2. OPERATING EXPENSES. COSTS. 3. OPERATING INCOME 1. OPERATING REVENUES. 2. OPERTING EXPENSES.(a+c) a) Cost of sales b) GROSS MARGIN c). COSTS. 3. OPERATING INCOME. 1. OPERATING REVENUES. 2. OPERATING EXPENSES.(I+IIIII) I beginnig work in progress and finished goods inventory + II COSTS. III beginnig work in progress and finished goods inventory. 3. OPERATING INCOME.
13 The structure of operating expenses (cost of goods sold) SERVICE COMPANIES 1. OPERATING REVENUES. 2. OPERATING EXPENSES. COSTS. 3. OPERATING INCOME MERCHANDISING (RETAIL WHOLESALE) COMPANIES 1. OPERATING REVENUES. 2. OPERTING EXPENSES.(a+c) a) Cost of sales b) GROSS MARGIN c). COSTS. 3. OPERATING INCOME. MANUFACTORING COMPANIES 1. OPERATING REVENUES. 2. OPERATING EXPENSES.(I+IIIII) I beginning work in progress and finished goods inventory + II COSTS. III ending work in progress and finished goods inventory. 3. OPERATING INCOME.
14 14 SERVICE COMPANIES
15 Excercise The following items of revenues, expenses and costs have been recorded in the accounting information system of the company X on the 31th December 201x. The company X is a small accounting firm. Task: Prepare profit and loss statement Costs are recorded as expenses when they are incurred
16 ITEM AMOUNT Operating revenues Salaries expense Rent expense Depreciation expense Advertizing expense Operating expenses? Operating income? Dividends Interest expense Gross income? Net income?
17 Company X Inc. Income statement for the period od x. 1) OPERATING REVENUES ) OPERATING EXPENSES (9.000) a) salaries expense b) rent expense c) depreciation costs d) advertising costs ) OPERATING INCOME ) FINANCIAL REVENUES (dividends) ) FINANCIAL EXPENSES (interest expense) (1.000) 6) INCOME FROM FINANCIAL ACTIVITIES ) TOTAL INCOME ) TOTAL EXPENSE (10.000) 9) PROFIT BEFORE INCOME TAXATION ) INCOME TAX (20%) ) PROFIT AFTER TAXATION (NET INCOME) 5.600
18 18 MERCHANDISING (RETAIL WHOLESALE) COMPANIES
19 Excercise The following items of revenues, expenses and costs have been recorded in the accounting information system of the company X on the 31th December 201x. The company X is a restaurant. Task: Prepare profit and loss statement
20 ITEM AMOUNT Restaurant sales revenue Franchise fee revenue Cost of sales salaries expense rent expense depreciation expense utilities expense Genaral and administrative expenses Dividends Interest expense Gain on sale of land Profit before taxation? Net income (profit after taxation)?
21 Company CD Inc. Income statement for the period od x. 1) OPERATING REVENUES a) Restaurant sales revenues b) Franchise fee revenue ) COST OF GOODS SOLD (30.000) 3) GROSS MARGIN (gross profit, gross profit margin) ) OPERATING COSTS (36.000) a) Salaries expense b) Rent expense c) Depreciation expense d) Utilities expense e) General and administrative expenses ) OPERATING INCOME ) FINANCIAL REVENUES (dividends) ) FINANCIAL EXPENSES (interest expense) (1.000) 8) INCOME FROM FINANCIAL ACTIVITIES 1.000
22 (continue) 9) ORDINARY REVENUES ) ORDINARY EXPENSES (67.000) 11) INCOME FROM ORDINARY ACTIVITIES ) EXTRAORDINARY (OTHER) REVENUES (gain on sale of land) ) EXTRAORDINARY (OTHER) EXPENSES 0 14) INCOME FROM EXTRAORDINARY ACTIVITIES ) TOTAL REVENUES ) TOTAL EXPENSES (67.000) 17) PROFIT OR LOSS BEFORE TAXATION ) INCOME TAX (20%) (1.000) 19) PROFIT OR LOSS AFTER TAXATION (NET INCOME) 4.000
23 23 MANUFACTORING COMPANIES
24 The structure of operating expenses (cost of goods sold) FUNCTION OF EXPENSE METHOD (COST OF SALES METHOD) 1. OPERATING REVENUES. 2.COST OF SALES I beginning work in progress and finished goods inventory +II PRODUCT COSTS III ending work in progress and finished goods inventory. 3. GROSS MARGIN 4. PERIOD COSTS general and administrative expenses 5. OPERATING INCOME NATURE OF EXPENSE METHOD (TOTAL COSTING METHOD) 1. OPERATING REVENUES. 2. OPERATING EXPENSES.(I+IIIII) I beginning work in progress and finished goods inventory + II TOTAL operating COSTS. III ending work in progress and finished goods inventory. 3. OPERATING INCOME
25 25 Prepare income statement (profit and loss account): Function of expense method (cost of sales method), Nature of expense method (total costing method): According to gross principle, According to net principle.
26 EXCERCISE 2. Based on the following information prepare Profit and Loss account for the period for the company CD Operating revenues Raw material inventory Sales in country Work in progress inventory Sales abroad Finished goods inventory Raw material inventory Material costs Work in progres inventory Labour costs Finished goods inventory Depriciation Financial revenues 800 Gross profit? Loss from financing activities (1.500) Other operating expenses Extraordinary revenues 500 Extraordinary expenses 300
27 Total operating cost in period are kn, product (manufacturing) costs are kn, and period costs kn (administration expenses 40%, and the rest are selling expenses). Calculate the cost of goods sold, the other missing date and prepare income statement (profit and loss account) under the assumption that accounting and tax basis are equal and that income tax is 20% Prepare income statement (profit and loss account): Function of expense method (cost of sales method), Nature of expense method (total costing method): According to gross principle, According to net principle.
28 28 What kind of inventories will a manufacturing firm have? Raw material inventories Finished goods inventories Work in progress inventories etc. What kind of inventories will be included in cost allocations? Work in progress Finished goods inventory
29 4 TOTAL operating costs Product costs allocation Work in progress inventory Finished goods inventory S S S i S i Cost of goods sold Period costs allocation Expense of period costs
30 Calculate the cost of sales 30 COST OF SALES (COST OF GOODS SOLD) AMOUNTS I beginning work in progress and finished goods inventory +II PRODUCT COSTS III ending work in progress and finished goods inventory. TOTAL
31 31 BEGINNING BALANCE ENDING BALANCE ITEM AMOUNT ITEM AMOUNT work in progress on work in progress inventory on finished goods inventory on finished goods inventory on TOTAL
32 32 BEGINNING BALANCE ENDING BALANCE ITEM AMOUNT ITEM AMOUNT work in progress on work in progress inventory on finished goods inventory on finished goods inventory on TOTAL Increase of work in progress and fininsed goods inventory (Change (2.500) (increase in inventories decrease the expenses )
33 Calculate the cost of sales 33 COST OF SALES (COST OF GOODS SOLD) AMOUNTS I beginning work in progress and finished goods inventory + II PRODUCT COSTS III ending work in progress and finished goods inventory. TOTAL
34 Calculate the cost of sales 34 COST OF SALES (COST OF GOODS SOLD) I beginning work in progress and finished goods inventory + II PRODUCT COSTS III ending work in progress and finished goods inventory. AMOUNTS (9.500) TOTAL
35 Company CD Inc. Income statement for the period od x. 1) OPERATING REVENUES a) Sales in county b) Sales abroad (deduct) 2) COST OF GOODS SOLD a) Increase in inventory (2.500) b) product costs in the period (29.410) 3) GROSS MARGIN ) (deduct) PERIOD COSTS Function of expense method (cost of sales method), a) Administrative costs b) Selling expenses (12.000) 5) OPERATING INCOME (PROFIT) ) FINANCIAL REVENUES 800 7) FINANCIAL EXPENSES (interest expense) (2.300) 8) LOSS FROM FINANCIAL ACTIVITIES (1.500)
36 (continue) 9) ORDINARY REVENUES ) ORDINARY EXPENSES (43.710) 11) INCOME FROM ORDINARY ACTIVITIES ) EXTRAORDINARY (OTHER) REVENUES ) EXTRAORDINARY (OTHER) EXPENSES (300) 14) INCOME FROM EXTRAORDINARY ACTIVITIES ) TOTAL REVENUES ) TOTAL EXPENSES (44.010) 17) PROFIT OR LOSS BEFORE TAXATION ) INCOME TAX (1.458) 19) PROFIT OR LOSS AFTER TAXATION (NET INCOME) 5.832
37 Nature of expense method (Total cost method) NET principle Company CD p.l.c. Profit and loss account (Income statement) from x. 1) OPERATING REVENUES a) Sales in country b) Sales abroad ) OPERATING EXPENSES (41.410) a) Increase of inventors (work in progress and finished goods invent.)(2.500) b) Costs in period Material costs Labor costs Depreciation costs Other costs ) OPERATING INCOME 8.590
38 Nature of expense method (Total cost method) gross principle Company CD p.l.c. Profit and loss account (Income statement) from x. 1) OPERATING REVENUES a) Sales in country b) Sales abroad )OPERATING EXPENSES (41.410) a) Beginning work in progres and finished goods inventory b) Cost in the period Material costs Labour costs Amortization costs Other costs c) Ending work in progres and finished goods inventory (9.500) 3) INCOME FROM OPERATING ACTIVITIES 8.590
39 EXCERCISE 4. At the end of accounting period ( x) in accounts of C! plc company there are the following information: Marketable securities (short term financial assets) Liabilities for salaries (wages) Sales (revenues) Decrease in inventory * (inventory change) Material cost Labor cost Depreciation (amortization) Dividend income (gains) Interest income (interest revenue) Land interest expenses Buildings Equipment Long term financial assets Raw materials Work in progress Finished goods Accounts receivable Accounts payable Short term debt (liabilities for short term credits) Liabilities for tax Extraordinary revenues Extraordinary costs Income tax Money Subscribed capital Ratained earnings Net income???? Long term debt (liabilities for long term debt) Long term liablities for securities 5.500
40 Assignment: *changes of work in progress and finished goods inventory Based on available information prepere balance sheet and profit and loss acccount
41 Company C dd. Profit and lost account x. OPIS STAVKE 1)Operating revenues (income) sales (revenues) IZNOS )Operating cost (expenses) ( ) a) decrease in inventory (work in progress and finished goods inventory) b) costs in period material costs labor costs depreciation ) Operating income )Financial revenues dividends interest income ) Financial expenses (interest) (7.000) 6) Financial income ) Ordinary revenues ) Ordinary expenses ( ) 9) Ordinary income ) Extraordinary (other) revenues ) Extraordinary (other) expenses (3.000) 12) Loss from extraordinary items (1.000) 13) Total revenues ) Total expenses ( ) 15) Income before tax ) Income tax (4.000) 17) Net income 6.000
42 COMPANY C d.d. BALANCE SHEET ON x. AKTIVA PASIVA I) LONG TERM ASSETS I) CAPITAL TANGLIBLE ASSETS Subscribed capital land Ratained earnings buildings Net income equipment II) NONCURRENT LIABILITIES FINANCIAL ASSESTS Liabilities for longterm credits II) CURRENT ASSETS (current assets) Liabilities for issued securities (notes) INVENTORY III) CURRENT LIABILITIES Raw material Liabilities for short term credits Work in progress Accounts payable Finished goods inventory Liabilities for wages (salaries) RECEIVABLES Liabilities for taxes Account receivables FINANCIAL ASSETS CASH TOTAL ASSETS TOTAL SOURCES OF ASSETS
43 43 Calculate the amount of operating expenses? The following items of assets, liabilities and equity have been recorded in the accounting information system of the company X on the 31th December 201x. Raw material costs $5 Salaries costs $2 Depreciation costs $2 Utility costs $1 Beginning work in progress and finished goods inventory $4 Ending work in progress and finished goods inventory $3
44 44 Calculate the amount of operating expenses? OPERATING EXPENSES $11 1. Beginning work in progress and finished goods inventory $ Total costs $10 3. Ending work in progress and finished goods inventory $(3) The operating expenses are higher then total operating costs. Operating expenses $11 Total operating costs $10 Decrease of the work in progress and finished goods inventory we sold more then we produced the operating expenses consist of (included) the costs recognized in previous reporting period
45 45 Increase of the work in progress and finished goods inventory. we produced more then we sold in the reporting period. same cost are allocated in assets (work in progress and finished goods inventory) The amount of the operating expenses and total costs will be equal all we produce we sold in the same reporting period.
46 46 Thank you for your attention!
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