HC1011(BPA & Bbus) and HF1008(BoF)

HC1011/HF1008

Topic 2
Financial Statements and
Transactions Analysis

Types of Business Entities

Introduction
This week we will cover the following:
Types of Business Entities
Basic financial statements
Assumptions made and characteristics
of information
Basic effects of transactions on the
accounting equation and financial
statements

Single proprietorship or sole trader

Owned by one person

Partnership
Owned by two or more partners

Company of corporation
Owned by shareholders
Separate legal entity

Simple Balance Sheets

Basic Financial Statements

Financial performance
Operating efficiency
Financial position
Economic condition
Cash flows
Operating activities
Investing activities
Financing activities
Statement of Changes in Equity

Balance Sheets consist of

Assets (current and non-current),
Liabilities (current and non-current) and
Equity (capital, retained earnings and
reserves).
Assets and Liabilities are those items which
belong to the entity, equity belongs to the owners.

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Simple Balance Sheets

The Balance Sheet

Marianas GEN Y Fashions
Balance Sheet

It is structured around the accounting equation:

as at 30 June 2015
ASSETS

LIABILITIES

Cash at Bank

ASSETS = LIABILITIES + EQUITY

Or

$ 50,340 Accounts payable

$ 20,760

Accounts receivable

17,790 Mortgage payable

201,000

Inventory

14,610

221,760

Dressmaking Equipment

110,700

Land

ASSETS LIABILITIES = EQUITY

Building

60,000 EQUITY
255,000 Marianas, Capital
$508,440

286,680
$508,440

ASSETS = LIABILITIES + EQUITY

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The Balance Sheet (cont.)

The Balance Sheet (cont.)

ASSETS
Cash at Bank
Accounts receivable
Inventory

What is Asset? What are the common asset

accounts?

$ 50,340
17,790
14,610

Dressmaking equipment
Land

110,700

What is liability? What are the common liability

accounts?

60,000

Building

255,000
$508,440

Less: LIABILITIES
Accounts payable

$ 20,760

Mortgage payable

201,000

ASSETS
LIABILITIES
= EQUITY

What is Owners Equity (Shareholders

Equity)?

221,760
NET ASSETS

$286,680

EQUITY
Marianas, Capital

286,680
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$286,680

Balance Sheet Accounts

The Balance Sheet (cont.)

Assets

Asset Accounts

Resources controlled by the entity as a result of past

transactions or events from which future economic
benefits are expected to flow to the entity

Liabilities
Present obligations of an entity arising from past
transactions or events, the settlement of which is
expected to result in an outflow of resources from the
entity

Equity
The residual interest of the owner/s in the assets
(less liabilities) of the entity
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Cash at bank (current)

Accounts receivable (current)
Bills receivable (either current or non-current)
Other receivables or debtors (usually current)
Prepaid expenses (usually current)
Land (non-current, fixed)
Buildings (non-current, fixed)
Plant and equipment (non-current, fixed)
Copyright, patents, etc. (non-current, intangible)

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Balance Sheet Accounts (cont.)

Balance Sheet Accounts (cont.)

Liability accounts

Equity accounts

Accounts payable (current)

Bills payable (either current or non-current)
Unearned income (usually current)
Other current liabilities
GST collections and outlays (current)
Mortgage payable (non-current)
Bonds and debentures (non-current)

Four main types of transactions

Investment of assets by owner
Withdrawal of assets by owner
Income derived
Expenses incurred
Types of accounts
Capital
Drawings or withdrawals

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The Income Statement

The Income Statement

Marianas GEN Y Fashions

The income statement, also referred to as the

Statement of Financial Performance (or a Profit
& Loss Statement), presents the financial
efforts of an entity for a given period (generally
one year).

Income Statement
For the year ended 30 June 2015
INCOME
Dress making revenue

$442,500

EXPENSES
Advertising expense

It presents information on Revenue and

Expenses, the outcome being either a Profit or
a Loss .

$ 20,250

Materials expense

91,710

Salaries & wages expense

127,800

Rent expense

40,260

Telephone expense

20,190

Light & Power expense

47,940

PROFIT

348,150
$ 94,350

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The Income Statement (cont.)

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The Statement of Changes in Equity

Income

Marianas GEN Y Fashions

Statement of Changes in Equity
For the year ended 30 June 2015

Inflows of or savings in outflows of economic

benefits that result in an increase in equity during
the reporting period

Marianas, Capital - 1 July 2014

Expenses
Decreases in equity representing the consumption or
loss of economic benefits in the form of reductions
in assets or increases in liabilities other than
distributions to owners

Net profit for the year

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94,350
$ 331,680

Less: Drawings
Mariana, Capital - 30 June 2014

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$ 237,330

45,000
$ 286,680

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The Statement of Cash Flows

The Statement of Changes in Equity (cont.)

Balance sheet

Income statement

Balance sheet

as at beginning of year

for the period

as at beginning of year

A1 L1 = E1

I E = Profit

A2 L2 = E2

Statement of owners equity

Income and expenses do not necessarily

represent cash.
Income & Expenses result in Profit/Loss. It
represents recognition of earnings as well as
expenses that can be accrued as well as some
non-cash expenses such as depreciation
Statement of cash flows reports
Cash in
Cash out
By activity type

for the period

E1 + Profit Drawings = E2
3
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In class exercise 1

The Statement of Cash Flows (cont.)

Consider the list of accounts given and categorise them as an asset, liability or
shareholders equity item that would appear on the balance sheet or a revenue or expense
that would appear on the income statement by ticking the appropriate column.

Marianas GEN Y Fashions

Statement of Cash Flows
For the year ended 30 June 2015

Asset

CASH FLOWS FROM OPERATING ACTIVITIES

Cash received from customers

$424,710

Cash paid to suppliers and employees

(342,000)

Net cash from operating activities

Cost of goods sold

Loan

Purchase of land and buildings

(315,000)

Purchase of dress-making equipment

(110,700)

Net cash used in investing activities

Equipment
Wages expense
Wages payable

(425,700)

Retained prots

CASH FLOWS FROM FINANCING ACTIVITIES

Amount borrowed under mortgage

201,000

Investment by owner

237,330

Drawings by owner

(45,000)

Accounts receivable
Accounts payable
Prepaid insurance

Net cash from financing activities

393,330

Net increase (decrease) in cash held

50,340

Cash at beginning of year

Unearned revenue
Accrued wages
Inventory

Cash at end of year

Deprecia*on

$ 50,340

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In class exercise 2

Answer:
Liability

Share capital

Shareholders
Equity

Sales

Accounts payable

14,000

Capital

Inventory

31,000

Unearned revenue

9000

Account payable

19,000

Prepaid insurance

6000

Wages expenses

13,000

Sales revenue

58,000

insurance expenses

3,000

Plant & Equipment

110,000

Loan

25,000

Cash

20,000

REQUIRED:

Accrued wages

1.Prepare an income statement for the period between Jan to 30 June 2013.
2.Whats the amount of the initial capital that Peter invested in his business?

3.Prepare balance sheet at 30 June 2013.

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Account receivable

Unearned revenue

Deprecia*on

Information:

Retained prots

Inventory

financial year, 30 June 2013. The business has the following account

Wages payable

Prepaid insurance

Peter started his small retail business in January 2013. At the end of the

Wages expense

Accounts receivable

Expense

Cost of goods sold

Equipment

Revenue

Loan

Shareholders Revenue Expense

Equity

Sales
$ 82,710

CASH FLOWS FROM INVESTING ACTIVITIES

Asset

Liability

Share capital

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Answer: Income Statement

Answer: Balance Sheet

Peters Retail
Income Statement
for the year ended at 30 June 2013

Sales
Expenses:
Wages
Insurance

13,000
3,000

Net Prot

$
58,000

16,000
42,000

Assets
Cash
Accounts Receivable
Inventory
Prepaid Insurance

Peters Retail
Balance Sheet
as at 30 June 2013
$
Liabili;es
20,000
Accounts Payable
Unearned revenue
14,000
31,000
Loan
6,000

Plant & Equipment

110,000

Total Assets

181,000

Equity
Capital
Total L + E

$
19,000

9,000

25,000
53,000
128,000
128,000
181,000

As the total L+E = A = 181,00. Equity is then 181,000-53,000 = 128,000

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Assumptions Made & Characteristics of Information (cont.)

Assumptions Made & Characteristics of Information

Financial Statement Assumptions

Qualitative Characteristics of Financial Information

Accounting entity assumption

Need to identify boundaries
Accrual basis assumption
Transactions and events recorded when they
occur
Going concern assumption
Entity will continue indefinitely
Accounting period assumption
Profit determined for a period of time
Monetary assumption

Relevance
Materiality
Comparability and consistency
Understandability
Reliability

Faithful representation
Substance over form
Neutrality
Prudence
Completeness

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Effects of Transactions on the Accounting Equation &

Financial Statements

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Example

Transactions result in changes in assets,

liabilities and equity
Every transaction affects at least
2 components of the accounting equation
After each transaction is recorded the equation
is still in balance

1. Gracie Jones deposits $35,000 in a business

bank account.
Assets
Cash at bank
(1) $35,000

=
=

Liabilities

Equity
Gracie Jones, Capital
$35 000

ASSETS = LIABILITIES + EQUITY

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Example (cont.)

Example (cont.)
3. Gracie purchases inventory for $2,500 on
credit

2. Gracie purchases a Vehicle & some Shopfittings in cash

Assets
=
Cash at bank Shop-fittings Vehicle
(1) $35,000
=
(2) -30,000 + 9,000
+ 21,000
5,000 + 9,000
+ 21,000 =

Liabilities

+
Equity
Gracie Jones, Capital
$35,000
35,000

Assets
Cash at bank Shop-fittings
(1) $35,000
(2) -30,000 + 9,000 +
5,000 + 9,000 +
(3)
5,000 + 9,000 +

35,000

=
Vehicle Inventory
21,000
21,000
+ 2,500
21,000 + 2 500

Liabilities
+
Equity
Accounts payable
Gracie Jones, Capital
=
$35,000

=
=
=

35,000
+2,500
2,500

$37,500

35,000

$37,500

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Transaction Analysis

In class exercise 3
Jeffs Pool Repairs began operations on 1 August 2013 and completed the following
transactions during the first month.
1.Jeff Drain deposited $50,000 of his personal funds in a current account at a bank
opened in the name of the business
2.Pool repair equipment was purchased at a cost of $30,000, of which $20,000 was
paid in cash. A loan payable was given for the remainder of $10,000
3.Jeff collected $6000 from customers for repair services performed.
4.Rent was paid for the month of August, $2400.
5.Supplies amounting to $2740 were purchased on credit
6.Wages of $1000 were paid as well as an account for electricity, $540.
7.Jeff paid for the supplies purchased in (5) above
8.Supplies used during August amounted to $1280
Required:
a) Prepare transaction analysis and show the effects of each of the transactions on the
accounts listed. Indicate totals after each transaction
b) Prepare an income statement and a statement of changes in equity for the month
ended 31 Aug, and a balance sheet as at 31 Aug 2013.
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Answer:

Answer

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Answer

Answer

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Basic Rules of double entry

For every DR there
must be an equal CR

When to increase &

when to decrease

DR

Tutorial
Reading: Chapter 1, 2 & 3
Tutorial:
Chapter 1

CR

Asset

Discussion Questions: 15, 16,

Problems: 1.3, 1.19, 1.22

Expense

Chapter 2

Liability

Discussion questions: 1, 7,
Problems: 2.1, 2.11,

Equity

Chapter 3
Discussion questions: 1, 3
Problem 3.1, 3.5, 3.7 & 3.15 pp. 131-140

Revenue
This will be further discussed in next weeks lecture
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