6 chpt 3&4

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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008

Slide 3.1

Drs. Galama, Stenden University

LEARNING OUTCOMES

You should be able to

prepare an income statement from relevant

financial information;

discuss the nature and purpose of the

income statement;

explain the main accounting conventions

underpinning the income statement.

discuss the main measurement issues that must beconsidered when preparing the income statement;

Chapter 3 Measuring and reporting financial performance

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Slide 3.2


Measuring profit

Total revenue for the periodless

Total expenses incurred in generating that revenue

Profit(or loss)

for the

period

=

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Slide 3.3


Revenue generated by Rolls-Royce plc during the year

ended 31 December 2006

(3,775m)

Civil aerospace (1,300m)

Marine

(512m)

EnergyDefence aerospace

(1,569m)

53%

18%

22%7%

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Slide 3.4


Relationship between the income statement and the

balance sheet

The above equation can be extended to:

Profit

(Loss)Assets Equity Liabilities

+

()= +

+Sales

revenue

Expenses Liabilities+Assets Equity=

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Slide 3.5


Example 3.1 Better-Price Stores

Income statement for the year ended 31 October 2008

Sales revenue 232,000

Cost of sales (154,000)

Gross profit 78,000

Salaries and wages (24,500)

Rent and rates (14,200)

Heat and light (7,500)

Telephone and postage (1,200)

Insurance (1,000)

Motor vehicle running expenses (3,400)

Depreciation fixtures and fittings (1,000)

Depreciation motor van (600)

Operating profit 24,600

Interest received from investments 2,000

Loan interest 1,100

Profit for the year 25,500

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Slide 3.6


Calculating gross profit for Better-Price Stores

Sales revenue 232,000

Cost of sales:

Opening inventories 40,000

Goods bought 189,000

Closing inventories (75,000) (154,000)

Gross profit 78,000

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7/34Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008

Slide 3.7


Profit measurement and the recognition of revenue

It is probable that the economic

benefits will be received

The amount of revenue can be

measured reliably

Basic criteria that must be met

before revenue is recognised

Additional criterion is to be

applied where the revenue comes

from the sale of goods

Ownership and control of the

item should pass to the buyer

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Slide 3.8


Accounting for sales commission

Sales commission

expense6,000

Income statement

(profit and loss

account)

Balance

sheetat year

end

Cash 5,000

Accrual 1,000

Cash flow

statement

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Slide 3.9


Accounting for rent payable

Rent payable expense16,000

Income statement

Balance

sheetat year

end

Cash 20,000

Prepaid expense 4,000

Cash flow

statement

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Slide 3.10


Accounting conventions and the income statement

Accruals

Materiality

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Slide 3.11


Profit measurement and the calculation of depreciation

The useful life of the asset

The residual value of the asset

The cost (or fair value) of the asset

To calculate a depreciation charge for a period, fourfactors have to be considered:

The depreciation method.

Slid 3 12

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Slide 3.12


Graph of written-down value against time using the

straight-line method

Written

-do

wnvalue(

000)

Asset life (years)

20

40

60

80

0 1 2 3 4

Slid 3 13

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Slide 3.13


Written

-do

wnvalue(

000)

Asset life (years)

20

40

60

80

0 1 2 3 4

Graph of written-down value against time using the

reducing-balance method

Slide 3 14

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Slide 3.14


Calculating an annual depreciation charge

Year 1 Year 3Year 2 Year 4

and so on

Depreciation DepreciationDepreciationDepreciation

less

Residual value

equals

Cost (fair value)

Depreciable amount

Asset life (number of years)

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Slide 3.15


Last in, first out (LIFO)

Weighted average cost (AVCO).

First in, first out (FIFO)

Common assumptions used are:

Profit measurement and inventory costing methods

Slide 3 16

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Slide 3.16


Uses of the income statement

Provides information on how

effective the business has been in

generating wealth

Provides information on how the

profit was made

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Slide 3.17


LEARNING OUTCOMES

You should be able to

describe the main features of the owners claim

in a limited company;

discuss the nature of the limited company;

explain how the income statement and balance

sheet of a limited company differ in detail from that

of a sole proprietorship or a partnership business.

discuss the framework of rules that surround

accounting for limited companies;

Chapter 4 Accounting for limited companies

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Slide 3.18


Main features of a limited company

Limited liability

Perpetual life

Slide 3.19

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Slide 3.19


Two main forms of limited company

Private limited company (Ltd)

Public limited company (plc)

Slide 3.20

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Slide 3.20


The economic importance of public limited companies an example

Market share of the four largest grocers: 12 weeks to 15 July 2007

11.1%

Morrison

Other

24.5%

16.7%

Asda

16.2%

Sainsbury

Tesco

31.5%

Slide 3.21

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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. Galama, Stenden University

Corporate governance

Accountability

Disclosure

Fairness.

Three guiding principles:

Slide 3.22

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The Combined Code

Every listed company should have a

board of directors

There should be a clear division of responsibilities

between the chairman and the chief executive officer

There should be a balance between

executive and non-executive directors

Appointments to the board should be subject to

rigorous, formal and transparent procedures

The board should receive timely information

Slide 3.23

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The Combined Code (Continued)

All directors should submit themselvesfor re-election at regular intervals

The board has a responsibility for ensuring that a

satisfactory dialogue with shareholders occurs

There should be formal and transparent procedures

for developing policy on directors remuneration

Boards should use the annual general meeting tocommunicate with private investors

Slide 3.24

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The Combined Code (Continued)

Formal and transparent arrangements should be

in place for internal controls and financial

reporting and for maintaining a relationship with

auditors

Internal controls should be in place to protect

the shareholders wealth

The board should publish a balanced and

understandable assessment of the companys

position and performance

Institutional shareholders have a responsibility touse their votes

Slide 3.25

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Share

issues

Long-term

loans

Long-term finance

Retained

profits

Sources of long-term finance for a typical limited company

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Further issues of new shares

Public issues

Rights issues

Private placings

Slide 3.27

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Notavailable

for

dividend

Share capital(at nominal

or par value)

Capital

reserves

Revenuereserves

Available

for

dividend

Availability for dividends of various parts of the shareholders claim

Slide 3.28

E l 4 5 D Sil l

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(12)Printing and stationery

(4)Insurance

(20)Motor vehicle expenses

(24)Rent and rates

(18)Heat and light

(98)Wages and salaries

320Gross profit

(520)Cost of sales

840Revenue

m

Example 4.5 Da Silva plc

Income statement for the year ended 31 December 2008

Slide 3.29

E l 4 5 D Sil l (C ti d)

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(45)Depreciation

(4)Audit fee

95Operating profit

(10)Interest payable

85Profit before tax

(24)Taxation

61Profit for the year

m

Example 4.5 Da Silva plc(Continued)

Income statement for the year ended 31 December 2008

Slide 3.30

Example 4 5 Da Silva plc

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m

305

50Other reserves

25Retained earnings

30Share premium account200Ordinary shares of 0.50 each

Equity

516Total assets

213

36Cash

112Trade receivables

65Inventories

Current assets303

100Intangible assets

203Property, plant and equipment

Non-current assets

Example 4.5 Da Silva plc

Balance sheet as at 31 December 2008

Slide 3.31

Example 4 5 Da Silva plc (Continued)

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Non-current liabilities

100Borrowings

Current liabilities

99Trade payables

12Taxation

111516Total equity and liabilities

m

Example 4.5 Da Silva plc(Continued)

Balance sheet as at 31 December 2008

Slide 3.32

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Accounting standards

how information should be

presented;

how assets should be valued;

what information should be

disclosed;

how profit should be measured.

Deal with issues such as:

Slide 3.33

S f t l ti l ti f UK bli li it d li t d th

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Company

law

International

financial

reportingstandards

External

accounting

rules

Stock Exchange rules

imposed by FSA

Sources of external accounting regulations for a UK public limited company listed on the

London Stock Exchange

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The relationship between the shareholders, the directors and the auditors

Elect

Report

ElectReview

Account

Shareholders Auditors

Directors

Documents

6 chpt 3&4