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Financial Accounting
(MBA 1)
My Contact Details:
AJ Ramgoon [B.Comm, UHDE,
MBA, Pastel (Advanced), MYOB,
ADR (SA),
PG Dip (Advanced Taxation)
Contact Number : 083 775 6211 (Mobile)
Email address : [email protected]
Chapter 1:
The Purpose of Financial Statements
To provide users with a snapshot of the
businesses performance for a specific
period.
An expression of financial health
To determine whether the business has
achieved its objectives.
Classification of Accounts
Balance Sheet Accounts “B” (Statement
of Financial Position)
Assets Tangible Assets (Types, lifespan, examples)
Financial Assets (Types, lifespan, examples)
Current Assets (Types, lifespan, examples)
Classification of AccountsBalance Sheet Accounts “B” (Statement of Financial Position)
Equity Capital accounts: Capital and Drawings
Share premium
Retained income
Classification of AccountsBalance Sheet Accounts “B” (Statement of Financial Position)
LiabilitiesCurrent (Lifespan, examples)
Non current (Lifespan, examples)
Classification of Accounts
Nominal Accounts “N” (Statement of
Comprehensive Income)
Income (profits increase; examples)
Expenses(profits decrease; examples)
Classification of Accounts
Final Accounts “F”
F1: Trading account (GP)
F2: Profit and loss account (NP)
F3: Appropriation (Tax, dividends,
Share of profits)
Income Statement Concepts
Turnover
Cost of Sales
Gross Profit
Depreciation/Asset impairment
Credit Losses/Write offs/Bad Debts
Net Profit before Tax
Income Statement Concepts
Taxation
Net Profit after Tax
Dividends
Ordinary share dividends
Preference share dividends
Retained income
Balance Sheet Concepts
Tangible Assets (vs Intangible Assets)
Accumulated depreciation
Financial Assets
• Investments
Current Assets
• Inventory
• Trade and other Receivables
• Cash (and Cash equivalents)
Balance Sheet Concepts Shareholders’ Equity
• Share capital: Authorised and Issued
• Share Premium
• Retained Income
Non Current Liabilities
• Mortgage Loan
Current Liabilities
• Trade and other Payables
• SARS Accounts
• Shareholders for Dividends
Key Ratios
The current ratio
Acid Test ratio
Stock turnover ratio
Debtors collection period
Creditors payment period
Debt ratio
Debt equity ratio
Interest cover
The Accounting Equation
A = O + L
CASH FLOW STATEMENTS
A cash flow statement reveals from where
the business has received its cash (funds) and
the way the cash (funds) was used within a
financial period.
The changes in cash flow are determined by
comparing one year’s figures with another
years figures.
CASH FLOW STATEMENTS
The cash flow statement essentially
accounts for the change in the bank/cash
balance from one year to another as a result
of the following activities:
CASH FLOW STATEMENTS
1. Operating Activities: Information is obtained from the current income statement and the working capital section of the balance sheet.
2. Investing Activities: Information is obtained from the fixed assets and investment sections of the balance sheet.
3. Financing Activities: Information obtained from the
capital employed section (own capital and borrowed
capital) of the balance sheet.
WHO ARE THE PRIMARY USERS OF FINANCIAL STATEMENTS
Shareholders and potential shareholdersThe suppliers of short term credit
(Creditors)The suppliers of long term credit
(Financial Institutions)ManagementUnions/StaffAuditorsSARS
Demystifying Key Ratios
Liquidity Ratios 1. The Current ratio
Current ratio = Current AssetsCurrent Liabilities
Acid Test Ratio = Current assets – Inventory
Current liabilities
Efficiency Ratios
Rate of stock turnover = Cost of goods sold Average stock
Average Collection period = Accounts Receivable X 365
Credit sales 1
Average Payment Period = Accounts Payable X 365 Credit Purchases 1
Interest Cover Ratio
The Debt Equity Ratio
End of Chapter 1