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Financial Awareness
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Financial Statements
At the end of an accounting period, the business accounts for its
activities by producing three main financial statements:
Profit & Loss Statement
Cash Flow Statement
Balance Sheet Statement
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Profit and Loss Statement
The Profit and Loss Statement reports sales and expenses of the
business over a period of time.
SalesCosts and Expenses
It reports the sales made during the period and the costs andexpenses relating to those sales
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Profit and Loss Statement
The Profit and Loss Statement starts with Sales
Sales
$100
The Sales account records the amount charged tocustomers for goods or service supplied
Various costs and expenses are then deducted from
sales to reveal profit or loss
Costs and expenses refer to the amount of money
incurred in running the business during the relevantperiod
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Profit and Loss Statement
The Profit and Loss Statement starts with Sales
Sales
$100 Gross
Profit
$60
The first costs deducted are Cost of Sales. These
are costs directly associated with the
manufacture of products, the purchase ofproducts for resale, or the cost of providing a
service to a customer
Deducting Cost of Sales from Sales leaves us
with Gross Profit
Costsof
Sales
$40
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Profit and Loss Statement
Sales
$100 Gross
Profit$60
Expenses
$30
The next costs deducted are other Expenses.
These are costs which are incurred in the
daily running of the company such as Sales
Expenses, Marketing Expenses, Advertising
Expenses, Administrative Expenses...
Costs
Sales
$40
of
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Profit and Loss Statement
Sales
$100 Gross
Profit$60
Expenses
$30
Operating
Profit
$30
Deducting Expenses from Gross Profit
leaves us with Operating Profit
Gross Profit and Operating Profit reflect
the results achieved in managing the
business
Costs
Sales
$40
of
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Profit and Loss Statement
Sales
$100 Gross
Profit$60
Expenses
$30
Operating
Profit
$30
Costs
Sales
$40
of
PBT
$25
The next costs deducted are other
expensesTaking other expense/income
from operating profit leaves us
with Profit Before Tax (PBT)
OtherExpense $5
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Profit and Loss Statement
Sales
$100 Gross
Profit$60
Expenses
$30
Operating
Profit
$30
Costs
Sales
$40
of
PBT
$25
OtherExpense $5
Tax$7
PAT
$18
PBT minus CorporateIncome Tax shall be
equal to Profit After Tax
(PAT)
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Profit and Loss Statement
Sales
$100 Gross
Profit$60
Expenses
$30
Operating
Profit
$30
Costs
Sales
$40
of
PBT
$25
Other
Expenses $5
Dividends-$12
Finally, dividends paid
to shareholders of the
company are deducted
from Profit after Tax
to leave Retained
Earnings
Retained
Earnings $6
Tax
$7
PAT
$18
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Profit and Loss Statement
Profit & Loss StatementFor the Year Ended 31/12/200x
Sales $100
Cost of Sales 40
Gross Profit 60Expenses 30
Operating Profit 30
Other Expense/(Income) 5
Profit Before Tax 25
Dividends 12
Retained Earnings 6
Corporate Income Tax 7Profit After Tax 18
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Balance Sheet Statement
The Balance Sheet Statement shows the assets, liabilities and
equity of a business at a point in time
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Balance Sheet Statement
Assets:
There are two main types of assets
Fixed Assets
Current Assets
Total Assets+
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Balance Sheet Statement
F ixed Assets:
Fixed assets are assets held permanently in the business and not
intended for resale, such as
Vehicles Building
Plant and Equipment
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Balance Sheet Statement
Current Assets:
Current assets are cash or other assets that will be
converted into cash in the normal course of business
within 12 months such as
DebtorsStock
Cash
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Balance Sheet Statement
Total Assets - Summary:
Land
Buildings
Plant & MachineryFixtures & Fittings
Vehicles
Raw Materials
Work in Progress
Finished Goods
Debtors
Cash
Fixed Assets
Current Assets
Total Assets
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Balance Sheet Statement
LiabilitiesThere are two main types of liabilities
Long-Term Liabilities
Short-Term Liabilities
Total Liabilities
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Balance Sheet Statement
Long Term L iabi l i ties
Long-term liabilities are debts to berepaid after one year
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Balance Sheet Statement
Short Term Liabil i ties
Short-term liabilities are debts to be
repaid within one year
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Balance Sheet Statement
Short-Term Liabi l i ties - Trade Creditors
Trade creditors are amounts owing to suppliers for products and
services bought but not yet paid for.
For example:
Suppli ers of raw mater ialsTelephone bil l
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Balance Sheet Statement
Short-Term L iabi l i ties - Other Creditors
Other creditors are amounts owing to others.
For example:
Government Authorities:
(VAT, PIT)
Owners:
(Dividends)
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Balance Sheet Statement
EquityEquity has two components
Contributed Capital
Retained Earnings
+ Equity
Contributed Capital is the money the owners have injectedinto the business
Retained Earnings are the cumulative profits that have not
been paid as dividends to the owners
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Balance Sheet Statement
Assets
Fixed Assets - Net Book Value $200
L iabil ities & Equity
Long-term Liabilities $200
Balance Sheet Statement31-12-200x
Current Assets 150
Total Assets $350
Short-Term Liabilities 50
Equity 100
Total $350
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Cash Flow Statement
The Cash Flow Statement reports the cash inflows and
outflows of a business during an accounting period.
Cash flow from
operating activities
Cash flow from
investing activities
Cash flow from
financing activities
It is designed to provide cash flow information about 3
activities of a business:
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Cash Flow Statement
Cash f low from operating activities
-
Net cash flows from operating activities
Inflows
- Collection from customers
- RecU&NIpts of interest and dividends
- Tax refunds- Other operating cash recU&NIpts
- Payments to suppliers
Outflows
- Payments to employees
- Payment of income tax
- Other operating cash payments
- Interest payments
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Cash Flow Statement
Cash flow from I nvesting activities
-
Net cash flows from investing activities
Inflows
- Sales of Investments
- Collection on loans
- Sales of fixed assets
Outflows
- Purchase of fixed assets
- Investments
- Making loans
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Cash Flow Statement
Cash f low from financing activities
-
Net cash flows from financing activities
Inflows: Outflows:
- Issuance of equity securities
- Issuance of long-term debt
- Payment of dividends
- Payment of long-term debt
- Repayment of amount borrowed- Borrowings
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Cash Flow Statement
Cash flows Statement
- Net Cash Flows from Operating Activities $100
- Net Cash Flows from Investing Activities (200)
- Net Cash Flows from Financing Activities 30
For the Year Ended 31-12-200x
Net Increase/(Decrease) in Cash (70)
Cash at beginning of the year 120
Cash at end of year 50
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