Project Cost

Management
Module 4
Financial Statement Analysis
Module 4: Agenda

• Basic Accounting principles and terminology

• Balance Sheet and Income Statements
• Depreciation
• Group Assignment – Financial Ratios
• Quiz 2

2
Definition of Accounting
The method of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and
events which are, in part at least, of a financial character, and
interpreting the results thereof.

Accounting:
• How a business records, organizes, and understands its
financial information
• How to get a clear picture of your financial position

3
Corporate Accounting Vs Project Accounting

Corporate Accounting Project Accounting

Mandatory process Beneficial for project control
Based on a historic records Takes a futuristic view
Conforms to Generally Accepted No set standards established
Accounting Principles (GAAP)
Subject to financial audits Audit is dependent on the project
management governance structure
Spans fiscal periods Spans the project life span
Includes accruals Relies on forecasts

4
Financial Statements
Financial statements are a collection of summary-
level reports about an organization's financial
results, financial position, and cash flows. They
include the income statement, balance sheet, and
statement of cash flows.

Source: Accountingtools.com

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Users of Financial Statements

• Management
• Shareholders
• Prospective Investors
• Lenders & Suppliers
• Customers
• Competitors
• Governments

6
Types of Business Organizations

• Proprietorships
• Partnerships
• Corporations

https://www.youtube.com/watch?v=A-Up-JUkaj0&t=5s

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 Accounting Concepts & Principles

The Entity The Reliability The Cost

Concept (Objectivity) Principle
Principle
The cost principle states
An accounting entity is an
that assets and services
organization or a section
should be recorded at
of an organization that
their historical
stands apart from other
organizations and Accounting records and (purchasing) cost.
individuals as a separate statements are based on
economic unit. the most reliable data
available so that they will Could encounter
be as accurate and useful differences between
as possible. Reliable data historical and actual costs.
From an accounting
are verifiable and may be
perspective, sharp
confirmed by an
boundaries are drawn
independent observer.
around each entity so as
not to confuse its affairs IFRS addresses this
with those of other
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problem .
entities.
Financial Statements Types

1. Statement of Financial Position or Balance Sheet

2. Statement of Income
3. Statement of Changes in Equity
4. Statement of Cash Flows

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 Balance Sheet & Income Statement
15 minutes total

https://www.google.com/search?q=what+is+a+balance+sheet+vs+income+statement&sou
rce=lmns&tbm=vid&bih=586&biw=1200&hl=en-US&sa=X&ved=2ahUKEwi5sq7lk93-
AhWJF2IAHfKICrUQ_AUoAnoECAEQAg#fpstate=ive&vld=cid:c28c45c8,vid:wZdaVEX41WQ

https://www.google.com/search?q=what+is+a+balance+sheet+vs+income+statement&sou
rce=lmns&tbm=vid&bih=586&biw=1200&hl=en-US&sa=X&ved=2ahUKEwi5sq7lk93-
AhWJF2IAHfKICrUQ_AUoAnoECAEQAg#fpstate=ive&vld=cid:0dcee93f,vid:oMu_nW6fExY

10
 Balance Sheet
• Lists all the assets, liabilities, and owner’s equity of an entity as of a
specific date, usually the end of a month or a year.

• Is like a snapshot of the equity.

• The accounting equation (or basic accounting equation) offers a simple

way to understand how these three parts of the Balance Sheet relate to
each other.

Assets = Liabilities + Owner's Equity

• The accounting equation must be "in balance“, meaning the left side
should always equal the right side.

• Because there are two or more accounts affected by every transaction,

the accounting system is referred to as double-entry accounting.
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 ASSETS LIABILITIES Balance Sheet
Current Assets: Accounts Payable
Cash Notes Payable • Assets - are a company's
Cash Equivalent / Near Accrued Interest
Cash Payable resources (what it owns).
Short Term Due to Government • Liabilities - are a company's
Investments Loans Payable

=
Accounts Receivable obligations (what it owes to
+ others)
Allowance for Bad
Debt
Notes Receivable • Owner's Equity (the difference
Interest Receivable between assets and liabilities)
Inventories EQUITY
Prepaid Expense of – also called Net Assets.
Supplies Stakeholders’
Equity Retained Liabilities can be viewed in two
Non-Current Earnings
(for corporations) ways:
Assets:
Long Term Investments
Owners’ Capital
1. As claims by creditors against
Land
Building
(for sole the company's assets, and
proprietorships)
Furniture & Fixtures 2. As a source—along with
Equipment
Accumulated
Partners’ Capital owner or stockholder
(for partnerships)
Depreciation
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equity—of the company's
assets.
 Balance Sheet - Example
Company A - Statement of Financial Position
for the year ended 31 December ($ '000)

2014 2013 2014 2013

EQUITY AND LIABILITIES
ASSETS Current liabilities
Current assets Accounts payables 35,000 25,000
Cash and cash equivalents 8,000 10,000 Short-term borrowings 10,000 8,000
Accounts receivables 25,000 30,000 Current tax payable 5,000 2,000
Inventories 12,000 10,000 Current portion of long-term 15,000 15,000
Prepaid expenses 3000 2000 65,000 50,000
48,000 52,000
Non-current liabilities
Long term borrowings 35,000 40,000
Non-current assets Total liabilities 100,000 90,000
Property, plant & equipment 130,000 120,000
Intangible assets 60,000 50,000 Equity
Goodwill 30,000 30,000 Share capital 100,000 100,000
220,000 200,000 Retained earnings 68,000 62,000
Total equity 168,000 162,000

TOTAL ASSETS 268,000 252,000 TOTAL EQUITY AND LIABILITIES 268,000 252,000

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Transaction Example
Company A borrowed $20,000 from the bank using a line of
credit.

Results of Journal Entry

Cash balance increases by $20,000. --> Increase in Assets
Short term Borrowings balance increases by $20,000. --> Increase in Liabilities

Journal Entry
Debit Credit
Cash 20,000
Short term Borrowings 20,000

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Balance Sheet - Example
Company A - Statement of Financial Position
for the year ended 31 December ($ '000)

2014 2013 2014 2013

EQUITY AND LIABILITIES
ASSETS Current liabilities
Current assets Accounts payables 35,000 25,000
Cash and cash equivalents 28,000 10,000 Short-term borrowings 30,000 8,000
Accounts receivables 25,000 30,000 Current tax payable 5,000 2,000
Inventories 12,000 10,000 Current portion of long-term 15,000 15,000
Prepaid expenses 3000 2000 85,000 50,000
68,000 52,000
Non-current liabilities
Long term borrowings 35,000 40,000
Non-current assets Total liabilities 120,000 90,000
Property, plant & equipment 130,000 120,000
Intangible assets 60,000 50,000 Equity
Goodwill 30,000 30,000 Share capital 100,000 100,000
220,000 200,000 Retained earnings 68,000 62,000
Total equity 168,000 162,000

TOTAL ASSETS 288,000 252,000 TOTAL EQUITY AND LIABILITIES 288,000 252,000

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The Accounting Equation balances after the transaction
How can you increase the Owner’s Equity?
• Owner’s investment
• Net Profit

How would the owner’s equity decrease?

• Owner’s withdrawal
• Net Loss

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 Income Statement
• Presents a summary of the revenue and expenses of an equity for a
specific period of time, such as a month or a year.

• Also called the statement of earnings or statement of operations

• Presents a moving financial picture of business operations during

the period. If expenses exceed revenues, a net loss results for the
period.

REVENUE

NET INCOME
= -
EXPENSE
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 Income Statement - Example
Global, Inc.

(Consolidated) Statement of Income and Expense

for the year ended 31 December ($ millions)

2021 2020

Revenue 201.9 182.1

Cost of sales 158.4 151.6

Gross profit 43.5 30.5

Selling and distribution expenses 9.8 8.9

General and administrative expenses 14.0 11.0

23.8 19.9

Operating profit/earnings before interest and taxes (EBIT) 19.7 10.6

Interest income 1.3 0.6

Interest expense 3.6 2.8

Profit/ Loss from investments 6.9 5.5

Earnings before taxes 24.3 13.9

Income taxes
18 6.0 4.2

Net income 18.3 9.7

Exercise 1 -Chuck Beavers opens a Bed & Breakfast business next to
Humber College North Campus in Toronto. He is the sole owner of
the proprietorship, which he names “Beavers B & B”. During the first
month of operations, January 2010, the following transactions
occurred:

(a) Beavers invest $ 35,000 of personal funds to start the business.

(b) The business purchases, on account, equipment costing $ 350
(c) Beavers B & B pays cash of $ 30,000 to acquire a parcel of land.
The business intends to use the land as a future extension.
(d) The business provided lodging services for clients and receives
cash of $ 1,900.
(e) The business pays $ 100 on the account payable created in
Transaction (b).
(f) Chuck Beavers pays $ 2,000 of personal funds for a vacation for
his family.
(g) The business pays cash expenses for office rent, $ 400, and
utilities, $ 100
(h) The business returns to the supplier part of the equipment
that cost $ 150. The extra components of equipment was
shipped.
(i) Chuck Beavers withdraws $ 1,200 cash for personal use.

(j) Chuck has $5100 cash on hand.

Required:

(A) Analyze the preceding transactions in terms of their effects on

the accounting equation of Beavers B & B.
(B) Prepare the income statement, statement of owner’s equity,
20
and balance sheet of Beavers B & B after recording the
transactions.
 Transaction Answers
• April 9 – Collected $3000 cash on Accounts Receivable
• April 14 – Paid $2000 cash on the Accounts Payable
• April 17 - Bought $ 300 supplies on account.
• April 19 - Tom Golden invested $ 2,000 in cash.
• April 20 - Paid $ 1,100 cash on the Accounts Payable.
• April 22 – Sold piece of land for $6000
21 • April 25 – Returned $200 of supplies on Account
• April 26 – Paid cash $200 for office supplies
 Depreciation
A S S ET S
• Depreciation is an Current Assets
accounting method of Cash $123,000
Short term investments $200,000
allocating the cost of a Accounts Receivable $345,000
tangible asset over its useful Inventories $100,000
life and is used to account Total Current Assets $768,000
for declines in value.
Long-Term Assets
Building $350,000
• Businesses depreciate long- - Accumulated Depreciation $–50,000
term assets for both tax and Net Building $300,000
accounting purposes Land $325,000
Total Long-Term Assets $625,000

Total Assets $1,393,000

https://www.google.com/search?q=what+is+depreciation&source=lnms&tbm=vid&sa=X&ved=2ahU
22 KEwiQxtXEz57_AhX6tYkEHSXoB0AQ_AUoA3oECAEQBQ&biw=1280&bih=721&dpr=2#fpstate=ive&vld
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 Depreciation Methods

23
Financial Ratio Analysis -
Group Assignment
Group Assignment – Financial Ratios
• BB/Group Assignments/ Financial Ratios
• Each group has specific ratios assigned – See Assignment
• The following 4 topics must be covered in your presentation:
1. Equation for the specific ratio
2. Explanation of the ratio
3. Practical application of the ratio
4. Simple numeric example using the ratio
• Create a professional presentation to your shareholders (the class)
• Due June 6
• Presentations – June 7th

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QUIZ 2