Accounting Information Updated

The Need for
Accounting
Information
Accounting – the process of using accepted
methods and procedures to classify analyse and
summarize the financial records of a business.
According to The American Accounting

Association accounting is the process of
identifying, measuring and communicating
economic information to permit informed
judgements and decisions by users of the
information. This Photo by Unknown Author is licensed under CC BY-SA-NC
Who Uses Accounting Information? 3
A number of different individuals and groups have a stake in how a company is run:
Internal Users – individuals or groups within an organization such as managers and
shareholders (investors)
External Users – individuals and groups outside the organization such a suppliers,
customers and the local community.
These users utilize the accounting information I different ways.
Shareholders – want to know that the company is managed well. They are interested in
the financial performance of the company in terms of sales and profits, the net wealth of
the business, the solvency of the business (whether it has sufficient cash balance to keep
on trading) and the directors benefits ( to check the benefits and renumeration of
directors to make sure it is not disproportionate to the success of the business)
Who Uses Accounting Information?
4
Creditors – Financial institutions and other businesses that supply a business with credit. Before making
credit available a creditor might want to check the financial statements of the purchaser to check
whether they are likely to pay when the credit becomes due for payment.
Suppliers are also creditors as they supply goods and services on credit. They are therefore interested in
the customers solvency to ensure they receive payments.
Oher Users –
Customers – want to have confidence in the financial stability of the company to ensure continuing
supplies.
Employees – want to know the company is financially stable and is able to to offer a secure future.
Government – needs to be able to assess tax liabilities based on published financial information.
Members of the local community in which the company is located may want to check the viability of the
company especially if it is a provider of local jobs.
5
The Main Financial Accounting Statements

• The purpose of financial accounting statements is to show the financial position of a
business at a particular point in time and to show how that business has performed over a
second period. The three main financial accounting statements are:
•
The profit and loss account for the reporting period – the income statement is a historical
record of the trading of a business over a specific period (normally one year)
• The balance sheet for the business at the end of the reporting period – shows what
resources (assets) are owned by a business and what it owes to others (liabilities) at a
particular point in time.
• The cash flow statement for the reporting period- a cash flow statement shows the cash
inflows and cash outflows for a business over the past twelve months.
Components of
Financial Statements
Income Statements
7
Income Statement
Key Terms
Income Statement – one of the main financial
One of the most frequently used financial statements.
statements showing the revenues, cost of
It shows the profit or loss made by a business in a sales, expenses and income of a business over
particular accounting period (often a year but can be a period of time.
for a shorter period) Profit – the amount by which sales revenue
Companies make profits or loss based on selling items (also called turnover or income) exceeds
expenses (or costs) for the period being
or providing services.
measured.
To determine profit, subtract the cost of making the Gross Profit – Profit calculated as the sales of a
sales and the expenses of running the business from business minus the costs associated with
the value of the sales making the sales
Net Profit – The profit of a business after the
cost of sales and other expenses have been
deducted.
8
Income Statement
The main lines in the income statement:
Category Explanation
Revenues Revenues (sales) during the period are recorded first. This is the total value of sales made to
customers
Cost of Sales The direct cost of generating the recorded revenues goes into “cost of sales” This includes
cost of raw materials, components, goods bought for resale and the direct labour costs of
production
Gross Profit The difference between revenue and cost of sales. The gross profit margin (%) is a simple
measure of how much profit is generated for every $ of revenue before overheads and other
expenses are taken into account.
Distribution and Administration Operating costs and expenses that are not directly related to producing the goods or services
Expenses (Operating Expenses) recorded here. This includes distribution costs (e.g. marketing, transport etc) and the range of
administrative expenses and overheads (e.g. rent) that a business sincurs.
Operating Profit A record of how much profit has been in total from the trading activities of the business
before any account is taken of how the business id financed.
9
Income Statement
The main lines in the income statement:
Category Explanation
Finance Expenses Interest paid on bank and other borrowings, minus interest income received on cash balances.
This is a useful figure which shareholders can use to assess how much profit is being used up
by the funding structure of the business
Profit Before Tax Calculated operating profit less (minus) finance expenses
Tax An estimate of the amount of corporation tax that is likely to be payable on the recorded
profit before tax.
Profit attributable to The amount of profit that is left after the tax has been accounted for. The shareholders then
shareholders decide how much of this is paid out to them in dividends and how much is left in the buiness
(retained earnings in the equity section of the balance sheet).
Income Statements 10
31, March 2023

$000
Gross Profit : Sales revenue – Cost of
Sales = Gross Profit
Sales Revenue 4,901.4
Cost of Sales (2,689.5) 4,901.4 – 2,689.5 = 2,211.9
Operating Profit : Gross Profit --
Gross Profit 2,211.9
Operating Expenses = Operating Profit
Operating Expenses ( 1,614.7) 2,211.9 – 1, 614.7 = 597.2
Operating Profit 597.2 Profits Before Tax : Operating Profit +/-
Net Interest = Profit before tax
Net Interest 15.3
597.2 +15.3 = 612.5
Profits Before Tax 612.5
Net Profit : Profit before tax – Tax = Net
Taxes paid (104.3) Profit
Net Profit 508.2 612.5 – 104.3 = 508.2
Making Comparisons 11
31, March 2023 31 March 2024

$000 $000 The presentation of income statements
needs to be consistent so that statements
Sales Revenue 4,901.4 6,405.1
from different companies and different
periods of time can be compared to each
Gross Profit 2,211.9 2,896.7
other.
Operating Profit 597.2 828.2 In an income statement the sales are often
Profits Before Tax 612.5 834.8
referred to as the top line.
The bottom line is the net profit (the profit
508.2 689.7 after all deductions have been made).
Net Profit
Profit figures for XYZ Company for 2023 and 2034

Practice Question 12
31, March 2023

$000 The income statement for Sea
Sales Revenue 5,000 Island Cotton is shown at the left.
Cost of Sales (2,000)
Gross Profit A
Calculate the values for the letters
A, B, C & D.
Operating Expenses
Marketing (750) Why is there a difference between
Administration (1,500)
Operating Profit B the gross profit and the net profit
of a business ?
Net Interest 10
Profit Before Tax C
Taxes (50)
Net Profit D
Thank You

Accounting Information Updated

Uploaded by

Copyright:

Available Formats

Accounting Information Updated

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Information Updated

Uploaded by

Copyright:

Available Formats

The Need for

According to The American Accounting

The Main Financial Accounting Statements

31, March 2023

31, March 2023 31 March 2024

Profit figures for XYZ Company for 2023 and 2034

31, March 2023

Profit Before Tax C

You might also like