L2 Lecture notes - Statement of Financial Position (SOFP) PDF

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Statement of Financial Position (SOFP)...

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MN30170:Fundamentals of accounting and financial management Statement of Financial Position (SOFP) “Accounting and Finance for Non-Specialists” by Atrill & McLaney, 10th Edition. The ISBN of this text is: 978-1-292-13560-1.

LECTURE 2

The Accounting Equation

We don’t have assets: the balance sheet will be impacted on buying assets with credits. NO cash, amount of assets increasing Debit assets (haven’t paid yet) Only have to pay in a month’s time (liability) Trade payables

Types of CompaniesTom and Company SOFP as at 1st October

This is how we will answer in the exam Income statement and the balance sheet Assets always = liabilities

SOFP as at 2nd October

Owner introduces 6000 into business bank account Owners’ equity increases by 6000 SOFP as at 3rd October

Bought 2nd hand car for 3000 paid by cheque Asset increase by 3000 Cash is a being reduced Net effect still have cash in account Replaced short term asset with a long term asset

SOFP as at 4th October

Repaid lender 4000 by cheque owe money to bank, decrease cash by 4000 decrease liability/ borrowing by 4000 ASSETS ON TOP LIABILITIES BELOW

SOFP as at 5th October

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In practice, we don’t draw up a balance sheet every day, we just draw one up at the end of a s uitable accounting period Usually m  onthly/quarterly for management accounting, half-yearly/annually for financial accounting ▪

On 7th October the business sells all the inventories for £7,000 cash

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What is the effect on the SOFP? o We have 5000 of inventories o We have made 2000 profit (3 diff: gross operating and net) o We will use the indirect method for the course Three fold effect

The effect of trading operations on the SOFP

Non-curre nt

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Assets that are held for the long-term (>1yr) o o o o o

ASSETS Current SHORT TERM

Land Buildings Plant &equipment Vehicles Computers

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Assets held for the short term

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Have ANY of the following characteristics: ▪

Held for sale or consumption in the normal course of business

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Expected to be sold within the next year

NB can refer to purpose of business here. Eg property developers hold land/buildings as current assets to sell, car dealership holds vehicles as current assets to sell, etc. whereas for most businesses land/buildings are held for the long term as a place from which to run the business, vehicles used long term for sales and deliveries, etc.

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Depreciate, reduce in value, NOE: normal operating expense

The circulating nature of current assets

MN30170:Fundamentals of accounting and financial management

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Held primarily for trading

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Cash or near cash o Inventories (stock) o Trade receivables (debtors) o Cash

IMPAREMENT In most businesses (except retailing) sales are made on credit, that is, the goods or services are sold to the customers on one date, who are then given a period of time (usually 30 days) to pay.

Current liabilities SHORT TERM

Amounts due to be paid in the short term Have ANY of the following characteristics: ▪ Expected to be settled in the normal course of business ▪

Expected to be settled within the next year

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Held primarily for trading

Examples ▪ Trade payables (creditors)

CLAIMS

▪ Non-current liabilities

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EXERCISE

The equation for the standard layout

Bank overdraft

Amounts due to be paid after more than 1 year Examples ▪ Long-term loans Debentures corporate debt, issued for the benefit of raising long term funding from investors Pay coupon – Annual amount paid as interest NB obviously over time non-current liabilities will become current as the payment date will eventually shorten to be within one year. There is then a reclassification. Label each item as one of: Current asset, Non-current asset, Current liability, Non-current liability, Capital ▪

Delivery van: NCA

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Bank loan to be repaid in 2 years’ time NCL

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Money owed by customers C  A

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Cash in the office safe CA

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Electronic parts to be used in production process NCA

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Bank overdraft CL

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Money the owner put into the business C  (EQUITY)

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Office computer NCA

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Unpaid electricity bill CL (Accrul, Unpaid operating expense)

MN30170:Fundamentals of accounting and financial management -

Uses of Statement of Financial Position

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Conclusion

Cant value a brand, subjective worth. It is all perception Goodwill is also not a value to the business o Unless, there’s cash involved, it is sold

It shows how the business is financed a nd how its funds are deployed It can provide a basis for assessing the value  of the business Relationships between assets and claims can be assessed Performance can be better assessed Statement of Financial Position – A.k.a. Balance Sheet Transactional impact on: – Assets • Non-current assets • Current assets – Liabilities • Non-current Liabilities • Current Liabilities...