ACCOUNTING EQUATION

ASSETS = CAPITAL + LIABILITIES

ASSETS-LIABILITES = CAPITAL

3 REASONS WHY CAPITAL SHOULD CHANGE OVER TIME:

INCREASE IN NET ASSETS= PROFIT – DRAWING + CAPITAL INTRODUCED

CALCULATION FOR TRADERS NET PROFIT

PROFIT = CLOSING NET ASSET + DRAWING – CAPITAL INTRODUCED- OPENING NET ASSETS

TERM NET ASSETS = ASSETS – LIABILITES

CLOSING NET ASSETS – OPENING NET ASSETS= PROFIT – DRAWING + CAPITAL INTRODUCED

STATEMENT OF FINANCIAL POSITION – AS AT

STATEMENT OF PROFIT OR LOSS – FOR THE YEAR ENDED

TRADING ACCOUNT

$ $

SALES REVENUE XX

COST OF SALES:

OPENING INVENTORY X

PURCHASES X

XX

CLOSING INVENTORY (XX)

XXX

GROSS PROFIT XXXX

 CASH A/C

CASH RECEIVED CASH PAID

INCREASE WITH: DEAD COIL

DEBITS CREDITS
EXPENSES OWNERS EQUITY
ASSETS INCOME/REVENUE
DRAWING LIABILITIES
OPPOSITE TO DECREASE
Statement of Cash Flows – PROFORMA

X plc Statement of Cash Flows for the year ended 31 December 2008

$ $

CASH FLOWS FROM OPERATING ACTIVITIES

Net profit before taxation x

Adjustments for:

Depreciation x

Profit on sale of non-current assets (x)

Interest expense x

Op. profit before working cap. Changes x

Increase in accounts receivable (x)

Increase in inventories (x)

Increase in accounts payable x

Cash generated from operations x

Interest paid (x)

Dividends paid (x)

Taxation paid (x)

Net cash from operating activities x

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of non-current assets (x)

Sale proceeds of non-current assets x

Interest received x

Dividends received x

Net cash from investing activities x

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issue of shares x

Repayment of debenture loan (x)

Net cash from financing activities x

Net increase in cash & cash equivalents x

Cash and cash equivalents b/f x

Cash and cash equivalents c/f x

The layout for arriving at the cash flow from operations is as follows: DIRECT METHOD

Cash received from customers x

Cash payments to suppliers (x)

Cash paid to and on behalf of employees (x)

Other cash payments (x)

Net cash inflow from operating activities x

SALES X

MARGIN / MARK UP (X)/X

COST XXX

PRE-AQUISTION – RETAINED EARNINGS

COST OF SALES – XX

SHARE CAPITAL – (XX)

RETAINED EARNINGS - XXX

The calculation of the goodwill arising on consolidation therefore becomes as follows:

Fair value of consideration transferred X

PLUS: fair value of non-controlling interest at date of acquisition X

LESS: fair value of net assets at date of acquisition

Share capital X

Retained earnings at date of acquisition X

(X)

Goodwill arising on consolidation X

The entitlement of the NCI will be made up of the following:

Fair value of the NCI at the date of acquisition X

Plus: NCI’s share of post-acquisition profits X

Now we need to calculate the retained earnings belonging to P. This will be calculated in the

normal way:

Retained earnings of P X

Retained earnings of S X

Less: pre-aquisition profits X

Post-acquisition profits of S X

P’s share of post-acquisition profits of S X

XX
 PROFITABILITY

Return on capital employed = Profit before interest and tax

Total long-term capital

(= capital + reserves + long-term liabilities)

Net profit margin = Profit before interest and tax

Revenue

Asset turnover = Revenue

Total long-term capital

NB: ROCE = asset turnover × net profit margin

Gross profit margin = Gross profit

Revenue

Return on equity = Profit after tax and preference dividend

Equity shareholders’ funds

 LIQUIDITY

Current ratio = Current assets

Current liabilities

Quick ratio (or acid test) = Current assets – Inventory

Current liabilities

Inventory days = Inventory

X 365 DAYS
Cost of sales

Average collection period

(receivables days) = Trade receivables

X 365 DAYS
Revenue

Average payment period

(payables days) = Trade payables

X 365 DAYS
Purchases
 GEARING

Gearing = Total long-term debt

%
Shareholders’ equity + total long-term debt

Leverage = Shareholders’ equity

Shareholders’ equity + total long-term debt

Interest cover = Profit before interest and tax

Interest charge
Statement of Profit or Loss for the year ended 31 December 2016

` $

Revenue 100,000

Cost of sales (40,000)

Gross profit 60,000

Other income 2,000

62,000

Distribution costs (26,000)

Administrative expenses (9,000)

27,000

Finance costs (Interest) (2,000)

Profit before tax 25,000

Company Tax expense (5,000)

Profit for the year 20,000

The main difference is the presentation of the amount owing to the owners (equivalent to the

capital in the case of a sole trader) as you can see in the example below:

ASSETS $ $

Non-current assets

Property, plant and equipment 100,000

Motor Vehicles 20,000

120,000

Current assets

Inventories 5,000

Trade receivables 8,000

Prepayments 500

Cash 1,500

15,000

Total assets 135,000

EQUITY AND LIABILITIES

Capital and Reserves

Share capital 50,000

Capital reserves 15,000

Revenue reserves 42,000

107,000

Non-current liabilities

10% Loan Notes 20,000

20,000

Current liabilities

Trade and other payables 2,000

Company Tax 4,000

Short term borrowings 2,000

8,000

Total equity and liabilities 135,000