Firm’s financial information
 A firm’s financial information refers to
results of business operation within a
specific ti...
 Example of external parties who use this
financial information are:
 Potential investors and firm shareholders
 Lender...
 By analyzing the given information,
managers could:
 Detect any deviation between the firm’s
forecasted sales and actua...
Sources of financial information
on companies in Malaysia
1. Annual report
2. KLSE handbook
3. KLSE daily diary- Company’s...
 A firm annual report prepared for the
shareholder presents two important types
of information
1. The 1st is a verbal sta...
Presentation of Financial
Information
 The financial information is generally
presented in three forms of reports.
1. Pro...
Azmi Company
Profit and Lost Statement
For the period ended 31/12/2002
Sales
Cost of good sold
RM 10,000,000
<6,000,000>
G...
Profit and loss statement
 The profit and lost statement
summarizes the firm’s revenue and
expenses over a period of time...
Items on the profit and loss
statement
Different methods, such as First in First Out (FIFO) and Last in Last
Out (LIFO), c...
 Example: evaluating ending inventory
Assume a firm makes purchases of an item to be sold every three
months. Each purcha...
 FIFO method:
 LIFO method:
Cost of the ending inventory
based on the FIFO method :
1000 units*RM4.00 = RM 4,000
Cost of...
 Different method thus give different values of
cost of goods sold. In this case, LIFO method
of inventory valuation prod...
Balance sheet
 This statement shows the firm’s assets
and the claims against those assets at a
moment in time.
Assets = L...
 Assets
 Firm’s assets are arranged accordingly to their
liquidity.
 Liquidity in this case reflects the time required ...
 A firm’s assets can be divided into two categories:
1. Current assets
○ Items expected to become cash within one
year.(S...
2. Fixed assets
○ Assets that are expected to have life, longer
than one year.
○ Example: plant machinary, equipment
○ At ...
 Liabilities
 Liabilities represent company debts or obligations
to outsiders.
 Can be divided into:
○ Long term liabil...
 Equity
 Equity represent money that is supplied to the
company by the owners either throuh direct
investment or retaine...
 Retained earnings come from the profits of a
business that are not paid out to owners as
dividen. Instead, profit are re...
Cash flow statement
 Statement of cash flows shows the
detailed movement of cash in a firm.
 The movement is detected by...
 Asset increase = use of cash
 Purchase of assets with the firm’s cash.
 Therefore, this will reduce the firm’s total
c...
 Liability increase = source of cash
 Firm has obtained credit for its purchases or
obtain loan from the financial insti...
 Liability decrease = use of cash
 The firm has paid all of its credit purchases
made previously or paid off the loan
ob...
Developing statement of cash
flow
 To develop a statement of cash flow, it
requires three steps:
 Determining net cash f...
 Determining net cash flow from operating
activities
 Operating activities are things a company
does on a day to day bas...
 Determining net cash flow from investing
activities
 Investing activities normally include the
purchasing of fixed asse...
ABCD Co.
Balance Sheet Statement
As at 31/12/2012 (RM)
2001 2002
Cash 1,600 2,000
Account receivable 5,200 12,000
Inventor...
Acc 2023 chapter 2
Acc 2023 chapter 2
Acc 2023 chapter 2
Acc 2023 chapter 2
Acc 2023 chapter 2
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Acc 2023 chapter 2

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Acc 2023 chapter 2

  1. 1. Firm’s financial information  A firm’s financial information refers to results of business operation within a specific time period, state in monotery terms and used by both internal and external parties.  The time period for the financial information normally covers from six months to one year of firm business operations.
  2. 2.  Example of external parties who use this financial information are:  Potential investors and firm shareholders  Lender  Tax authorities  The internal parties in this case are the firm’s managers themselves. They need the information to see how effectively their firm is being run.
  3. 3.  By analyzing the given information, managers could:  Detect any deviation between the firm’s forecasted sales and actual sales of the firm or between the forecasted overhead and actual overhead.  Study those result shown to pinpoint relative strenght and weakness in operation.
  4. 4. Sources of financial information on companies in Malaysia 1. Annual report 2. KLSE handbook 3. KLSE daily diary- Company’s share price  The most widely used source of financial information is the firm’s annual report .
  5. 5.  A firm annual report prepared for the shareholder presents two important types of information 1. The 1st is a verbal statement of the company’s recent operating results and its expectations for the coming year. 2. 2nd is the quantitative financial statement parts which report what actually happened to the firm’s financial position, earning, and dividends over the past few years
  6. 6. Presentation of Financial Information  The financial information is generally presented in three forms of reports. 1. Profit and loss statement 2. Balance sheet statement 3. Cash flow statement  Each report is audited by external auditors to ensure its completeness and accountability.
  7. 7. Azmi Company Profit and Lost Statement For the period ended 31/12/2002 Sales Cost of good sold RM 10,000,000 <6,000,000> Gross Margin 4,000,000 Expense Depreciation <1,600,000> <500,000> Earning before interest and taxes Interest expense 1,900,000 <4,000,000> Earning before tax Tax 1,500,000 <500,000> Net income RM 1,000,000
  8. 8. Profit and loss statement  The profit and lost statement summarizes the firm’s revenue and expenses over a period of time.  It also gives an indication on how much profit the company has earned during a year (sometime 6 months) of accounting period from its operations.  This value is available once firm’s expenses have been subtracted from the firm’s revenue.
  9. 9. Items on the profit and loss statement Different methods, such as First in First Out (FIFO) and Last in Last Out (LIFO), can be used to determine the value of ending invetoy This methods, in turn, affect the reported cost of goods sold and the firm total profit differently.
  10. 10.  Example: evaluating ending inventory Assume a firm makes purchases of an item to be sold every three months. Each purchase consists of 1000 units of goods. Due to rapid inflantonary growth the cost of purchased increases each time. The remaining inventory unsold at the end of the year, was 1000 units.
  11. 11.  FIFO method:  LIFO method: Cost of the ending inventory based on the FIFO method : 1000 units*RM4.00 = RM 4,000 Cost of the ending inventory based on the LIFO method : 1000 units*RM1.00 = RM 1,000
  12. 12.  Different method thus give different values of cost of goods sold. In this case, LIFO method of inventory valuation produces higher cost of goods sold value when other factors remain constant.
  13. 13. Balance sheet  This statement shows the firm’s assets and the claims against those assets at a moment in time. Assets = Liability + Equity
  14. 14.  Assets  Firm’s assets are arranged accordingly to their liquidity.  Liquidity in this case reflects the time required and the ease to convert one or a few on the firm’s assets into cash in the event the firm has to generate cash in order to pay off its debt.  The shorter the times it takes and the easier the process of converting those assets, the higher their liquidity.  For instance a firm’s assets such as marketable securities and account payable have higher liquidity level compare to other’s firm assets.  Typically, they ranked second and third behind cash.
  15. 15.  A firm’s assets can be divided into two categories: 1. Current assets ○ Items expected to become cash within one year.(Shorter time period) ○ Example: Cash, account payable, marketable securities, and inventory. ○ Activities such as selling of inventory, collection of account receivable from sale made on credit earlier and other firm securities. Assets Details Cash Money in the bank’s checking account and foreign currency on hand Account receivable Credit sales which have not been paid but are generally expected to be paid soon Inventory Product held for sale in normal course of doing business. Example: raw materials, work in process, finished goods.
  16. 16. 2. Fixed assets ○ Assets that are expected to have life, longer than one year. ○ Example: plant machinary, equipment ○ At the end of fiscal year, accumulated depreciation of an asset is subtracted from its fixed cost to give its net books value of the asset. ○ The accumulated depreciation actually represent the total of this year’s depreciation and all the previous year’s depreciation expense.
  17. 17.  Liabilities  Liabilities represent company debts or obligations to outsiders.  Can be divided into: ○ Long term liability  Longer payback period  Consist of bonds and lon term loans.  As the firm uses more debt, the more highly leveraged it is said to be. ○ Short term liability ○ Also known as current liabilities: account payable, accruals, notes payable,and short term note  Payment within one year
  18. 18.  Equity  Equity represent money that is supplied to the company by the owners either throuh direct investment or retained earning.  Direct investment in the case of sole proprietorship and joint venture occurs when an owner puts money into a business as starting capital.  On the other hand, direct investment for a corporation occurs when the corporation sells its shares to the public the first time. Such event known as initial public offering (IPO)
  19. 19.  Retained earnings come from the profits of a business that are not paid out to owners as dividen. Instead, profit are reinvested back into business. The excess profit is usually used by businesses to acquire assets  Preferred stock is also classified as an equity. It is also instrument that can be used to raise capital.  Preferred stock is included in the balance sheet in the equity section.  Therefore, the total equity is the sum of common stock, preferred stock and retained earning.
  20. 20. Cash flow statement  Statement of cash flows shows the detailed movement of cash in a firm.  The movement is detected by observing where the money came from and what it was used on.  Cash flow statement is constructed from information found in the income statement of the current year and balance sheets from the previous year and the current year.
  21. 21.  Asset increase = use of cash  Purchase of assets with the firm’s cash.  Therefore, this will reduce the firm’s total cash level  Asset decrese = source of cash  Selling of the firm’s asset  Generate cash to the firm
  22. 22.  Liability increase = source of cash  Firm has obtained credit for its purchases or obtain loan from the financial institutions.  There is no cash payment required from the firm.  This will preserved the cash balance for that period of time.  Increase the firm cash reserve.  Obtaining loan will increas firm’s cash balance.  This because loans are normally given to firm in cash
  23. 23.  Liability decrease = use of cash  The firm has paid all of its credit purchases made previously or paid off the loan obtained from the financial institutions  Those payment are made of cash  This will reduce the firm’s cash balance.
  24. 24. Developing statement of cash flow  To develop a statement of cash flow, it requires three steps:  Determining net cash flow from operating activities  Determining net cash flow from investing activities  Determining net cash flow from financing actvities
  25. 25.  Determining net cash flow from operating activities  Operating activities are things a company does on a day to day basis to conduct its business.  Example: buying inventory, producing and selling product, paying expenses and taxes, collecting credit sales.  The end result of all of these activities is reflected by the company net income.
  26. 26.  Determining net cash flow from investing activities  Investing activities normally include the purchasing of fixed assets.  Determining net cash flow from financing actvities  Financing activities in general deal with the capital accounts, long term debt and equity.
  27. 27. ABCD Co. Balance Sheet Statement As at 31/12/2012 (RM) 2001 2002 Cash 1,600 2,000 Account receivable 5,200 12,000 Inventory 15,600 14,000 Fixed assets 20,000 27,000 Accumulate depreciation <14,400> <16,000> Total assets 28,000 39,000 Account payable 2,500 3,000 Accrued expenses 1,500 1000

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