2. Project No: 2017-1-IE01-KA202-025711
This project has been funded with support from the European Commission.
This publication reflects the views only of the author, and the Commission
cannot be held responsible for any use which may be made of the
information contained therein.
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3. What’s in this Module
• Aim and use of the Balance Sheet
• Aim and use of the Profit & Loss Statement
• The ratios of the financial analysis
• The financial diagnosis
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4. Aim: To acquire the main notions of economic and financial management
of the farm
Objectives: By the end of this session you will be able to:
Aims & Objectives
To evaluate the performance of a farm
Look at the risk assessment of a farm
5. 5
The financial structure and cash-flow : the balance sheet of its farm
Reminder: what is the balance sheet for?
To read and to analyse the balance sheet
The activity and the profitability : the profit and loss account
Reminder : what is the profit and loss account for ?
To read and to analyze the profit and loss account
Training program
6. Training program
To understand the ratios of the financial analysis
Profitability ratios
Financial structure and solvency ratios
Liquidity ratios
To formulate a financial diagnosis
The different steps of the financial diagnosis
Social and environmental, economic use of performance indicators
6
7. • What is
•Financial Position - (Is it Solvent / What’s it worth)
•Cash flow level – (Can it pay its debts)
• Creditors (Who we owe)
• Debtors (Who owes us)
•Profitability
•Fixed Assets
•Any exceptional items
• Going concern ?
Financial Statements
What we would like to know?
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Irish Co-operative Organisation Society (ICOS)
8. • There are three primary statements
• What are they?
Primary Statements
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Irish Co-operative Organisation Society (ICOS)
9. Primary Statements
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Irish Co-operative Organisation Society (ICOS)
The primary statements are:
Profit and
Loss
Account
(Statement of
Comprehensive
income)
Balance
sheet
(Statement of
Financial
Position)
Cash Flow
Statement
11. • Summary of income and expenditure
• Covers specific Period of Time
• Comparison purposes
• against budgets, prior periods and industry performance
• “Bottom Line” is entity’s profit / loss
• Revenue – Expenses = Profit / Loss
• Prepared at regular intervals
• monthly, quarterly and at the financial year end
Profit & Loss Account - Purpose
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Irish Co-operative Organisation Society (ICOS)
12. • Recognise areas that need more analysis, and take
action
• Analyse all income & expenditure categories
• Provides better understanding of income & costs
• Also known as
• Income Statement
• Statement of Comprehensive Income
Profit & Loss Account - Purpose
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Irish Co-operative Organisation Society (ICOS)
13. Components
Revenue
Inflows or other
enhancements
of assets to the
entity
Sale of goods or
services, rent,
interest,
commissions
Expenses
Outflows or
other using up
of assets.
Costs incurred to earn
revenues, i.e. salaries /
wages, rent, utilities,
advertising etc.
Profit /
Loss
Profit = the
balance after all
expenses have
been deducted
from revenue -
“bottom line”
Loss = the
excess of
expenses over
revenues
– =
14. P&L – Examples Revenue & Expenses
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Irish Co-operative Organisation Society (ICOS)
Revenue
• Sale of goods,
• Sale of services,
• Commissions,
• Membership fees,
• Interest,
• Dividends,
• Affiliation fees,
• Rent,
• Etc.
Expenses
• Direct – direct purchases,
labour, L&H & Dep’n
• Indirect -Wages Salaries,
training, rent, rates,
insurance, computer costs,
light and heat, cleaning,
motor and travel expenses,
telephone, deprecation etc.
• Finance costs - interest
15. P&L Overview
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Irish Co-operative Organisation Society (ICOS)
Profit and Loss account of ________
For the period / year ended _________
Sales = Revenue
Cost of sales / (COGS) *** = (opening stock + purchases,
direct costs – closing stock)
Gross Profit = Revenue - COGS
Expenses / Overheads = Indirect / finance costs
Net Profit / Loss = Gross profit – expenses
***Cost of sales = (opening stock + purchases, direct costs – closing stock)
“COGS” =Cost of goods sold
16. P&L Example
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Irish Co-operative Organisation Society (ICOS)
Profit and Loss account of ABC Limited
For the period / year ended 31/12/2016 €
Sales 75,000
Less Cost of sales (COGS) (20,000)
Gross Profit 55,000
Expenses
Purchases 10,000
Wages 15,000
Light and heat 5,000
Rent 10,000 (40,000)
Net Profit 15,000
17. P&L Exercise
17
Irish Co-operative Organisation Society (ICOS)
As of the 31st March 2016, XYZTraders have annual sales to
the value of €100,000.The “cost of sales” figure is €50,000.
As part of their operating costs, they have purchases, to the
value of €13,000, rent to the value of €10,500, light and
heat bills to the value of €5,500 and the wages bill is
€15,000 annually.
Using the template provided, calculate the following:
• Gross Profit / Loss
• TheTotal Cost of Expenses
• Net Profit / Loss
18. P&L Exercise - Solution
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Irish Co-operative Organisation Society (ICOS)
PROFIT & LOSSACCOUNTOF XYZTRADERS
FORTHEYEAR ENDED 31/3/2016
€
Income (Revenue)
Sales 100,000
Cost of Sales (50,000)
Gross Profit 50,000
Expenditure (Expenses)
Purchases 13,000
Rent 10,500
Light and heat 5,500
Wages 15,000
Total Expenses 44,000
Net Profit 6,000
19. Profit & Loss Account - Recap
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Irish Co-operative Organisation Society (ICOS)
• Summary of income and expenditure
• Covers specific Period of Time
• Comparison purposes - budgets, prior periods and industry
• “Bottom line” is entity’s profit / loss
• Revenue – Expenses = Profit / Loss
• Prepared at regular intervals
• Also known as
• Income Statement / Statement of Comprehensive Income
21. Balance Sheet
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Irish Co-operative Organisation Society (ICOS)
• What is the Purpose of a balance sheet?
• What are the main elements of a balance
sheet?
22. Balance Sheet - Purpose
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Irish Co-operative Organisation Society (ICOS)
• Snap shot of the financial position at a particular date.
• Prepared regularly (monthly, quarterly, at the year end)
• Summary of all business activity from commencement
• The Balance sheet includes:
Assets: Cash, Stock, Debtors, Equipment etc.
Liabilities: Creditors, money owed to suppliers or
Revenue, Loans
Equity: The value of the business after deducting what
the business owes.
23. Balance Sheet
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Irish Co-operative Organisation Society (ICOS)
Total Assets =
Fixed
Buildings,
P&M, Vehicles
+
Current
Stock,
Debtors,
Cash
Total Liabilities = Share Capital
& Reserves
+ Borrowings &
other creditors
Intangible
Patents,
Copyrights,
goodwill,
trademarks
+
24. Balance Sheet
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Irish Co-operative Organisation Society (ICOS)
Assets
Current, Fixed &
Intangible
=
Liabilities
Current Liabilities
Long Term Liabilities
+
Shareholders’ Equity
Contributed Capital
Retained Earnings
25. Balance Sheet
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Irish Co-operative Organisation Society (ICOS)
Components
Assets
Resources of the entity
that are expected to
increase or cause future
cash flows (everything the
entity owns)
Liabilities
Obligations of the entity to
outsiders or claims against
its assets by outsiders
(debts of the entity)
Equity
The residual interest
in, or remaining claims
against, the entity’s
assets after deducting
liabilities (rights of the
owners)
26. Balance Sheet
• Fixed Assets
• Held by the business for
use rather than for resale –
long term assets
Land and Buildings
Plant and equipment
Motor Vehicles
Fixtures and fittings
Financial Assets
Interest in Subs / JV
A
• Current Assets
• Short term assets – readily
convertible to cash
Stock
Debtors & Prepayments
Bank and Cash
• Intangible Assets
• Lack physical substance
Patents, copyrights,
goodwill, trademarks,
franchises, trade names
27. Balance Sheet
• Liabilities – where the
business gets the money
to fund the business
• Categories
• Shareholders’ Equity
• Ordinary Shares
• Preference Shares
• Reserves
• Creditors – divided into
due within 1 year and due
after 1 year
• Due within 1 year
• Bank overdraft,Term Loan
• Trade Creditors, Accruals
• Finance Lease,
• Taxes (PAYE/PRSI,VAT, CT)
• Dividends,
• Deferred income
• Due after 1 year
• Term loan, mortgage,
• Finance lease
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28. Balance Sheet
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Irish Co-operative Organisation Society (ICOS)
Assets
Fixed Assets
+ Inventory
+ Accounts Receivable
+ Cash and Cash equivalent
= Total Assets
Shareholder’s Equity and Liabilities
Equity
Share Capital
+ Other Restricted Equity
+ Net Profit for the Year
+ Retained Earnings
= Total Equity
Liabilities
Long Term Loans
+ Short Term Loans
+ Accounts Payable
= Total Shareholder’s Equity and Liabilities
Total Assets = Total Shareholder’s equity and liabilities
GeographyIshistory.com
29. BALANCE SHEET OVERVIEW
• Fixed Assets
• Property, plant & Equip XX
• Intangible Assets XX
• Financial Assets XX
• XX
• Current Assets
• Inventories XX
• Trade & other receivables XX
• Cash & Cash equivalents XX
• XX
• Creditors due <1 yr (XX)
• Net Current Assets XX
• Total assets less current
• liabilities XX
• Creditors due > 1 yr (XX)
• Net Assets XX
• Financed by
• Equity
• Equity share Capital XX
• Retained Profit XX
• Total Equity XX
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Balance Sheet
For the year ended 31st December XX
30. Balance Sheet Example
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Irish Co-operative Organisation Society (ICOS)
• Fixed Assets
• Property, plant & Equip 244,967
• Financial Assets 1,270
246,237
• Current Assets
• Inventories 260,579
• Trade & other receivables 487,794
• Cash & Cash equivalents 1,214,196
1,963,839
• Creditors due <1 yr (398,851)
• Net Current Assets 1,564,988
• Total assets less current
liabilities 1,809,955
• Creditors due > 1 yr ( - )
• Net Assets 1,809,955
• Financed by
• Equity
• Equity Share Capital 100,000
• Retained Profit 1,709,955
• Total Equity 1,809,955
31. Balance Sheet Exercise
• Building 500,000
• Stock 10,000
• Taxes 35,000
• Shares 100,000
• Loan within 12 mths 50,000
• Loan after 12 mths 50,000
• Debtors 80,000
• Retained earnings 405,000
• Prepayment 5,000
• Fixtures & Fittings 15,000
• Cash 135,000
• Goodwill 50,000
• Creditors 55,000
31
At the year ended 31st March 2016, XYZ Traders have the
following assets and liabilities
Using the template provided, please complete the Balance
sheet
32. Balance Sheet Solution
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Irish Co-operative Organisation Society (ICOS)
• Fixed Assets
• Property, Plant & Equip 515,000
• Intangible Assets (Goodwill) 50,000
565,000 A
• Current Assets
• Inventories 10,000
• Trade & other receivables 85,000
• Cash & Cash equivalents 135,000
230,000 B
• Creditors due <1 yr (140,000) C
• Net Current Assets 90,000 D = (B - C)
• Total assets less current
liabilities 655,000 E = (A + D)
• Creditors due > 1 yr (150,000) F
• Net Assets 505,000 E + F
• Financed by
• Equity
• Equity Share Capital 100,000
• Retained Profit 405,000
• Total Equity 505,000
Building 500K & FFE 15K
Debtors 80K, Prepay 5K
Creditors 55K, Taxes 35K, Loan < 12mths 50K
33. Balance Sheet - Recap
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Irish Co-operative Organisation Society (ICOS)
• Is a snap shot of the financial position of the business at a particular date.
• Prepared regularly
• Summary of all business activity since commencement
• The main elements of balance sheet are:
Assets
Liabilities
Equity
35. Cash Flow Statement
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Irish Co-operative Organisation Society (ICOS)
• What is the purpose of a Cash flow
statement?
• What are the main elements of a cash flow
statement?
36. Cash Flow Statement - Purpose
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Irish Co-operative Organisation Society (ICOS)
• Summary flow of funds in/out during specific time
• It is prepared regularly (weekly, monthly, at year end)
• Provide helpful warning signals
• Shows if business is running out of money
• Identify sources of cash inflow and where cash used
• Helps to maintain a proper matching between cash
inflows and outflows
• Shows capital purchases as money out
37. Cash Flow Statement - Purpose
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Irish Co-operative Organisation Society (ICOS)
• Provides relevant information - cash receipts
/ cash payments of an entity during a period.
• The statement provides answers to the
following questions:
Where did the cash come from?
What was the cash used for?
What was the change in the cash balance?
38. Cash Flow Statement
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Irish Co-operative Organisation Society (ICOS)
Content and Format
Operating
Cash inflows and
outflows from
operations
(sales revenue, salary
expenses, etc)
Investing
Cash inflows and
outflows from non-
current assets.
(purchase of new
equipment)
Financing
Cash inflows and
outflows from non-
current liabilities and
equity.
(Borrowing funds,
payment of
dividends)
The statement’s value is that it helps users evaluate liquidity,
solvency, and financial flexibility.
39. Cash Flow Statement
39
Irish Co-operative Organisation Society (ICOS)
Three different activities
Operating, Investing, Financing
Statement of Cash Flows
Cash flows from operating activities € XXXX
Cash flows from investing activities € XXXX
Cash flows from financing activities € XXXX
Net increase (decrease) in cash € XXXX
Cash at beginning of year € XXXX
Cash at end of year € XXXX
41. ABC Company Ltd
Statement of Cashflows
For the year ended 31st December 2015
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Irish Co-operative Organisation Society (ICOS)
31 Dec 15 31 Dec 14
Notes € €
Cash flows from operating activities
Cash generated from operations 1 445,312 1,148,542
Taxation paid (81,749) (106,485)
Net cash flows from operating activities 363,563 1,042,057
Cash flows from investing activities
Payments to acquire Tangible Fixed Assets (311,601) (21,048)
Payments to acquire intangible assets 0 0
Interest received 25,502 22,175
Net cash flows from investing activities (286,099) 1,127
Cash flows from financing activities
Interest paid 0 0
Net cash flow from financing activities 0 0
Net increase in cash and cash equivalents 77,464 1,043,184
Cash and cash equivalents at beginning of year 1,136,732 93,548
Cash and cash equivalents at end of year 2 1,214,196 1,136,732
42. ABC Company Ltd
Cashflow Statement Note 1
For the year ended 31st December 2015
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Irish Co-operative Organisation Society (ICOS)
31 Dec 15 31 Dec 14
€ €
Profit after taxation 645,317 953,082
Addback
Income tax expense 82,699 109,285
Finance Income (25,502) (22,175)
Operating Profit 702,514 1,040,192
Adjustment for
Depreciation 108,245 49,324
Changes in working capital
Inventories (5,094) (14,356)
Trade and other receivables (337,962) (33,875)
Trade and other payables (22,391) 107,257
Cash generated from operations 445,312 1,148,542
1. RECONCILATION OF OPERATING PROFIT TO NET CASH INFLOW/(OUTFLOW)
FROM OPERATING ACTIVITIES
43. ABC Company Ltd
Cashflow Statement Note 2
For the year ended 31st December 2015
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Irish Co-operative Organisation Society (ICOS)
2. ANALYSIS OF CASH & CASH EQUILALENT AND NET DEBT
At 31 Dec
2014
Cash Flow At 31 Dec
2015
€ € €
Cash on hand 1,136,732 77,464 1,214,196
Bank overdraft 0 0 0
Total 1,136,732 77,464 1,214,196
The balances above should agree to the CF Statement
and the bank figure in the Balance sheet
44. Cash Flows - Recap
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Irish Co-operative Organisation Society (ICOS)
Summary movement of cash during period
Prepared regularly
Provide helpful warning signals
Without Cash – the entity will not survive.
Provides answers to the following questions:
Where did the cash come from?
What was the cash used for?
What was the change in the cash balance?
45. Summary
Profit and Loss, Balance Sheet and Cash Flow Statements
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Irish Co-operative Organisation Society (ICOS)
Balance Sheet – Present
The value of a company at a certain point in time.
Statement of Assets and Liabilities.
Cash Flow – Future
Statement showing cash generation
(inflow)
and cash usage (outflow)
Profit and Loss Statement – History
Measures and reports Profit generated during a certain period.
Profit/Loss is an opinion, based on Accounting Principles.
GeographyIshistory.com
46. • What is
•Financial Position - (Is it Solvent / What’s it worth)
•Cash flow level – (Can it pay its debts)
• Creditors (Who we owe)
• Debtors (Who owes us)
•Profitability
•Fixed Assets
•Any exceptional items
• Going concern ?
Financial Statements
What we would like to know?
46
Irish Co-operative Organisation Society (ICOS)
47. • Balance sheet
•Net Assets
•Bank
•Creditors
•Debtors
•Fixed assets
Financial Statements
Review Process
47
Irish Co-operative Organisation Society (ICOS)
• Profit and Loss
• Auditors report
• Cash flow
• Related notes
48. • Review Annual Report in full (commentaries, notes etc.)
• Director responsibilities - In “Statement of the Society’s and
Board’s Responsibilities”
• “Independent Auditors Report” confirms if responsibilities met
• Audit Opinion - If adverse / qualified ask why?
• Review figures - comparison, industry, expectations
• Once off transactions affects results
Financial Statements
Review Process
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Irish Co-operative Organisation Society (ICOS)
49. • Points to note
• Financial Statements – Historical
• Profit is NOT Cash!
• Exceptional Items – Watch for!
• Future Expectations
• Limitations – doesn’t show
Staff Morale
Impending Technological advances
Market Position
Age of Equipment
Financial Statements
Review Process
49
Irish Co-operative Organisation Society (ICOS)
50. Conclusion
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Irish Co-operative Organisation Society (ICOS)
You are now able to;
Identify the primary statements
Outline the purpose of each statement
List the major components of each
statement
Review a set of Financial statements
51. Conclusion
51
Irish Co-operative Organisation Society (ICOS)
Profit &
Loss
Trading performance
for year, comparison
with budgets &
industry
Income – Expenses =
Profit / Loss
Balance
Sheet
Snap shot of financial
position at point in
time
Assets = Liabilities +
Equity
Cash flow
Cash flow movement
for year, cash, Without
Cash – the entity will
not survive
Operations, Investing,
Financing
Comparing the three statements
Three different perspectives
* P&L Account – Whether your entity is making a profit
* Balance sheet – A snap shot of the financial position at a specific point in time
* Cashflow statement – whether the company is turning profits into cash
Summary of the entity’s operations for the period
Direct expenses (COGS) – directly related to the main activity of the entity – i.e. manufacturing company –
direct purchases,
direct labour,
L&H and
Depreciation on the assets
Distribution Expenses: - Phone costs, entertaining, courier, postage etc.
Indirect expenses – Administrative / operating –
* Summary of financial position at a given point in time
* Relies on the following basic equation: Assets = Liabilities + Owners Equity
* Assets are what the company invests in so that it can conduct business
* Liabilities are the means by which the assets are acquired
* Efficiency of utilisation of assets and how liabilities are being managed in pursuit of profit.
Assets = Fixed assets, Current assets
Liabilities = Current, Long term
Shareholders funds = Equity, Reserves (capital, revenue, revaluation etc)
* Describes how company spent its cash over the period
* Uses of cash are recorded as negative and sources of cash are recorded as positive
* Difference between this and P&L is that it only cash transactions are recorded in this statement
* Cashflow statement translates the net profit to a cash basis
* Both results are the same
Why Profit is not = to Cash
Timing (debtors and creditors)
Inventory movements
Vat
Depreciation
Capital Expenditure
Loans and Loan repayments
Equity