Financial Literacy for Non-Financial Managers 2017 NEAS Conference Friday 12 May 2017 Greg Bell Client Director Bentleys NSW Pty Ltd
Disclaimer This presentation has been prepared for the purpose of general training and information only. It should not be used for specific advice purposes, or for formulating decisions under any circumstances. Bentleys NSW Pty Limited, its directors and its employees exclude all liability relating to relying on the information and ideas contained within. - 2 -
Administration matters Introduction Terms & Jargon Accounting Concepts Key Financial Reports Analysis and Interpretation - 3 -
Purpose of Accounting PROFIT & LOSS STATEMENT BALANCE SHEET BUDGETS DECISION MAKING COSTINGS STATEMENT OF CASH FLOWS ACCOUNTING RECORDS ANALYSIS - 4 -
Accounting concepts The birth of accounting in 1494 Luca Pacioli What has changed since then? - 5 -
Accounting concepts Increase Debit Credit Credit Assets Liabilities Equity Decrease Credit Debit Debit Increase Credit Debit Credit Revenue Expenses Profit/Loss Decrease Debit Credit Debit - 6 -
SOURCE DOCUMENTS The Accounting Process GENERAL LEDGER Key: YEAR END ADJUSTMENTS TOTALS ONLY DETAILED - 7 -
Accrual accounting - 8 -
Accounting systems A General Ledger account is established for each similar type of transaction recorded within the business. Date Account Name DR Details Account Type CR $ Date Details $ General Ledger Account Account Name DR Date Details Account Type CR $ Date Details $ The collection of the accounts is what is known as the GENERAL LEDGER. General Ledger - 9 -
Trial Balance We prepare a Trial Balance of the General Ledger to check that the DEBIT entries posted agree to the CREDIT entries posted. A/C # Account Name Type DR CR 250 Sales R 23,000 270 Purchases E 57,000 300 Accountancy Fees E 3,000 312 Bank Charges E 1,240 - - - 695,234 695,234 These two column balances must be in balance before we can proceed to prepare the accounts. Trial Balances will not disclose all errors in our accounting system. Such as: - duplicated postings - postings to wrong account - postings omitted altogether - 10 -
Key Financial Reports Balance Sheet Income Statement or Profit & Loss Statement of Cash Flows - 11 -
Profit & Loss Statement Sales Less: Cost Of Goods Sold Opening Stock Add: Purchases Less: Closing Stock Gross Profit Less: Expenses NET PROFIT xx xx (xx) - 12 -
Profit & Loss Statement - 13 -
Balance Sheet ASSETS Current Non-Current Total ASSETS Less: LIABILITIES Current Non-Current Total LIABILITIES NET ASSETS Represented by: OWNERS EQUITY Share Capital Retained Profits Total OWNERS EQUITY XXXX XXXX - 14 -
Balance Sheet - 15 -
Current versus Non-Current Current Asset = Will be turned into cash or used within the next 12 months Current Liability = Will be paid or extinguished within the next 12 months Non-Current = Anything (Asset or Liability) that will be changed after 12 months - 16 -
Definitions Asset. Future economic benefit, control. Liability. Present obligation, sacrifice economic benefit. Equity. Balance of Assets less Liabilities Revenues. Inflows or enhancements. Expenses. Outflows or loss of future economic benefits. - 17 -
Statement of Cash Flows Cash Flows from OPERATING Activities Receipts from customers Payments to suppliers Income taxes paid Cash Flows from INVESTING Activities Payments for PPE Proceeds from sale of PPE Cash Flows from FINANCING Activities Proceeds from borrowings Repayments of borrowings Net increase/(decrease) in cash held Cash at beginning of the period Cash at the end of the period XXX XXX XXX - 18 -
Type of Cash Flow Statement Adjustments Receivables Payables Borrowings Dividends Share Issues Depreciation Investments (sales & purchases) Provisions (eg. Employee) - 19 -
Statement of Cash Flows - 20 -
Statement of Cash Flows example Cash Flows from OPERATING Activities Company A Company B Receipts from customers 1,000,000 600,000 Payments to suppliers (700,000) (800,000) 300,000 (200,000) Cash Flows from INVESTING Activities Payments for PPE (500,000) (50,000) Proceeds from sale of PPE 100,000 200,000 (400,000) 150,000 Cash Flows from FINANCING Activities Proceeds from borrowings 100,000 400,000 Repayments of borrowings (250,000) (250,000) (150,000) 150,000 Net increase/(decrease) in cash held (250,000) 100,000 Cash at beginning of the period 200,000 200,000 Cash at the end of the period (50,000) 300,000-21 -
Underlying Assumptions Accounting entity Accrual basis Going concern Period assumption Relevance Reliability Materiality Economic substance - 22 -
Ratio Analysis Profitability Liquidity Efficiency Financial - 23 -
Profitability ratios Gross Profit Ratio % Gross Profit X 100 Sales Expense Ratio % Expense Item X 100 Sales Net Profit Ratio % Net Profit X 100 Sales Return on Investment Pre Tax Profit X 100 Owners Equity - 24 -
Liquidity ratios Current Ratio (Working Capital Ratio) Current Assets Current Liabilities Quick Asset Ratio Current Assets - Stock Current Liabilities - Bank O/Draft - 25 -
Efficiency ratios Stock Turnover (days) Average Stock x 365 Cost of Sales Average Days to convert stock to cash Stock Turnover + Days to collect debtors Days to Collect Debtors Average Debtors x 365 Total Credit Sales - 26 -
Financial ratios Price / Earning Ratio Share Price Earnings per share Gearing / Debt to Equity Ratio Total Liabilities Owners Equity Dividend Yield Dividend Paid per share Share Price Interest Cover Net Profit + Interest Expense Interest Expense - 27 -
Questions THANK YOU! - 28 -