CHAPTER 3

Statement of financial position and income

statement
Contents

Introduction to financial statements

Statement of financial position

The income statement

Organisational structure

Users of accounts
Introduction to financial
statements

The statement of financial position

Basic
The income statement accounting
statements

The cash flow statement

Statement of financial
position
A statement of the assets, liabilities and
capital of a business 'as at' a particular date.

CAPITAL
ASSETS EQUAL
LIABILITIES

Also called the Balance sheet

Typical statement of financial
position
Assets

Assets

Non-current Current assets

assets
• Expected to be
• Acquired for long- converted into
term use within cash within one
the business year

• Strictly, more than Text

one accounting
period

Text
Classification depends on the nature of the business
Example

Assets

Non-current Current
assets assets

• Land • Cash
• Office building • Inventory
• Factory • Receivables
• Machinery • Etc.
• Office equipment Text
• Etc.
Discussion
 Current or non-current?

Non-
current
Non-
current
Curre
nt
Non-
current
Curre
nt
Liabilities

Liabilities
Non-current Current
liabilities liabilities

• Debts not • Debts payable

payable within within one
the 'short year.
term
• E.g.: short-
• E.g: long- term loans,
term bank Text bank
loans. overdrafts,
trade
payables, etc.

Text is split to:

Long-term loan
-Amount due within one year
-Amount due beyond one year
Question
On 1 December 2006 Pat borrowed $40,000 at a
fixed rate of interest. A single capital repayment is
due on 1 December 2009. During the year to 30
November 2007 the interest of $300 per month
has been paid on the last day of each month.
How should the loan be reported on Pat’s Balance
Sheet at 30 November 2007?
Current liability Non-current liability
A $3,600 $40,000
B $40,000 $3,600
C nil $40,000
D $40,000 nil
Answer
On 1 December 2006 Pat borrowed $40,000 at a
fixed rate of interest. A single capital repayment is
due on 1 December 2009. During the year to 30
November 2007 the interest of $300 per month
has been paid on the last day of each month.
How should the loan be reported on Pat’s Balance
Sheet at 30 November 2007?
Current liability Non-current liability
A $3,600 $40,000
B $40,000 $3,600
C nil $40,000
D $40,000 nil
Question
At 31 October 2006 Janine had an outstanding
balance of $24,000 on her bank loan account. The
terms of the loan require her to repay $400 on the
first day of each month.
 How should the loan be reported on Janine’s
balance sheet at 31 October 2006?
Current Liability Non-current liability
A nil $24,000
B $24,000 nil
C $19,200 $4,800
D $4,800 $19,200
Answer
At 31 October 2006 Janine had an outstanding
balance of $24,000 on her bank loan account. The
terms of the loan require her to repay $400 on the
first day of each month.
 How should the loan be reported on Janine’s
balance sheet at 31 October 2006?
Current Liability Non-current liability
A nil $24,000
B $24,000 nil
C $19,200 $4,800
D $4,800 $19,200
Discussion
 Classification:
(a) PC used in the accounts department of a
retail store
Non-current asset
(b) A PC on sale in an office equipment shop
Current asset
(c) Wages due to be paid to staff at the end
of the week
Current liability
Discussion
 Classification:
(d) A van for sale in a motor dealer's
showroom
Current asset
(e) A delivery van used in a grocer's business
Non-current asset
(f) An amount owing to a bank for a loan for
the acquisition of a van, to be repaid in 9
months
Current liabilities
Capital

Business capital account

Amounts Profit earned

invested by and retained
the owner(s) by the
in the business.
business
Text

The make-up depends on the legal nature of the business

The income statement

Shows in detail how the profit or loss of a period has been made.
Income statement
breakdown
Income statement

Gross profit: Net profit:

Compares Different
revenue with between gross
cost of goods profit and total
sold (direct Text overheads
costs) (indirect
costs).
Capital expenditure vs. revenue
expenditure

Capital expenditure Revenue expenditure

Incurred in:
Results in: • For the purpose of
• The acquisition of
the trade of the
non-current business.
assets; or • To maintain the
• An improvement
existing earning
in their earning capacity of non-
capacity. current assets.

Balance sheet items Income statement items

Exam focus
Capital and revenue income

Capital income Revenue income

• Proceeds from • The sale of trading
the sale of non- assets
trading assets.
• Rent, interest and
dividends received
from non-current
assets held by the
business

Profit/loss apprears on IS Appears on income statement

Exam focus
Discussion
‘Capital' or 'revenue' expenditure or income?
(a) Purchase of leasehold premises
CE
(b) Solicitors' fees in connection with the
purchase of leasehold premises
CE
(c) Costs of adding extra storage capacity to
a mainframe computer used by the
business
CE
Discussion

‘Capital' or 'revenue' expenditure or income

(d) Computer repair and maintenance costs
RE
(e) Profit on the sale of an office building
CI
(f) Revenue from sales by credit card
RI
(g) Cost of new machinery
CE
Discussion
‘Capital' or 'revenue' expenditure or income
(h) Customs duty charged on the machinery when
imported
CE
(i) 'Carriage' costs of transporting the new
machinery to the premises of the business
purchasing the machinery
CE
(j) Cost of installing the new machinery in the
premises of the business
CE
(k) Wages of the machine operators
 Emplo
yees
Users of accounts

of the
busine Trade
Owner ss
s of contac
the ts
busine Users
ss
of
accou
Manag nts Provid
ers of ers of
the financ
busine e to
Tax autho rities
ss the
busine
ss
What’s what?
(a) Freehold property
Non-current asset
(b) Payment of wages for a director with a
two year service contract
Expense
(c) Payments into a pension fund
Expense
What’s what?
(d) A trade receivable who will pay in 18
months time
Non-current asset
(e) An irrecoverable debt written off
Expense
(f) A patent
Non-current asset
(g) A company car
Non-current asset
What’s what?
(h) Interest on a bank overdraft
Expense
(i) A bank loan repayable in five years
Non-current liability
(j) Petty cash of $25
Current asset
(k) The portion of local taxes paid covering the
period after the reporting date
Current asset: prepayment
QB 5
Net profit was calculated as being $10,200. It was
later discovered that capital expenditure of $3,000
had been treated as revenue expenditure, and
revenue receipts of $1,400 had been treated as
capital receipts.
The correct net profit should have been
A $5,800
B $8,600
C $11,800
D $14,600

Answer: D