Introduction to basic financial statement
I’ll be reviewing basic financial statement with the example of Simon’s case. Below is the story of Simon.
The idea of a statement of a value
Non-current assets(Fixed Assets)
These kinds of assets are long-term assets. Which value is evaluated by the price left after usage. I’ll give you an example. Look at the Personal circumstances part of the above text. Simon bought a Land Rover “Discovery” for 12,000$(in cash). When Simon purchased the vehicle local mechanic told Simon that he would be able to use this car for about 6 years. Since he bought this car 1 year ago regardless of the value right now. This car will be positioned in non-current assets as 10,000$(12,000 - 12,000$ * 1 / 6 = 10,000$) because Simon is not about to sell the car for a while and this car is used 1 years.
Other personal effects(books, clothes, tools and golf clubs, etc.) are all non-current assets. These personal effects are priced as the worth which is 1,300$. So total non-current assets are 11,300$ for Simon.
Current assets
These kinds of assets are relatively short-term assets. First, there are cash in the bank account, and his wallet. So for simons case 2,400$ is in his bank account, and 50$ in his wallet. So it will be 2450$ as cash.
There can be Debtors/Trade receivables and Prepayments. Prepayments is defined as Prepayment is an accounting term for the settlement of a debt or installment loan in advance of its official due date. To be simple this means something we paid for earlier. In Simon’s case this would be a season ticket for the local football team. Since he went 11 of their 21 home league this will be evaluated as 110$(210$ / 21 * 11 = 110$). Trade receivables are defined as the amount owed to a business by its customers following the sale of goods or services on credit. In simons case, there is no trade receivables. Debtors mean a person or institution that owes a sum of money. In the case of Simon we can find two kinds of debtors. First, the company has owed two weeks’ worth of overtime. This will be evaluated as 1,000$(26,000$ / 52 * 2 = 1,000$). This debt is something that will be paid back in short amount of time. On the other hand, if you look at the Part-time business part you can find a similar story. A customer has owed one ship(12$), but since he had fled the country this is not evaluated as current assets. According to “Prudence” Concepts revenues and profits should not be anticipated. So this will not be evaluated as current assets.
Stock and Inventories also can be part of current assets. This part was a little tricky for me. To understand this part we should look at the Part-time business part of the text. Simon has a raw material of 180$ which will be sectioned as inventories. Simon has already made 20 sailing ships. Simply put, you might think that if you sell 20 for $12, you get $240 of current assets. However, since this inventory is an inventory that has not yet been sold, it must be calculated at cost so that there is no error in calculating profits afterward. So the stock is valued at $140. Everything added current assets for Simon should be 3,870$(2450$ + 1110$ + 320$).
Current liabilities
Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle. To make it simple current liabilities are something owed which has specific due dates. In case of Simon this would be debt for American express which is 850$. Also 90$ borrowed by the timber merchant will also be a current liabilites.
Fundamental accounting concepts
“Accurals” basis of concepts
Revenue and costs are accrued, that is, recognised as they are earned or incurred, not as money is received or paid. To make it simple I’ll give some simple example. If I am running a factory where machine costs 100,000$. When I put this 100,000$ as a cost my factory will be bankrupt. So in accounting 100,000$ will be divided as the length I’ll be using this machine. So if this machine will be used for 10 years. Each years should be 1,000$ of cost for the machine.
“Going concern” basis of concepts
This assumes that the enterprise will continue in operational existence for the foreseeable future. This implicates capital assets are recorded at cost instead of liquidation value, amortization is used, items are labeled as current or non-current. Not really sure with this parts features…
“prudence” concept
Revenue and profits are not anticipated, but are recognised only when the ultimate cash realisation can be assessed with reasonable certainty. This part was explained above in Simon’s case.