B415 Financial Statements - Seminar 3

1. Principles of
Business
Introduction to Finance –
Seminar 3: Financial statements

2. Learning outcomes
By the end of this session you should be able to:
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• Explain the role and purpose of each of the main
financial statements
• Explain the nature of the financial statements
• Understand the limitations of financial statements

3. Seminar 3: Pre-seminar work
- Read chapters 2,3,6 of the core textbook (Atrill &
McClaney)
- Review Pearson Plc’s 2013 annual report
(https://www.pearson.com/content/dam/corporate/global/p
earson-dot-com/files/annual-reports/ar2013/2013--annual-report-
accounts.pdf)
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4. 4
A recap on financial statements
• What is the role of the income statement?
• What is the role of the balance sheet?
• What is the role of a cash flow statement?
Elements of the financial statements
• Assets
• Capital (equity)
• Expenses
• Income
• Liabilties

5. Task 1
Explain why each of the following
stakeholders would have an interest in
financial statements
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6. Task 2: Let’s think….
1. Why are financial statements prepared under
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financial reporting standards?
2. At what point is a sale made by a business?
3. Why are cash and profit two different things?

7. 7
Task 3
After the first week of trading, the following events have happened at Johnny
Goode’s new guitar business:
• Johnny has sold £14,000 worth of guitars, 50% of which were sold on two
week’s credit to recording studios
• Johnny took out a new 2 year bank loan for £10,000 from the bank at the
start of the week. Interest is accrued weekly at an annual rate of 7.5%
• Johnny purchases stationery for the business at a cost of £300
• Johnny pays his Part Time Assistant their weekly wage of £500 through bank
transfer
• An electrician stops by the shop to repair a faulty plug socket. Johnny agrees
to pay them £100 at the end of the month.
• Rent was already paid for the whole year in advance earlier in the year.
Weekly rental costs work out at £1,000.
1. Calculate profit for the week (by preparing an income statement)
2. Assuming the opening bank balance at the start of the week is £9,000,
prepare an internal cashflow statement to calculate the week’s closing
balance.

8. End of seminar
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9. 9
End of seminar