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Drawing Financial Statements and Projections

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25 views36 pages

Drawing Financial Statements and Projections

Uploaded by

Aaron Mushunje
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Drawing Financial Statements and Projections

FINANCIAL STATEMENTS
Financial Statements.
-financial statements ‘are a collection of accounting items with the objectives
of gathering, processing and reporting the economic performance of a
company” [karableva etal 2017]
-financial statements gives information regarding assets, liabilities,
shareholder equity, income and expenditure and cash flow [hasanaj and kuqi
(2019)]
-these are statements which show the operations, income and expenditure,
cash flows and position of the business.
-it is a collection of summary level reports about an organization’s financial
results, position and cash flows.
Purposes of Preparing Financial Statements

 Enables an entity to assess its ability to generate cash inflows.

 Shows the financial health of the business.

 Shows the revenue, expenditure, assets and liabilities of the business.

 Enables creditors and investors to make informed decisions.


 Enables better management of debt.

 A legal requirement.

 Allows an entity to efficiently and effectively use its resources.

 Assesses how well management has discharged it duties.


Types of Financial Statements

1. Statement of profit and loss and other comprehensive income.

2. Statement of financial position

3. Statement of cash flows

4. Statement of changes in equity

5. Notes to financial statements


Statement of profit and loss and other comprehensive income

-it is also known as an income statement or profit and loss account.

-it shows revenue/income and expenses made in a particular period.

-usually prepared annually.


statement of Profit and Loss and other Comprehensive Income for the year ended
31 December 2020
Sales xx
less Sales Returns xx
Turnover xx
Less Cost of Goods Sold
Opening Inventory/Stock xx
add Net Purchases xx
Cost of goods available for sale xx
less Closing Inventory/stock xx xx
Gross profit xx
add other Income
Discounts received xx
Rent received xx

Total Income xx

Less Expenses

Salaries and wages xx

Discounts allowed xx

Rent payable xx

Insurance xx

Electricity and water xx xx

Net profit xx
Statement of Financial Position

-shows the financial position of the business for a particular period.


-shows the assets, liabilities and capital of the business.
Statement of Financial Position As At 31 December 2020

Non Current Assets

Land xx

Buildings xx

furniture and equipment xx

Motor vehicles xx

xx
Current Assets
Debtors xx
inventory xx
Bank xx
Cash xx xx
xx
Financed By
Capital xx
less Drawings xx
xx
Liabilities
Loans xx
Creditors xx
Bank overdraft xx xx
xx
Statement of Cash flows

Statement of Cashflows For The Year Ended 31 December 2020


Cashflow from operating activities
Cash receipts from
customers xx
Cash paid to suppliers and employees (xx)
Cash generated from operations xx
interest received xx
Dividends
Received xx
Interest paid (xx)
Income tax paid (xx)
Dividends paid (xx)
Net cash in/(out)flow from operating activities xx/(xx)
Cashflow from investing activities
Purchase of PPE (xx)
Proceeds from sale of PPE xx
Purchase of financial investments (xx)
Sale of financial
investments xx
xx/(
Net cash in/(out)flow from investin activities xx)
cashflow from financing activities
proceeds from issue of
shares xx
proceeds from loans
incurred xx
Repayment of
loans (xx)
repayment of lease liability (xx)
Net cash in/(out) flow from financing activities xx/(xx)
Net increase/(decrease) in cash or cash
equivalents xx/(xx)
Cash and cash equivalents beginning of period xx
Cash and cash equivalents end of
period xx
Statement of changes in equity for the year ended 31 December 2020
Capital Retained Earnings Total
Balance b/d 01/01/2020 xx xx xx
Addittional capital contributed by the
owner xx xx
Profit for the year xx xx
Drawings (xx) (xx)
Balance c/d 21/12/2020 xx xx xx

NB equity is made up of capital and retained earning. Retained earnings are profits for the trader

Accounting Equation

Assets = Capital + Liabilities

Capital = Assets - Liabilities


FINANCIAL PROJECTIONS
These projections are forecasts of your cash inflows and outlays,
income and balance sheet.
They show bankers and investors how you will repay loans, what
you intend to do with your money and how you will grow.
They also help you identify financing needs, optimize your pricing,
plan production, time major expenditures and monitor your cash
flow Financial projections use existing or estimated financial data to
forecast your business’s future income and expenses.
DEVELOPMENT OF FINANCIAL PROJECTIONS

As you develop your business plan, list the key expenditures you will
need to make to get your company off the ground and your
subsequent costs to operate.

Be sure to include recurring expenses—salaries, rent, gas,


insurance, marketing, raw materials, maintenance and the like—and
one-time purchases, such as machinery, website design and vehicles.
Research industry spending to get a better idea of the numbers.
Create financial projections
Plug your expenses and revenues into a cash flow projection that shows
monthly inflows and outflows of money for the first 12 months of
operations. For the second year, you can make quarterly or yearly
projections.
To create the projections, you can use an Excel spreadsheet or tools
available in your accounting software.
Don’t assume sales equal cash in the bank right away. Enter them
as cash only when you expect to get paid based on industry
averages and any prior experiences of your team.

Use your cash flow projections to prepare annual projected income


(profit and loss) statements and balance sheet projections.
Determine your financial needs
Your financial projections will help you see if your business plans are
realistic, whether you’ll have any shortfalls and what financing you
may need.
The documents will also be vital for building a case for
business loans.
Use the projections for planning
It can be useful to include various scenarios—most likely, optimistic and
pessimistic—for each projection in order to help you foresee the financial
impacts of each one.

Your projections can also help you analyse the impacts of different
strategies for your new business. What if you charged a different price?
Or were able to collect bills more quickly? Or opted for more efficient
equipment? Plugging in various numbers shows how such decisions
would affect your finances.
Plan for contingencies

What would you do if an unexpected event threw off your projections? It’s
a good idea to do some contingency planning ahead of time.

Also consider setting aside a cash reserve, just in case. Many


entrepreneurs like to have enough cash for 90 days of operations
(including cash in the bank and/or room on their line of credit).
Monitor
As your business starts operations, compare your projections against
actual results to check if you’re on target or need to make changes.

Monitoring helps you learn about your company’s cash flow cycle and
spot looming shortfalls early on, when they’re usually easier to
address.
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