Financial Accounting: Income Statement, Statement of Financial Position, and Cash Flow Statement

This article covers the basics of financial accounting, including income statement, statement of financial position, and cash flow statement. It also includes a sample cash flow statement and explanations of depreciation, disposal of non-current assets, and increase in inventories.

Financial accounting

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
Income statement........................................................................................................................3
Statement of financial position...................................................................................................4
CASH FLOW STATEMENT..........................................................................................................5
Question 2a.................................................................................................................................5
Question 2b.................................................................................................................................5
REFERENCES................................................................................................................................7

QUESTION 1
Income statement
Particulars Details (£) Amount (£)
Sales Revenue 164000
Less Cost of sales
Opening inventory 6000
Add Purchases 100000
Less closing inventory Less
goods taken out by owner for
personal use (4400 – 500)
(3900) -102100
Gross Profit 61900
Add Discount received 500
62400
Operating expenses:
Discount allowed 920
Carriage outward 1500
Rents and rates excluding
prepaid rent
9300 – 1300 = 8000
Heating and lighting 4500
Salaries and wages 37000
Motor running cost including
closing outstanding
630 + 90 = 720
Depreciation (Delivery van) 9000 – 3500 = 5500*25% =
1375
Depreciation (shop fittings) 8500*20% = 1700
Less Total operating expenses -55715
Net profit 6685

Statement of financial position
Particulars Details (£) Amount (£)
ASSETS
Non-current assets
Delivery Van 9000
Shop Fittings 8500
Total 17500
Current assets:
Trade receivables 13000
Cash in hand 1350
Inventory 4400 - 500 3900
Prepaid rent 1300
Total 19550
Total assets 37050
Liabilities
Current liabilities:
Trade payables 5000
Bank overdraft 1200
Accumulated depreciation
(Delivery van) 3500 + 1375
4875
Accumulated depreciation
(Shop fittings) 1500 + 1700
3200
Outstanding motor expense 90
Total 14365
Capital:
Opening balance 30000

Add Net Profit 6685
Less Drawings -14000
Total 22685
Total capital and liabilities 37050
CASH FLOW STATEMENT
Question 2a
Statement of cash flow
Particular Amount
Cash flow from operation 11000
Net cash from operating activity 11000
Cash flow from investing activity
Spending on non- current asset (125000)
Net cash from investing activity (125000)
Cash flow from financing activity
Dividend paid (18000)
Borrowing 90000
Net cash from financing activity 72000
Net change in cash and cash equivalent (42000)
Opening cash and cash equivalent 15000
Closing cash balance (27000)
Question 2b
a. Depreciation

Depreciation is a non cash transaction which defines the depreciated value of the asset.
Depreciation is being deducted for the purpose of calculating the net profit. Hence this
depreciation needs to be added back to the net income while preparing the cash flow statement
using the indirect method (Muniroh and Yuliati, 2021). The reason pertaining to the fact is that
the increase in the asset will outline the outflow of the cash. The depreciation reduces the amount
of the net income but it does not affect the cash as it is a non cash transaction. Hence because of
this reason the depreciation is added back at the time of calculating the cash flow statement.
b. Disposal of non- current asset
The disposal of non current asset is being referred to as selling of the asset. Hence this
can provide two different situations that is it can either be a loss for the company or a profit for
the business. Thus in the present case the disposal of non- current assets has resulted in loss for
the company that it will be deducted from the net cash flows from the investing activities. On the
other hand in case there will be profit been generated on the disposal of the net current assets
then this will result in adding up to the investing activities (Bruwer and et.al., 2021). Hence due
to this reason the noncurrent acids amount is being added up or deducted from the investing
activities. Thus in case there will be loss from the non- current assets then it will be deducted
from the cash from investing activities. On the other hand in case there will be profit on the
disposal of the non- current assets then it will be added in the cash flow from investing activities.
c. Increase in inventories
Increase in inventory refers to as purchasing of the inventory and increasing the level of
stock within the business. This implies that the inventory will be increased only when cash will
be paid. Hence as a result of this it is under the category of reduction in cash that is cash outflow
(Reid and Myddelton, 2017). Thus as a result of this it will be deducted from the cash flow
statements while preparing the statement. This is particularly because of the reason that
decreases in cash flow of the outflow of cash reserves in reduction within the cash amount.
Hence it will be reduced at time of preparing cash flow under indirect method.

REFERENCES
Books and Journals
Bruwer, J. P. and et.al., 2021. The Theoretical Link Between Cash Flow Statement Usage and
Decision Making In South African Small, Medium and Micro Enterprises. International
Journal of Business Research and Management (IJBRM). 12(4). pp.191-204.
Muniroh, I. and Yuliati, A., 2021. Do Cash Flow and Accounting Profit Information Affect
Stock Prices?. Journal of Accounting and Strategic Finance. 4(1). pp.108-121.
Reid, W. and Myddelton, D. R., 2017. Cash flow statement. In The Meaning of Company
Accounts (pp. 16-16). Routledge.