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

This article explains the concepts of income statement, statement of financial position, and cash flow statement in financial accounting. It provides a solved example of each statement and highlights their importance in tax planning, decision making, and financial analysis. The article also includes references for further reading.

Financial Accounting

Contents
QUESTION 1.................................................................................................................................................3
Income statement...................................................................................................................................3
Statement of financial position................................................................................................................4
QUESTION 2.................................................................................................................................................5
Question 2a.............................................................................................................................................5
Question 2b.............................................................................................................................................6
REFERENCES................................................................................................................................................8

QUESTION 1
Income statement
An income statement is a financial record or record that shows a firm's profits and costs for
a specified fiscal year term. The income statement is used by businesses to compute net income,
which is a crucial factor in tax planning. It displays profits or losses on the simplest level. All
revenues and earnings are included with us on the report, followed by damages and losses to
indicate the total. Income statements are also used by businessmen and senior executives to make
judgments on procedures, profitability, effectiveness against rivals, and potential outcomes. In
contrast, public corporations must file financial filings with the SEC, which include a net
income. Financial statements must be prepared on a regular or annualized basis by any
organisation, corporation, or corporation. Governing agencies, shareholders, and other
participants including the IRS and the businesses' registration are all required to receive annual
accounts from major corporations.
The statement of income, balance sheet, and cash flow statements, in addition to the net
income, give important information about a business’ financial. An income statement can
provide management with information on revenues, net earnings, and performance.
Income Statement of Aderonke Ltd For the year ending of 31 December 2020
Particulars Details (£) Amount (£)
Sales Revenue 164,000
Less: Cost of sales
Opening inventory 6000
Add: Purchases 100,000
Less: Closing inventory
Less goods taken out by
owner for personal use (4400
– 500)
(3900) (102100)

Gross Profit 61900
Add Discount received 500
Operating Profit 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
Balance sheet: A simple balance sheet should have three parts: assets, liabilities, and capital,
commonly known as "owner's equity." A balance sheet is a type of financial statement that
shows the assets and liabilities of a company. It's a straightforward yet effective method for
gaining an overview of a business’ financial. This covers information such as the tangible
securities and their price. The balance sheet's goal is to give an overview of a firm’s financial
position. It does this by laying out an organization's corporate assets, and also any sums debtors
and creditors or bankers, and also the value of the shares.
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
QUESTION 2
Question 2a
A cash flow statement is a financial statement that shows the inflow and outflow of monies
in or out of a business or company over the course of a financial period. The fundamental
objective of a cash flow statement informs the reader about receivable payment transactions. The
financial statements are completed by this report. It's crucial to understand that cash flow isn't
just about net profit. The circulation of cash into and out of a business is referred to as cash
inflows, and it is influenced by a variety of noncash activities.
A cash flow statement shows the firm's input and outflow of cash or cash equivalents over
a certain time period. To put it another way, the statement of cash flow the reasons for
fluctuations in money flow between two Balance Sheet dates. The term "cash flow" refers to the
influx and flow of cash and cash equivalents. It refers to the inflow and outflow of funds inside a
business.
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 the loss of a real asset's financial worth through point due to
usage, mileage, or expiration. It's an accounting technique for allocating a part of an asset's cost
to the income statements for a finance period over the asset over its useful life. Likewise, the
asset's total price on the balance sheet is decreased to the same degree. Depreciation is non-cash
expenditure since it affects a company's profitability despite requiring a cash investment
(Retolaza and San-Jose, 2021).
Depreciation is subtracted while computing net income. Like a result, when producing
the cash flow statement that uses the indirect method, this depreciation must be restored
calculating the net revenues. The rationale for this is because a growth in the property will define
the cash flow. Depreciation decreases the company's net income, but it has no effect on cash

because it is a non-cash operation. As a result, depreciation is officially added when computing
the statement of cash flows.
(b) Disposal of non current asset: The process of disposing of assets includes removing assets
from the financial statements. This is required to entirely eliminate an asset from the financial
statements. A deficit or surplus on an asset disposal may necessitate the accounting of a gains
and losses on the activity in the period ending in which the disposal happens. In this situation,
the sale of non-current assets led to a loss for the firm, which will be subtracted from the net
income from investment operations. From the other side, if a company is profitable on the sale of
net current assets, the proceeds will be added to the investment activity. As a result, the
noncurrent currency value is charged up or removed from the investment activity (Setyawati and
Sudaryati, 2021).
The revenues from the selling of lengthy assets are recorded in the investment operations
portion of the cash flow statement, whereas the profit on the selling is recorded as a reduction
from net earnings in the operating operations section. The differential between the earnings and
the price to book or significant increases of the lengthy assets at the time of the transaction is a
profit on the sale or disposition. The relationship between the cost obtained and the purchase
price is a loss on the selling or disposal. To determine the asset's market price at the time of
selling, depreciation must be documented prior to the time of disposition.
(c) An increase in inventories: The term "increase in inventory" involves the purchase of stock
levels and the excessive amount of stocks in the firm. This means that the inventories will only
be expanded once money is collected. As a consequence, it comes under the heading of cash
flows, which is a drop in money. As a consequence, when compiling the summary, it will be
subtracted from the cash flow figures. This is due, in part, to the fact that declines in cash flow
from the outflow of excess cash result in a drop in the cash payout. As a result, it will be lowered
when calculating cash flow using the indirectly technique (Putsom, 2021). But at the other
extreme, if a profit is made on the sale of non-current assets, it will be included in the cash
inflows from investment operations.
Stock creates cash flow; however acquiring inventory necessitates a financial outlay,
which impacts the cash position of the organisation. In the cash flow sheet, a growth in inventory

levels will show as a bad sum, suggesting a cash outflow or that a company has acquired more
things than has been delivered.

REFERENCES
Books and Journal
Retolaza, J. L. and San-Jose, L., 2021. Understanding Social Accounting Based on
Evidence. SAGE Open. 11(2). p.21582440211003865.
Setyawati, D. and Sudaryati, E., 2021. Accounting Ethics in Financial Reporting in The Context
of The Metaphor of ‘Lawang Sewu’(thousands of doors, thousands of information,
thousands of interests). The Indonesian Accounting Review. 11(2). pp.187-195.
Putsom, S., 2021. The Testing of the Reliability and Validity of Accounting and Financial Skills
Measures: An Empirical Evidence of Thai Dairy Farm Entrepreneurs. St. Theresa
Journal of Humanities and Social Sciences. 7(1). pp.1-22.
Hwang, K. J., Kang, P. K. and Jung, D. J., 2021. The association between human resource
investments in the internal accounting control system and non-audit fees: evidence from
South Korea. International Journal of Trade and Global Markets. 14(2). pp.97-106.