UNIT 2. FINANCIAL STATEMENTS

Profit & Loss Statement

ABC Travel

Year Ended 30 June 1986

Income                                                               Actual     Budget     Variance

Domestic Travel                                                  90,021     105,000     ( 14,979)

International Travel                                             65,523     75,000        ( 9,477)

Cruising                                                                   5,650         6,000         ( 350)

Coach/Rail Travel                                                 1,264         2,000          ( 736)

Sundry Income                                            642                              642

Total Income                                                     163,100     188,000     ($24,900)

Expenses

Accounting Fees                                                  2,000       1,800       ( 200)

Bank Charges                                                         1,563     1,400         ( 163)

Depreciation                                                           5,555     5,000         ( 555)

Electricity                                                                 560         600             40

General Expenses                                                 1,563         1,400       ( 163)

Insurance                                                                 960             950         ( 10)

Licence Fees                                                         1,500             1,500             -

Leasing                                                                     4,300             4,020     ( 280)

Motor Vehicle Running                                           4,200         4,256            56

Repairs & Maintenance                                          1,632         1,850             218

Rent                                                                          25,000         25,000             -

Salaries                                                                     75,200         78,000         2,800

Staff Amenities                                                             893              600         ( 293)

Stationery                                                                 2,350             2,160         ( 190)

Subscriptions                                                             1,650         1,500         ( 150)

Telephone                                                                     3,200         3,360         160

Travel                                                                             523             1,000         477

Total Expenses                                                       132,649      134,396         1,747

NET PROFIT (before tax)                                      $30.451         $53.604     ($23,153)

Note: Brackets denote unfavourable variance

BALANCE SHEET

ABC Travel

as at 30 June 1986

A Profit and Loss Statement is sometimes called an Income Statement or Revenue Statement and measures the profitability for a firm over a period of time by simply comparing income and expenses.

Note that the statement for Jones Travel has actual, budget and variance columns. The "actual" figures are produced from the Trial Balance whereas the "budget" figures are produced from the yearly budget, which would have been prepared at the beginning of the financial year.

By subtracting "actual" from "budget" we can create a "variance" column, which helps us with a management technique called "management by exception". This means that we will only focus on significant variances. Positive (favourable) variances will tend to indicate opportunities whilst negative (unfavourable) variances will indicate problems.

The isolation of these variances greatly assists the problem-solving/ decision-making process by quantifying the issue involved.

The Balance Sheet for Jones Travel measures the financial position of the organisation as at 30.6.86. This is just a time- slice or photograph of the business at one point in time whereas the Profit & Loss Statement measures performance over a period of time.

When you look at a Balance Sheet it helps to think of the figures as referring to "funds". Jones Travel has sourced funds of $94,974 from internal and external sources. Internal in that it has been funded to the extent of $60,451 by the owners of the business and the remaining $34,523 by outsiders. Creditors have advanced funds just as the bank has advanced funds and we can say therefore that the business is using money sourced from these people. In fact the business has a liability to repay these funds at some future point in time. That's why we say liabilities are amounts owed by the business.

On the other hand these funds that have been sourced or raised internally and externally have been invested in a wide range of assets. $32,200 has been invested in short term assets of various kinds whilst $64,774 has been invested in long term assets. That's why we refer to assets as things owned by the business.

Of course we can't easily link sources to uses of funds, for example you can't look at the original owner's equity of $30,000 and say that is represented by any one particular asset. We have to think of the total liabilities as a pool of funds sourced and likewise the total assets as a pool of investments.

When we come to a decision to make an investment we will of course have to consider the unique source of funds to finance the investment.

Copyright © Bill Wright 1994