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Page 1: Introduction

-The presentation begins with an overview of the T-Level Technical Qualification in Management and Administration, specifically focusing on core management and administration aspects. Common financial terms utilized in financial reporting documents are introduced as a critical part of financial literacy for effective management.

Page 2: Learning Objectives

• The learners are expected to achieve the following by the end of the session:• Discuss common terms used in financial reports.• Explain the importance of understanding these terms.• Emphasize the correct application of each term in the context of financial reporting documents.

Page 3: Common Terms in Financial Reporting

-Financial terms provide clarity on various items in financial documents, enabling readers to interpret sections in a business context. The three primary financial reporting documents include:

• Income Statement (Profit and Loss)

• Balance Sheet

• Cash Flow Statement

• To aid in understanding these terms, a fictional business named Cupcake Pi, which sells bakery items, is utilized as an example.

Page 4: Common Financial Terms in Cupcake Pi’s Context

-Cupcake Pi is owned and managed by Sara, a sole trader.

• Sid, a master baker, has a salary of £20k annually for producing cupcakes.

• Sara manages finances, sales, and marketing, drawing a salary of £20k per annum.

Page 5: Accounting Period

-The accounting period is defined as the timeframe covered by the financial accounts. For Cupcake Pi:

• The annual accounting period begins on 01/01/20XX and ends on 31/12/20XX.

Page 6: Sales Turnover/Revenues

-Sales turnover or revenues refer to the revenue generated from trading activities, specifically from the sale of products or services.

• For Cupcake Pi, the monthly sales steady at £14,000, leading to a yearly total recorded in the income statement.

Page 7: Income Statement

-The income statement is crucial for showing the income and expenditure, enabling the assessment of profit or loss for a specific accounting period.

• The income statement of Cupcake Pi for 1st Jan 20X2 to 31st Dec 20X2 reflects total sales revenues of £168,000.

Page 8: Understanding Costs

-Costs or expenses represent the money spent by a business for its operations.

• Costs are categorized into:

  • Fixed Costs: Remain constant regardless of output (e.g., rent, van lease).

  • Variable Costs: Fluctuate based on production level (e.g., raw materials).

• Managing costs efficiently is vital for profit realization.

Page 9: Costs in the Income Statement

-(1) The terms costs, expenditure, and overheads represent the expenses incurred by a business.

• For Cupcake Pi, direct costs are allocated in the income statement, including opening stock and raw material purchases.

Page 10: Cost of Goods Sold (COGS)

-(2) Direct costs are allocated to production, termed as the Cost of Goods Sold (COGS). For Cupcake Pi, the calculation involves:

• Opening stock/raw materials: £8,000

• Raw material purchases: £90,000

• Closing stock deduction: £12,000

• Total COGS: £86,000.

Page 11: Gross Profit Calculation

-Gross profit indicates the profit after deducting direct costs but before accounting for taxes and dividends:

• Gross profit = Total sales revenues (£168,000) - COGS (£86,000) = £82,000.

Page 12: Reporting Other Costs

-In the income statement, company-wide operating expenses such as wages and rent are accounted for.

• Total costs for Cupcake Pi are:

  • Wages (Sara and Sid): £40,000

  • Delivery van lease: £5,000

  • Rent: £12,000

  • Energy: £8,400

  • Total: £65,400.

Page 13: Company-Wide Operating Costs

-Additional company-wide operating costs must be consistently classified across accounting periods to enable year-on-year comparisons.

• Total other expenses are recorded as £65,400.

Page 14: Extracting Annual Income Statement

-The simplified income statement for Cupcake Pi displays the calculated figures clearly for the reporting period.

Page 15: Net Profit Definition

-Net profit represents the earnings remaining after all expenses, taxes, and dividends are deducted from gross profit:

• Net profit = Gross profit (£82,000) - Other expenses (£65,400) = £16,600.

• After taxes at 20%, the net profit totals £13,280.

Page 16: Comprehensive Income Statement Display

-The income statement is updated to include tax deductions, showcasing the net income.

Page 17: Cash Flow Overview

-Cash flow represents the fiscal movement of cash into and out of the business.

• A cash flow forecast provides a prediction of future cash movements, while an actual cash flow statement reflects real transactions.

• Distinction between cash flow and profit is emphasized; they are not synonymous.

Page 18: Cash Flow Statement - Income

-Cash flow statements for Quarter 1 illustrate the total income entering Cupcake Pi, with a total income of £57,000 across January, February, and March.

Page 19: Cash Flow Statement - Expenditure

• A cash flow statement delineates the total outflow of cash, detailing the purchase of equipment and monthly operating costs for Cupcake Pi.

Page 20: Cash Flow Balance

-Cash flow summary details the monthly bank balance, elucidating the cash balance carried from January through March.

Page 21: Cash Flow vs. Profit Insight

-The distinction is drawn that cash flow reflects real-time money transactions while profit encompasses total income after all expenses are cleared.

• The implications of delayed payments from customers create potential vulnerabilities for the business.

Page 22: Cash Flow vs. Profit Summary

-A detailed distinction between cash flow and profit, outlining cash flow as an overview of all financial movement while profit is determined by remaining income after all expenses are settled.

Page 23: Balance Sheet Overview

-A balance sheet provides a snapshot of assets, liabilities, and equity at a specific time, highlighting its significance within financial documents.

Page 24: Assets on the Balance Sheet

• The presentation of assets in the balance sheet distinguishes between fixed and current assets, based on liquidity and time frame.

Page 25: Fixed Assets and Their Depreciation

-Fixed assets, including their depreciation, are recorded on the balance sheet.

• The depreciation of assets is crucial for more accurate expense allocation.

Page 26: Understanding Depreciation

• Depreciation allows capital expenditure on fixed assets to be distributed over their useful life for accurate cost reporting.

Page 27: Current Assets Definition

• Current assets are listed in order of their liquidity, indicating how quickly they can be converted to cash.

Page 28: Liabilities on the Balance Sheet

-The balance sheet categorizes liabilities, differentiating between current and long-term obligations based on payment timelines.

Page 29: Current Liabilities Breakdown

• Current liabilities are prioritized for payment based on urgency, providing insight into financial obligations.

Page 30: Total Assets Computation

• Total assets are calculated by subtracting current liabilities from total fixed and current assets, resulting in a comprehensive asset valuation.

Page 31: Financing the Business

-The 'financed by' section illustrates owner investments and retained profits, showing capital flow in relation to earnings.

Page 32: Retained Profits Usage

-Retained profits refer to income set aside for reinvestment rather than distribution, and potential uses include new equipment purchases or inventory increases.

Page 33: Summary of Topics Covered

-The session summarized the financial terms explored, emphasizing their importance in understanding and contextualizing financial reporting.

Page 34: Conclusion and Questions

-The presentation concludes, inviting any questions from learners, highlighting the learning contents, and reinforcing key financial concepts.