Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsAdam’s Computer BagsIncome StatementFor the year ending Year OneSalesLess cost of goods soldGross profitLess operating expensesNet profitRM52,000RM31,200RM20,800RM15,600RM 5,200When we look at Adam’s incomestatement, we can see that he willmake RM20,800 in gross profit. Thisway of recording the transaction iscalled accrual accounting, that is,sales are recorded when made,rather than when cash is collected.This is the most effective way ofmatching all costs to the transactionand makes it easier to see clearlyhow much profit is generated fromthe transaction.Using Adam’s example, let us assume that he sells 500 bags at RM52 per bagto a computer manufacturer on thirty days’ credit, meaning that he will receiveRM26,000 from this customer at the end of month one. He is also able to export200 bags at RM52 each, which means that the payment of RM10,400 from theoverseas customer is not received until the second month from delivery. Thebalance of his inventory will be sold later in the year. All the bags have beenimported at the beginning of the year at the total cost of RM34,320, which waspaid at the end of the first month of trading.When we look at the cash flows from Adam’s sales, it becomes clear that thecash flows will not equal the profit until the total transaction is completed, that is,when all the money is received from all the sales.TransactionMonth 1Cash MovementMonth 2 Month 3 to 12Sales RM52,000 RM26,000 RM10,400 RM15,600Payment forinventoryGross profitCash balanceRM34,320 (RM34,320)0 0RM20,8000(RM8,320)(RM8,320)RM10,400RM 2,080RM15,600RM17,68068Chapter 6 p66-78 Eng.indd 688/15/11 5:02:24 PM