chapter 7 preparing financial statements. contents constructing financial statements accounting...

Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5© 2005 Peter Walton and Walter Aerts

CHAPTER 7Preparing financial

statements


Contents

Constructing financial statements

Accounting adjustments Uses of financial statements


Constructing financial statements

Start with aggregate transaction data from the accounting database at the end of the accounting period

Quantify the adjustments necessary to convert the data to reflect GAAP

Bring aggregates and adjustments together in the approved statement format


Extended trial balance A trial balance is the listing of all the

balances on all the general ledger accounts at the end of the accounting period

At year-end, the trial balance data will be refined through the year-end adjustments

In the extended trial balance, the ledger balances and adjustments are added mathematically and the adjusted balance is entered in the income statement column or in the balance sheet column


Extended trial balance format

Ledger +Adjustment

s = Profit and or Balance

balances loss sheet

D / C D / C D / C D / C€ € € € € € € €


Year-end adjustments

1. Calculation of cost of goods sold2. Adjustments for accruals and

deferrals3. Charging annual depreciation4. Updating provisions5. Reviewing assets for potential

impairment


Worked example –Trial balance Mornington Crescent Emporium SA

Trial balance as at 31 December 20X1

€ Assets Land 30,000 Equipment (at cost) 15,000 Accumulated depreciation -4,500 Inventory at 1 Jan. X1 13,250 Trade receivables 23,000 Bank 18,560 95,310 Financing Share capital 50,000 Retained profits 10,500 Trade payables 16,850 Sales 193,000 Purchases –145,000 Salaries and wages –15,325 Rent –10,000 Insurance –2,500 Legal & professional expenses –1,250 Telephone –345 Light and heat –620 95,310


Extended trial balance worksheet Trial Income Balance

balance Adjustments statement sheet Premises 30,000 30,000 Equipment (at cost) 15,000 15,000 Accumulated depreciation -4,500 (h)-1,500 -6,000 Inventory at 1 Jan X1 13,250 (a)+900 14,150 Trade receivables 23,000 23,000 Bank 18,560 18,560 Prepaid expenses (b)+2,000 2,500 (c)+500 Totals 95,310 +1,900 97,210 Share capital 50,000 50,000 Retained profits 10,500 10,500 Profit for year (i) 16,730 Trade payables 16,850 16,850 Sales 193,000 193,000 Purchases –145,000 (a)+900 –144,100 Salaries and wages -15,325 -15,325 Rent -10,000 (b)+2,000 -8,000 Insurance -2,500 (c)+500 -2,000 Legal & prof. exp. -1,250 (f)-2,000 -3,250 Telephone -345 (d)-80 -425 Light & heat -620 (e)-50 -670 Accrued expenses (d)+80 2,130 (e)+50 (f)+2,000 Short-term provision (g)+1,000 1,000 Provision expense (g)-1,000 -1,000 Depreciation expense (h)-1,500 -1,500 Profit (i)-16,730 Totals 95,310 +1,900 97,210


Income statement for the year ended 31 December 20X1 (format for use internally)

Mornington Crescent Emporium SA

€ €

Sales 193,000 Cost of goods sold (144,100) 48,900 Salaries and wages 15,325 Rent 8,000 Insurance 2,000 Light and heat 670 Depreciation expense 1,500 Provision expense 1,000 Legal and professional 1,250 Telephone 425 Audit 2,000 (32,170) Net income 16,730


Income statement for the year ended 31 December 20X1 (published format)


€ €

Revenue 193,000 Cost of goods sold (144,100) 48,900 Personnel costs 15,325 Other operating costs

(excluding depreciation and provisions) 14,345

Depreciation expense 1,500 Provision expense 1,000 (32,170) Profit before interest and tax 16,730


Balance sheet as at 31 December 20X1 Mornington Crescent Emporium SA € €

Non-current assets Premises 30,000 Equipment (at cost) 15,000 less accumulated depreciation (6,000) 9,000 39,000 Current assets Inventory 14,150 Trade receivables 23,000 Prepaid expenses 2,500 Bank 18,560 58,210 Total assets 97,210 Equity Share capital 50,000 Retained earnings 10,500 16,730 27,230 77,230 Current liabilities Short-term provisions 1,000 Trade payables 16,850 Accrued expenses 2,130 Total equity and liabilities 97,210


Additional accounting adjustments

Interest expense adjustments Accrual adjustments at year-end

Income tax adjustments Year-end accruals for estimated income tax

on annual pre-tax profit Dividend

Charged directly against reserves/retained profits in shareholders’ equity

Dividends declared after balance sheet date may not be recognised as a liability because they do not constitute a present obligation at balance sheet date


Presentation of interest and income tax expense

The deduction of interest and tax expense normally figures separately in the income statement:Profit before interest and tax XXXXX

Finance costs (Interest expense) (XXXX)Profit before tax XXXXX

Income tax expense (XXXX)

(Net) Profit for the period

XXXX


Income statement for the year ended 31 December 20X1


€ €

Revenue 193,000 Cost of goods sold (144,100) 48,900 Personnel costs 15,325 Other operating costs

(excluding depreciation and provisions) 14,345

Depreciation expense 1,500 Provision expense 1,000 Allowance for doubtful debts 230 (32,400) Profit before interest and tax 16,500 Interest expence (500) Profit before tax 16,000 Income tax expense (4,800) (Net) Profit for the period 11,200


Balance sheet as at 31 December 20X1 Mornington Crescent Emporium SA

€ €

Non-current assets Premises 30,000 Equipment (at cost) 15,000 less accumulated depreciation (6,000) 9,000 39,000 Current assets Inventory 14,150 Trade receivables 23,000 less impairment allowance (230) Prepaid expenses 2,500 Bank 18,560 57,980 Total assets 96,980 Equity Share capital 40,000 Retained earnings 10,500 11,200 21,700 61,700 Non-Current liabilities Long-term debenture 10,000 Current liabilities Short-term provisions 1,000 Trade payables 16,850 Accrued expenses 2,630 Taxes payable 4,800 Total equity and liabilities 96,980


Uses of financial statements To measure how much dividend might be

paid To provide reassurance of a company’s

financial strength to creditors To provide a basis for measuring future

growth for stock market analysis To measure management performance in

a principal/agent context To provide a basis of taxation of the

company To give employees an idea of the

company’s strength

chapter 7 preparing financial statements. contents constructing financial statements accounting...

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