preparation of financial statements
TRANSCRIPT
PREPARATION OF FINANCIAL STATEMENTS
PREPARED FOR: MS. KIM OANH VU
PREPARED BY: AN DUC KIEN
STUDENT NO: F06-066
CLASS: F06B
SUBMISSION DEADLINE: 14th November,
Table of ContentsINTRODUCTION..................................................1
CHAPTER 1: HOW INFORMATION NEEDS OF DIFFERENT USER GROUPS VARY. 2CHAPTER 2: PREPARATION OF FINANCIAL STATEMENTS.................3CHAPTER 3: INCOMPLETE RECORDS..................................7CHAPTER 4: FINANCIAL STATEMENT PUBLICATION BY A PARTNERSHIP FIRM..............................................................11CHAPTER 5: CONSOLIDATION OF ACCOUNTS..........................15CONCLUSION...................................................19
References....................................................19
INTRODUCTIONA financial statement (or financial report) is a formal record ofthe financial activities of a business, person, or other entity(Anon., n.d.). Financial statement record all the financialactivity of business during a period of time. Financialinformation is presented in a structured manner and in a formeasy to understand.
Balance sheet: represent the value of company’s assets,liabilities and equity
Income statement or profit and loss report: reportscompany‘s income, expenses and profit during a period oftime
Giving the exact financial information is essential to decisionmaking of different groups of user. To do that, it require acareful analysis from the financial data. This report will helpreader to understand how to prepare a financial statement forsole trader and partnership through the example of Nguyen Luucompany and EdLu Ltd.
CHAPTER 1: HOW INFORMATION NEEDS OF DIFFERENTUSER GROUPS VARY
Different user groups have different requirement for the information from the financial statement of a business. Businesses need to know that in order to provide the right information for them. User groups could be divided in two types: external and internal group (Anon., 2013).
1. Internal groupa. Managers and Owners: they need information in order to
measure the company performance and plan theappropriate strategy for the company. The manager andowner need information from financial report fordecision making. For owners, they use the informationfrom financial statement to analyze the profitabilityof their investment and decide to keep investing in thecompany or not.
b. Employees: They also use information from financialstatement to assess profitability of company in orderto make sure the security of the job and their futurein the company. Employee needs of information alsoinclude performance bonuses, commissions, revenuesharing or simply want to know the financial standingof their employer.
2. External group:a. Creditors: this users need information in order to
consider: Should we lend them our money? The mostcommon user in this group is bank. When a company wantto borrow money from the bank, the bank usually look inthe financial statement of company, specifically the
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debt section in order to assess the ability to repay ofthe company.
b. Investors: Investors use information in order toconsider the financial strength of a company. Thiswould help them to make investment decisions.
c. Government: base on the financial statement of acompany, the government can determine the exact amountof tax that the company have to pay, line with thecompany financial strength.
d. Customers: Customer are interested to judge theprofitability of the business for assess the ability ofthe company to survive so that they are supplied. Withstrong financial background also relate to qualityproducts and the innovation of products.
CHAPTER 2: PREPARATION OF FINANCIAL STATEMENTSNGUYEN LUU
ADJUSTED TRIAL BALANCEAs at 31st May, 2013
Debit Credit Land and building £
240,000 Tools and equipment £
160,000 Depreciation, Provision
+ Land and building: £ 43,600
+ Tools and equipment: £ 97,000
Purchase £ 500,000
Sales £ 804,400
Stock £ 100,000
Discount allowance £ 36,000
Discount received £ 9,600
Return out £ 30,000
Salaries and Wages £ 119,200
Bad debt £ 9,200
Interest on loan £ 10,200
Other expense £ 34,800
Trade creditor £ 72,000
Trade debtor £
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76,000 Cash in hand £
600 Bank £
2,600 Drawing £
48,000 Allowance for receivable
£ 1,520
Doubtful debt £ 520
17% long term loan £ 60,000
Capital £ 242,600
Prepaid expense £ 600
Depreciation expenseLand and building £
3,600 Tools and equipment £
21,000 Accrued Salaries £
1,600 £ 1,362,320
£ 1,362,320
*Note for Adjusted Trial Balance:
1. Salaries and Wages
2. Other expenses
3. Doubtful debt
4. Depreciation
Depreciation – Land (Straight line method) = 240,000 * 1.5% = £ 3,600Depreciation – Equip (Reducing balance method) = (160,000 – 76,000)*25% = £ 21,000
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NGUYEN LUUINCOME STATEMENTAs at 31st May, 2013
REVENUESale £
804,400 Less: cost of goods sold
£ 486,000
Total Revenue £ 318,400
EXPENSESDepreciation expenseLand and building £
3,600 Tools and equipment £
21,000 Discount Allowanced £
36,000 Salaries Expense £
119,200 Bad debt £
9,200 Other expense £
34,800 Interest on loan £
10,200 Doubtful debt £
520 Total Expenses £
234,520 Income from
operation £ 83,880
Plus: Disccount Received
£ 9,600
NET INCOME £ 93,480
*Note for income statement:
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According to scenario, there are £ 30,000 is defined as return out. Therefore, when calculate COGs, this number mustbe minus.
COGs = Opening Balance + Purchase – Closing Balance – Return out
= 100,000 + 500,000 – 84,000 – 30,000 = £ 486,000
Discount Allowanced is the amount of discount which Nguyen Luu company gave to customer, so it will be classify as expense of company
Discount Received is the amount of discount which Nguyen Luu company receive from supplier, so it will be classify as revenue of company and need to be added in revenue section.
Bad debt is a debt which a business finds it impossble to collect from the customer. It is an expense that the business have to bear when selling on credit to customers.
NGUYEN LUUBALANCE SHEET
As at 31st May, 2013ASSETS £ £
Stock £ 84,000
Cash in hand £ 600
Land and Building £ 196,400
Tools and Equipment £ 63,000
Trade debtors £ 74,480
Bank £ 2,600
Prepaid other expenses £ 600
TOTAL ASSETS £ 421,680
LIABILITIESTrade creditor £
72,000 17% long term loan £
60,000 Accrued Salaries £
1,600 TOTAL LIABILITIES £
133,600 EQUITY
Capital £ 242,600
Net Income £ 93,480
Less: Drawing £ 48,000
TOTAL EQUITY £ 288,080
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TOTAL EQUITY ANDLIABILITIES
£ 421,680
CHAPTER 3: INCOMPLETE RECORDS1. Trade debtors
There are a missing information in the record of Nguyen Luu Company, which is the trade debtor on 31st March, 2013.
Trade DebtorsOB (1st April,
2012) £ 661,200
Credit Sale £ 2,688,400
£ 2,560,000
Cash and discount to creditor
£ 16,800
Bad debt
CB (31st March,2013)
£ 772,800
However, according to the scenario, there are £ 58,000 that call return from debtor, which mean among £ 772,800 of trade debtor, the customers return £ 58,000 to Nguyen Luu Company. Therefore, this number must be minus.
Trade debtor on 31st March, 2013 = £ 772,800 - £ 58,000 = £ 714,800
2. Credit Purchases
Trade Creditors
£ 630,800 OB
Payment to creditor £ 2,410,800
Discount Allowed bycreditors
£ 28,000
Return to creditors £ 16,000
£ 2,320,000
Credit purchases
£ 496,000 CB
3. Cost of goods soldPage | 12
COGS = Opening stock balance + Purchase – Closing stock balance – Return to creditors
= 321,600 + 41,200 + 2,320,000 – 444,800 – 15,000
= £ 2,222,000
4. Fixed Assets Depreciation
Fixed Assets
OB £ 464,400
Machinery acquired bycheque
£ 127,200
£ 110,000 Depreciation
£ 591,600
Less: CB £ 481,600
5. Cash in hand and in bank A/c
6. Outstanding expenses
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NGUYEN LUUINCOME STATEMENT
For the year ended 31st March, 2013 £ £
REVENUESales £
2,872,400 Discount Allowance by creditors
£ 28,000
Less: cost of goods sold £ 2,222,000
Return from debtors £ 58,000
TOTAL REVENUE £ 620,400
EXPENSESCash expenses £
382,800 Bad debt £
16,800 Outstanding expense £
10,800 Depreciation £
110,000 Discount Allowance to debtors
£ 60,000
TOTAL EXPENSES £ 580,400
NET PROFIT £ 40,000
NGUYEN LUUBALANCE SHEET
As at 31st March, 2013 £ £
ASSETSCash in hand £
48,000 Cash at bank £
275,200 Stock in hand £
444,800 Total fixed assets £
481,600 Trade debtors £
714,800 Outstanding expenses £
13,200
TOTAL ASSETS £ 1,977,600
LIABILITIESTrade creditors £
496,000 CAPITAL
Capital £ 1,458,800
Net Profit £ 40,000
Less: Drawing £ 17,200
TOTAL CAPITAL £ 1,481,600
TOTAL CAPITAL ANDLIABILITIES
£ 1,977,600
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CHAPTER 4: FINANCIAL STATEMENT PUBLICATION BY APARTNERSHIP FIRM
1. Goodwill Adjustment Account
Before admission of Nguyen Luu
Goodwill A/C £ 60,000
Bernard's capitalaccount
£ 24,000
Edana's capitalaccount
£ 16,000
Nguyen Luu's Capitalaccount
£ 20,000
After admission of Nguyen LuuBernard's capital account
£ 24,000
Edana's capital account
£ 24,000
Nguyen Luu's capital account
£ 12,000
Goodwill A/C £ 60,000
Before Bernard’s retirement
Goodwill A/C £ 80,000
Bernard's capitalaccount
£ 32,000
Edana's capitalaccount
£ 32,000
Nguyen Luu's capitalaccount
£ 16,000
After Bernard’s retirementEdana's capital account
£ 40,000
Nguyen Luu's capital £
account 40,000
Goodwill A/C £ 80,000
2. Capital Account of Partners
Bernard Edana Nguyen Luu Bernard Edana Nguyen LuuDrawing 12,000£ 10,000£ 5,600£ Capital 70,000£ 40,000£ 20,000£ M otor van 7,400£ Furniture and Fixtures 6,000£
12% Debentures 100,000£ Profit upto 30 Sept 2012 26,400£ 17,600£ Goodwill adjustm ent account 24,000£ 24,000£ 12,000£ Profit upto 31 M arch 2013 6,240£ 6,240£ 3,120£
Bank 15,240£ Goodwill adjustm ent account 24,000£ 16,000£ 20,000£ Goodwill adjustm ent account 32,000£ 32,000£ 16,000£
Balance c/f -£ 77,840£ 47,520£ 158,640£ 111,840£ 65,120£ 158,640£ 111,840£ 65,120£
Capital Accounts of Partners
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*Notes:
The balance c/f of Bernard must equal to 0 because he retire, so the remaining in bank account of Bernard will equal to total assets of Bernard minus total amount of Bernard’s withdraw
Bernard’s bank account = 158,640 – (12,000 +7,400 + 100,000 + 24,000) = £ 15,240
3. Profit and Loss Appropriation Account
Profit & Loss Appropriation AccountFor the year ended 31st March 2013
Loss on the sale of plant £ 2,000
Selling motor car
£ 2,000
Profit distribution to:Net profit transferred
£ 59,600
Bernard £ 32,640
Edana £ 23,840
Nguyen Luu £ 3,120 £ 61,600
£ 61,600
*Notes:1. Profit for the next six months ended 31st March, 2013
Total profit of two preceding year £ 72,400
Profit of current year £ 59,600 £ 132,000
Profit for six months ended 30th September, 2012 £ 44,000
Profit for the next six months ended 31st March2013
£ 15,600
The profit for 6 months ended 30th September 2012 = the average of the two preceding years and the current year
2. Distribution of profit
Distribution of profitTotal Bernard Edana Nguyen
Luu £ 44,000 £ 26,400 £ 17,600 £ 15,600 £ 6,240 £ 6,240 £ 3,120 £ 59,600 £ 32,640 £ 23,840 £ 3,120
3. Sale of plant and motor carPlant sold in lower price than book value:
£ 8,000 (book value) - £ 6,000 (actual value) = £ 2,000
Motor van was sold to Bernard with higher price: £ 7,400 (selling price) - £ 5,400(book value) = £ 2,000
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Edlu LtdBALANCE SHEET
As at 31st March, 2013ASSETS
Furniture and Fixtures
£ 20,000
Plant and Machinery
£ 38,000
Bank A/C £ 23,360
Stock £ 26,000
Trade debtor £ 62,000
Goodwill £ 80,000
TOTAL ASSETS £ 249,360
LIABILITIESTrade Creditor £
24,000 12% of loan £
100,000 £
124,000 EQUITY
Share capital:Edana £
77,840 Nguyen Luu £
47,520 £
125,360 £ 249,360
*Notes:
1. Total Bank A/C of EdLu after Bernard’s retirement
Total capital ofbalance closingEdana £
77,840 Nguyen
Luu £ 47,520
Total £ 125,360
Capital dividedequally
Edana £ 62,680
NguyenLuu
£ 62,680
Amount of capitalneeded in order to
achieve 50:50Edana £
15,160 Nguyen
Luu £ 15,160
The bank A/C closing balance = 53,760 – 15,160 – 15,240 = £ 23,360
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CHAPTER 5: CONSOLIDATION OF ACCOUNTSEdLu LTD
Consolidated Statement of Comprehensive IncomeFor the year ended 31st March, 2013
£’000 Revenue (Note 2) £
1,060,000 Cost of sales (Note 3) £
557,600 Gross profit £
502,400 Distribution cost £
59,200 Administrative expenses £
77,000 Finance cost £
4,200 Profit before tax £
362,000 Income tax expense £
123,800 Profit for the year £
238,200
Other comprehensive incomeGain on revaluation of land £
7,000 Loss on fair value of equity financial asset investment
£ 1,800 £ 5,200
Total comprehensive income £ 243,400
Profit attribute to:Owner of EdLu £
223,200
Non-controlling interest (25%) ( Note 4) £ 15,000
Profit for the year £ 238,200
Total comprehensive income attributable to:Owner of EdLu £
228,000 Non-controlling interest (25%) (Note 4) £
15,400 Total comprehensive income £
243,400 *Notes for Consolidated Statement
1. All the expense and revenue of two companies will be addedtogether. Furthermore, because EdLu brough EcoTime on 30th
Septemer, 2012 and this statement was set up on 31st March,2013. It mean grouping two companies, we have just calculatehalf year of EcoTimes. For example, the distribution cost ofEdLu and EcoTime are 47,200 and 24,000. When entering theConsolidated Statement, the distribution cost of twocompanies will equal to 47,200 + 24,000*6/12 =59,200.
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2. Revenue calculation
EdLu Revenue £ 900,000
Half year revenue ofEcoTime
£ 240,000
Total revenue £ 1,140,000
Less: Intra-group purchase £ 80,000
Revenue £ 1,060,000
When associate company sell goods to parent company, thistransaction is call intra-group purchase. EcoTime sold goods toEdLu for 80 millions. It is EdLu that is received 80 millionsbecause EdLu is parent company. As when record that transactionfor the purpose of consolidated accounts, because it wasn’tclassify as a sale to third party so intra-group purchases isadded to consolidated cost of sales account. Therefore, thisnumber must be minus in revenue.
3. Cost of sales
Cost of sales £’000
Unrealized profit on sale ofplant
£ 2,000
Intra group purchase £ (80,000)
Depreciation plant £ (400)
Unrealized profit in inventory £ 6,000
EdLu £ 520,000
EcoTime £ 110,000
TOTAL COST OF SALES £
557,600
EdLu transferred plant with carrying amount of £8 million toEcoTime with value of £10 million. Therefore, the unrealizedprofit on sale of plant equal to £10 million minus £8 million.Plus, the remaining useful life of plant is 2.5 years and EdLuhad included the profit on this transfer as a reduction in itsdepreciation costs. All depreciation is charged to cost of sales.The depreciation of plant equal to unrealized profit on sale ofplant divided remaining useful life and then multiplied with halfyear.
According to scenario, after purchasing £80 million fromEcoTime, the closing inventory of EdLu is £24 million. It isnecessary to calculate the profit of closing inventory of EdLu.
It equal to £24 million * £20million£80million , in which, £20 million is
the profit gain from selling £80 million. It equal to £80 millionminus cost of £80 million sales: £60 million.
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4. Non-controlling interest
£’000EcoTime profit for half year £ 66,000
Less: Unrealized profit in inventory £ 6,000 £ 60,000
Non-controlling interest (25%) £ 15,000
Other comprehensive income £ 400
Total non-controlling comprehensiveincome
£ 15,400
EcoTime Profit for half year = 132,000 * 6/12 = 66,000Because EdLu hold 75% shares of EcoTime, therefore the amount ofprofit EcoTime hold after acquisition will be 60,000 * 25% =15,000.Other comprehensive income = (2,000 – 800/2) * 25% = 400.
Equity section£’000
Share capital (Note 1) £ 660,000
Share premium (Note 2) £ 680,000
Revaluation Reserve (land) £ 23,800
Other equity reserve £ 4,600
Retained earnings (Note 3) £ 418,200
Total equity £ 1,786,600
Non-controlling interest in statement of financial position (Note 4)
£ 215,400
TOTAL EQUITY OF EDLU £ 1,571,200
*Notes for Equity section:
1. Share capital
£’000
Share capital from EdLu £ 500,000
Share exchange in ratio 2:3 £ 160,000
Total share capital £ 660,000
EdLu exchange share with EcoTime as ratio: 2 shares of EdLu to 3 shares of EcoTimeShare exchange = 320,000 * 75% *2/3 = 160,000.
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2. Share Premium = EdLu share premium before buy EcoTime + Share exchange in ratio 2:3 * price in excess of share nominal value
= 200,000 + 160,000*3 = £ 680,0003. Retained Earnings
£’000Retained earnings of EdLu as at 1 April 2012
£ 180,000
Profit attribute to owner of EdLu £ 238,200
Total £ 418,200
4. Non-controlling interest in statement of financial position
£’000
Share preminum at 31st March 2013 £ 200,000
Non-controlling interest in total comprehensive income
£ 15,400 £ 215,400
CONCLUSIONIn conclusion, this report had provided a detail way to make
financial statement in different cases. From the incompleterecord of Nguyen Luu, researcher have prepared the financialstatements, and from that Nguyen Luu, owner of the company canclearly see the profit and loss of his company for the year ended31st March, 2013 and the value of his company’s assets,liabilities and equity. The researcher also handle the financialstatement of a partnership firm, including Goodwill AdjustmentAccount; Capital Accounts of three owners: Bernard, Edana andNguyen Luu; Profit and Loss Appropriation Account and finally,the balance sheet of EdLu Ltd, a company set up by Nguyen Luu andEdana after Bernard retire. Researcher also prepare consolidationaccount when EdLu Ltd purchased 75% of equity shares of anothercompany, EcoTimes.
ReferencesAnon., 2013. Users of Financial Statements. [Online] Available at: http://finance.mapsofworld.com/financial-report/statement/users.html[Accessed 14 November 2014].
Anon., n.d. Presentation of Financial Statements. [Online] Available at: http://www.iasplus.com/en/standards/ias/ias1[Accessed 14 November 2014].
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