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Preparation of Published Financial Statements
Preparation of Published Financial Statements
Preparation of Published Financial Statements
The preparation of published financial statements involves preparing and presenting financial statements to external users especially
shareholders in a form prescribed by the law (Companies Act) and the International Reporting Standards (IFRSs).
The Companies Act gives the guidelines on preparation of the financial statements, then registration with the registrar of companies,
auditing and certain disclosures such as director’s salaries.
IFRSs Gives the guideline on the content and the accounting statements of certain events and transactions in the financial statements.
The following IFRSs are relevant for the purpose of preparing published financial statements;
The objective is to give guidance regarding the preparation of published financial statements and prescribe the content of the published
financial statement.
The following information should be prominently displayed and repeated when it is necessary for a proper understanding of the information
presented:
(a) The name of the reporting enterprise and other means of identification.
(b) Whether the financial statements cover an individual enterprise or a group of enterprises.
(c) The balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial
statements.
(d) The reporting currency.
(e) The level of precision used in the presentation of figures in the financial statements (e.g. Shs. ‘000’ or millions of Shs.)
IAS 1 requires companies to observe the following rules in preparing published financial statements:
1. The financial statements should reflect a true and fair view of the company ‘s financial position and performance. Where
transactions are reported faithfully and the financial statements comply in all aspects with IFRSs then the true and fair view
objective is achieved.
2. The company should apply its accounting policies consistently form one financial period to the next and incase there is a change in
the accounting policy then, adequate disclosure should be made.
3. The Financial statement should be prepared on a going concern basis incase the going concern basis isn’t suitable; adequate
disclosure should be made.
4. The financial statements should be made on an annual basis (should related to a period of 12 months) and incase the period
covered is more or less than 12months then, this fact should be disclosed.
5. The financial statement should be presented on a comparable basis i.e. the current years’ and previous years’ financial results
unless it is the first year of trading.
6. [financial statements should disclose the date when they were approved for issue by the directors.
IAS 1 prescribes the contents of published financial statements. The major reports that are included as part of the published
financial statements is:-
The most cases, companies that prepare published financial statements include the following additional reports (that are not financial
statements).
It shows the financial performance of the company during the given financial period. It discloses the income and expenses and
thus the net profit for the period.
IAS 1 recommends that the income statement can be presented in 2 ways or formats
a) By classifying by function
Under this format, the expenses of the company are classified into 5 major categories i.e.
Under this format, expenses are not classified by their nature i.e. referred to specifically according to their type and the major
categories of expenses are:-
NOTE: Classification of expenses by function is the most common format used and classification of expenses by nature is more
appropriate for manufacturing firms.
There are certain types of incomes and expenses that do not face within the trading activities of the business but are within the ordinary
activities of the firm. E.g. disposal of property, plant and equipment and other non-current assets.
The standard requires that if the above incomes and expenses are material, they can either be classified as part of the other expenses
or shown separtely on the face of the income statement.
The company should give additional information about such items in the notes to the accounts.
Examples:
a) Profit/Loss on disposal of non-current assets
b) Material write down or reversal of write down on assets e.g. PPE inventory and debtors.
c) Restructuring and re-organization cost e.g. redundancy payments
d) Litigation costs – payments made as a result of court decisions
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a) By function
ABC LTD
INCOME STATEMENT FOR THE YEAR ENDED 31/12/
£ £
Revenue x
Cost of sales (x)
Gross profit x
Other incomes (e.g. investment income) x
x
Expenses
Distribution costs x
Administration costs x
Other expenses x
Finance costs x (x)
Profit before x
Income tax expense (x)
Profit for the period xx
b) By Nature
ABC LTD
INCOME STATEMENT FOR THE YEAR ENDED 31/12/
£ £
Revenue x
Other incomes x
x
Expenses
Raw materials consumed x
Changes in finished goods and work in progress x
Depreciation and armortisation x
Employee benefits x
Other expenses x
Finance costs x (x)
Profit before tax x
Income tax expenses (x)
Profit for the period xx
Currently, the standard requires the first part of the balance sheet to show the total assets (i.e. non-current assets + current
assets) and the second part of the balance sheet to show equity and liabilities. Equity is the shareholders funds while liabilities are
the total of non-current and current liabilities.
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The format of the balance sheet is given as follows:
ABC LTD
BALANCE SHEET AS AT 31/12/
£ £
NON-CURRENT ASSETS
Property, plant and equipment x
Goodwill x
Other intangible assets x
Investment Longterm x
x
CURRENT ASSETS
Inventory x
Accounts receivables and prepayments x
Short-term investment x
Cash at bank and in hand x x
TOTAL ASSETS xx
RESERVES
Share premium x
Revaluation reserve x
General reserve x x
Retained profits x
Shareholders funds x
NON-CURENT LIABILITIES
Loan stock/debentures x
Redeemable preference shares x
Deferred tax x
Other long-term provisions x x
CURRENT LIABILITIES
Bank overdraft x
Trade and other payables (accruals) x
Current tax (tax payable) x
Current portion of loan stock x
Prepared dividends (and shares or preference shares) x x
TOTAL EQUITY AND LIABILITY xx
NOTE:
Most of the balance sheet items are shown in totals and the breakdown of the figures is given by way of notes to the accounts. E.g. property,
plant and equipment which is made up of land, buildings, plant and machinery and motor vehicles is given in the balance sheets at the total
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net book values of all there assets and part of the notes to the accounts will explain the make-up of the assets and movements during the
year.
No workings should be given/shown in the balance sheet for most of the items and only the total or the net figures should be presented
e.g. accounts receivables should be net of provision for doubtful debts.
IAS 32 requires that redeemable preference shares should be treated as a non-current liability just like any other loan. Therefore, the
preference dividends are shown as part of finance costs in the income statement, and other accrued interest and shown as part of
current liabilities.
If the company proposes dividends on ordinary and preference share capital before the year end then, this will be provided for in the
statements of changes in equity and shown as part of current liabilities in the balance sheet. However, even the proposed dividends on
disclosed after the financial year end, then they will be mentioned only by the way of notes to he accounts and not provided for in the
financial statement.
This is a very important report because it explains the movements in the shareholder funds during the year and also acts as a link
between the income statement and the balance sheet.
The report also shows the total gains or losses made by the company during the year. Some of these gains or losses may not be
included in the income statement e.g. gains or losses on revaluation or PPE and investments (long -term)
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The format of the statement of changes in equity is given as follows:
The final value of the total should be the same as the shareholder funds in the balance sheet.
The notes to the accounts provide additional information on the a/c policies that the company has adopted the make-up of some of the
items appearing on the face of the financial accounts and additional information on items not provided for in the accounts.
IAS 1 does not give the standard format of the notes to the accounts and that this would vary from one company to another. However,
the standard requires the following approach to be used when presenting the notes to the accounts.
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1. The company should state the basis of financial statement (most cases historical basis of accounting)
2. The company should present the significant policies adopted
3. The make-up of some of the items appearing on the face of the final accounts e.g. PPE and inventory.
4. Explanation of items not provided for in the final accounts (e.g. Dividends)
These financial statements have been prepared under the historical cost basis of accounting which is modified to accommodate the
revaluation of certain property, plant and equipment.
Property, plant and equipment are stated in the accounts of cost or revalued amount less accumulated depreciation. Depreciation is based
on the estimated useful life of the asset and is provided at the following rates:
Assets Rate
Land No depreciation
Buildings 2 % on cost
Plant and machinery 20% on cost
Fixtures, furniture and fittings 25% on cost
Motors vehicles 30% on reducing balance
Inventory is stated at the lower of cost and net realizable value. Cost represents the purchase price or production cost and other
expenses incurred to get the inventory ready for sale. Net realizable value is the selling price of the inventory less other expenses that
will be incurred to get he inventory ready for sale.
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NOTE 2: Profit for the period
The profit for the period has been arrived at after charging the following expenses:
£ £
Depreciation x
Amortization (impairment of good will ) x
Directors emoluments:
Salaries x
Fees x
Re-imbursment of expenses x
Pension x
Compensation for loss of office x x
Other employee benefits
Salaries and wages x
Pension costs x
NHIF x x
Auditors remuneration x
Loss on disposal of PPE x
Restructuring /Re-organization costs x
Depreciation
Balance as at 1.1 - x x x x x
Change in the year - x x x x x
Eliminated in disposal - (x) (x) (x) (x) (x)
Eliminated in revaluation - (x) (x) (x) (x) (x)
- x x x x x
NOTE 4: Inventory
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£
Raw materials x
Work in progress x
Finished goods x
xx
NOTE 5: Dividends
During the year, the company paid a dividend of Sh.2 per share on the ordinary share s outstanding and Sh.1 on the preference shares
outstanding. The company is now proposing a final dividend of Sh.3 per share on ordinary shares and sh.1 on preference shares.
The company has contracted X constructors to construct a warehouse a total cost of £200,000. Construction is to begin on 1st June.
Example 1
The accountant of Wislon Co has prepared the following list of account balances as at 31 December 2005
£ ‘ 000’
50p ordinary shares (fully paid) 350
7% £1 preference shares (fully paid) 100
10% Loan stock 200
Retained earnings 1.1.2005 242
General reserve 1.1.2005 171
Land and buildings 1.1.2005(cost) 430
Plant and machinery 1.1.2005 (cost) 830
Aggregate depreciation
Buildings 1.1.2005 20
Plant and machinery 1.1.2005 222
Inventory 1.1.2005 190
Sales 2,695
Purchases 2,152
Preference dividend 7
Ordinary dividend (interim) 8
Interest on Loan stock 10
Wages and salaries 254
Light and heat 31
Sundry expenses 113
Suspense account 135
Trade accounts receivable 179
Trade accounts payable 195
Cash 126
Additional information
a) Sundry expenses include £9,000 paid in respect of insurance for the year ending 1 September 2005. Light and heat does
not include an invoice of £3,000 for electricity for the three months ending 2 January 2006, which was paid in February
2006. Light and heat also includes £20,000 relating to salesmen’s commission.
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b) The suspense account is in respect of the following items.
£ ‘ 000’
Proceeds from the issue of 100,000 ordinary shares 120
Proceeds from the sale of plant 300
420
Less consideration for the acquisition of Mary & Co 285
135
c) The net assets of Mary & Co were purchased on 3 March 2005. Assets were valued as follows:
£ ‘ 000’
Investments 231
Inventory 34
265
The entire inventory acquired was sold during 2005. The investments were still held by Wislon at 31.12.05. Any goodwill arising
from the acquisition is considered to be impaired at the rate of 20%.
d) The property was acquired some years ago. The buildings element of the cost was estimated at £100,000 and the
estimated useful life of the assets was fifty years at the time of purchase. As at 31 December 2005 the property is to be
revalued at £800,000.
e) The plant which was sold had cost £350,000 and had a net book value of £274,000 as on the date of disposal. £36,000
depreciation is to be charged on plant and machinery for 2005.
f) The 50p ordinary shares all rank for dividends at the end of the year.
Required
Prepare the published financial statement of Wislon Co as at 31 December 2005.
Solution
Wislon Co
Income statement for the year ended 31 December 2005.
£ ‘000’ £ ‘000’
Revenue 2,695
Cost of sales (2,194)
Gross profit 501
Other income
Gain on disposal of plant 26
527
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Expenses
Distribution expenses 20
Administration expenses 276
Other expenses 107
Finance costs 20 (423)
Profit before tax 104
Less income tax expense (30)
Profit for the period 74
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Wilson and Company
Statement of changes in equity for the year ended 31/12/2005
NON-CURRENT ASSETS
Property, plant and equipment 1,098
Goodwill 16
Investment 231
1,345
CURRENT ASSETS
Inventory 220
Trade receivable 179
Prepayments 6
Cash 126 531
TOTAL ASSETS 1,876
RESERVES
Share premium 70
Revaluation reserve 392
General reserve 187 649
Retained profits 285
Shareholders funds 1,434
NON-CURRENT ASSETS
10% stock 200
NON-CURRENT LIABILITIES
Trade payables 195
Accrued expense 17
Current tax 30 242
TOTAL EQUITY AND LIABILITY 1,876
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b) Property, plant and equipment is stated in the accounts at cost or revalued amount less accumulated
depreciation. Depreciation is based on the estimated useful life of the assets.
c) Inventory is stated at the lower of cost an net realizable value Cost includes the purchase price or production
cost and other expenses incurred to get the inventory ready for sale. Net realizable value is the selling price less
expenses increased to complete the sale.
The profit for the profit has been arrived at changing the following expenses:
£ ‘000’
Depreciation 38
Impairment of goodwill 4
Employee benefits:
Salaries and wages 254
Salesman commission 20 274
Auditors remuneration 4
Depreciation
Balance as at 1.1.2004 20 222 242
Charge in the year 2 36 38
Eliminated in disposal - (76) (76)
Eliminated in revaluation (22) - (22)
Balance as at 31.12.2004 - 182 182
NOTE 4: Dividends
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During the year, the company paid an interim dividend of £1.14 per shares on the ordinary shares outstanding and up
ton the preference shares. The directors are now proposing a final dividend of 2% per share on the ordinary shares
outstanding at the end of the year.
WORKINGS
£ ‘000’ £ ‘000’
1. Cost of sales
Opening inventory 190
Purchases 2,152
Investment in Mary & co. 34 2,186
2,376
Less: closing inventory (220)
2,156
Add: Depreciation on building (100,000 /50) 2
Plant 36 38
2,194
2. Other income
Gain on disposable of plant
Disposal account
Plant 350 Depreciation 76
Profit and loss 26 Suspense 300
376 376
3. Expenses:
4. Goodwill impairment
Disposal account
Suspense 285 Interest (balance sheet) 231
Purchases (stock) 34
___ Goodwill 20
285 285
5. PPE
£ ‘000’
Land and buildings 800
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Plant and machinery 298
1,098
Revaluation account
Land and building 370
Balance c/d 392 Land and building depr. 22
392 392
Accrued expenses
£ ‘000’
Interest on loan stock (20 – 10) 10
Light and heat 3
Audit fees 4
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Example 2
Auto Transmissions manufactures electrical equipments. The following trial balance as at 31 March 2005 has been
extracted from the books of the company:
£ £
Ordinary shares of 50 p each 400,000
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10% Redeemable Preference shares of £1 each 200,000
Retained profits as at 1 April 2004 42,475
Office block (Land £40,000) 170,000
Plant and machinery 730,000
Office equipment 110,000
Motor vehicles 200,000
Provision for depreciation – Plant and Machinery 224,500
- Office equipment 24,500
- Motor vehicles 80,000
Accounts receivables/Payables 500,000 356,226
Provision for doubtful debts 1,000
Manufacturing wages 501,400
Inventory as at 1 April 2004 – raw materials 70,000
- Work in progress 126,000
- Finished goods 250,000
Transport expenses 85,013
Returns inwards 15,106
Purchases of raw materials 518,600
Sales 2,600,147
Bank balance 60,020
Directors salaries 60,114
Maintenance of plan t 30,102
Rent 40,063
Advertising 190,048
Rates 50,171
Insurance 20,116
Office salaries 166,013
Light and heat 46,027
Factory power 30,014
Bank interest 7,070
Interim dividends on preference shares 10,000
General administration expenses 63,011 _________
3,988,868 3,988,868
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(8) The corporation tax of £100,000 is to be provided,
(9) During the year 1,500 electrical equipments were transferred from the factory to the warehouse. Only 100
equipments were in hand at the end of the year.
(10) Inventory at cost as at 31 March 2005 was as follows:
Required:
Prepare the published income statement for the year ended 31 March 2005 and a balance sheet as at the same
date. (20 marks)
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