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F3 Eng Full LSCO Final
F3 Eng Full LSCO Final
Financial Accounting
For exams from 1 September 2015 – 31 August 2016
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Syllabus
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Chapter 1 •
•
•
Introduction to
accounting •
•
The purpose of financial reporting
Types of business entity
Users
Governance
The main financial statements
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Syllabus learning outcomes 1
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Syllabus learning outcomes 2
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Syllabus learning outcomes 3
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Syllabus learning outcomes 4
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Syllabus learning outcomes 5
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Overview
Statement of financial
Statement of profit or loss
position
Users of financial
Financial statements
information
Governance Introduction
to accounting
Types of business
entities
Limited liability
Sole trader Partnership
company
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The purpose of financial reporting 1
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The purpose of financial reporting 2
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Types of business entity 1
What is a business?
• A business of whatever size or nature exists to make a
profit.
• Profit occurs when income exceeds expenses.
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Types of business entity 2
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Users
Users of accounts
• Managers of the company
• Shareholders of the company
• Trade contacts
• Providers of finance to the company
• Taxation authorities Employees
• of the company Financial
• analysts and advisors
• Government and their agencies
• The public
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Discussion question
Required
What information would these users of financial
information be interested in?
(a) Investors
(b) Employees
(c) Lenders
(d) Suppliers
(e) Customers
(f) Governments and their agencies
(g) Public
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Answer to discussion question
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Answer to discussion question (cont'd)
(b) Employees
— Profitability
— Long-term growth
— Security of their job
— Likelihood of bonus
— Number of employees
— Ability to pay retirement benefits
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Answer to discussion question (cont'd)
(c) Lenders
— Whether return on finance will continue to be met
— Other providers and security of their debt
— Likelihood of repayment of capital amount
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Answer to discussion question (cont'd)
(d) Suppliers
— Likelihood of payment on time
— Likelihood of payment at all
— Whether they should continue to supply
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Answer to discussion question (cont'd)
(e) Customers
— Ability of entity to continue supplying
— Profitability as a measure of value for money of
goods bought
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Answer to discussion question (cont'd)
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Answer to discussion question (cont'd)
(g) Public
— Contribution to local economy
— Information about trends in the prosperity of the
entity
— Range of activities provided
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Governance
Directors
• Main aim – to create wealth for shareholders.
• Have a duty of care to show reasonable competence;
may have to indemnify the company against loss
caused by their negligence.
• Are in a fiduciary position in relation to the company
which means that they must act honestly in what they
consider to be the best interests of the company and in
good faith.
• Are responsible for the preparation of the financial
statements of the company.
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The main financial statements 1
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The main financial statements 2
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The main financial statements 3
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The main financial statements 4
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Chapter Summary 1
1 Accounting
Accounting is a way of recording, analysing and
summarising a business‘s transactions.
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Chapter Summary 2
2 Accounting records
All businesses must keep sufficient accounting records in
order to be able to produce accurate information about the
entity's activities.
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Chapter Summary 3
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Chapter Summary 4
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Chapter Summary 5
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Chapter Summary 6
6 Governance
Corporate governance is the process by which businesses
are directed and controlled by those responsible for
running the business.
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Chapter Summary 7
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Chapter 2 • The regulatory system
• IASB
The regulatory
framework
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Syllabus learning outcomes 1
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Syllabus learning outcomes 2
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Overview
Regulatory
framework
IFRSF
Issue IFRS
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The regulatory system 1
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The regulatory system 2
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The regulatory system 3
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IASB 1
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IASB 2
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Lecture example 1
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Answer to lecture example 1
B The IFRSF
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Lecture example 2
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Answer to lecture example 2
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Lecture example 3
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Answer to lecture example 3
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Lecture example 4
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Answer to lecture example 4
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Chapter summary 1
1 Regulatory system
Financial statements are relied on by many different user
groups to make economic decisions. A system of
regulation is therefore necessary to ensure that the
information produced is of a high standard.
The IFRSF appoints members to the IASB, IFRSIC and
IFRSAC.
The IASB issues International Financial Reporting
Standards.
The IFRSIC issues guidance on how to apply accounting
standards.
The IFRSAC advises the IASB on its agenda.
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Chapter summary 2
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Chapter 3 • The IASB's Conceptual
Framework
• Qualitative characteristics of
The qualitative financial information
characteristics of
financial information
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Overview
The objective of
Underlying assumption
financial statements
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The IASB's Conceptual Framework 1
Underlying assumption
Going concern
• The financial statements are normally prepared on the
assumption that an entity is a going concern and will
continue in operation for the foreseeable future.
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The IASB's Conceptual Framework 2
Accruals basis
• The effects of transactions and other events are
recognised when they occur (and not as cash or its
equivalent is received or paid) and they are recorded in
the accounting records and reported in the financial
statements of the periods to which they relate.
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The IASB's Conceptual Framework 3
Qualitative characteristics
Two fundamental qualitative characteristics:
• Relevance
• Faithful representation
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The IASB's Conceptual Framework 4
Relevance
—Information is relevant when it influences decisions of
users, affected by nature and materiality
—Materiality: information is material if its omission or
misstatement could influence the economic decisions of
users taken on the basis of the financial statements
Faithful representation
— Financial information must faithfully represent the
underlying economic phenomena
— Complete, neutral, free from error
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The IASB's Conceptual Framework 5
Enhancing characteristics
• Comparability
• Verifiability
• Timeliness
• Understandability
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The IASB's Conceptual Framework 6
Comparability
—Users must be able to compare financial statements
through time and with other entities
—Disclose accounting policies
—Disclose corresponding information for comparative
periods
Verifiability
— Information that can be independently verified
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The IASB's Conceptual Framework 7
Timeliness
— Information is available in time to be capable of
influencing decisions
Understandability
— Users must be able to understand financial statements
— Users assumed to have some economic, business and
accounting knowledge
— Complex matters should not be left out if relevant
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The IASB's Conceptual Framework 8
Other concepts
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The IASB's Conceptual Framework 9
Fair presentation
• Financial statements are required to present fairly in all
material respects the financial results and position of the
business.
• Compliance with IFRSs will achieve this.
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The IASB's Conceptual Framework 10
Consistency
• Presentation and classification of items should remain
consistent from one period to the next.
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Chapter summary 1
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Chapter summary 2
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Chapter 4 • Statement of financial
position
•
Statement of profit or loss
•
Sources, records The role of source
and books of prime •
documents
•
entry Sales and purchase day
• books
Cash books
Controlling petty cash –
the imprest system
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Syllabus learning outcomes 2
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Syllabus learning outcomes 3
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Overview
Statement of financial
Statement of profit or loss
position
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Lecture example 1
Required
List out everything you own and owe.
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Answer to lecture example 1
Own
— Examples:
(i) House
(ii) Bicycle
(iii) Cash
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Answer to lecture example 1 (cont'd)
Owe
— Examples:
(i) Mortgage
(ii) Bank loan
(iii) Credit card
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Statement of financial position
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Key features 1
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Key features 2
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Statement of profit or loss 1
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Statement of profit or loss 2
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The role of source documents 1
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The role of source documents 2
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The role of source documents 3
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Sales and purchase day books 1
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Sales and purchase day books 2
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Cash books 1
Cash book
• Cash receipts and payments are recorded in the cash
book.
Cash receipts are recorded as follows, with the total column
analysed into its component parts.
CASH RECEIPTS
Date Narrative Total Discounts Rec'bles ledger Cash Sundry
allowed sales
$ $ $ $ $
3.3.X9 Cash sale 150 150
ABC & Co 1,000 50 1,000
(discount taken)
1,150 50 1,000 150 –
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Cash books 2
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Cash books 3
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Controlling petty cash – the imprest system
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Chapter summary 1
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Chapter summary 2
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Chapter summary 3
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Chapter summary 4
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Chapter summary 5
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Chapter 5 • The nominal ledger
• The accounting
equation
•
Ledger accounts Double entry
and double entry •
bookkeeping
•
The journal
•
Day book analysis
The receivables and
payables ledgers
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Syllabus learning outcomes 1
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Syllabus learning outcomes 2
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Syllabus learning outcomes 3
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Overview
Ledger accounts
and double entry
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The nominal ledger 1
NAME OF ACCOUNT
$ $
DEBIT SIDE CREDIT SIDE
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The nominal ledger 2
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The nominal ledger 3
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The accounting equation 1
Capital
• Investment of funds with the intention of earning a return
Drawings
• Amounts withdrawn from the business by the owner
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The accounting equation 2
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Double entry bookkeeping 1
Basic principles
• Double entry bookkeeping is based on the same idea as
the accounting equation.
• Every accounting transaction has two equal but opposite
effects.
• Equality of assets and liabilities is preserved.
• In a system of double entry bookkeeping every accounting
event must be entered in ledger accounts both as a debit
and as an equal but opposite credit.
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Double entry bookkeeping 2
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Double entry bookkeeping 3
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Double entry bookkeeping 4
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Lecture example 1
Required
What is the double entry for each of the following?
Explain each entry in terms of the general rules above.
(a) Sales for cash
(b) Sales on credit
(c) Purchase for cash
(d) Purchase on credit
(e) Pay electricity bill
(f) Receive cash from a credit customer
(g) Pay cash to a credit supplier
(h) Borrow money from the bank
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Answer to lecture example 1
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Answer to lecture example 1 (cont'd)
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Lecture example 2
Douglas
• Douglas had the following transactions during January:
(1) Introduced $5,000 cash as capital
(2) Purchased goods on credit from Richard, worth $2,000
(3) Paid rent for one month, $500
(4) Paid electricity for one month, $200
(5) Purchased car for cash, $1,000
(6) Sold half of the goods on credit to Tish for $1,750
(7) Drew $300 for his own expenses
(8) Sold goods for cash, $2,100
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Lecture example 2 (cont'd)
Required
Post transactions (1) to (8) to the relevant ledger
accounts.
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Answer to lecture example 2
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Answer to lecture example 2 (cont'd)
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Lecture example 3
Required
Balance off the cash account to determine the amount of
cash held at the end of January.
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Lecture example 3 (cont'd)
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Answer to lecture example 3
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The journal
The journal
• Book of prime entry
• Keeps a record of unusual movements between accounts
• Format of journal entries is as follows:
Date Debit Credit
$ $
DEBIT A/c to be debited X
CREDIT A/c to be credited X
Narrative to explain transaction
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Day book analysis 1
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Day book analysis 2
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The receivables and payables ledgers 1
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The receivables and payables ledgers 2
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The receivables and payables ledgers 3
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Flow of information
Assorted transactions
Categorised in books of
prime entry
TOTALS
double entry
FINANCIAL STATEMENTS
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Chapter summary 1
1 Introduction
In chapter 4 the totals on the books of prime entry were
summarised in the nominal ledger. These amounts are
posted to the nominal ledger using double entry.
The principles of double entry work on the basis that for
each debit entry there must be a credit entry. This is also
known as the dual effect.
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Chapter summary 2
2 Ledger accounts
A debit entry increases assets, expenses and drawings
and a credit entry increases liabilities, income and capital
– this can be remembered as DEAD CLIC.
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Chapter summary 3
3 Flow of information
A business' transactions are categorised in the books of
prime entry and the totals are then posted to the nominal
ledger. A trial balance (Chapter 6) can then be extracted
from the balances on the nominal ledger accounts and the
statement of financial position and statement of profit or
loss produced.
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Chapter summary 4
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Chapter summary 5
5 Memorandum ledgers
There are two memorandum ledgers: the receivables
ledger and the payables ledger. The receivables ledger
shows how much the business is owed by each
individual customer at a point in time and the payables
ledger shows how much it owes to each individual
supplier at any point in time.
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Chapter 6 • The trial balance
• Statement of profit or loss
• Statement of financial
From trial balance to
financial statements • position
Preparing financial
statements
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Syllabus learning outcomes
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Overview
Trial balance
Statement of financial
Statement of profit or loss
position
Accounting equation
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The trial balance 1
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The trial balance 2
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The trial balance 3
Trial balance
• The balances are then collected in a trial balance. If the
double entry is correct, total debits = total credits.
• An example of a trial balance, incorporating the above
receivables balance, is shown on the next slide.
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The trial balance 4
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Lecture example 1
• Douglas
Cash
$ $
Car 1,000
Drawings 300
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Lecture example 1 (cont'd)
Capital
$ $
Cash 5,000
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Lecture example 1 (cont'd)
Trade payables
$ $
Purchases 2,000
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Lecture example 1 (cont'd)
Purchases
$ $
Trade payables 2,000
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Lecture example 1 (cont'd)
Rent
$ $
Cash 500
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Lecture example 1 (cont'd)
Electricity
$ $
Cash 200
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Lecture example 1 (cont'd)
Car
$ $
Cash 1,000
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Lecture example 1 (cont'd)
Drawings
$ $
Cash 300
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Lecture example 1 (cont'd)
Trade receivables
$ $
Sales 1,750
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Lecture example 1 (cont'd)
Sales
$ $
Trade receivables 1,750
Cash 2,100
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Lecture example 1 (cont'd)
Required
Balance off the ledger accounts for Douglas
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Answer to lecture example 1
Cash
$ $
Capital 5,000 Rent 500
Sales 2,100 Electricity 200
Car 1,000
Drawings 300
Bal c/d 5,100
7,100 7,100
Bal b/d 5,100
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Answer to lecture example 1 (cont'd)
Capital
$ $
Bal c/d 5,000 Cash 5,000
5,000 5,000
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Answer to lecture example 1 (cont'd)
Trade payables
$ $
Bal c/d 2,000 Purchases 2,000
2,000 2,000
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Answer to lecture example 1 (cont'd)
Purchases
$ $
Trade payables 2,000 Bal c/d 2,000
Bal b/d 2,000
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Answer to lecture example 1 (cont'd)
Rent
$ $
Cash 500 Bal c/d 500
Bal b/d 500
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Answer to lecture example 1 (cont'd)
Electricity
$ $
Cash 200 Bal c/d 200
Bal b/d 200
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Answer to lecture example 1 (cont'd)
Car
$ $
Cash 1,000 Bal c/d 1,000
Bal b/d 1,000
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Answer to lecture example 1 (cont'd)
Drawings
$ $
Cash 300 Bal c/d 300
Bal b/d 300
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Answer to lecture example 1 (cont'd)
Trade receivables
$ $
Sales 1,750 Bal c/d 1,750
Bal b/d 1,750
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Answer to lecture example 1 (cont'd)
Sales
$ $
Bal c/d 3,850 Trade receivables 1,750
Cash 2,100
3,850
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Lecture example 2
Douglas
• Refer to Lecture example 1 where the ledger accounts
were balanced off.
• Using the ledger accounts for Douglas, prepare the trial
balance as at the end of January.
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Answer to lecture example 2
Trial Balance
Debit Credit
Cash $ $
Capital 5,100
Trade payables 5,000
Purchases 2,000
Rent 2,000
Electricity 500
Car 200
Drawings 1,000
Trade receivables 300
Sales 1,750
3,850
10,850 10,850
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Statement of profit or loss
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Statement of profit or loss 2
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Statement of profit or loss 3 – Transferring
Rent
$ $
Cash 4,000 Bal c/d 4,000
Bal b/d 4,000 SPL 4,000
SPL
Rent 4,000
NB: The remaining profit or loss account balances are also then
transferred to the statement of profit or loss account as
illustrated above.
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Lecture example 3
• Douglas
Refer to Lecture example 2.
Required
Prepare a statement of profit or loss in ledger account
form.
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Answer to lecture example 3
Purchases
$ $
Creditors 2,000 Bal c/d 2,000
Bal b/d 2,000 SPL 2,000
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Answer to lecture example 3 (cont'd)
Rent
$ $
Cash 500 Bal c/d 500
Bal b/d 500 SPL 500
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Answer to lecture example 3 (cont'd)
Electricity
$ $
Cash 200 Bal c/d 200
Bal b/d 200 SPL 200
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Answer to lecture example 3
Sales
$ $
Bal c/d 3,850 Trade receivables 1,750
Bal b/d 200 Cash 2,100
3,850 3,850
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Answer to lecture example 3 (cont'd)
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Statement of financial position 1
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Statement of financial position 2
DRAWINGS
$ $
Cash 5,000 Capital 5,000
CAPITAL
$ $
Drawings 5,000 Capital 10,000
Balance c/d 18,500 SPL 13,500
23,500 23,500
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BPP LE ARNIN G MEDIA
Statement of financial position 3
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Lecture example 4
• Douglas
Refer to Lecture example 2 and Lecture example 3.
Required
Draw up a statement of profit or loss for the period and a
statement of financial position at the end of January.
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BPP LE ARNIN G MEDIA
Answer to lecture example 4
DOUGLAS
STATEMENT OF PROFIT OR LOSS FOR THE MONTH OF
JANUARY
$ $
Sales 3,850
Less cost of sales:
Purchases 2,000
2,000
Gross profit 1,850
Less expenses:
Rent 500
Electricity 200
(700)
Net profit 1,150
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BPP LE ARNIN G MEDIA
Answer to lecture example 4 (cont'd)
DOUGLAS
STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY
$ $
NON-CURRENT ASSET
Motor Vehicle 1,000
CURRENT ASSETS
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Answer to lecture example 4 (cont'd)
$ $
PROPRIETOR'S INTEREST
Capital introduced on 1 January 5,000
Profit for the year 1,150
Less: drawings (300)
Balance 31 January 5,850
CURRENT LIABILITIES
Trade payables 2,000
7,850
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BPP LE ARNIN G MEDIA
Lecture example 5
• Douglas
Refer to Lecture example 4.
Required
Transfer the profit and drawings to the capital account.
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BPP LE ARNIN G MEDIA
Answer to lecture example 5
Drawings
$ $
Cash 300 Bal c/d 300
Bal b/d 300 Capital 300
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BPP LE ARNIN G MEDIA
Answer to lecture example 5 (cont'd)
BP P LEARNING
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Answer to lecture example 5 (cont'd)
Capital
$ $
Bal c/d 5,000 Cash 5,000
6,150 6,150
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BPP LE ARNIN G MEDIA
Lecture example 6
• Douglas
Refer to Lecture example 4.
Required
Prepare the accounting equation for Douglas.
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Answer to lecture example 6
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Preparing financial statements
Accounting process overview
Receipt/
Invoice Payment Invoice
Dr Cr
Dr Dr
General
ledger
Cr Cr
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BPP LE ARNIN G MEDIA
Chapter summary 1
1 Introduction
Once a business‘s transactions have been categorised in
the books of prime entry and summarised in the nominal
ledger accounts the next step is to extract a trial balance.
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BPP LE ARNIN G MEDIA
Chapter summary 2
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Chapter summary 3
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Chapter summary 4
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Chapter summary 5
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Chapter 7 • Nature and collection of
sales tax
•
Accounting for sales tax
Sales tax
BPP
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Syllabus learning outcomes
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Overview
Accounting treatment
Sales tax
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Nature and collection of sales tax 1
Sales tax
• Is an indirect tax levied on the sale of goods and services
• Administered by tax authorities
• Can have a number of rates, eg standard rate, reduced
rate
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Nature and collection of sales tax 2
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Nature and collection of sales tax 3
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Accounting for sales tax 1
Credit sales
• Include sales tax in sales day book; analyse it separately
• Include gross receipts from receivables in cash book; no
need to show sales tax separately
• Exclude sales tax element from statement of profit or loss
• Credit sales tax control account with output sales tax
element of sales invoices
BP P LEARNING
BPP LE ARNIN G MEDIA
Accounting for sales tax 2
Credit purchases
• Include sales tax in purchases day book; analyse it
separately
• Include gross payments in cash book; no need to show
sales tax separately
• Exclude recoverable sales tax from statement of profit or
loss
• Include irrecoverable sales tax in statement of profit or
loss
• Debit sales tax control account with recoverable input
sales tax element of credit purchases
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BPP LE ARNIN G MEDIA
Accounting for sales tax 3
Cash sales
• Include gross receipts in cash book; show sales tax
separately
• Exclude sales tax element from statement of profit or loss
• Credit sales tax control account with output sales tax
element of cash sales
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BPP LE ARNIN G MEDIA
Accounting for sales tax 4
Cash purchases
• Include gross payments in cash book: show sales tax
separately
• Exclude recoverable sales tax from statement of profit or
loss
• Include irrecoverable sales tax in statement of profit or
loss
• Debit sales tax control account with recoverable input
sales tax element of cash purchases
BP P LEARNING
BPP LE ARNIN G MEDIA
Lecture example 1
A business buys goods for $1,000 plus 15% sales tax. They then sell those
goods for $1,500 + 15% sales tax.
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BPP LE ARNIN G MEDIA
Lecture example 1 (cont'd)
As the business is purely collecting the sales tax for the tax authorities,
and is able to set off its sales tax suffered it does not include sales tax
as either an expense or income in the statement of profit or loss. The
sales tax is accounted for when the transaction occurs.
Required
(a) Post the double entry to the ledger account below.
$ $
Dr Purchases 1,000
Dr Sales tax control account 150
Cr Trade payables 1,150
BP P LEARNING
BPP LE ARNIN G MEDIA
Lecture example 1 (cont'd)
$ $
Dr Trade receivables 1,725
Cr Sales 1,500
Cr Sales tax control account 225
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BPP LE ARNIN G MEDIA
Answer to lecture example 1
Purchases
$
Trade payables 1,000
Trade payables
$
Purchases 1,150
Trade receivables
$
Sales 1,725
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 1 (cont'd)
Sales tax control a/c
$ $
Trade payables 150 Trade rec. 225
Sales
$ $
Trade rec. 1,500
BP P LEARNING
BPP LE ARNIN G MEDIA
Chapter summary 1
1 Introduction
A business acts as a collecting agent for the tax
authorities and charges sales tax (output tax) on its sales
and reclaims sales tax (input tax) on its purchases.
BP P LEARNING
BPP LE ARNIN G MEDIA
Chapter summary 2
2 Accounting treatment
Sales and purchases are recorded at the net amount.
Sales tax may be charged at various rates, however the
rate of sales tax will always be provided in an exam
question.
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Chapter summary 3
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Chapter summary 4
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Chapter summary 5
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Chapter 8 • Cost of goods sold
• Accounting for opening and
closing
Inventory inventories
•
• Counting inventories
Valuing inventories
•
IAS 2 Inventories
BPP
BP P LEARNING
LE ARNIN G MEDIA
Syllabus learning outcomes 1
BP P LEARNING
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Syllabus learning outcomes 2
BP P LEARNING
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Syllabus learning outcomes 3
BP P LEARNING
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Syllabus learning outcomes 4
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Overview
Accounting adjustments
Inventory
FIFO AVCO
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Cost of goods sold 1
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Cost of goods sold 2
Carriage inwards
• Cost paid by purchaser of having goods transported to his
business
• Added to cost of purchases
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Cost of goods sold 3
Carriage outwards
• Cost to the seller, paid by the seller, of having goods
transported to customer
• Is a selling and distribution expense
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Accounting for opening and closing inventories 1
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Accounting for opening and closing inventories 2
Entries at year-end
• The first thing to do is to transfer the purchases account
balance to the statement of profit or loss:
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Accounting for opening and closing inventories 3
BP P LEARNING
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Accounting for opening and closing inventories 4
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Counting inventories 1
Counting inventories
• In order to make the entry for the closing inventory, we
need to know what is held at the year-end. We find this out
not from the accounting records, but by going into the
warehouse and actually counting the boxes on the
shelves.
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Counting inventories 2
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Valuing inventories 1
Valuation
Inventories must be valued at the lower of:
• Cost
• Net realisable value (NRV)
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BPP LE ARNIN G MEDIA
Valuing inventories 2
Cost
Can use per IAS 2:
• FIFO (First In Last Out)
• Average cost (both periodic weighted average and
continuous weighted average)
• LIFO (Last In First Out) is not permitted
BP P LEARNING
BPP LE ARNIN G MEDIA
Valuing inventories 3
NRV
Expected selling price X
Less: costs to get items ready for sale (X)
selling costs (X)
X
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Valuing inventories 4
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IAS 2 Inventories
IAS 2
• Inventories should be measured at the lower of cost and
net realisable value – the comparison between the two
should ideally be made separately for each item.
• Cost is the cost incurred in the normal course of business
in bringing the product to its present location and
condition, including production overheads and costs of
conversion.
BP P LEARNING
BPP LE ARNIN G MEDIA
IAS 2 Inventories 2
IAS 2
• Inventory can include raw materials, work in progress,
finished goods, goods purchased for resale
• FIFO and average cost (both periodic weighted average
and continuous weighted average) are allowed
• LIFO is not allowed
BP P LEARNING
BPP LE ARNIN G MEDIA
IAS 2 Inventories 3
BP P LEARNING
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IAS 2 Inventories 4
BP P LEARNING
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Lecture example 1
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Lecture example 1 (cont'd)
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 1
C
Transport costs to deliver goods to customers are an
example of carriage outwards and should not be included.
Administrative overheads do not relate to production and
cannot therefore be included.
The depreciation of the factory machine is a production
overhead and should be included.
BP P LEARNING
BPP LE ARNIN G MEDIA
Lecture example 2
Required
What is the net realisable value of Jessie's inventory?
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BPP LE ARNIN G MEDIA
Answer to lecture example 2
BP P LEARNING
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Lecture example 3
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Lecture example 3 (cont'd)
BP P LEARNING
BPP LE ARNIN G MEDIA
Lecture example 3 (cont'd)
Required
Determine the valuation of closing inventories and cost of
sales using:
(a) FIFO
(b) Weighted average cost (continuous)
(c) Weighted average cost (periodic)
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 3
$4,285
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 3 (cont'd)
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 3 (cont'd)
(b) Closing inventories and cost of sales (AVCO – continuous)
Average Total Cost of
Units Cost Unit Cost Cost Sales
$ $ $ $
1.1.X2 b/f 200 10.00 2,000
10.1.X2 Purchase 300 10.85 3,255
500 (W1) 10.51 5,255
14.1.X2 Sales (280) 10.51 (2,943) 2,943
220 2,312
20.1.X2 Purchase 350 11.50 4,025
570 (W2) 11.12 6,337
21.1.X2 Sales (400) 11.12 (4,448) 4,448
170 1,889
25.1.X2 Purchase 250 13.00 3,250
420 (W3) 12.24 5,139
28.1.X2 Sale (80) 12.24 (979) 979
340 4,160 8,370
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 3 (cont'd)
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 3 (cont'd)
(c) Closing inventories and cost of sales (AVCO – periodic)
Total Value
Units Units Cost (opening +
$ purchases)
$
2,000
1.1.X2 b/f 200 10.00
3,255
10.1.X2 Purchases 300 10.85
14.1.X2 Sales (280)
20.1.X2 Purchases 350 11.50 4,025
BP P LEARNING
BPP LE ARNIN G MEDIA
Answer to lecture example 3 (cont'd)
$
Opening inventories ($200 × $10) 2,000
Purchases (3,255 + 4,025 + 3,250) 10,530
12,530
Cost of sales $
Opening inventories 2,000
Purchases 10,530
12,530
Less closing inventories (3,873)
8,657
BP P LEARNING
BPP LE ARNIN G MEDIA
Chapter summary 1
1 Introduction
Inventories can be a significant figure in an entity's
accounts and will impact both the profit figure and the net
asset position. It is important therefore that it is recorded
correctly.
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BPP LE ARNIN G MEDIA
Chapter summary 2
2 Accounting adjustment
As seen in chapter 6 the statement of profit or loss
matches the sales revenue earned in a period with the
cost of sales incurred to generate that revenue. There
are therefore two inventory adjustments: the opening
inventory adjustment and the closing inventory
adjustment.
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Chapter summary 3
3 Valuation
Inventories should be valued at the lower of cost and
net realisable value.
BP P LEARNING
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Chapter summary 4
4 Cost
The cost of inventory includes the cost of purchase,
costs of conversion and any other costs necessary
to bring the inventory to its present location and
condition.
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BPP LE ARNIN G MEDIA
Chapter summary 5
BP P LEARNING
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Chapter summary 6
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Chapter summary 7
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Chapter 9 • Capital and revenue
expenditure
•
IAS 16 Property, plant and
Tangible non current equipment
•
assets Depreciation
•
Non-current asset
•
disposals
•
Revaluations
Disclosure
BPP
BP P LEARNING
LE ARNIN G MEDIA
Syllabus learning outcomes 1
BP P LEARNING
BPP LE ARNIN G MEDIA
Syllabus learning outcomes 2
BP P LEARNING
BPP LE ARNIN G MEDIA
Syllabus learning outcomes 3
BP P LEARNING
BPP LE ARNIN G MEDIA
Syllabus learning outcomes 4
BP P LEARNING
BPP LE ARNIN G MEDIA
Syllabus learning outcomes 5
BP P LEARNING
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Syllabus learning outcomes 6
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Overview
Capital versus revenue
Cost
expenditure
Tangible non-current
assets
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Capital and revenue expenditure 1
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Capital and revenue expenditure 2
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IAS 16 Property, plant and equipment 1
IAS 16
• Initial measurement – at cost
• Components of cost
— Purchase price (including import duties, excl trade
discount, recoverable sales tax)
— Initial estimate of dismantling and restoration costs
— Directly attributable costs, eg site preparation, delivery
and handling costs installation, assembly costs, testing
and professional fees
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IAS 16 Property, plant and equipment 2
• Subsequent expenditure
— added to carrying amount if improves condition
beyond previous performance
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Depreciation 1
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Depreciation 2
Two methods
• Straight line
dep'n = cost – RV
useful life
• Reducing balance
dep'n = cost × RB%
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Depreciation 3
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Depreciation 4
CV at revised date
Remaining useful life
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Non-current asset disposals 1
Disposal
• On disposal of an asset a profit or loss will arise
depending on whether disposal proceeds are greater or
less than the carrying value of the asset.
• If proceeds > CV = profit
• If proceeds < CV = loss
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Non-current asset disposals 2
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Non-current asset disposals 3
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Revaluations 1
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Revaluations 2
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Disclosure
Disclosure
With regard to disclosure, a proforma non-current asset note is shown here.
Total Land and Plan and
buildings equipment
$ 000 $ 000 $ 000
Cost or valuation
At January 20X7 160 100 60
Revaluation surplus 20 20 –
Additions in year 50 30 20
Disposals in year (45) (15) (30)
At 31 December 20X7 185 135 50
Depreciation
At 1 January 20X7 30 20 10
Charge for year 7 5 2
Eliminated on disposals (3) (3)
At 31 December 20X7 34 –25 9
Carrying value
At 31 December 20X7 151 110 41
At 1 January 20X7 130 80 50
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Lecture example 1
Required
What examples of tangible non-current assets can you
identify?
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BPP LE ARNIN G MEDIA
Answer to lecture example 1
• Examples include:
• (a) Land and buildings
• (b) Plant and equipment
• (c)Motor vehicles
• (d) Furniture and fittings, computers
• Required
• At what amount should the machine be capitalised in
the entity's records?
• A $20,000
• B $20,700
• C $20,200
• D $21,600
• B
• The cost capitalised should include the purchase price
($20,000) plus all directly attributable costs (delivery and
installation).
• Required
• (a) Calculate the annual depreciation charge.
• (b) Calculate the cost, accumulated depreciation
and net book value (NBV) for each year of the asset's
life. Note: NBV = cost – accumulated depreciation to date.
2,500 ─ 250
Depreciation charge= = $750 per
3 years annum
Accumulated
Year Cost NBV
depreciation
1
2,500 750 1,750
2
2,500 1,500 1,000
3
2,500 2,250 250
250
Year
0 3
• Required
• Calculate depreciation expense, accumulated depreciation
and net book value of the asset for the first three years.
1
40% 2,400 2,400 3,600
2
40% 1,440 3,840 2,160
3
40% 864 4,704 1,296
3,600
2,160
1,296
Year
1 2 3 4 5
• Required
• Using the information in Lecture example 3, show:
• (a) The journal entry which would have been
written at the end of the first year.
• (b) The treatment of depreciation for all years in
the relevant ledger accounts.
• (c) The relevant statement of profit or loss and
statement of financial position extracts for each year.
•
Depreciation expense (SPL)
$ $
Year 1 Accumulated dep'n 750 Year 1 SPL 750
Year 2 Accumulated dep'n 750 Year 2 SPL 750
Year 3 Accumulated dep'n 750 Year 3 SPL 750
•
Accumulated depreciation (SOFP)
$ $
Bal c/d 750 Year 1 Depreciation expense 750
Bal c/d 1,500 Year 2 Bal b/d 750
Depreciation expense 750
Bal c/d 1,500 1,500
2,250 1,500
Year 3 Bal b/d 750
2,250 Depreciation expense 2,250
• Required
• (a) Calculate the profit or loss on disposal of the
machine.
• (b) Complete the ledger accounts to show how the
disposal would be accounted for.
• (a)
• $
• Sales proceeds 3,000
• NBV at end of year 2 (2,160)
• 840
• (b)
Machine (SOFP)
$ $
Bal b/d 6,000 (a) Disposal account 6,000
•
Disposal account (SPL)
$ $
(a) Machine 6,000 (c) Cash 3,000
Balance = profit 840
on disposal (SPL) (b) Accumulated dep'n 3,840
6,840 6,840
• Required
• (a) Calculate the profit or loss on disposal of the
machine.
• (b) Calculate the amount of cash paid for the new
machine.
• (c) Complete the ledger accounts to show both the
disposal and the acquisition.
•
Old machine (SOFP)
$ $
Bal b/d 6,000 (a) Disposal account 6,000
•
New machine (SOFP)
$ $
(c) Disposal account 3,000 Bal c/d 10,000
Cash 7,000
10,000 10,000
Bal b/d 10,000
•
Disposal account (SPL)
$ $
(a) Machine 6,000 (c) New machine (part 3,000
Profit disposal (SPL) 840 exchange)
6,840 (b) Accumulated 3,840
depreciation
6,840
• Required
• (a) Show the double entry to record the
revaluation and make the postings to the ledger
accounts.
• (b) What would be the depreciation charge for the
year if the building has a remaining useful life of 40
years?
Dr Non-current asset-building(150-100)
50,000
Dr Accumulated depreciation-building
20,000
Cr Revaluation Surplus
70,000
Building (SOFP)
$ $
Bal b/d 100,000
revaluation surplus 50,000 Bal c/d 150,000
150,000 150,000
150,000
Required
Calculate the depreciation charge, accumulated
depreciation and NBV for each year of the asset's life (year
end 31 December).
Required
Calculate the depreciation charge, accumulated
depreciation and NBV for each year of the asset's life (year
ended 31 December).
1 Introduction
Expenditure on non-current assets is often significant
and it is important therefore that it is accounted for
appropriately.
2 Non-current assets
Capital expenditure results in a non-current asset being
shown on the statement of financial position. Revenue
expenditure, such as repairs and maintenance, is shown as
an expense in the statement of profit or loss.
3 Depreciation
Depreciation is an expense charged in relation to the
asset each year to reflect the using up of the asset. Land
usually has an unlimited useful life and so is not
depreciated.
4 Methods of depreciation
Depreciation is usually calculated on a straight line or
reducing balance basis.
9 Revaluations
10 Depreciation revisited
If an entity changes the method of depreciation used
from straight line to reducing balance (or vice versa) or
revises the useful life of an asset it should write off the
asset's net book value using the revised method or
useful life.
Intangible non-current
assets
Accounting treatment
Accounting treatment
Amortisation
Examples
• Goodwill (see Chapter 24)
• Leases
• Patents and trade names
• Deferred development costs
Amortisation
• Intangible assets must be amortised systematically over
their useful life. An intangible asset with an indefinite
useful life is not amortised but should be reviewed each
year for impairment.
Disclosure
• Method of amortisation used
• Useful life of the assets or amortisation rate used
• Gross carrying value, accumulated amortisation and
accumulated impairment losses at beginning and end of
period
• Movements during the period
• Carrying amount of internally-generated intangible assets
• Applied research
IAS 38 criteria:
• P – Probable future economic benefits
• I – Intention to complete the intangible asset and use or
sell it
• R – the availability of Resources to complete the
development and use or sell
• A – Ability to use or sell
• T – Technical feasibility of completing the asset
• E – reliable measurement of Expenditure
Required
How should each of the above items be shown in the
financial statements for the year ended 31 August 20X8?
Required
Show statement of profit or loss and statement of financial
position extracts for the years 20X1–20X5 inclusive.
Non-current assets X1 X2 X3 X4 X5
$ $ $ $ $
Development expenditure 55,000 120,000 120,000 120,000 120,000
Amortisation – – (40,000) (80,000) (120,000)
Net book value 55,000 120,000 80,000 40,000 –
1 Definition
An intangible non-current asset is an identifiable non-
monetary asset without physical substance.
4 Accounting treatment
Accounting
treatment
Accrual
Prepayment
Prepayment
• Accruals
Rent
1.2.X7 375 3 months to 31 March 20X7
6.4.X7 1,584 12 months to 31 March 20X8
Note: On 6 March 20X8 Fiona received an electricity bill for $168 for
the quarter to 28 February 20X8.
BPP LEARNING MEDIA
Lecture example 1 (cont'd)
Required
(a) $
Electricity expense
Cash paid: 10.3.X7 96
12.6.X7 120
14.9.X7 104
10.12.X7 145
465
December expense missing (1/3 × $168) 56
521
$
Rent expense
Cash paid: 1.2.X7 375
6.4.X7 1,584
1,959
Less: expense relating to Jan – March × (3/12× $1,584) (396)
1,563
Required
1,959 1,959
Accruals (SOFP)
$ $
31.12.X7 Bal c/d 56 31.12.X7 Electricity 56
56 56
1.1.X8 Bal b/d 56
Prepayments (SOFP)
$ $
•
• During March 20X9 Fiona received an electricity bill for
$189 for the quarter to 28 February 20X9.
Required
Accruals (SOFP)
$ $
1.1.X8 Accrual 56 1.1.X8 Bal b/d 56
reversed
31.12.X8 Bal c/d 63 31.12.X8 Electricity accrual 63
119 119
1.1.X9
Bal b/d 63
Required
What insurance expense and end of year prepayment
should be included in the financial statements for the year
ended 30 June 20X7?
Expense Prepayment
A $29,000 $2,500
B $29,000 $5,000
C $28,500 $2,500
D $28,500 $5,000
B
$
Insurance expense
July X6 – August X6 ( 2/12 × $24,000) 4,000
Sept X6 – June X7 ( 10/12 × $30,000) 25,000
29,000
Prepayment
1 June X7 paid ( 1/4 × $30,000) 7,500
Less: June X7 ( 1/3 × $7,500) (2,500)
5,000
1 Introduction
2 Accounting treatment
Irrecoverable debts
Irrecoverable debts
and allowances
Allowances
Specific General
Irrecoverable debts
If definitely irrecoverable, it should be written off to the
statement of profit or loss as an irrecoverable debt.
• Receivables allowances
• If uncertainty exists as to the recoverability of the debt, an
allowance should be set up. This is offset against the
receivables balance on the statement of financial position.
General allowances
When calculating the general allowance to be made, the
following order applies.
$
Receivables balance per receivables control account X
Less: irrecoverable debts written off (X)
amounts specifically allowed (X)
Balance on which general allowance is calculated X
Required
(a) Calculate the balance c/d on the trade receivables
account at the end of the year.
(b) Calculate the irrecoverable debt expense shown in the
statement of profit or loss.
• Workings
Trade receivables (SOFP)
$ $
31.12.X7 Bal b/d 65,000 31.12.X7 irrecoverable debt 15,000
expense
(Ali $7,000)
(Tyson $8,000)
31.12.X7 Bal c/d 50,000
65,000 65,000
Workings
Allowance for receivables (SOFP)
$ $
Bal c/d 3,500 Allowance for receivables 3,500
expense
Required
(a) Calculate the allowance for receivables shown in the
statement of financial position.
(b) Calculate the total receivables expense shown in the
statement of profit or loss.
Working
(W) General allowance:
$
Trade receivables (net of irrecoverable debts written off) 47,100
Less: specific allowance (400)
46,700 × 2%= $934
Required
Show the treatment of this recovery in the relevant 'T'
accounts.
Cash (SOFP)
$
Irrecoverable debt expense 7,000
Required
Required
Following on from the information used in Lecture example
2, suppose that in the next accounting period, the debt from
Bugner is considered to be irrecoverable.
$ $
Dr Allowance for receivables 3,500
Cr Trade receivables 3,500
Required
Show the required adjustment to the allowance for
receivables account in the year ended 31 December 20X8.
BPP LEARNING MEDIA
Answer to lecture example 7
Long method
Allowance for receivables (SOFP)
$ $
(a) Allowance for 1,000 1.1.X8 Bal b/d
receivables expense ($20,000 × 5%) 1,000
(20,000 × 5%) (ii) 31.12.X8 Allowance for
Bal c/d 1,500 receivables expense 1,500
2,500 ($30,000 × 5%) 2,500
Short method
Allowance for receivables (SOFP)
$ $
31.12.X7Bal b/d
31.12.X8 Bal c/d ($20,000 × 5%) 1,000
($30,000 × 5%) 1,500 Allowance for receivables 500
expense (increase in
1,500 allowance) 1,500
Required
What amount should appear in the statement of profit or loss
for the year ended 30 September 20X8 for the above items?
A $13,000
B $15,000
C $17,000
D $23,000
A $13,000
Allowance for Statement of
receivables profit or loss
$ $
(1) Write off recovered (2,000)
(2) Write off in 20X8 18,000
(3) Change in allowance:
At 30.9.X7 24,000
At 30.9.X8 21,000
Decrease required 3,000 (3,000)
13,000
BPP LEARNING MEDIA
Chapter summary 1
1 Introduction
A trade receivable is an asset of the business which
should only be shown in the financial statements if it is
believed to be recoverable.
2 Irrecoverable debts
contingencies
Provisions
Provisions and
contingencies
Provision
• A liability of uncertain timing or amount
Contingent liability
• A possible obligation that arises from past events, whose
existence will be confirmed by the occurrence or non-
occurrence of future events not wholly in the entity's
control.
Contingent asset
A possible asset that arises from past events and whose
existence will be confirmed by the occurrence of one or more
uncertain future events not wholly within the entity's control.
Required
(a) What provision should be made in 20X7 and what accounting
entry is needed to record it?
(b) What entry should be made in 20X8 assuming the provision
required then is $0.75m?
(c) What entry should be made in 20X9 assuming the provision
required then is $0.3m?
1 Introduction
IAS 37 provides guidance on when a provision must and
must not be made.
2 Provisions
3 Contingent liabilities
A contingent liability should be disclosed where the
criteria for making a provision are not met, but where
there is either a possible obligation or a present
obligation but it is only possible that the expenditure
will be incurred.
4 Contingent assets
Contingent assets should only be included in the
financial statements if it is certain to be received and
should be disclosed if probable.
Control accounts
• Return of goods
• Payment in advance
• Posting errors
Required
(1) Record the above transactions in the books of
prime entry and the memorandum ledgers.
350
Purchase day book
Date Supplier Amount
15 Jan X6 Supplier Y 100
15 Jan X6 Supplier Z 1,300
1,400
200 200
Cash payment book
Date Narrative Total Purchases Payables
21 Jan X6 Supplier Y 100 100
100 100
Memorandum ledgers
Receivables ledger
Customer A
$ $
10.1.X6 Sales 150
Bal c/d 150
150 150
Bal b/d 150
Customer B
$ $
10.1.X6 Sales 200 21.1.X6 Payment 200
received
200 200
• Payables ledger
Supplier Y
$ $
21.1.X6 Payment made 100 15.1.X6 Purchases 100
100 100
Supplier Z
$ $
Bal c/d 1,300 15.1.X6 Purchases 1,300
1,300 1,300
(4) Reconciliation
Balance per list of balances $
Receivables ledger
Customer A 150
Customer B –
150
Balance per RLCA 150
Required
Record the initial sale.
• Required
• Record the full settlement of the amount owed.
Required
(c) What would your answer be to part (b) if the
settlement
discount were not taken?
(a)
Sales (SPL) RLCA (SOFP)
$ $ $ $
1.1X7 RCLA 10,000 1.1X7 Sales 10,000
(b)
Bank (SOFP) RLCA (SOFP)
$ $ $ $
4.1.X7 RCLA 9,000 1.1X7 Sales 10,000 4.1.X7 Bank 9,000
Discounts 1,000
allowed
10,000 10,000
$ $
4.1.X7 RCLA 1,000
(c)
Bank (SOFP) RLCA (SOFP)
$ $ $ $
4.1.X7 RCLA 10,000 1.1X7 Sales 10,000 4.1.X7 Bank 10,000
10,000 10,000
Required
In the books of Ryan:
(a) Show the initial recording of the purchase.
(b) Record the payment for the goods assuming Ryan
pays within seven days.
(c) Record the payment for the goods if payment is made
after seven days.
BPP LEARNING MEDIA
Answer to lecture example 3
(a)
Purchases (SPL) PLCA (SOFP)
$ $ $ $
PLCA 5,000 Purchases 5,000
5,000 5,000
(c)
Bank (SOFP) PLCA (SOFP)
$ $ $ $
PLCA 5,000 Bank 5,000 Purchases 5,000
Required
What amount should Brick show in Cement's payables
ledger to record this purchase?
A $48,576
B $50,336
C $50,600 NB: VAT is calculated after ALL discounts.
D $57,500
BPP LEARNING MEDIA
Answer to lecture example 4
• B
• $
• List price 50,000
• Less: trade discount (12%) (6,000)
• Record purchase at this value 44,000
• Less: settlement discount (4%) (1,760) $50,336
• Calculate sales tax on this value 42,240
•
• Sales tax at 15% 6,336
• (a) Required
• Post the following transactions to and balance off the
receivables ledger control account.
• (1) Opening balance $614,000
• (2) Credit sales made during the month $302,600
• (3) Receipts from customers $311,000
• (4) Irrecoverable debts were written off $32,000
• (5) Discounts allowed for prompt payment $3,400
• (6) Contras against amounts due to suppliers in
payables
ledger $8,650
• Required
BPP LEARNING MEDIA
Answer to lecture example 5
•
(a) RLCA
$ $
Balance b/d 614,000 Bank 311,000
Sales 302,600 Discounts allowed 3,400
Contras(PLCA) 8,650
Irrecoverable debts 32,000
Bal c/d 561,550
916,600 916,600
(b)• Reconciliation
RLCA
$ $
Bal b/d (part (a)) 561,550
(i) Sales (SDB undercast) 3,600 Bal c/d 565,150
565,150 565,150
$
Balance per list of balances 563,900
(ii) Credit balance included as a debit
(2 × $450) (900)
Customer balance omitted 2,150
1,250
565,150
1 Recap
Where the two balances are not the same an error must have
arisen and a reconciliation should be performed to identify the
errors (Section 5).
3 Other entries
If an entity has a customer is also a supplier the two
parties may choose to settle their accounts by making a
contra entry. The contra is always for the lower of the
two balances.
If a customer returns goods having paid for them or
overpays for goods then the entity will owe money back
to that customer and the customer will have a credit
balance on their account.
If a customer is late in settling their account the entity
may decide to charge them interest on the overdue
account. This will increase the balance owed.
4 Discounts
Differences
• Bank reconciliation
• A comparison of a bank statement with the cash book.
• The bank reconciliation is an important financial control.
• The bank reconciliation will invariably show a difference.
Required
Make any necessary adjustments to the cash book
balance and complete the bank reconciliation statement as
at 31 March 20X8.
•
Adjustment of cash book balance
Cash account
$ $
• Required
• Which of these items will result in an adjustment to the
balance per the bank statement?
• A 2, 3, and 5
• B 1 and 4
• C 1, 4, and 5
• D 1, 3 and 5
B
(1) is a bank error, (4) is an outstanding cheque (2), (3)
and (5) have all been processed correctly by the bank but
need recording in the cash account.
1 Introduction
A business maintains a cash book to tell it how much
cash it has at a particular point in time. It should
reconcile this balance to the bank statement in order to
ensure the cash book information is accurate.
Any items not in the cash book will then need to be recorded
and the cash book updated.
The balance per the bank statement must then be adjusted for
any timing differences (unrecorded lodgements and
outstanding cheques) or errors by the bank.
Types of error
Correction of errors
Correction of errors
• Errors can be corrected using the journal, but only those
errors which required both a debit and an (equal) credit
adjustment.
Example
• Accountant omits to record invoice from supplier for
$2,000. This would be corrected by the following journal
entry.
Another example
• Accountant posts car insurance of $800 to motor
vehicles account. Correct as follows.
(3)No entry had been made for the refund of $2,620 made
by cheque to V Woolf in March 20X7, in respect of
defective goods returned to Tiffany. V Woolf, who had
already paid for the goods, returned them on 28 February
20X7.
BPP LEARNING MEDIA
Lecture example 1 (cont'd)
Required
Prepare
(a) Journal entries to correct the above errors
(b) A suspense account showing how it is cleared
•
(b) Suspense account
$ $
Brought forward Stationery and postage
(102,800 – 85,240) 17,560 (5) 1,460
Cash at bank (4) 1,900 Capital (6) 18,000
19,460 19,460
Required
Prepare a statement of adjustments to profit for
Lecture example 1.
Adjustments
(2) A machine which had been held for two years and
had originally cost $15,000 was depreciated this year
using a 331/3% reducing balance basis. Z Co's policy
is to depreciate machines over four years.
BPP LEARNING MEDIA
Lecture example 3 (cont'd)
Required
What would be the net profit after adjusting for these
errors?
A $103,250
B $105,750
C $105,950
D $108,450
1 Introduction
If the trial balance doesn't balance an error has been
made and must be corrected.
2 Types of error
3 Suspense accounts
Where the trial balance does not balance a suspense
account will be inserted and the errors, once identified,
will be corrected via a journal entry.
A suspense account should never appear in the final
financial statements.
4 Adjustments to profit
Where the process of correcting errors requires changes
to income and expense accounts the business' profit will
be affected. In this case a statement of adjustments to
profit can be prepared to determine the revised profit
figure.
Trial balance
Final accounts
You have now revised all areas necessary to prepare the
final accounts of a sole trader. Areas you should be totally
familiar with are as follows.
• Ledger accounts
• Trial balance
• Format of statement of profit or loss and statement of
financial position
Steps to follow:
(1) Prepare trial balance
(2) Do final adjustments
(3) Clear suspense account
(4) Prepare statement of profit or loss
(5) Prepare statement of financial position
Rent 500
Inventories 1 January 20X7 510
Electricity 240
Insurance 120
Wages 1,634
Purchases 9,876
Trade receivables 672
Sales 15,542
19,349 19,349
Required
(a) Prepare journal entries to record items (1) – (8).
Cr Wages 120
Cr Trade receivables 37
Dr Drawings 63
Cr Purchases 63
Cr Accruals 100
Cr Electricity expense 90
Cr Suspense account 73
Suspense account
b/d 433
(5) Bank 360
433 433
Mugg
SPL for the y/e 31.12.X7 $ $
Sales 15,542
Less: cost of sales
Opening inventory 510
Purchases (9,876 – 63) 9,813
Less: closing inventory 647
9,676
Gross profit 5,866
Discounts received 129
5,995
Non-current assets
Motor vehicles 1,740 870 870
Furniture and fixtures 830 332 498
2,570 1,202 1,368
Current assets
Inventories 647
Trade receivables (672 – 37) 635
Prepayments 90
Cash and bank balances (5 + 762 + 360) 1,127 2,499
3,867
$ $
Capital
Capital as at 1 Jan 20X7 2,377
Profit for the period 2,073
Less: drawings (1,200 + 63 + 120) 1,383
3,067
Current liabilities
Trade payables 700
Accruals 100
800
3,867
1 Introduction
Incomplete records
Types of question
Accounting equation
• An examination question may provide information about
the assets and liabilities of an entity at the beginning of a
period, leaving you to calculate capital as the balancing
figure.
• Remember:
Assets – Liabilities = Proprietor's capital
Business equation
• If you have opening and closing net assets, you can
calculate profit for the year by the use of the business
equation:
P = I + D – Ci
$
Sales 100
Less Cost of sales 25
Equals Gross profit 75
$
Sales 133.3% 80
COS 100% (60)
Gross profit 33.3% 20
$
Sales 100% 80
COS 75% (60)
Gross profit 25% 20
— If insured
DEBIT Insurance claim account
(receivable)
CREDIT Cost of sales
— If not insured
DEBIT Expenses (eg Admin)
CREDIT Cost of sales
BPP LEARNING MEDIA
Cash book 1
Cash book
Incomplete records problems often concern small retail
entities where sales are mainly for cash. A two column cash
book is often the key to preparing final accounts.
payment).
RENT
$ $
Prepayment: bal b/f 700 SPL (bal fig) 9,000
Cash 9,300 Prepayment: bal c/f 1,000
10,000 10,000
Drawings
Note three tricky points about drawings.
Owner pays personal income into business bank account
DEBIT Cash
CREDIT Drawings
CREDIT Cash/Purchases
Required
What is cost of sales?
% $
Sales 100 476,000 ×60%
COS 60 285,600
GP 40 190,400
Required
What is the value for purchases in 20X7?
% $
Sales 130 221,000 X100/130
GP 30 51,000
Purchases: $
Cost of sales
Opening inventory 43,000
+ Purchases 174,500
Cost of sales
$
Opening inventories 620,000
Purchases 700,000
1,320,000
Less: cost of sales (788,000)
Closing inventories should be 532,000
Closing inventories is (180,000)
∴ inventory lost in fire 352,000
Required
Based on the information above what was the value of
purchases made during the year?
BPP LEARNING MEDIA
Answer to lecture example 4
Trade payables
$ $
Bal b/d 38,450
Till 430
Bank 167,224
Balance c/d 43,825 Purchases 173,029
211,479 211,479
• Required
• Based on the information above what was the value of
sales made during the year?
Cash
$ $
Bal b/d 50
Receipts from General expenses 4,500
Trade receivables 39,204 Drawings 6,250
(1)
Bankings 28,454
Bal c/d 50
39,254 39,254
Trade receivables
$ $
Bal b/d 1,447 Cash (deduced from
cash a/c) 39,204
Sales (2) 39,685
Bal c/d 1,928
41,132 41,132
$
Purchases of goods (on credit) 20,000
Wages for clerical assistant (per week;
there are 52 weeks in the year) 100
Stationery 500
Electricity 1,200
Bankings 12,800
Opening inventories 2,000
Closing inventories 3,000
Required
What were Bob's drawings during the year?
$4,050
Cost structure:
$
Sales = 100% = 23,750
∴ COS = 80% = 19,000
Gross profit 20% 4,750
Cash
$ $
Bal b/d 1,000 Wages 5,200
Stationery 500
Sales 23,750 Electricity 1,200
Bankings 12,800
∴ drawings 4,050
Bal c/d 1,000
24,750 24,750
1 Issue
2 Cost structures
a percentage of sales.
cost.
loan notes.
premium accounts.
statements.
Introduction to
company accounting
Shares
Accounting treatment
Features
• Limited liability companies offer limited liability to their
owners (shareholders).
• Owner/manager split
Disadvantages
IFRS
Funding
• Retained profits
• Share capital
• Loan notes
Shares
• The proprietors' capital in a limited liability company
consists of share capital.
Share capital
• Authorised. The maximum amount of share capital that a
company is empowered to issue.
• Issued. The amount of share capital that has been issued
to shareholders. The amount of issued capital cannot
exceed the amount of authorised capital.
• Loan notes
• Companies may issue loan notes. These are long term
liabilities not capital. They differ from shares as follows:
• Shareholder = owner; note holder = payable
• Loan note interest must be paid; not so dividends
• Loan notes often secured on company assets
• Reserves
• Revenue reserves consist of distributable profits and can
be paid out as dividends.
• Retained earnings
• Others, as the directors decide, eg general reserve
• Bonus issue
• A bonus (or capitalisation) issue uses reserves to pay for
the issue of share capital.
• Example
• Issue of 5,000 new $1 shares
• DEBIT Reserves (share premium or
retained earnings) $5,000
• CREDIT Share capital
$5,000
• Rights issue
• A rights issue enables existing shareholders to acquire
further shares.
• Example
• Issue of 5,000 new $1 shares at $1.50 per share
• DEBIT Cash
$7,500
• CREDIT Share capital
$5,000
• CREDIT Share premium
$2,500
• Required
• Show how this issue of shares would be accounted for and
what the statement of financial position would look like
immediately after the issue.
Rab Co
$ $
Dr Cash (200,000 × 80c) 160,000
Cr Share capital (200,000 × 50c) 100,000
Cr Share premium account (200,000 × 30c) 60,000
• Rab Co
• Statement of financial position (extract)
• $
• Share capital – 50c ordinary shares
150,000
• Share premium account
60,000
• Retained earnings
200,000
•
410,000
• Several years later Rab Co is to make a bonus issue on
a 1 for 4 basis.
BPP LEARNING MEDIA
Lecture example 2 (cont'd)
• Required
• Show how this issue of shares would be accounted for and
prepare the statement of financial position of Rab Co
immediately after the issue.
Bonus Issue
New share capital: 300,000 ($150,000/ 0.5) / 4
×50c = 37,500
Double entry: $ $
Dr Share premium account 37,500
Cr Share capital 37,500
• Rab Co
• Statement of financial position (extract)
•
$
• Share capital – 50c ordinary shares
187,500
• Share premium account
BPP LEARNING MEDIA
Lecture example 3 (cont'd)
• Required
• Show how this issue of shares would be accounted for and
prepare the statement of financial position of Rab Co
immediately following the issue.
Rights Issue $ $
New share capital: 375,000 / 5 × 50c 37,500
Share premium: 375,000 / 5 × $1 75,000
$ $
Dr Cash 112,500
Cr Share capital 37,500
Cr Share premium account 75,000
Rab Co
Statement of financial position (extract)
$
Share capital – 50c ordinary shares 225,000
Share premium account 97,500
Retained earnings 230,000
552,500
• Required
• Show the movement in retained earnings for ABC Co for
the year ended 31 December 20X7.
ABC Co
Reconciliation of movement in retained earnings
for year ended 31 December 20X7
$ $
Retained earnings at beginning of year 125,000
Profit for the period 50,000
Dividends – preference 6,000
– ordinary (200,000 shares × 5c) 10,000
(16,000)
Retained earnings at end of year 159,000
Note. Dividends which have been paid are deducted from retained earnings
in the statement of financial position. Proposed dividends are not adjusted
for.
• Required
• (1) Record the tax entries for the years ended 31
December 20X5 and 20X6 in the ledger accounts.
• (2) Prepare the tax note which relates to the
statement of
profit or loss for the year ended 31 December 20X6.
(1)
Income tax expense (SPL)
$ $
31.12.X5 Current tax payable 62,000 31.12.X5 Statement of profit 62,000
30.9.X6 Current tax payable 3,000 or loss
31.12.X6 Current tax payable 43,000
1 Introduction
Companies use the same method of bookkeeping to
record transactions. There are however some differences
in the terminology and the formats used.
3 Share capital
An entity may issue two main types of shares. Ordinary
or equity shareholders have voting rights and therefore
have control over the company. Preference shareholders
are really just providers of finance to the business and
have limited rights.
5 Reserves
A company may have several different types of reserve
such as a share premium account, a revaluation surplus
and retained earnings.
6 Dividends
Shareholders may receive a dividend as a return on
their investment; these are accounted for as a deduction
to retained earnings.
8 Finance costs
It will have to pay interest on any debt that it issues and
this will be shown as 'finance costs' in the statement
of profit or loss.
9 Current tax
Companies pay corporation tax on their profits.
10 Comparison
Sole traders and partnerships are very similar in their
nature whilst companies are quite different. You must
ensure that you are happy with both the differences and
similarities.
for companies
position.
given information.
and expenses.
reporting period.
Statement of financial
Statement of profit or loss
position
20X2 20X1
$ $ $ $
Assets
Non-current assets
Property, plant and equipment X X
Goodwill X X
Other intangible assets X X
X X
Current assets
Inventories X X
Trade receivables X X
Other current assets X X
Cash and cash equivalents X X
X X
Total assets X X
20X2 20X1
$ $ $ $
Equity and liabilities
Equity
Share capital X X
Retained earnings/(losses) X X
Other components of equity X X
Total equity X X
20X2 20X1
$ $ $ $
Non-current liabilities
Long-term borrowings X X
Long-term provisions X X
X X
Current liabilities
Trade and other payables X X
Short-term borrowings X X
Current portion of long-term
borrowings X X
Current tax payable X X
X X
Total equity and liabilities X X
• IAS 18 Revenue
• Sale of goods
• Rendering of services
and dividends
Measurement
$'000
ASSETS
Non-current assets
Property, plant and equipment 5,000
5,000
Current assets
Inventories 610
Trade receivables 1,000
Cash and cash equivalents 1,170
2,780
Total assets 7,780
Statement of profit or loss and other comprehensive income for the year
ended 30 September 20X6
$'000
Revenue 12,740
Cost of sales (7,040)
Gross profit 5,700
Distribution costs (2,060)
Administrative expenses (2,375)
Finance costs (72)
Profit before tax 1,193
Income tax expense (270)
Profit for the year 923
Other comprehensive income:
Gains on property revaluation 600
Total comprehensive income for the year 1,523
Statement of profit or loss and other comprehensive income for the year
ended 30 September 20X6
$'000
Profit for the year 923
Other comprehensive income:
Gains on property revaluation 600
Total comprehensive income for the year 1,523
Required
Using the information from the illustration in Lecture
Example 1, produce a statement of changes in equity
for Arrow for the year ended 30 September 20X6.
Working
Rights issue:
Issue is on a 1 for 6 basis, therefore issue 3,000,000 ÷ 6 =
500,000 shares at $1.27 each.
Record as:
Dr Bank (500,000 × $1.27) 635,000
Cr Share capital (500,000 × 50c) 250,000
Cr Share premium (500,000 × 77c) 385,000
1 Introduction
The financial statements published by a company need
to follow the format prescribed by IAS 1.
reporting period
Definition
Adjusting events
Provide additional evidence of conditions existing at the
reporting date.
Standard accounting
Change the figures in the financial statements if the event is
material and either it is an adjusting event or the going
concern concept is no longer appropriate.
Standard accounting
Disclose non-adjusting event in a note to the financial
statements.
Dividends proposed or declared after the end of reporting
period but before the financial statements are approved
should be disclosed in a note to the financial statements.
A non-adjusting event that affects going concern becomes
an adjusting event.
A 2 only
B 1 and 3
C 1, 3 and 4
D 2 and 4
1 Definition
2 Adjusting events
3 Non-adjusting events
flows
flows.
activities.
Cash flows
Statements of
cash flows
IAS 7
Purpose
• A statement of cash flows shows the effect of an entity's
commercial transactions on its cash balance.
• It is thought that users of accounts can readily understand
cash flows, as opposed to statements of profit or loss and
statements of financial position, which are subject to
manipulation by the use of different accounting policies.
Format
IAS 7 Statement of cash flows splits cash flows into the
following headings:
• Cash flows from operating activities
Direct method
The direct method proforma is the same except for the first
part which appears as follows:
Advantages
• Disadvantages
• Criticisms of IAS 7
• Inclusion of cash equivalents does not reflect the way
businesses are managed.
• The requirement that a cash equivalent has to be within
three months of maturity is unrealistic.
• Management of cash equivalents is not distinguished from
other investment decisions.
Required
What is the amount of income taxes paid during the year?
Required
Show the relevant entries for property, plant and equipment
which would appear in a statement of cash flows for Erosion
Co in 20X9.
Accumulated depreciation
$'000 $'000
Disposal 9 Bal b/d 80
Bal c/d 111 SPL Charge 40
120 120
Profit/loss on disposal:
$
Net book value of asset sold 11,000
Sales proceeds (8,000)
Loss on sale (3,000)
The entries in the statement of cash flows for 20X9 would be:
$
(i) Cash flows from operating activities (extract)
Adjustments for
Depreciation 40,000
Loss on sale of plant 3,000
43,000
(ii) Cash flows from investing activities (extract)
Purchase of property, plant and equipment (100,000)
Proceeds from sale of plant 8,000
(92,000)
Required
What are the dividends paid during the year ended 31
December 20X9?
Dividends paid
Dividends payable
$'000 $'000
Dividends paid 50 Bal b/d 35
Bal c/d 45 Retained earnings 60
95 95
Required
Produce a statement of cash flows for Emma Co for the year
ended 31 December 20X8.
c/d 39
59 59
Dividends payable
b/d 16
Divs paid 22 Divs (RE) 24
c/d 18
40 40
Required
$'000 $'000
Cash flows from operating activities
Cash receipts from customers (W1)
Cash payments to suppliers and employees (W2)
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
$'000 $'000
Cash flows from operating activities
Cash receipts from customers (W1) 579
Cash payments to suppliers and employees (W2) (452)
Cash generated from operations 127
Interest paid (8)
Income taxes paid (20)
Net cash from operating activities 99
Trade receivables
b/d 147
Cash rec'd 579
Revenue 600
c/d 168
747 747
Trade payables
b/d 121
Cash paid 452
Expenses W3 467
c/d 136
588 588
1 Purpose
bank overdrafts.
received.
raised from issuing shares and loans and the cash used
Introduction to • Definitions
• Associates
consolidated
financial statements
—Parent
—Subsidiary
—Control
—Trade/simple investment
Introduction to consolidated
financial statements
Overview
Basic principles
• Consolidation means adding together.
• Consolidation means cancellation of like items internal to
the group.
• Consolidate as if you owned everything then show the
extent to which you do not own everything.
statements
Significant influence:
SOFP
Investment in associate:
Cost of investment X
Share of retained earnings/losses X
X
Include in non current assets
Required
Which of these companies are subsidiaries of J for financial
reporting purposes?
A None of them
B K, L and M
C K and L only
D K and M only
D
• Both K and M are subsidiaries even though J owns less
than 50% of the ordinary shares. IAS 27 defines a
subsidiary as an entity controlled by another entity. J has
control over K because it has the power to govern K's
financial and operating policies. J has control over M
because it can appoint or remove the majority of the
directors.
• J only has significant influence over L so L is an associate
of J.
Pegasus Sylvester
$'000 $'000
ASSETS
Non-current assets
Property, plant and 20,000 900
equipment
Investment in Sylvester 1,300
21,300
Current assets
Inventories 3,200 400
Trade receivables 2,500 175
Cash 500 125
6,200 700
27,500 1,600
Required
Working
1 Group structure
Pegasus
1.1.X1 100%
Pre-acquisition ret'd earning $1,200k
Sylvester
2 Cancellation
$'000 $'000
Consideration (investment) 1,300
are as follows.
Pegasus Sylvester
$'000 $'000
ASSETS
Non-current assets
Property, plant and equipment 24,000 4,200
Investment in Sylvester 1,300
25,300 4,200
Current assets 8,500 2,100
33,800 6,300
Equity
31,800 5,300
33,800 6,300
Required
Prepare the consolidated statement of financial
position of the Pegasus Group as at 31 December 20X3.
Working
1 Group structure
Pegasus
1.1.X1 100%
Pre-acquisition ret'd earning $1,200k
Sylvester
2 Cancellation
$'000 $'000
Consideration (investment) 1,300
3 Retained earnings
Pegasus Sylvester
$'000 $'000
Per question 26,800 5,200
Pre-acquisition retained earnigs (1,200)
4,000
Sylvester – share of post acq'n earnings 4,000
(4,000 × 100%)
30,800
statements.
1 Concept
Consolidated accounts are prepared for a group of inter-
related companies.
2 Types of investment
These are three types of investment in the syllabus:
• Subsidiaries (where there is control)
Consolidated statement of
Financial position
Non-controlling
Goodwill Fair values
interest
intra-group
trading
Other reserves
Cancellation
Part cancellation
An item may appear at differing amounts in the parent's and
subsidiary's statement of financial position.
Goodwill
• Goodwill arises when the parent pays more for their
investment than the par value of the shares they acquire.
• Goodwill working
$ $
Fair value of consideration transferred X
Fair value of NCI at acquisition X
Less net acquisition-date fair value of
identifiable
Assets acquired and liabilities assumed:
Ordinary share capital X
Share premium X
Retained earnings at acquisition X
Fair value adjustments at acquisition X
(X)
Goodwill X
Non-controlling interest
Non-controlling interest
SOFP – equity
Retained earnings
PCo SCo
$ $
Per question X X
Adjustments (unrealised profit attribute to P Co) (X)
Pre-acquisition retained earnings (X)
Y
Group share of post-acq'n ret'd Earnings S Co (Y × %) X
Group retained earnings X
• Non-controlling interest
• NCI share of retained profits = Y × NCI%
• Intra-group trading
• Unrealised profit will arise on intra-group transactions
where the inventory is still held at the reporting date:
• Work out which company made the profit.
• Calculate the provision for unrealised profit (PUP).
• For consolidation purposes, eliminate the profit from
inventory, consolidated retained earnings and NCI (if
required).
• Required
• Prepare the consolidated statement of financial
position of the Pogo group as at 1 February 20X0.
$'000
Goodwill (W2) 3,000
Other assets [9,500 + 6,500] 16,000
19,000
Share capital [Pogo only] 9,000
Retained earnings (W3) 6,000
15,000
Liabilities [2,500 + 1,500] 4,000
19,000
• 1 Group structure
Pogo
1.2.X0 100%
Pre-acquisition ret'd earnings $2m
Stick
2 Goodwill
$'000 $'000
Consideration 8,000
Non-controlling interest 0
Net assets at acquisition represented by:
Share capital 3,000
Retained earnings 2,000
(5,000)
Goodwill arising on acquisition 3,000
3 Retained earnings
Pogo Stick
$'000 $'000
Per question 6,000 2,000
Pre-acquisition retained earnings (2,000)
0
Group share of post acquisition earnings:
Stick (0 × 100%) 0
6,000
Pop Snap
$'000 $'000
Investment in Snap 6,000 –
Other assets 10,500 9,200
16,500 9,200
Share capital 10,000 4,000
Retained earnings 1,500 2,200
11,500 6,200
Liabilities 5,000 3,000
16,500 9,200
• Required
• Produce the consolidated statement of financial
position of Pop and its subsidiary as at 31 December
20X8.
• 1
Workings
Group structure
Pop
1.1X8 75%
Pre-acquisition ret'd earnings $1m
Snap
2 Goodwill
$'000 $'000
Consideration 6,000
Non-controlling interest 1,500
Net assets at acquisition represented by:
Share capital 4,000
Retained earnings 1,000
(5,000)
Goodwill arising on acquisition 2,500
3 Retained earnings
Pop Snap
$'000 $'000
Per question 1,500 2,200
Pre-acquisition retained earnings (1,000)
1,200
Group share of post acquisition earnings:
Snap (1,200 × 75%) 900
2,400
4 Non-controlling interest
$'000
NCI at acquisition (W2) 1,500
NCI share of post acquisition earnings ((W3) 1,200 × 25%) 300
1,800
• Required
• Calculate the goodwill arising on acquisition of Y.
• Goodwill
$ $
Fair value of consideration
Cash 250,000
Shares [(1/3 × 300,000) × $7.35] 735,000
985,000
Fair value of non-controlling interest 280,000
Les: Fair value of net assets at acq'n
Share capital 400,000
Retained earnings 500,000
Fair value adjustment (160,000 – 100,000) 60,000
(960,000)
Goodwill at acquisition 305,000
• Workings
• 1 Group structure
X
1.1.X5 300/400 = 75%
Pre-acquisition ret'd earnings $500,000
Y
Poach Steal
$'000 $'000
Non-current assets
Property, plant and equipment 200 50
Investment in Steal 6
206 50
Current assets
Inventories 22 18
Receivables – from Poach – 30
– other 96 29
Cash 4 15
122 92
328 142
Equity
Share capital 100 10
Retained earnings 147 73
247 83
Current liabilities
Trade payables – to Steal 30 –
– other 51 59
81 59
328 142
• Notes
• (i) The fair value of the non-controlling interest in Steal at
acquisition was $4,000.
• (ii) Steal sells goods to Poach at a profit margin of 25%
on selling price. At the year end, $12,000 of the
goods that Poach had purchased from Steal remained
in inventories.
• Required
• Prepare a consolidated statement of financial position
as at 31 December 20X8.
Current assets
Inventories (22 + 18 – (W4) 3) 37
Receivables – from Poach (30 – 30) –
– other (96 + 29) 125
Cash (4 + 15) 19
181
431
Equity attributable to the owners of the parent
Share capital 100
Retained earnings (W2) 189
289
Non-controlling interest (W3) 32
321
Current liabilities
Trade payables – to Steal (30 – 30) –
– other (51 + 59) 110
431
•1 Workings
Group structure
Poach
On incorporation 60% \non-controlling interest 40%
(\no goodwill)
Pre-acquisition ret'd earnings $0
Steal
3 Non-controlling interest
$'000
NCI at acquisition 4
NCI share of post acquisition retained earnings ((W2) 70 × 40%) 28
32
Pat Slap
14,500 6,000
• Required
• Calculate the goodwill at the date of acquisition.
$'000 $'000
Consideration transferred 4,000
Non-controlling interest (1,000 × 20% × $4.50) 900
Workings
1 Group structure
Pat
30.9.X7 80%
Pre-acquisition ret'd earnings – see W2
Slap
2 Goodwill
Positive goodwill is capitalised as an intangible non-
current asset. 'Negative' goodwill (once reassessed to
ensure it is accurate) is recognised as a bargain
purchase in the profit or loss.
3 Fair values
In order for the goodwill figure to be accurately
measured, both the consideration transferred and the
fair value of the assets acquired and liabilities assumed
must be recognised at fair value at the date of
acquisition.
4 Other reserves
Other reserves, eg a revaluation surplus, are calculated
using the same process as retained earnings, ie only
post-acquisition reserve movements are
consolidated.
5 Non-controlling interest
Non-controlling interest shows the amount of the assets
and liabilities under the control of the parent, but which
are not owned by the parent's shareholders.
6 Intra-group trading
At the year end, intra-group payables and receivables
must be eliminated.
Unrealised profit in year end inventories from intra-
group trading must be eliminated by reducing
inventories and the seller's retained earnings.
7 Mid-year acquisitions
Only post-acquisition profits are consolidated.
Therefore, if the acquisition is mid-year, a retained
earnings figure must be estimated for the goodwill and
retained earnings calculations.
intra-group
Purpose Approach to the trading
consolidated statement
of profit or loss and other
comprehensive income
Mid-year
acquisitions
profit.
Reason
• To show the extent to which profits generated through P's
control are in fact owned by other parties
profit or loss.
$'000
Profit for the year 8,000*
Other comprehensive income:
Gains on property revaluation 2,000
Total comprehensive income for the year 10,000
Patois Slang
$'000 $'000
Revenue 100 90
Cost of sales (75) (55)
Gross profit 25 35
Distribution costs (5) (6)
Administrative expenses (8) (10)
Dividend from subsidiary 4.5 –
Profit before tax 16.5 19
Income tax expense (4) (6)
PROFIT FOR THE YEAR 12.5 13
Other comprehensive income for the year, net 20 10
of tax
TOTAL COMPREHENSIVE INCOME FOR THE 32.5 23
YEAR
Required
Prepare the consolidated statement of profit or loss
and other comprehensive income for the Patois group for the
year ended 30 June 20X9.
Working
1 Group structure
Patois
1.7.X490% \non-controlling interest 10%
Pre-acquisition ret'd earnings $15,000
Slang
on 1 January 20X2.
Required
and other comprehensive income for the Pouch group for the
Other comprehensive income for the year, net of tax (2,000 + 1,000) 3,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 12,100
Working
1 Group structure
Pouch
1.1.X2 75% \non-controlling interest 25%
Sack
PFY TCI
2 Non-controlling interest $'000 $'000
Per question 4,000 5,000
PUP on sales made by Sack (W3) (400) (400)
3,600 4,600
× 25% 900 1,150
3 Unrealised profit
Sack Pouch
PUP = $8m × 25/125 × ¼ in inventories = $400,000
Add $400,000 to cost of sales and as the subsidiary is the seller, adjust NCI.
Perilous Safe
$'000 $'000
transfer of $30,000.
year end.
Required
Perilous Group - Consolidated statement of profit or loss for the year ended
30 September 20X5
$'000
9 10,550
Revenue (10,000 + (1,000 × 12 ) – 200)
9
Cost of sales and expenses (6,000 + (700 × 12 ) – 200 + 15 (W3)) (6,340)
Profit before tax 4,210
9
Income tax expense (1,400 + (120 x 12 )) (1,490)
Profit for the year 2,720
Workings
1 Group structure and timeline
Perilous
Safe
2 Non-controlling interest
1 Purpose
3 Intra-group trading
4 Mid-year acquisitions
financial position.
Ratio analysis
Purpose
As well as:
• Employees – will I get paid?
• Governments – tax, regulations compliance
• Suppliers/lenders – will we get paid?
• Customers – can we rely on this company?
by competitors)
• Return on equity
Profit margin
Asset turnover
Sales
Asset turnover
Total assets less current liabilities
• Current ratio
Current assets
Current ratio
Current liabilities
Quick ratio
Current assets - Inventory
Quick ratio (acid test)
Current liabilities
Trade receivables
365
Credit sales
Debt ratio
Total debts
Debt ratio %
Total assets
Gearing
Interest cover
PBIT
Interest cover
Interest payable
Limitations
• Comparative information is not always available.
• They sometimes use out of date information.
Limitations (cont'd)
• Interpretation requires thought and analysis. Ratios should
not be considered in isolation.
Limitations (cont'd)
• The exercise is subjective, for example not all companies
use the same accounting policies.
• Ratios are not defined in standard form.
Required
How do the following users of financial statements
benefit from ratio analysis?
a) Shareholders
b) potential investors
c) Banks and other providers of loan capital
d) Employees
e) Management
f) Suppliers
g) Governments
20X5 20X4
$m $m
Revenue 20,510 17,835
Cost of sales 18,970 16,835
Gross profit 1,540 1,000
Operating profit 650 530
Finance costs 200 130
20X4
Gross profit margin 5.6%
Required
• Current ratio
• Inventory holding period
• Payables payment period
• Interest cover
Current ratio =
0.61
Current assets 1,570
0.54
Current liabilities 2,920
TJF are paying their suppliers more quickly. This is bad for cash flow as TJF is
not taking advantage of the free credit but good for supplier relationships.
The decrease appears to be due to:
The new strengthened Grocery Supplier Code of Practice coming into force
– presumably TJF is paying suppliers more quickly to meet their credit
terms and to treat suppliers more fairly in the spirit of the code.
Interest cover =
4.08
Profit before interest and taxation 650
3.25
Financecosts 200
Interest cover has deteriorated. However, TJF is still easily able to pay
its finance costs out of profit.
The deterioration in interest cover appears to be due to:
Increased borrowings to cover the financing of the new stores
opened in the year.
statements
decision.
3 Ratio analysis
Split into categories:
— Profitability
— Liquidity
— Efficiency
— Position
Only useful if compare with:
— Previous financial periods
— Similar businesses
— Industry averages
4 Profitability ratios
Gross profit margin
Operating profit margin
Return on capital employed
Return on equity
5 Liquidity ratios
Current ratio
Quick ratio
6 Efficiency ratios
Inventory holding period
Receivables collection period
Payables payment period
Asset turnover
7 Position ratios
Interest cover
Gearing