AF2101 Intermediate Financial Accounting

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1 LIVE ONLINE LECTURE 3

Preparation of Published
Accounts
Practical session involving
a worked example
(Valencia handout)
 Preparation of published accounts
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We will use the question Valencia to illustrate the

preparation of a Statement of Comprehensive
Income and a Statement of Financial Position as
required by IAS 1.

The aim is that you should be able to:

prepare
a set of accounts that conform to the
prescribed formats; and
understand how a company arrives at the figures

that appear in the published financial statements.

 Step-wise Approach
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 We will follow a progressive step-wise approach to the

preparation of published accounts:
 Step 1: Internal Income Statement from the trial balance
data
 Step 2: Statement of Comprehensive Income (with costs
analysed by function – Format 1).
 Step 3 (if required): Statement of changes in Equity
 Step 4: Statement of Financial Position
 Step1: Internal Income Statement
from Trial Balance
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£ £
Sales 345,000
Less: Op. inventory 43,125
Purchases 258,750
Cl. Inventory (25,875)
Cost of Sales (276,000)
Gross Profit 69,000
 Less Expenses
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£
Salaries (18055+5175) 23,230
Motor expenses 9,200
Depreciation (see next slide) 5,175
Insurance 3,450
Post /phone 1,840
Audit Fees 1,150
Director’s remuneration 1,150
Light and power 920
Repairs (2760 – 2300) 460
Hire charges 300
Miscellaneous (sundries) 275
Total 47,150
 Depreciation Charge for the Year
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 Buildings 2% Straight Line

2% x 57500 = 1,150
 Equipment 10% Reducing balance
10% * (14950 – 3450) = 1,150
 Vehicles 25% Reducing balance
25%* (20700 – 9200) = 2,875

 Total depreciation = 5,175

 Profit
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£
Gross Profit 69,000
Less Expenses (47,150)
Operating profit 21,850
Finance costs (1150+ 6325) (7,475)
Profit Before Tax 14,375
Tax (5,750)
Profit for the year 8,625
Dividends (1,725)
Profit transferred to reserves 6,900
 Step 2: Statement of Comprehensive Income
(according to function)
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 The previous slides show what you are familiar with

– the income statement in an internal format
 Now we need to redraft into one of the prescribed
legal formats from IAS 1

 We need to:
 Reallocate cost of sales and expenses according to
Function (choice of function or nature - we are just
looking at function)
 Disclose further specific information in notes to the
accounts
 Expenses allocation
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 Expenses are allocated to:

 Cost of sales
 Distribution costs
 Administration expenses
 Some expenses may have to be apportioned to more
than one classification
 The company will have to make some decisions and
assumptions to make the allocation. These vary
between companies:
 For example, floor space is frequently used to apportion certain
expenses such as rent, or depreciation of buildings
 ALWAYS SHOW YOUR WORKINGS!!!!
 W1- Salaries and Wages Allocation
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Total before Costs of Distribution Administration

reallocation sales Costs costs
£000 £000 £000 £000

Factory staff 11,500 11,500

Factory
Inspectors 575 575

Warehouse staff 4,600 4,600

Accounts dep’t 575 575

Drivers 3,680 3,680

Salespersons'
salaries 2,300 2,300
23,230 12,075 10,580 575
 W2- Allocation of Depreciation
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Total before Costs of Distribution Administration

reallocation sales Costs costs
£000 £000 £000 £000
Freehold
buildings 1,150 575 287.5 287.5

Equipment 1,150 575 287.5 287.5

Motor vehicles 2,875 2,875

5,175 1,150 3,450 575
 W3- Expenses allocated on basis of space occupied
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Total Cost of Sales Distrib’n Admin

£000 £000 £000 £000

Insurance 3,450 1,725 862.5 862.5

Post etc 1,840 920 460 460

Lighting 920 460 230 230

Repairs 460 230 115 115

Hire 300 150 75 75

Misc 275 137.5 68.75 68.75

Total 7,245 3,622.5 1,811.25 1,811.25

 Other expenses
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 Motor expenses
 Common sense indicates these are allocated to
distribution
 Audit fees
 these are always allocated to admin
 Directors’ remuneration
 In this case, additional information assumes that half of
time is on production and half on admin
Summary of expenses allocated

Cost of Sales £000 Distrib’n £000 Admin £000

Cost of sales 276,000

Salaries & wages 12,075 10,580 575

Motor expenses 9,200

Depreciation 1,150 3,450 575

Allocated on
space 3,622.5 1,811.25 1,811.25

Audit fees 1,150

Directors’ pay 575 575

Total 293,422.5 25,041.25 4,686.25

 Statement of Comprehensive Income (by function)
for year ended 31 December 2021
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£000
Turnover 345,000.00
Cost of sales 293,422.50
Gross profit 51,577.50
Distribution and selling costs 25,041.25
Administrative expenses 4,686.25
Operating profit 21,850.00
Finance costs 7,475.00
Profit on ordinary activities before tax 14,375.00
Tax 5,750.00
Profit for the year 8,625.00
 Minimum required information on the face of
the Statement of Comprehensive Income
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 Turnover (sales)
 Finance costs
 Tax
 Profit for the year

 That’s it!
 Note what is NOT required
 Information disclosed by way of note
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 Usual practice is to have a note referenced to the profit on

ordinary activities before tax.
 For Valencia the note as below with additional information
regarding the loss on the inventory:

Profit on ordinary activities before tax is stated after charging:

£000
Depreciation and amortisation 5,175
Directors’ remuneration 1,150
Audit fee 1,150
Exceptional loss on inventory 1,000
 Step 3: Statement of changes in Equity
for year ended 31st December 2021
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Retained
Share capital earnings Total
£000 £000 £000
Balance as at 1
January 2021 17,250 57,500 74,750
Changes in equity for
2021:

Dividends paid (1,725) (1,725)

Total comprehensive
income for the year 8,625 8,625
17,250 64,400 81,650
 Step 4: Preparation of the
Statement of Financial Position as at 31.12.21
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 Prepare the note for Movement on Property, Plant

and Equipment, where cost, depreciation and net
book value must all be shown

 Do this before preparing the Statement of Financial

Position
 Note X: Property, plant and equipment
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Freehold Equipment Motor Vehicles
Property £000 £000 £000 Total £000
Cost
At 1.1.21 115,000 14,950 20,700 150,650
Additions
Disposals
At 31.12.21 115,000 14,950 20,700 150,650

Accum.
Depreciation
At 1.1.21 3,450 9,200 12,650
Charge for 1,150 1,150 2,875 5,175
Year
At 31.12.21 1,150 4,600 12,075 17,825

NBV 31.12.21 113,850 10,350 8,625 132,825

NBV 31.12.20 115,000 11,500 11,500 138,000
 Statement of Financial Position as at 31.12.21
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£000 £000
Non-current assets
Property, plant and equipment Note X 132,825
Current assets
Inventory 25,875
Receivables 28,750
Cash at bank and in hand 4,600
Prepayments 2,300 61,525

Total Assets 194,350

 Statement of Financial Position as at 31.12.21
(cont)
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£000 £000
Equity
Share capital 17,250
Retained earnings 64,400 81,650

Non-current liabilities
10% Loan 63,250
Current liabilities
Payables 29,900
Provision for income tax 5,750
Accrued charges 5,175
Bank overdraft 8,625 49,450

Total Equity & Liabilities 194,350

 Other issues
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 Presentation of discontinued operations

 A layered treatment is required by IFRS 5, which
requires the results of continuing and discontinued
operations to be disclosed separately.

 Unusual activities
 IAS 1 requires separate disclosure of nature and amount
when items of income and expense are material
 These items may include losses on termination of
operations and profits or losses on the sale of non-
current assets
 Exercise Summary
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 We’ve looked at how to prepare financial accounts in a

format suitable for publication:
 First we prepared an internal income statement (this stage can
usually be omitted)
 Allocation of costs and expenses – make sure you have
understood how to do this properly
 Statement of Comprehensive Income
 Statement of Changes in Equity
 Information disclosed in notes, especially on non-current
assets
 Statement of Financial Position
 Presentation for discontinued operations and unusual
 Required reading
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 Chapter 3, E&E textbook (19th edition)