Displayed here are the draft financial statements which have been prepared for Valerie’s business for the year ended 30 April 2021. Draft Statement of Financial Position as at 30 April 2021 Assets Non-current assets see point a. below Cost 90,000 Provision for depreciation 30,600 Net Book Value 59,400 Current assets Inventory To be advised Trade receivables 43,200 Cash 4,680 47,880 Total assets 107,280 Liabilities Current liabilities Trade payables 17,280 Non-current liabilities Bank loan 16,000 Total liabilities 33,280 Net assets 74,000 Owner’s interest Capital invested 24,000 Profit and Loss Reserve: Opening balance 34,720 Draft profit for the year (provisional figure) 15,280 Profit and Loss Reserve closing balance 50,000 Closing owner’s interest 74,000 Draft Statement of Profit or Loss for the 12 months to 30 April 2021 Revenue 247,200 Opening inventory 23,040 Purchases 98,880 Cost of sales (provisional figure) 121,920 Gross profit 125,280 Salaries 48,000 Power 20,400 Insurance 12,050 Other operating overheads 29,550 110,000 Operating profit 15,280 Final adjustments are now needed in order to complete the statements. The information needed to finalise the accounts is as follows: An analysis of the net book value of non-current assets is shown below. The balances represent those brought forward on 1 May 2020. Vehicles Fixtures and Fittings Total Cost 54,000 36,000 90,000 Depreciation provision 21,600 9,000 30,600 Net Book Value 32,400 27,000 59,400 No accounting entries have yet been made for depreciation for the year ended 30 April 2021. The vehicles are being depreciated on a straight-line basis over 5 years, with nil residual value assumed, whilst fixtures and fittings are being depreciated on a 25% reducing balance basis. The draft accounts were prepared before the information from the stock-take on 30 April 2021 had been collated. It is now known that the value of inventory held on that date was £24,320. Due to a power cut on the last day of the accounting period, sales invoices issued on 30 April 2021 were prepared manually and still need to be recorded in the computerised accounting system. These sales were all made on credit and the day’s invoices came to a total of £2,800. Due to the uncertain economic climate, Valerie has decided to create a provision for doubtful debts representing 4% of the balance outstanding at the year end. The solicitor has also advised that the business’s defence against a charge for breaches of Health and Safety regulations is likely to fail, with the business having to pay some £5,000 in fines and costs in summer 2021. The power expense in the Statement of Profit or Loss represents bills paid and received in the year, with adjustment having been made for the accrual brought forward on 1 May 2020. No adjustment has been made yet for the estimated £3,900 of power consumed in March and April 2021 but not billed until May 2021. The insurance expense in the Statement of Profit or Loss takes account of the prepayment brought forward on 1 May 2020 and all of the annual premium paid on 1 January 2021. This premium of £7,200 provides cover for the 12 months ended 31 December 2021. Interest on the bank loan at a rate of 7% was paid during the year but has not been recorded anywhere in the accounting records, including the bank account. Requirements: Prepare the final Statement of Profit or Loss for the year ended 30 April 2021 together with the Statement of Financial Position as at that date, using all of the information provided.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Displayed here are the draft financial statements which have been prepared for Valerie’s business for the year ended 30 April 2021.
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Draft |
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||
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Assets |
|
|
|
|
Non-current assets |
see point a. below |
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|
|
Cost |
|
90,000 |
|
|
Provision for depreciation |
|
30,600 |
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Net Book Value |
|
|
59,400 |
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Current assets |
|
|
|
|
Inventory |
|
To be advised |
|
|
Trade receivables |
|
43,200 |
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|
Cash |
|
4,680 |
47,880 |
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Total assets |
|
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107,280 |
|
|
|
|
|
|
Liabilities |
|
|
|
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Current liabilities |
|
|
|
|
Trade payables |
|
17,280 |
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Non-current liabilities |
|
|
|
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Bank loan |
|
16,000 |
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Total liabilities |
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33,280 |
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Net assets |
|
|
74,000 |
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|
|
|
|
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Owner’s interest |
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|
|
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Capital invested |
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24,000 |
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|
|
|
|
|
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Opening balance |
34,720 |
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|
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Draft profit for the year (provisional figure) |
15,280 |
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|
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Profit and Loss Reserve closing balance |
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50,000 |
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Closing owner’s interest |
|
74,000 |
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Draft Statement of Profit or Loss for the 12 months to 30 April 2021 |
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Revenue |
|
247,200 |
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Opening inventory |
23,040 |
|
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Purchases |
98,880 |
|
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Cost of sales (provisional figure) |
|
121,920 |
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Gross profit |
|
125,280 |
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Salaries |
48,000 |
|
|
Power |
20,400 |
|
|
Insurance |
12,050 |
|
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Other operating overheads |
29,550 |
|
|
|
|
110,000 |
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Operating profit |
|
15,280 |
Final adjustments are now needed in order to complete the statements. The information needed to finalise the accounts is as follows:
- An analysis of the net book value of non-current assets is shown below. The balances represent those brought forward on 1 May 2020.
|
|
Vehicles |
Fixtures and Fittings |
Total |
|
Cost |
54,000 |
36,000 |
90,000 |
|
Depreciation provision |
21,600 |
9,000 |
30,600 |
|
Net Book Value |
32,400 |
27,000 |
59,400 |
No accounting entries have yet been made for depreciation for the year ended 30 April 2021. The vehicles are being depreciated on a straight-line basis over 5 years, with nil residual value assumed, whilst fixtures and fittings are being depreciated on a 25% reducing balance basis.
- The draft accounts were prepared before the information from the stock-take on 30 April 2021 had been collated. It is now known that the value of inventory held on that date was £24,320.
- Due to a power cut on the last day of the accounting period, sales invoices issued on 30 April 2021 were prepared manually and still need to be recorded in the computerised accounting system. These sales were all made on credit and the day’s invoices came to a total of £2,800.
- Due to the uncertain economic climate, Valerie has decided to create a provision for doubtful debts representing 4% of the balance outstanding at the year end. The solicitor has also advised that the business’s defence against a charge for breaches of Health and Safety regulations is likely to fail, with the business having to pay some £5,000 in fines and costs in summer 2021.
- The power expense in the Statement of Profit or Loss represents bills paid and received in the year, with adjustment having been made for the accrual brought forward on 1 May 2020. No adjustment has been made yet for the estimated £3,900 of power consumed in March and April 2021 but not billed until May 2021.
- The insurance expense in the Statement of Profit or Loss takes account of the prepayment brought forward on 1 May 2020 and all of the annual premium paid on 1 January 2021. This premium of £7,200 provides cover for the 12 months ended 31 December 2021.
- Interest on the bank loan at a rate of 7% was paid during the year but has not been recorded anywhere in the accounting records, including the bank account.
Requirements:
- Prepare the final Statement of Profit or Loss for the year ended 30 April 2021 together with the Statement of Financial Position as at that date, using all of the information provided.
‘The measurement of cash flow is straightforward and objective. Profit on the other hand is complex and subjective, with the result being shaped by the impact of accounting concepts, conventions and judgement’: discuss.
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