Preparation Of Financial Statements
Overview
All year the books have been recording, checking and adjusting. Now comes the moment everything was for: turning a page of balances into two statements that answer the only two questions anybody outside the business really asks. Did it make money this year, and what is it standing on? An income statement answers the first, and a statement of financial position answers the second.
The model is the same whoever owns the business, but the finishing changes. A sole trader keeps every penny of the profit, so her statements are the simplest. Partners have to divide the profit according to their agreement. A limited company is owned by shareholders and pays them dividends. A manufacturer has to work out what its own goods cost to make before it can say what they cost to sell. A club is not trying to make a profit at all. And a trader who never kept a ledger can still be told what she earned. This lesson prepares all six.
Objectives
- The use of concepts in the preparation of financial statements.
- The advantages and disadvantages of different organisations.
- Sole traders: Prepare financial statements of sole traders from ledger accounts including adjustments from the application of accounting concepts.
- Prepare and comment on income statements and statements of financial position from a trial balance including adjustments from the application of accounting concepts. Partnerships: Prepare and comment on the financial statements of partnerships.
- Prepare and comment on the capital and current accounts of partners.
- Limited companies: Prepare and comment on the internal financial statements of limited liability companies.
- Manufacturing organisations: Prepare and comment on the financial statements of manufacturers.
- Clubs and non-profit making organisations: Prepare and comment on the financial statements of clubs and non-profit making organisations.
- Accounting for organisations with incomplete records: The calculation of profit of an organisation where there are insufficient records to prepare income statements. The benefits and limitations of maintaining accounting records using different systems including single and double entry records.
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Lesson Note
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Lesson Evaluation
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You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which item is added to purchases when calculating the cost of sales? A. Carriage inwards B. Carriage outwards C. Discount received D. Returns outwards Answer: A
- Femi and Grace are partners sharing profits and losses in the ratio 2:1. The profit for the year was $54 000 before Grace's salary of $6 000. What is Femi's share of the residual profit? A. $16 000 B. $18 000 C. $32 000 D. $36 000 Answer: C
- Where would subscriptions in arrears be shown in the statement of financial position of a club? A. Accumulated fund B. Current assets C. Current liabilities D. Non-current assets Answer: B
- Which item is NOT shown in a receipts and payments account of a club? A. Depreciation of equipment B. Purchase of equipment C. Rent paid D. Subscriptions received Answer: A
- What does the abbreviation Ltd indicate in a company's name? A. The company's borrowing is limited B. The company's profits are limited C. The number of shareholders is limited D. The shareholders' liability for the company's debts is limited Answer: D
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