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Financial statements


Financial statements

CLASSIFYING THE INCOME STATEMENT Income can be classified as Revenue is all revenue included in determining the operating profit of the period, and is the main source of revenue for the firm. e.g., for a trading business this will be the sale of goods. Other Income is supplementary revenues, not from the main activities of the firm e.g. renting out some spare warehouse space.

Expenses can be classified as a) Selling and Distribution Expenses b) Administrative Expenses c) Financial Expenses d) Other Expenses

a) Selling and distribution expenses – those expenses incurred to increase the sales of a business and distribute the product to the customers. For example sales salaries and wages, advertising, sales van expenses, cartage outwards.

b) Administrative expenses – those expenses incurred in order to organize a business. For example: electricity, rates, telephone, rent, office salaries and wages, insurance, accountancy fees.

d) Financial expenses – those expenses incurred in financing the business. For example: bad debts, interest on loan, interest on mortgage, discount allowed.

Examples of Other Expenses are loss on sale of property, donations

COST OF GOODS SOLD
This applies to businesses that sell goods rather than services. . In order to calculate the cost of goods sold during the accounting period, it is necessary to know the amount of opening and closing inventory for the period and the cost of goods purchased during the period.

Opening inventory for the period plus the goods purchased during the period will represent the total cost of goods available for resale. Closing inventory will represent that portion of the goods available for resale that remain unsold at the end of the period. The balance will then represent the cost of goods sold for the period.

Example 1
Opening Inventory Plus Purchases Goods available for sale Less Closing Inventory Cost of Goods Sold 40,000 200,000 240,000 60,000 $ 180,000

Example 2
Opening Inventory Plus Purchases 150,000 Less Purchases Returns 5,000 Cartage in Import duty Goods available for sale Less Closing Inventory Cost of Goods Sold 25,000

145,000 17,000 13,000 200,000 30,000 170,000

GROSS PROFIT Gross Profit = Sales – Cost of Goods Sold

Sales 7,600 less Sales Returns and Allowances 76 Net Sales 7,524 less Cost of Goods Sold Inventory 1 January 790 plus Purchases 4,750 less purchases returns and allowances 48 4,702 Freight in 230 Goods available for sale 5,722 less Inventory 31 December 803 COST OF GOODS SOLD 4,919 GROSS PROFIT 2,605 Plus Other Income Discount received 89 2,694

1 Using the information below, calculate Gross Profit for Plant Supplies for the year ended 31 March 2013, then add on any further income as necessary. Inventory 1 April 2012 16,900 Inventory 31 March 2013 17,300 Purchases 175,000 Sales 255,000 Purchases returns and allowances 8,750 Sales returns and allowances 12,750 Discount received 1,750

STATEMENT OF CHANGES IN EQUITY
1 EQUITY FOR SOLE PROPRIETOR Owner's Equity: Capital (opening) 120,000 Plus: Contributions/Investment by Owner 20,000 140,000 Plus: Profit for the period 15,475 (Less: Loss for the period) 155,475 Less: Drawings 50,000 Capital (closing) $105,475

2 ACCOUNTING FOR COMPANIES The Shareholders' Equity section of the Balance Sheet, for a company, may comprise 3 parts – Share Capital, Retained Earnings and other Reserves, including Revaluation Reserves.

Share Capital $ 400,000 ordinary shares 600,000 200,000 ordinary shares, issue price $2, paid to 80 160,000 Issued and Paid-Up Capital 760,000 Retained Earnings 750,000 Land Revaluation Reserve 150,000 Total Equity $1,660,000

1 SHARE CAPITAL
Shares are the basic units of ownership of a company and Share Capital represents shares issued at a particular issue price. All companies issue ordinary shares. Some companies also issue other classes of shares, preference shares being the most common.

Ordinary shares carry voting rights and the shareholders expect to receive higher dividends when the company does well, but lower dividends (or none at all) if the company has a bad year.

2 RETAINED EARNINGS Retained Earnings are Profits (surpluses) that have been made by the company but not distributed. Instead, the funds are "retained" by the company to fund growth. The opening balance of Retained Earnings represents undistributed profits (surpluses) from previous years. This year's profit after tax is added and then any dividends are subtracted. This gives the closing balance of Retained Earnings.

Retained Earnings beginning XXX plus Profit for the period (after Tax) XXX less Distributions paid XXX (Subtracted) = Retained Earnings end XXX.

Dividends are distributions of profits (surpluses). They are usually paid in cash and, when paid in respect of ordinary shares, are calculated on a "cents per share' basis. For example, a dividend of 5 cents per share, with a shareholding of 500,000 shares, would total $25,000, regardless of the issue price of each share. Interim dividends are paid during the year and any final dividends declared are taken out of Equity (usually Retained Earnings) at the time it is declared.

1 Locus Ltd had at 1 August 2011: 150,000 ordinary shares issued for $450,000 A Retained Earnings balance of $420,000 A Land & Buildings Revaluation Reserve of $200,000, Plus the following balances at 31 July 2012: Interim ordinary dividend paid $45,000 Profit for the Period (after tax) $210,000

The directors resolved to pay a final dividend of 10 cents per share based on the shares held on 1 August 2011. The carrying amount of land and buildings was increased from $500,000 to $1,000,000. No purchases or sales of land and buildings had been made. Required: Calculate the Retained Earnings balance for the year ending 31 July 2012 Prepare the Equity section of the Balance Sheet as at that date.

Locus Ltd Retained Earnings Opening balance, 1 August 2011 420 add Profit for the period (after Tax) 210 630 less Dividends: Interim ordinary dividend Final ordinary dividend (150,000 x $.10) Closing balance, 31 July 2012 45 15 60 $570

Balance Sheet as at 31 July 2012 $000 Equity Share Capital - 150,000 Ordinary shares (fully paid) 450 Retained earnings 570 Land & Buildings revaluation reserve 700 Total Equity $1,720


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