CA BUSINESS SCHOOL EXECUTIVE DIPLOMA IN BUSINESS AND ACCOUNTING SEMESTER 1:Preparation of Financial Statements Preparation of Financial Statements M B G Wimalarathna (FCA, ACMA, ACIM, SAT, ACPM)(MBA–USJ/PIM)

Introduction We discussed key aspects of overall accounting functions including environment of accounting and corporate governance in our previous chapters. Hence, it is high time to discuss final product of overall accounting process; preparation and presentation of financial statements/final accounts. Basis of preparation and presentation of financial statements will vary based on the nature/types of an organization. As we already aware, preparation and presentation of financial statements in quoted public companies quite complex than any other types of organizations.

Key Components Based on the requirement of accounting standards and companies act, set of financial statements refers following components;  Income statement/comprehensive income statement  Balance sheet/Statement of financial position  Statement of cash flows  Statement of changes in equity  Accounting policies & comprehensive notes Note: the above key components and their respective specified formats will only be mandatory for companies.

Key Adjustment Entries In general, following key adjustments are expected to make when preparing financial statements with the available data/information. (trial balance) A.Closing stock/inventory B.Accruals C.Pre-paid & income received in advance D.Bad & doubtful debtors E.Depreciation of NCA F.Dividends G.Provision for obsolete stocks H.EPF/ETF/PAYE

Comprehensive discussion of the above key adjustments will be as follows; A.Closing inventory The value derived based on LKAS – 02 (after conducting annual physical stock count/verification) will be shown as; Current asset in B/S (till convert to sales) and Reduction from purchases during the year in Trading A/C Exercise 01 Cost of purchase 01 unit of “X” is LKR 5.00 and brokerage will be total of LKR 50, Company will procure 100,000 units and further LKR 80, will incur as cost of conversion. Company plans to sell 01 unit at LKR 7.50 and sales commission of LKR 60, will be incurred in the event of sales. Compute the value of inventory based on LKASs and show the entries appeared in relevant places.

B.Accruals Income and expenditures will be recorded in the books regardless whether they actually paid or received by means of cash or not if (and only if) such income and expenditures are relevant to the particular financial period. Expenditures: Relevant expenditure A/C Dr (I/S) Expenditure accruals/payables A/C Cr (B/S) Income: Income receivables A/C Dr (B/S) Relevant income A/C Cr (I/S) Exercise 02 Some of the particulars belongs to PQR Ltd is given below; 1.Telephone bill for march/2012 is LKR 50, Electricity bill for march/2012 is LKR 20, Investment made in FD value of LKR 10% rate on 1/10/2011 Compute the value of accruals. Show the ledger entries and places where they should shown in F/S ending 31 st March 2012.

C.Pre-incurred expenditures and income received in advance Pre-incurred expenditures: The value pertaining to current financial year should only be treated as an expenditure in I/S and value pertaining to next financial year should shown as an asset in the B/S. Pre-incurred expenditure Dr (B/S) Relevant to current year Dr (I/S) Cash Cr (B/S) Income received in advance: The value pertaining to current financial year should only be an income in I/S and value pertaining to next financial year should shown as a liability in the B/S. Cash Dr (B/S) Received for next year Cr (B/S) Relevant to current year Cr (I/S) Exercise 03 Details of transactions pertaining to XYZ Ltd are given below; 1.LKR 600, insurance paid for 12 months starting from 1/10/ Company received LKR 1.2 million of building rent for 24 months which was rented on 1/4/2011 Compute the value of Pre-incurred expenditures and income received in advance and show necessary ledger entries along with the places to be appeared in F/S ending 31 st March 2012.

D.Bad & doubtful debtors Bad debtors should be an expenditure of the company for the period in which it is identified and make sure such balances couldn’t be recoverable. Bad debtors (exp)Dr (I/S) Debtors (control a/c)Cr (B/S) Note: if bad debtors recovered during the current year, it should be debited to cash book and credit should be to the income statement as other income. A doubtful debtor is a provision made in line with prudent concept and such value depicts the uncertainty of recoverability. Doubtful debtors (exp)Dr (I/S) Provision for doubtful debtors Cr (B/S) Note: value of debtors which based for provision of doubtful debtors should be net of bad debtors. The closing balance of doubtful provision a/c should be shown as deduction against net debtors at the balance sheet.

Exercise 04 Total value of the debtor balance of ABC Ltd as at 31 st March 2012 is LKR 5 million. Company is certain that the following debtors balances couldn’t be recoverable. LKR/Mn P0.2 Q0.35 R0.65 Company also decided to provide for doubtful debtors as follows; LKR/Mn% X0.810 Y0.410 Z0.220 Company is also decided to provide for doubtful debtors by using a flat rate of 8% of closing balance. Compute bad debtors/specific & general provision of doubtful debtors and show necessary ledger entries along with the balances appeared in F/S.

E. Depreciation Depreciation is simply a adjustment made in the books in order to justify that depreciable amount of the particular asset will be allocated through useful lifetime since ability of generating economic benefits will deteriorated when use in the business. Depreciable amount of the asset will be ascertained by eliminating scrap value from the cost of the asset. (generally in straight line method) Methodology; Annual depreciation of the particular asset is concern will be calculate using following methods. 1.Straight line 2.Reducing balance 3.Units of production 4.Sum of digits Straight line: most common and simple mechanism where depreciable amount of the asset will be allocate in a systematic manner throughout the useful life time of the asset. Annual depreciation = (Cost – Scrap value)/Useful life time

Reducing balance: quite conservative mechanism where more depreciation will be charge at the beginning and low will be charge at the latter part of the useful life time. Annual depreciation = Net book value* depreciation rate Net book value = Cost – accumulated depreciation Depreciation rate = derived through the useful life time of the asset Accounting: annual depreciation calculated as above will be accounted for as follows; Depreciation (exp) A/C Dr (I/S) Provision for depreciation A/C Cr (B/S) Note: provision for depreciation balance will be deducted from the respective asset value at the year end in B/S. When disposing the asset which is already used in the business, disposal A/C to be opened and then cost/accumulated depreciation and disposal value should be recorded respectively and profit/loss of such disposal should transfer to the I/S immediately.

Exercise 05 PQR Ltd procured a motor vehicle for the value of LKR 2.5 million and expected to generate revenue over next 5 years. After fifth year it could be sold for LKR 0.5 million. 1.Calculate the depreciable amount under both straight line and reducing balance methods 2.Calculate depreciation for next 3 years under both straight line and reducing balance methods 3.Show the necessary ledger entries and places to be appeared in F/S for next 3 years 4.Assume that motor vehicle sold for LKR 1.5 million after 3 years. Calculate profit/loss under both straight line and reducing balance methods F.Provision for obsolete & slow moving stock Based on the prudent concept, it is required to make suitable provision for obsolete or/and slow moving inventories. Obsolete stock Dr (I/S) Provision for obsolete stock Cr (I/S) Note: year end balance of provision A/C should be shown as deduction against expenditures in trading A/C.

G.EPF/ETF/PAYE Based on the provisions available in provident fund act of 15 of 1958, trust fund act of 46 of 1980 and IRD act, company is bound to pay/remit statutory payments in a systematic manner. EPF/ETF/PAYE (exp) Dr (I/S) EPF/ETF/PAYE payables Cr (B/S) When payments made actually: respective payables Dr Cash Cr

Exercise 06 Following transactions are belongs to ABC Ltd for the year ended 31 st March You are required to record each of the transactions in accounting worksheet showing affect to the accounting equation. You also required to show the ledger entries along with the preparation of trial balance and extract of financial statements as at 31 st march LKR 20 million of initial capital introduced by means of share capital at the beginning (1/4/2011) 2.Procured following assets on 1/7/2011; Motor vehicleLKR 4 Mn MachineryLKR 6 Mn Furniture & fittingsLKR 2 Mn 3.Purchase of goods on 10/5/2011 for LKR 8 million from XYZ Ltd. 4.Total sales for the period are LKR 15 million on which 40% is for PQR Ltd. 5.LKR 6 million paid to XYZ Ltd on 12/12/ Half of the dues from PQR Ltd collected on 1/3/ LKR 0.5 million to be write-off as bad debtors and 10% of doubtful debtors provision to be made at the year end 8.Motor vehicle, machinery and furniture & fittings depreciate at 20%, 10% and 8% respectively 9.LKR 4 million Bank loan obtained from HNB on 1/10/2011 at a rate of 12% (finance cost) 10.Staff salaries paid LKR 1.2 million for the period 11.Total of utility bills paid LKR 0.4 million 12.provision for income tax is LKR 0.8 million