COMPANY FINANCIAL STATEMENTS (LIVE) 09 APRIL 2015 Section ...

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Apr 9, 2015 - A physical stock take revealed that the following were on hand at the end of the financial year: Trading s
COMPANY FINANCIAL STATEMENTS (LIVE)

09 APRIL 2015

Section A: Summary Notes and Examples Adjustments Here are the most common adjustments pertaining to companies and how to do them. You will need to practise several examples in order to master these adjustments, but every adjustment can be placed in one of the categories below. As you work through examples, you will gradually become an expert at identifying the relevant adjustment! (Refer to Chapter 3 pages 35 – 42 for examples)

1. Trading stock deficit / Consumable stores on hand This common adjustment usually takes the following form: A physical stock take revealed that the following were on hand at the end of the financial year: Trading stock

R15 000

Stationery

R380

(Instead of stationery, there could be consumable stores or packing material on hand as well).

2. Accrued income This is income that you have earned during the financial year, but that will only be received in the next financial year. Example: Interest on the fixed deposit of R50 000 is 12% per annum, payable quarterly. One quarter’s interest has not yet been received.

3. Accrued expenses These are expenses that you have incurred during the financial year, but that will only be paid in the next financial year. Example: February’s phone bill of R2 900 has not yet been paid.

4. Deferred income / Income received in advance This is income that you have received during the financial year, but that will only be earned in the next financial year. Example: The business lets a building to a tenant. Two months’ rent has been received in advance for the next financial year. The monthly rent was unchanged throughout the year.

5. Prepaid expenses These are expenses that you have paid during the financial year, but that will only be incurred in the next financial year.

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Example: The insurance of R8 650 includes R3 600 paid as an annual premium on 1 October 2011. The financial year ends on 28 February 2012.

6. Depreciation The steps for this adjustment are simple: 1.

Calculate total depreciation for the year on Vehicles and Equipment.

2. Record depreciation in the statement of comprehensive income as an operating expense. You should only have one figure for depreciation in the statement of comprehensive income – you do not record depreciation on vehicles and equipment separately. 3. Record depreciation in note 3 – the fixed asset note – in the statement of financial position. Here, you will have separate columns for depreciation on vehicles and on equipment. Remember that land and buildings do not depreciate. 4.

The journal entries for depreciation are as follows: Dr Depreciation (expense) Cr Accumulated depreciation on vehicles / equipment

(negative asset)

See the chapter on fixed assets for additional hints on calculating depreciation.

7. Provision for bad debts adjustment A provision for bad debts is an amount that is set aside to account for debtors who do not pay. Since the debtors change all the time, it is necessary to adjust this provision at the end of the financial year to account for these changes. Example: The provision for bad debts must be adjusted to 5% of book debtors. (Note that provision for bad debts adjustment can be either an income or an expense, depending on whether the existing provision is too big or too small. Also don’t confuse the adjustment with the provision itself – they are two different things!)

8. Errors You will often get adjustments where an inexperienced bookkeeper has made a mistake in recording a transaction. Here, you simply need to make whatever entry is necessary to correct the error. Examples: 1) Stationery of R560 was bought on credit. This was mistakenly recorded as R650. 2) An improvement to a storeroom for R50 000, paid in cash, was mistakenly debited to Repairs.

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9. Omissions This type of adjustment refers to all transactions that have not been recorded. Omissions can take many forms (e.g. bad debts, trading stock returned, donations of stock by the business, drawings). One common example of an omission is when an employee’s salary was not recorded:

10. Current portions of loans or fixed deposits This is the easiest adjustment of all to do, but it is one that learners often forget to do. It occurs when part of a loan or fixed deposit will be paid back or received during the financial year, and involves moving it from the non-current section of the statement of financial position to the current section. Example: The business has a loan of R120 000 with ABSA. This loan is repaid at R2 000 per month.

11. Income tax for the year When dealing with companies, you are usually given the income tax at the end of the year (or you may have to calculate it as a percentage of the net profit). Remember that companies pay provisional tax, so an end-of-year adjustment will have to be done. Example: The net profit for the year was R174 000. Income tax is calculated at 30% of pre-tax profits.

12. Dividends declared at the end of the year When a business recommends a final dividend at the end of the year, it owes its shareholders money for that dividend. This must therefore be recorded. Example: A final dividend of 20c per share was declared at the end of the financial year.

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Section B: Practice Questions Question 1 Shrek Limited has an authorised share capital of 2 000 000 ordinary shares. Calculate the new Net profit amount after adjustments and complete the required notes

(70)

Information The following balances appeared in the General Ledger of Shrek Limited on 28 February 2013: BALANCE SHEET ACCOUNTS SECTION Ordinary Share Capital (300 000 shares)

600 000

Retained Income (1 March 2012)

22 500

Loan: Okra Bank

120 000

Land and Buildings, at cost

500 000

Vehicles, at cost

200 500

Equipment, at cost

75 600

Accumulated Depreciation: Vehicles (1 March 2012)

15 568

Accumulated Depreciation: Equipment (1 March 2012)

23 472

Trading Inventory

76 480

Debtors Control

80 560

Provision for Bad Debts (1 March 2012)

4 000

Creditors Control

32 496

Bank

41 799

Petty Cash

1 000

Cash Float

5 000

Deposit: Water and Electricity

500

S.A Pension Fund

4 500

SARS - Income Tax

40 500(Dr)

NOMINAL ACCOUNTS SECTION Ordinary Share Dividends

48 000

FINAL ACCOUNTS SECTION Profit and Loss Account

R124 903

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1. The net profit of R 124 903, was arrived at before the following items had been taken into account:    

Packing material on hand at 28 February 2013: Interest on loan due to OKRA: Provision for bad debts was increased by Insurance pre-paid by the business amounted to



The total rent received by the business for the year amounted to R 41 250. This amount included rent for March 2013. Rent was increased by 12,5% on 1 October 2012. Depreciation on Equipment was calculated at R 4 528 Depreciation on Vehicles amounted to R 8 432

  2.

R 589 R 3 000 R 28 R 4 000

The directors declared a final dividend of 8 cents per share on 28 February 2013, payable on 31 March 2013. The interim dividend of 16 cents per share was paid on 30 September 2012. 50 000 new shares were issued during the year on 31 August 2012.

3.

Income tax for the year amounts to R 45 000.

4.

The loan agreement with OKRA bank stipulates an annual repayment of R 10 000 to be made on 31 July each year.

5.

Post-dated cheques issued to creditors on 28 February 2013 amounted to R 1 070.

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Answer Book Question 1 Notes to the financial statements for the year ended 28 February 2013 4.

INVENTORY

(3)

Trading inventory Consumable stores

5.

TRADE AND OTHER RECEIVABLES

(7)

Trade Debtors Provision for Bad debts Net trade Debtors Pre-paid Expenses

7.

ORDINARY SHARE CAPITAL

(12)

Authorised

Issued

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8.

RETAINED INCOME/ACCUMULATED PROFIT

(14)

9.

TRADE AND OTHER PAYABLES

(22)

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Section C: Solutions Question 1 Calculate the new Net profit amount after adjustments:

(12)

R124 903 +589 – 3 000 – 28 +4 000 – 3 375 – 4 528 – 8 432= 110 129() RI= 7x +6(1,125x) – 41 250 7x +6,75x = 41 250 13,75 x = 41 250 41 250 /13,75 = 3 000 before increase of 12,5% (3 000 x 12,5% ) = 375 Shrek Limited Notes to the financial statements for the year ended 28 February 2013 4.

INVENTORY

(3)

Trading inventory

76 480

Consumable stores on hand

589 77 069()

5.

TRADE AND OTHER RECEIVABLES

(7)

Trade Debtors

80 560 (4 028) 

Provision for Bad debts Net trade Debtors

76 532

Pre-paid Expenses

4 000

Deposit: Water & electricity

500 81 032()

7.

ORDINARY SHARE CAPITAL

(12)

Authorised 2 000 000 ordinary shares at R2 par value

4 000 000

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Issued 250 000 ordinary shares at R2 at beginning of year

500 000

50 000 ordinary shares at R2 issued during the year

100 000

300 000 ordinary shares at R2 in issue 9.

600 000

RETAINED INCOME/ACCUMULATED PROFIT

(14)

Balance at beginning of year

22 500

Net profit after tax (110 129 - 45 000)

65 129()

Ordinary share dividends 

(72 000)( )

Paid

48 000

Recommend

24 000

Balance at the end of the year

10.

15 629()

TRADE AND OTHER PAYABLES

(22)

Creditors (32 496 +1 070)

33 566

Accrued expense

3 000()

Income received in advance

3 375()

Shareholders for dividends (300 000 x 0.08)

24 000()

SARS-Income Tax (45 000 - 40 500)

4 500

Short term loan

10 000

SA Pension fund

4 500 82 941()

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