3. Preparing Financial statements

Question 1

Limitations of the TB are

Answer 1

There may be errors in the double-entry bookkeeping that are not revealed by the TB

Amounts in the TB do not distinguish between those relating to the SPL and the SFP

The 2-column TB doesn’t give a profit figure. Only when figs are used in the SPL can profit/loss be calculated.

Closing inventory needs to be recognised in both the SPL (as part of the COS/COGS) and SFP as an adjustment to the TB

Question 2

Financial statements can be produced more often than once a year (to give info to owners)

Answer 2

.

Question 3

SPL format

Answer 3

Sales revenue 
Less        Cost of Sales (often referred to as Cost of Goods sold)
Equals    Gross Profit
Less        Expenses
Equals    Profit/Loss for the year

Question 4

SFP format

Answer 4

Non-current Assets
Plus Net current Assets (current assets - current liabilities)
Minus Non-current Liabilities
Equals Net Assets
Equals Capital/ Equity (‘Financed by’)

Financed by
Capital
Opening Capital
Add Profit for the year
(Total .. no title)
Less Drawings
(Total … ‘Closing capital’)

Question 5

Adjustments to TB are

Answer 5

Closing inventory

Accruals and Prepayments of expenses and income

Depreciation of non-current assets

Irrecoverable debts written off

Allowance for Doubtful debts

Question 6

Remember about TBs / COGS

Answer 6

Might be given just a COGS in a TB … in which case don’t expect to see OI & Purchases & Purchases returns.

Should still see CI … but only once, on the Debit side.. to transfer to SFP

Question 7

What goes into COGS (or COS).

Answer 7

Opening inventory Dr
Closing inventory Cr
Purchases Dr
Purchase returns Cr

NOT Sales Revenue (might be a red herring given in a list).

(Sales revenue minus COGS = Gross profit)

Question 8

Appropriation of profit

Answer 8

Profit + interest on drawings.
Less salaries and interest on capital.
Leaves profit to distribute according to shares.

Question 9

Statement of Changes in Equity

Answer 9

B/f Balance of Retained earnings.
+ Add profit for the year.
- Deduct dividends paid during year.
= New balance is shown on SFP as a ‘Reserve’ of the company.