PREPARATION OF FINANCIAL STATEMENTS - PART 2

 

PREPARATION OF FINANCIAL STATEMENTS

Preparing Financial Statements:

• Manufacturing Account
• Trading and Profit and Loss Account
• Balance Sheet
• Statement of Cash flows
• Statement of Retained Earnings

Manufacturing Account: The main purpose of manufacturing account is to determine the Cost of Goods Manufactured or Cost of Goods Sold, which is transferred to the Trading Account.

Cost of Goods Sold = Value of Opening Stock + Cost of Purchases + Direct Expenses – Value of Closing Stock

• Stock includes raw materials, work-in-progress and finished goods
• Purchases include both cash and credit purchase of goods
• Direct Expenses include factory rent, manufacturing expenses, factory lighting, fuel, duty and packing expenses

Calculation of Cost of Goods Sold

Particulars	Rs.	Rs.
Opening Stock of raw materials		……..
Add: Purchases	…….
Less: Purchase Return	…….	……..
Freight and Carriage		……...
		………
Less: Closing Stock of raw materials		……..
Cost of Raw materials consumed		…….
Add: Direct Expenses
Wages	……..
Factory Expenses	……..
Other Direct Expenses	……..	.…….
Cost of Goods Sold		..…….

Trading Account: It is the summary of purchases, and sale of a business or production cost of goods sold and the value of sales.

Trading Account for the year ended 31^st March 2019

Particulars	Amount Rs.	Particulars	Amount Rs.
To Opening Stock	……	By Gross Sales
To Purchases	……	Less: Sales Return
Less: Purchase Return		Net Sales	……
To Direct Expenses	…..	By Closing Stock
Carriage Inward		By Gross Loss c/d	…...
Wages
Freight
Custom Duty
Fuel and Power
Factory Expenses
Royalty on Production
Other Direct Expenses
To Gross Profit c/d	…..
	…..		…..

           Gross Profit or Gross Loss = Sales – Cost of Sales

Profit and Loss Account: It is basically a summary of revenues and expenses of the business and is prepared to determine the profit earned or loss sustained by the business enterprise during the accounting period.

Profit and Loss Account for the year ended 31^st March, 2019

Particulars	Amount Rs.	Particulars	Amount Rs.
To Opening Stock	……	By Gross Sales	……
To Purchases	……	Less: Sales Return
Less: Purchase Return
To Direct Expenses	…..	By Closing Stock
Carriage Inward		By Gross Loss c/d	…...
Wages
To Gross Profit c/d	…..
	…..		…..
To Gross Loss b/d	…..	By Gross Profit b/d
To Office and Administrative Expenses	…..	By Non- Operating Incomes
To Selling and Distribution Expenses	…..
To Non-Operating Expenses	…..
To Net Profit c/d	…..	By Net Loss c/d	…..
(Transferred to Capital Account )	…..	(Transferred to Capital Account)	…..

 Income Statement:

An income statement is a financial statement that shows a company’s revenues and expenses over a specific period of time to demonstrate the financial success of failure of the company. Income statement comprises trading account and profit and loss account.

Revenues – Expenses = Net Income or Net Loss

Appropriation of Profit: It is the distribution of net profit to various heads. It is made only if there is a profit. E.g.: Retained Earnings

Charge against Profit: It is the deduction from revenue to ascertain net profit or net loss. E.g.: Interest on debenture will be paid even if there is loss in P/L account.

General form of Multi-step Income statement

Income statement for the year ended March 31, 2019

Particulars	Amount in Rs.
Sales Revenue	*****
Less:  Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Selling Expenses
General and  Administrative Expenses
Operating Profit Add: Operating Income
Other Income
Less: Depreciation and amortization expense
Earnings Before Interest Tax
Less: Interest Expenses
Profit before Tax
Less: Tax Expense
Profit after Tax/Net Profit	*****

 

Balance Sheet: A balance sheet is a financial statement showing the financial position of the business summarizing assets and liabilities at a given date.

Assets: Resource of a business which are utilized in the normal course operations to produce goods for sale in order to yield a profit.

Types of Assets	Description	Components
Fixed Assets	Tangible resources of specific value not intended to resale that are used as means for production of saleable goods or services in a company’s operations	Land and Buildings Plant and Machinery Furniture and Fixtures
Current Assets	Assets of transitory nature which are used for resale during the course of business operation	Cash in hand Cash at bank Inventories Sundry Debtors Bills Receivables
Fictitious Assets	Refers to any deferred charges which are not really assets	Preliminary Expenses Discount on issue of  shares and debentures
Contingent Assets	Refers to right to property which may come into existence on the happening of some future event	Right to obtain for shares in another company on favorable terms
Liquid Assets	Assets which are immediately converted into cash	Cash in hand, Cash at bank
Non-current Investments	Company’s investments in the common stock or debt of another entity that will not be sold within a year	Investments in the common stock or debt
Intangible Assets	Resources of specific value which has no physical substance and is not intended to resale which  are used as means for production of saleable goods or services in a company’s operations	Trademarks Patents Copyrights Goodwill

 

Liabilities: Claims on the business and against all the assets by the owners and external creditors which forms the sources of funds for the firm’s acquisition of assets and for its activity.

• Current Liabilities are short term liabilities which are repayable within a period of 12 months or a year. Examples: Creditors, Bills payable
• Non-Current Liabilities are long term liabilities which are not expected to be repaid within a year. Examples: Term loans, Debentures not maturing within one year.
• Retained earnings is the amount of equity a company generates by being profitable and retaining those profits in the business
• Contributed capital is the amount of equity a company generates through the sale of stock to investors, also known as capital stock.
• Reserves are specified allocations of funds created out of profits.

Balance Sheet of XYZ Co. as on 31^st March 2019

Assets	Amount in Rs.	Liabilities	Amount in Rs.
Current Assets		Current Liabilities
Inventories		Short term borrowings
Trade Receivables		Trade Payables
Cash and Bank Balances		Other Current Liabilities
Short Term Loans and Advances		Short Term Provisions
Other Current Assets		Total Current Liabilities	*****
Total Current Assets	*****	Non Current Liabilities
Non Current Assets		Long Term Borrowings
Fixed Assets		Deferred tax liabilities (net)
Non Current Investments		Other long term liabilities
Long term Loans and Advances		Long Term Provisions
Other non-current assets		Total Non Current Liabilities	*****
Total Non Current Assets	*****
		Shareholders’ Equity
		Share Capital
		Reserves and Surplus
		Total Shareholder's Equity	*****
Total Assets	*****	Total Liabilities and Shareholders’ Equity	*****

Statement	Purpose	Structure
Balance Sheet	Shows a company’s assets, liabilities, and equity at a specific point of time	Assets=Liabilities+ Equity
Income Statement	Shows a company’s revenues and expenses over a specific period of time	Revenue – Expenses =   Net Income /Loss
Statement of Cash Flows	Shows a company’s inflows and outflows of cash over a specific period of time	Operating cash flows+/-Investing cash flows+/- Financing cash flows = Net change in cash
Statement of Retained Earnings	Shows the changes in a company’s retained earnings over a specific period of time	Beginning Retained Earnings+/- Net Income/loss – Dividends = Ending Retained Earnings