Financial statement





Financial Statement Analysis






Table of Contents
Contents







Requirement 1
Journal entry is the first way to record any transaction. This records transactions in chronological order (WILSON et al., 2010). Process of recoding any transaction starts with journal and ends with financial statement preparation, further process come under the head of analysis of financial transactions. 
Required journal entries



Date
Particulars
Debit
Credit
2.
Sales
    £445,000


Unearned revenue

£445,000

(Unearned revenue recognized)






3.
Interest Expenditure
£40,000


Interest payable

£40,000

(interest expenses recognized)






4.
Dividend expenditure
£50,000


Dividends payable

£50,000

(Dividend declared)






5.
Administration expenditure 
£30,000


Outstanding Administration expenditure 

£30,000

(wages recoded)






6.
Bad debts expenditure
£40,750


Allowance for doubtful debts

£40,750

(Allowance for doubtful debts recoded)






7.
Loss on inventory revaluation
£10,000


Inventories

£10,000

(Loss on inventory revaluation recognized)






8.(a)
Revaluation loss
£100,000


Leasehold properties

£100,000

(Revaluation of lease hold properties)






8(b)
sales revenue
£25,000


Accumulated depreciation on equipment
£60,000


Loss on sale of equipment
£15,000


equipment

£100,000

(Rectification entry passed for sale of equipment)






8(c)
Administration cost- Depreciation
£167,250


Plant—accumulated depreciation

£66,000

Equipment—accumulated depreciation

£31,250

Leasehold property—accumulated depreciation

£70,000

(Depreciation expenses recorded)






9
Capitalized development expenditure
£225,000


Administration expenses

£225,000


( Development cost capitalization rectification)
Note: It is assumed that in cost of sales it is included in administration expenditure.






9
Amortization expenditure
£40,000


Development expenditure accumulated amortization

£40,000

(Amortization of capitalized development expenditure)












Requirement 2
Income statement is a part of financial statement; it shows the net profit earned by any organization during the period from its operating and non operating activities (Petersen and Plenborg, 2010). Income statement incorporates all revenue income and expenditure. It does not include assertions of capital nature.
Required income statement
Particulars
Amount
Amount
Sales

£4,925,000
Less: COGS


Inventories as at 01 January 2015
£765,000

Purchase (production costs)
£2,573,000

Less: inventories as at 31 December 2015
£ (815,000)

COGS

£2,523,000
Gross profit

£2,402,000
Distribution cost
£19,660

Administrative expenses
£110,250

Interest Expenditure
£40,000

Bad debts expenditure
£40,750

Revaluation loss
£100,000

Loss on sale of equipment
£15,000

Total expenditures expenditure

£255,660
Net profit

£2,076,340
Requirement 3
Balance sheet is a statement which shows the financial position of the organization (Dichev, n.d.). In balance sheet all assets and liabilities of any organization is presented. Balance sheet shows the figures of assets and liabilities of a specified date.
Required balance sheet 
Particulars
Amount
Amount
Assets


Current assets


Inventories 

£815,000
Trade receivable
£815,000

Allowance for doubtful debts
£40,750
£774,250
Cash at bank

£249,000
Fixed assets


Land-cost

£3,900,000
Leasehold property—cost
£1,500,000

Leasehold property—accumulated depreciation
£70,000

Less: Revaluation
£100,000
£1,330,000
Plant—cost at 1 January 2005
£1,320,000

Plant—accumulated depreciation
£726,000
£594,000
Equipment—cost—cost at 1 January 2007
£250,000

Equipment—accumulated depreciation
£111,250
£138,750
Capitalized development expenditure—at 1 January 2015
£425,000

Development expenditure —accumulated amortization
£80,000
£345,000


£8,146,000
Liabilities and shareholders’ equity


Current liabilities


Interest payable

£40,000
Unearned revenue

£445,000
Trade payable

£2,970,000
Outstanding Administration expenditure 

£30,000
Long term liability


5% bank loan repayable 2018

£800,000
Shareholders’ equity


Share capital

£1,000,000
Share premium

£500,000
Dividends payable

£50,000
Retained earnings

£2,311,000


£8,146,000



Requirement 4
Company can use any method out of historical cost or revaluation model for valuation of its fixed assets. In historical cost modal assets are shown with the cost accumulated cost, in revaluation modal assets are shown on the revalued value of asset and depreciation charged on for the remaining useful life of asset on the revalued value. Under revaluation method if due to revaluation asset value increased then revaluation reserve created and if asset value decreased then such deficit first charged from previous revaluation reserve of the same asset then charged as expense from the comprehensive income statement (Iasplus.com, 2017).
In the given question revaluation is done on 31 December 2014, which means remaining life of asset will be depreciated with this revalued amount. So, a journal entry for the revaluation of plant is passed on 31 December 2014, i.e.
Date
Particulars
Debit
Credit
31 Dec 2014
Plant—accumulated depreciation
£660,000


Plant

£660,000

(Accumulated depreciation charged from plant)






31 Dec 2014
Plant
£60,000


Revaluation reserve

£60,000

(Revaluation of plant recognized)




Remaining life of plant on 1 Jan 2015 is, 
Particulars
Description
Total life of plant
20 Years
Life expired
660000/66000= 10 Years
Remaining life
10 years

So, on 31 December 2015 depreciation will charged on £720,000 for next 10 years with straight line depreciation method, hence journal entry for depreciation of plant is,
Date
Particulars
Debit
Credit
31 Dec 2015
Administration cost- Depreciation
£72,000


Plant—accumulated depreciation

£72000

(Depreciation expenditure recognized)



Statement of comprehensive income also get effected from this revaluation hence new comprehensive income statement for year ended on 31 December 2015 is,
Particulars
Amount
Amount
Sales

£4,925,000
Less: COGS

£2,523,000
Gross profit

£2,402,000
Distribution cost
£19,660

Administrative expenses
£116,250

Interest Expenditure
£40,000

Bad debts expenditure
£40,750

Revaluation loss
£100,000

Loss on sale of equipment
£15,000

Other expenditure

£271,660
Net profit

£2,070,340

Statement of financial position will also show changes in some assertion hence the statement of financial position after recognizing revaluation will be,
Particulars
Amount
Amount
Assets


Current assets


Inventories 

£815,000 
Trade receivable
£815,000

Allowance for doubtful debts
£40,750
£774,250 
Cash at bank

£249,000 
Fixed assets


Land-cost

£3,900,000 
Leasehold property—cost
£1,500,000

Leasehold property—accumulated depreciation
£70,000

Less: Revaluation
£100,000
£1,330,000 
Plant—revalued value
£720,000

Plant—accumulated depreciation
£72,000
     £ 648,000.00  
Equipment—cost—cost at 1 January 2007
£250,000

Equipment—accumulated depreciation
£111,250
£138,750 
Capitalized development expenditure—at 1 January 2015
£425,000

Development expenditure —accumulated amortization
£80,000
£345,000 


£8,200,000.00 
Liabilities and shareholders’ equity


Current liabilities


Interest payable

£40,000 
Unearned revenue

£445,000 
Trade payable

£2,970,000 
Outstanding Administration expenditure 

£30,000 
Long term liability


5% bank loan repayable 2018

£800,000 
Shareholders’ equity


Share capital

£1,000,000 
Share premium

£500,000 
Dividends payable

£50,000 
Revaluation reserve

        £60,000.00 
Retained earnings

£2,305,000.00 


£8,200,000.00
Requirement 5
As per IAS 16 depreciation is the way in which depreciable amount of any asset is allocated over the useful life of asset with a systematic allocation (Dichev, n.d.). Depreciable amount can be cost of asset or any other value which is used as a substitution of cost of asset, less salvage value of assetIn depreciation measurement two factors are most important one is useful economic life of asset and other is wearing out of asset.Additionally, useful life of asset does not refers to the life till which asset last it is the life till which asset produce same quantity of goods and services till same quality. As per IAS 16 almost every asset is having a finite useful life, but in real life it is very difficult to arrive at a finite certain useful life of any asset. 
Requirement 6
As per IAS 16 in cost model after the initial reorganization, asset is valued at the cost less depreciation till date and less and impairment loss recognized. As per the same standard under revaluation model, asset is shown at revalued amount i.e. fair value of asset on the date of revaluation less depreciation or impairment loss (Iasplus.com, 2017).






References
• S WILSON, E., RECK, J., KATTELUS, S. and Robbins, W. (2010). Accounting for Governmental and Nonprofit Entities. Issues in Accounting Education, 25(1), pp.176-177. doi: 10.2308/iace.2010.25.1.176
• Petersen, C. and Plenborg, T. (2010). Financial statement analysis. 1st ed. København: Thomson Reuters.
• Valand, P. (2011). A Study Of Financial Statement. Indian Journal of Applied Research, 1(12), pp.8-10.
• Dichev, I. (n.d.). On the Balance-Sheet Based Model of Financial Reporting. SSRN Electronic Journal, 22(4), pp.453-470. Doi: http://dx.doi.org/10.2308/acch.2008.22.4.453
• Iasplus.com. (2017). IAS 16 — Property, Plant and Equipment. [online] Available at: https://www.iasplus.com/en/standards/ias/ias16 [Accessed 8 Mar. 2017].
• Elliott, B. and Elliott, J. (n.d.). Financial accounting and reporting. 1st ed.


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