CHAPTER 3

Statement of financial position and income statement

Contents

Users of accounts

Organisational structure

The income statement

Statement of financial position

Introduction to financial statements

Introduction to financial statements

The statement of financial position

The income statement

The cash flow statement

Basic accounting statements

Statement of financial position

ASSETSCAPITAL

LIABILITIES

A statement of the assets, liabilities and capital of a business 'as at' a particular

date.

A statement of the assets, liabilities and capital of a business 'as at' a particular

date.

EQUAL

Also called the Balance sheetAlso called the Balance sheet

Typical statement of financial position

BUSINESS NAME STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8

$ $ Non-current assets Land and buildings X Plant and machinery X Fixtures and fittings X X Current assets Inventory X Receivables X Cash at bank and in hand X

X X Capital Proprietor's capital X Retained profits X X Non-current liabilities Loan X Current liabilities Bank overdraft X Payables X X X

Assets

Text

Non-current assets

•Acquired for long-term use within the business

•Strictly, more than one accounting period

Assets

Text

Current assets

•Expected to be converted into cash within one year

Classification depends on the nature of the business

Example

Text

Non-current assets

•Land•Office building•Factory•Machinery•Office equipment

•Etc.

Assets

Current assets

•Cash•Inventory•Receivables•Etc.

Discussion Current or non-current?

Asset Business Current or non-current

Van Delivery firm

Cement mixer Builder

Car Car trader

Laptop Audit firm

Laptop Laptop trader

Non-current

Non-current

Non-current

Current

Current

Liabilities

Text

Non-current liabilities

•Debts not payable within the 'short term

•E.g: long-term bank loans.

Liabilities

Text

Current liabilities

•Debts payable within one year.

•E.g.: short-term loans, bank overdrafts, trade payables, etc.

Long-term loan is split to:- Amount due within one year- Amount due beyond one year

Question

On 1 December 2006 Pat borrowed $40,000 at a fixed rate of interest. A single capital repayment is due on 1 December 2009. During the year to 30 November 2007 the interest of $300 per month has been paid on the last day of each month.

How should the loan be reported on Pat’s Balance Sheet at 30 November 2007?

Current liability Non-current liability

A $3,600 $40,000

B $40,000 $3,600

C nil $40,000

D $40,000 nil

Answer

On 1 December 2006 Pat borrowed $40,000 at a fixed rate of interest. A single capital repayment is due on 1 December 2009. During the year to 30 November 2007 the interest of $300 per month has been paid on the last day of each month.

How should the loan be reported on Pat’s Balance Sheet at 30 November 2007?

Current liability Non-current liability

A $3,600 $40,000

B $40,000 $3,600

C nil $40,000

D $40,000 nil

Question

At 31 October 2006 Janine had an outstanding balance of $24,000 on her bank loan account. The terms of the loan require her to repay $400 on the first day of each month.

 How should the loan be reported on Janine’s balance sheet at 31 October 2006?

Current Liability Non-current liability

A nil $24,000

B $24,000 nil

C $19,200 $4,800

D $4,800 $19,200

Answer

At 31 October 2006 Janine had an outstanding balance of $24,000 on her bank loan account. The terms of the loan require her to repay $400 on the first day of each month.

 How should the loan be reported on Janine’s balance sheet at 31 October 2006?

Current Liability Non-current liability

A nil $24,000

B $24,000 nil

C $19,200 $4,800

D $4,800 $19,200

Discussion

Classification:(a) PC used in the accounts department of a

retail store Non-current asset

(b) A PC on sale in an office equipment shop Current asset

(c) Wages due to be paid to staff at the end of the week Current liability

Discussion

Classification:(d) A van for sale in a motor dealer's

showroom Current asset

(e) A delivery van used in a grocer's business Non-current asset

(f) An amount owing to a bank for a loan for the acquisition of a van, to be repaid in 9 monthsCurrent liabilities

Capital

Text

Amounts invested by the owner(s) in the business

Business capital account

Profit earned and retained by the business.

The make-up depends on the legal nature of the business

The income statement

BUSINESS NAME INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X8

$ $ Sales X Cost of sales X Gross profit X Selling costs X Distribution costs X Administration expenses X

X Profit for the year X

Shows in detail how the profit or loss of a period has been made.

Income statement breakdown

Text

Gross profit:

Compares revenue with cost of goods sold (direct costs)

Income statement

Net profit:

Different between gross profit and total overheads (indirect costs).

Capital expenditure vs. revenue expenditure

Capital expenditure

Results in: • The acquisition of non-current assets; or

• An improvement in their earning capacity.

Revenue expenditure

Balance sheet items Income statement items

Incurred in: • For the purpose of the trade of the business.

• To maintain the existing earning capacity of non-current assets.

Exam focus

Capital and revenue income

Capital income

•Proceeds from the sale of non-trading assets.

Revenue income

• The sale of trading assets

• Rent, interest and dividends received from non-current assets held by the business

Profit/loss apprears on IS Appears on income statement

Exam focus

Discussion

‘Capital' or 'revenue' expenditure or income?

(a) Purchase of leasehold premisesCE

(b) Solicitors' fees in connection with the purchase of leasehold premisesCE

(c) Costs of adding extra storage capacity to a mainframe computer used by the businessCE

Discussion

‘Capital' or 'revenue' expenditure or income(d) Computer repair and maintenance costs

RE(e) Profit on the sale of an office building

CI(f) Revenue from sales by credit card

RI(g) Cost of new machinery

CE

Discussion

‘Capital' or 'revenue' expenditure or income(h) Customs duty charged on the machinery when

imported CE

(i) 'Carriage' costs of transporting the new machinery to the premises of the business purchasing the machineryCE

(j) Cost of installing the new machinery in the premises of the business CE

(k) Wages of the machine operators RE

Users of accounts

Employees of the

business

Owners of the

business

Trade contacts

Users of accounts

Managers of the

business

Providers of finance

to the business

Tax authorities

What’s what?

(a) Freehold property Non-current asset

(b) Payment of wages for a director with a two year service contract Expense

(c) Payments into a pension fund Expense

What’s what?

(d) A trade receivable who will pay in 18 months time Non-current asset

(e) An irrecoverable debt written off Expense

(f) A patentNon-current asset

(g) A company car Non-current asset

What’s what?

(h) Interest on a bank overdraft

Expense

(i) A bank loan repayable in five years

Non-current liability

(j) Petty cash of $25

Current asset

(k) The portion of local taxes paid covering the period after the reporting date

Current asset: prepayment

QB 5

Net profit was calculated as being $10,200. It was later discovered that capital expenditure of $3,000 had been treated as revenue expenditure, and revenue receipts of $1,400 had been treated as capital receipts.

The correct net profit should have been

A $5,800

B $8,600

C $11,800

D $14,600

Answer: D