ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
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Chapter 11: Control accounts and bank reconciliations
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2 Which of the following statements about bank reconciliations are correct?
1 An overdraft is a debit balance in a bank statement.
2 If a cheque from a customer is dishonoured, a debit entry to record the event
should be entered in the cash book.
3 When preparing a bank reconciliation statement, unpresented cheques should be
deducted from the balance of cash as shown in the bank statement.
4 An error by the bank should be recorded by means of an entry in the cash book.
A 1 and 3
B 2 and 3
C 1 and 4
D 2 and 4
(2 marks)
3 A payables ledger control account showed a credit balance of $856,460. The payables
ledger balances totalled $871,260.
Which of the following possible errors could account in full for the difference?
A $14,800 cash paid to a supplier was entered on the credit side of the supplier’s
account in the payables ledger.
B The total of discounts allowed $31,300 was recorded as a debit entry in the
payables ledger control account instead of the correct figure for discounts
received of $16,500.
C The total of discounts received $7,400 has been entered on the credit side of the
payables ledger control account.
D A contra against a receivables ledger debit balance of $7,400 has been entered on
the credit side of the payables ledger control account.
(2 marks)
4 In preparing a bank reconciliation statement, a bookkeeper identified the following
differences between the bank statement balance and the cash book balance.
1 Customer cheque for $525 dishonoured
2 Lodgements not credited $52,890
3 Bank charges $290
4 Interest on bank overdraft $583
5 Outstanding cheques $68,942
6 Direct debit $350
Which of these items will require an entry in the cash book?
A 1, 3, 4 and 6
B 2, 3 and 5
C 1, 2, 5 and 6
D 3 and 4
(2 marks)
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5 Dee received a statement from one of its suppliers, Zed, showing a balance due of
$9,440. The amount due according to the payables ledger account of Zed in Dee’s
records was $4,770.
Comparison of the statement and the ledger account revealed the following.
1 A cheque sent by Dee for $3,700 has not been allowed for by Zed
2 The ledger account of Dee has not been adjusted for a cash discount of $80
disallowed by Zed because the payment was too late to earn the discount.
What difference remains between the two companies’ records after adjusting for these
items?
A $1,050
B $10,430
C $10,590
D $890
(2 marks)
6 The total of the list of balances in the payables ledger of Bounce on 30 June 2010 was
$289,500. This balance did not agree with the payables ledger control account balance.
The following errors were discovered.
1 The total of purchases returns was undercast by $3,000.
2 A contra entry of $690 was recorded in the payables ledger control account but
not in the payables ledger.
3 An invoice for $8,720 was recorded in the supplier’s account as $7,820.
What amount should Bounce record in its statement of financial position as the amount
of trade payables as at 30 June 2010?
A $291,090
B $289,710
C $286,710
D $291,510
(2 marks)
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Paper F3 (INT)
Financial Accounting
CHAPTER
12
Preparing financial
statements
Contents
1 Preparingasoletrader’sfinancialstatements
2 Preparingacompany’sfinancialstatements
3 Taxationanddividends
4 Eventsafterthereportingperiod
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Preparing a sole trader’s financial statements
From trial balance to income statement
From trial balance and income statement to statement of financial position
Current and non-current items
Working capital
Cut-off
1 Preparing a sole trader’s financial statements
This chapter draws together some of the accounting principles and practices that
have been described in previous chapters, and also considers some additional
factors that are relevant to the preparation of a set of financial statements.
1.1 From trial balance to income statement
At the end of an accounting period, a trial balance is extracted from the main ledger.
End-of-year adjustments are made to the balances to include depreciation and
amortisation charges for non-current assets, accruals and prepayments, opening and
closing inventories, bad debts and the allowance for irrecoverable debts.
After making all these end-of-year adjustments, the amounts in the ‘extended’ trial
balance for income and expenses can be used to prepare an income statement for the
accounting period, and calculate the profit or loss for the period. In the financial
statements of a sole trader, there is no tax charge on profits.
1.2 From trial balance and income statement to statement of financial
position
After making all the end-of-year adjustments and calculating the profit or loss for
the period, a statement of financial position can be prepared. A statement of
financial position is based on the accounting equation:
Assets = Capital + Liabilities.
Asset balances and liability balances can be obtained from the ‘extended’ trial
balance. The capital at the end of the year for a sole trader is calculated as:
$
Capital at the beginning of the year A
Any new capital introduced during the year B
Add profit (or subtract loss) for the year C
Deduct: Drawings during the year (D)
Capital at the beginning of the year A + B + C – D
Chapter 12: Preparing financial statements
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Example
The following trial balance has been extracted from the accounts of Brenda, a sole
trader.
Brenda
Trialbalanceasat30JuneYear6
DR CR
$ $
Sales428,000
Salesreturns 2,000
Purchases 302,000
Purchasereturns1,000
Carriageinwards 500
Carriageoutwards 900
Wagesandsalaries 64,000
Rent 14,000
Heatingandlighting 5,000
Inventoryasat1JulyYear5 15,000
Drawings 22,000
Provisionfordoubtfuldebts4,000
Equipment–atcost 102,000
Motorvehicles
–atcost 44,000
Accumulateddepreciation:
–equipment22,500
–motorvehicles9,000
Tradereceivables 51,000
Tradepayables42,000
Bank3,300
Sundryexpenses 8,500
Cash 500
Capitalasat1JulyYear5121,600
631,400 631,400
The following additional information as at 30 June Year 6 is also available.
$400 is owed for heating and lighting expenses.
$700 has been prepaid for rent.
It is decided that a bad debt of $1,200 should be written off, and that the
allowance for doubtful debts should be increased to $4,500.
Depreciation is to be provided for the year as follows:
− Equipment – 10% on cost
− Motor vehicles – 20% on cost.
Inventory at 30 June Year 6 was valued at $16,500.
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Required
Prepare Brenda’s income statement for the year ended 30 June Year 6 and her
statement of financial position as at that date.
Answer
Work through the following financial statements carefully. Workings are shown
where appropriate. Make sure that you understand how all the figures have been
obtained.
Brenda
Incomestatementfortheyearended30JuneYear6
$ $
Sales 428,000
LessSalesreturns(2,000)
426,000
Openinginventoryat1JulyYear5 15,000
Purchases 302,000
317,000
Less:Purchasereturns (1,000)
316,000
Carriageinwards 500
316,500
Less:Closinginventoryat30JuneYear6 (16,500)
Costofsales(300,000)
Grossprofit126,000
Wagesandsalaries 64,000
Rent(14,000–prepayment700) 13,300
Heatingandlighting(5,000+accrual400) 5,400
Depreciation,equipment:(10%×$102,000) 10,200
Depreciation,motorvehicles:(20%×$44,000) 8,800
Carriageoutwards 900
Badanddoubtfuldebts(1,200+(4,500–4,000)) 1,700
Sundryexpenses 8,500
(112,800)
Netprofit(transfertobalancesheet/capital)13,200
Statement of financial position: workings
Accumulated depreciation = opening figure in the trial balance + depreciation
charge for the year
(1) Equipment: $(22,500 + 10,200) = $32,700
(2) Motor vehicles: $(9,000 + 8,800) = $17,800.
Chapter 12: Preparing financial statements
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Brenda
Statementoffinancialpositionasat30JuneYear6
Non‐currentassets Cost
Accumulated
depreciation
Netbook
value
$ $ $
Equipment 102,00032,70069,300
Motorvehicles 44,00017,80026,200
146,00050,50095,500
Currentassets:
Inventory16,500
Tradereceivables(51,000–1,200bad
debt)
49,800
Less:Allowancefordoubtfuldebts (4,500)
45,300
Prepayment(rent)700
Cash 500
63,000
Totalassets
158,500
Capital
At1JulyYear5121,600
Netprofitfortheyear13,200
134,800
Drawings (22,000)
At30JuneYear6112,800
Currentliabilities
Bankoverdraft(creditbalanceinbank)3,300
Tradepayables42,000
Accruedheatingandlightingexpenses400
45,700
Totalcapitalandliabilities
158,500
1.3 Current and non-current items
In a statement of financial position, non-current assets are shown separately from
current assets, and non-current liabilities are shown separately from current
liabilities.
As a general rule, assets are current if they will be consumed or converted into cash
within the next 12 months. Cash and cash equivalents are also current assets. (Cash
equivalents are assets that can be converted into cash very quickly, such as money
on deposit in a bank deposit account).
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There are some exceptions to this general rule. For example inventory might be
included in current assets if it is used in the normal course of business operations,
and the average inventory turnover time exceeds 12 months. This means that work
in progress or finished goods that might be held in excess of 12 months could be
included in current assets.
Liabilities are current if they are payable within the next 12 months. It is therefore
necessary to check the repayment dates on any bank loans or loan notes. Loans
repayable within 12 months become current assets. For example if a company
obtains a five-year bank loan, where none of the loan principal is repayable until the
end of the loan period, the loan will be a non-current liability for the first four years
and will then become a current liability when it is repayable within 12 months.
Prepayments and accrued income are current assets, although they might be
included within the total for ‘receivables’ in the statement of financial position.
Similarly accrued expenses (and deferred income) are current liabilities, although
they are often included within the total for trade payables in the statement of
financial position.
1.4 Working capital
The term ‘working capital’ means the amount of long-term capital that a business
entity uses to finance its day-to-day business operations. There are several methods
of calculating working capital, but for the purpose of financial reporting the normal
definition is:
Working capital = Current assets minus Current liabilities.
An understanding of working capital and how business transactions affect the total
of working capital might be the subject of an examination question. In dealing with
these questions, it is important to remember:
the accounting equation (and the effect of each transaction on assets, liabilities
and capital/profit), and
the distinction between non-current and current items.
Example 1
A sole trader buys a machine costing $12,000. What effect does this have on working
capital?
Answer
There is either a fall in current assets (cash) or an increase in current liabilities
(payables) and an increase in a non-current asset. Working capital will therefore fall
by $12,000.
Chapter 12: Preparing financial statements
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Example 2
A sole trader receives payment of $4,000 from a credit customer. What effect does this
have on working capital?
Answer
There is an increase in cash and a reduction in receivables. The net result is no
change in working capital.
Example 3
A sole trader sells inventory costing $2,000 for $2,800. What effect does this have on
working capital?
Answer
There is an increase in cash or receivables ($2,800) and a reduction of $2,000 in
inventory. There is also an increase in capital (profit) of $800. The net effect is an
increase of $800 in current assets and working capital.
Example 4
A sole trader returns inventory costing $1,200 to a supplier and receives a credit
note. What effect does this have on working capital?
Answer
There is a reduction in inventory by $1,200 and a reduction in trade payables by
$1,200. Both current assets and current liabilities are reduced by the same amount, so
there is no change in working capital.
Example 5
A sole trader wrote off a debt of $1,500 as irrecoverable? Subsequently the customer
paid the money in full. What effect does this payment have on working capital?
Answer
There is an increase of $1,500 in cash. When the debt was written off as
irrecoverable, there was a charge against profit and the receivable was removed
from current assets. When payment is subsequently received, this is treated as an
addition to profit (and capital), reversing the previous loss. The effect of the
payment is therefore to increase current assets and working capital by $1,500.
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1.5 Cut-off
It is important to understand that a statement of financial position represents the
position of the business as at the end of the financial reporting period. In practice, a
business entity will decide on a ‘cut-off’: transactions before the cut off occur in the
reporting period just ending and transactions after the cut-off occur in the next
reporting period.
In order to establish a value for closing inventory, a business entity might carry out
an inventory count at the end of the financial year. For practical reasons, the
inventory count might not happen until a few days after the end of the financial
year. If there have been purchases, sales or purchase returns between the end of the
reporting period and the date of the inventory count, the value of inventory
obtained from the inventory count should be adjusted in order to arrive at a value
for inventory as at the end of the reporting period.
$
Value of inventory from the inventory count A
Adjustments for transactions between the end of the reporting
period and the inventory count
Deduct: Purchases during that time (B)
Add back: The cost of goods sold during that time C
Add back: Purchase returns during that time D
Inventory as at the year end for inclusion in financial statements A – B + C + D
Example
The financial year of a business entity ends on 31 December. The entity carries out
an inventory count on 5 January Year 2 and obtains a value for inventory as at that
date of $510,000.
The following transactions occurred between 31 December Year 1 and 5 January
Year 2.
$
Purchasereturnstoasupplier 1,100
Salesofinventory(profit=30%ofsales) 20,000
Newpurchases 7,300
What value for inventory should be included in the statement of financial position
as at 31 December Year 1?