CIMA - C2 Fundamentals of Financial Accounting
Подождите немного. Документ загружается.
30
3: An introduction to final accounts ⏐ Part A Conceptual and regulatory framework
By convention 'non-current' means more than one year. In UK limited liability company accounts, the CA 2006 requires
use of the term:
'Creditors: amounts falling due after more than one year', but IFRSs use 'non-current liabilities'.
Examples of non-current liabilities
(a) Loans which are not repayable for more than one year, such as a bank loan or a loan from an individual.
(b) A mortgage loan, which is secured against a property. The lender then has
'first claim' on the property
and can force its sale if the business fails to repay the loan.
(c) Loan notes, which are securities issued by a limited liability company at a fixed rate of interest. They are
repayable on agreed terms by a specified date in the future. The holders' interests, including security for
the loan, are protected by the terms of a trust deed.
1.6 Assets
Assets are what the business owns. They can be non-current assets or current assets.
Assets in the statement of financial position are divided into two groups.
(a) Non-current assets
• Tangible non-current assets (usually known as 'property, plant and equipment')
• Intangible non-current assets
• Investments (long term)
(b) Current assets
1.7 Non-current assets
A non-current asset is an asset acquired for continuing use within the business, with a view to earning income or
making profits from its use, either directly or indirectly.
A non-current asset is not acquired for sale to a customer.
(a) In manufacturing, a production machine is a non-current asset as it makes goods for sale.
(b) In a service industry, equipment used by employees giving service to customers is a non-current asset (eg
the equipment used in a garage, furniture in a hotel).
(c) Factory premises, office furniture, computer equipment, company cars, delivery vans or pallets in a
warehouse are all non-current assets.
In addition the asset must have a
'life' in use of more than one year (strictly, more than one 'accounting period' which
might be less than one year).
A tangible non-current asset is a physical asset, ie one that can be touched. It has a real,
'solid' existence.
All the examples mentioned above are tangible non-current assets.
An intangible non-current asset is an asset which does not have a physical existence. It cannot be
'touched'.
Examples of 'intangible non-current assets' are goodwill and research and development costs. Goodwill arises when a
business a business is sold. It represents the excess of the purchase price paid over the fair value of the net assets.
Research and development costs (R&D) are incurred in developing new products, for example. If R&D costs meet
Key term
Key term
FA
S
T F
O
RWAR
D
FA
S
T F
O
RWAR
D
51465 www.ebooks2000.blogspot.com
Part A Conceptual and regulatory framework ⏐ 3: An introduction to final accounts 31
certain conditions, they can be capitalised until the product goes into production. You do not need to know anything
more about intangible non-current assets at this stage of your studies.
An investment can be a non-current asset. Investments are commonly found in the published accounts of large limited
liability companies. Company A might invest in another company B, by purchasing some of its shares. These shares
would earn income for A in the form of dividends paid out by B. If the investments are purchased by A with a view of
holding them for more than one year, they would be non-current assets of A.
1.8 Non-current assets and depreciation
Depreciation is a means of spreading the cost of a non-current asset over its useful life. Non-current assets are normally
valued at cost less depreciation.
Non-current assets can be held and used by a business for a number of years, but they wear out or lose their usefulness
over time. Every tangible non-current asset has a limited life. (The only exception is land held freehold or on a very long
leasehold.)
The accounts of a business try to recognise that the cost of a non-current asset is gradually used up with time. This is
done by writing off the asset
's cost in the income statement over several accounting periods. For example, a machine
costs $1,000 and is expected to wear out after ten years. Therefore, we can write off the cost by $100 each year. This
process is known as depreciation. We will look at depreciation in detail later in this text.
1.9 Current assets
Current assets are either:
(a) items owned by the business with the intention of turning them into cash within one year; or
(b) cash, including money in the bank, owned by the business.
These assets are 'current' because they are continually flowing through the business. For example, a trader, David
Wickes, runs a business selling motor cars and purchases a showroom, which he stocks with cars for sale.
(a) If he sells a car in a cash sale, the goods are immediately converted into cash.
(b) If he sells a car in a credit sale, the car will be given to the customer who becomes a receivable of the
business. Eventually, the receivable will pay what he owes in cash.
The transactions described above could be shown as a cash cycle.
Receivables
Cash
Inventories of goods
Cash is used to buy goods which are sold. Sales on credit create receivables, but eventually cash is received. Some,
perhaps most, of the cash is then used to replenish inventories.
1.10 Main items of current assets
• Inventory
• Receivables
• Cash
Key term
FA
S
T F
O
RWAR
D
52465
www.ebooks2000.blogspot.com
32
3: An introduction to final accounts ⏐ Part A Conceptual and regulatory framework
It is important to realise that cars are current assets of David Wickes because he is a car trader. If he also has a car
which he keeps and uses on business, this particular car would be a non-current asset. The difference between a non-
current and a current asset is the purpose for which it is used in the business.
Question
Current or non-current?
A motor trader has a van for sale. How will this be shown in the accounts?
A Non-current asset
B Current asset
C Non-current liability
D Current liability
Answer
B Current asset as it is part of the inventory for sale.
1.11 Some other categories of current assets
(a) Short-term investments. These are stocks and shares of other businesses held with the intention of
selling them in the near future, eg shares in Marks and Spencer, ICI or GEC. The shares will be sold when
the business needs the cash again. If share prices rise in the meantime, the business will make a profit.
(b) Prepayments. These are amounts already paid by the business for benefits which will be enjoyed within
the next accounting period. A business pays an annual insurance premium of $240 to insure its premises
against fire and theft. The premium is payable annually in advance on 1 December. If the business has an
accounting year end of 31 December, it will only enjoy one month
's insurance cover by the end of the
year. The remaining 11 months
' cover ($220) will be enjoyed in the next year. The prepayment of $220 is
shown in the statement of financial position at 31 December as a current asset.
A prepayment can be thought of as a form of receivable. At 31 December, the insurance company still
owes the business 11 months
' worth of insurance cover.
1.12 Trade receivables and other receivables
Although it is convenient to think of receivables as customers who buy goods on credit, it is more accurate to say that a
receivable is anyone who owes the business money.
A distinction can be made between two groups of receivables.
(a) Trade receivables, ie customers who still owe money for goods or services bought on credit in the course
of the trading activities of the business.
(b) Other receivables, ie anyone else owing money to the business (including prepayments).
Assessment
focus point
53465 www.ebooks2000.blogspot.com
Part A Conceptual and regulatory framework ⏐ 3: An introduction to final accounts 33
Question
Assets and liabilities
Categorise the following as tangible non-current assets, intangible non-current assets, investments, current assets,
current liabilities or non-current liabilities.
(a) Shares in BP, intended to be held long term (f) Trade payables
(b) Machinery used in production (g) Trade receivables
(c) Goods for resale (h) Goodwill
(d) An overdraft (i) Prepayments
(e) A mortgage (j) Accrued expenses
Answer
(a) Investments (f) Current liabilities
(b) Tangible non-current assets (g) Current assets
(c) Current assets (h) Intangible non-current assets
(d) Current liabilities (i) Current assets
(e) Non-current liabilities (j) Current liabilities
1.13 Example: statement of financial position preparation
You might like to attempt to prepare a statement of financial position yourself before reading the solution.
Prepare a statement of financial position for the Ted Hills Hardware Store as at 31 December 20X6, given the information
below.
$
Capital as at 1 January 20X6
47,600
Profit for the year to 31 December 20X6
8,000
Freehold premises, net book value at 31 December 20X6
50,000
Motor vehicles, net book value at 31 December 20X6
9,000
Fixtures and fittings, net book value at 31 December 20X6
8,000
Long-term loan (mortgage)
25,000
Bank overdraft*
2,000
Goods held in inventory for resale
16,000
Receivables
500
Cash in hand*
100
Payables
1,200
Taxation payable
3,500
Drawings
4,000
Accrued costs of rent
600
Prepayment of insurance
300
* A shop might have cash in its cash registers, but an overdraft at the bank.
54465 www.ebooks2000.blogspot.com
34
3: An introduction to final accounts ⏐ Part A Conceptual and regulatory framework
Solution
TED HILLS
STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20X6
$
$
Non-current assets at net book value
Freehold premises
50,000
Fixtures and fittings
8,000
Motor vehicles
9,000
67,000
Current assets
Inventory
16,000
Receivables
500
Prepayment
300
Cash
100
16,900
83,900
Capital
Capital as at 1 January 20X6
47,600
Profit for the year
8,000
55,600
Less drawings
(4,000
)
Capital as at 31 December 20X6
51,600
Non-current liabilities
Loan
25,000
Current liabilities
Bank overdraft
2,000
Payables
1,200
Taxation payable
3,500
Accrued costs
600
7,300
83,900
Question
Statement of financial position
Prepare the statement of financial position for Abbax as at 31 December 20X4 from the information below.
$
Freehold premises 80,000
Inventory 2,500
Payables 4,000
Profit for the year to 31.12.X4 6,600
Capital introduced in the year to 31.12.X4 5,000
Receivables 3,000
Furniture 27,000
Accruals 500
Drawings in the year to 31.12.X4 3,000
Prepayments 1,000
Delivery vans 15,000
55465 www.ebooks2000.blogspot.com
Part A Conceptual and regulatory framework ⏐ 3: An introduction to final accounts 35
$
Cash at bank 4,600
Mortgage 70,000
Capital brought forward at 1.1.X4 50,000
Answer
$
$
Non-current assets at net book value
Freehold premises
80,000
Furniture
27,000
Delivery vans
15,000
122,000
Current assets
Inventory
2,500
Receivables
3,000
Prepayments
1,000
Cash
4,600
11,100
133,100
Capital
Capital brought forward at 1.1.X4
50,000
Capital introduced in the year
5,000
55,000
Profit for the year
6,600
61,600
Less: drawings
3,000
Capital carried forward at 31.12.X4
58,600
Non-current liabilities
Mortgage
70,000
Current liabilities
Payables
4,000
Accruals
500
4,500
133,100
1.14 The order of items in the statement of financial position
The format most commonly used is the vertical format. The following versions exist.
(a) Net assets above and capital below
(b) Non-current assets and net current assets above, with capital and non-current liabilities below
(c) Assets above with capital and liabilities below (as in the example above)
(d) Capital and liabilities above, with assets below
There is no general rule about which version of a vertical statement of financial position should be used. However CA
2006 requires (a) to be used for the published accounts of most limited liability companies in the UK and IFRSs use
format (c). We will be using format (c) in this Study Text.
56465 www.ebooks2000.blogspot.com
36
3: An introduction to final accounts ⏐ Part A Conceptual and regulatory framework
1.15 Order of items within categories
By convention, a statement of financial position lists assets and liabilities in a particular order.
(a) Non-current assets are listed in a descending order of
'length of useful life'. Property has a longer life
than fixtures and fittings, which usually have a longer life than motor vehicles. This is why the non-current
assets in the example above are listed in that order.
(b) Current assets are listed in descending order of the length of time it might be before the asset will be
converted into cash. Broadly speaking, inventory will convert into receivables, and receivables will convert
into cash. So inventory, receivables and cash will be listed in that order. Prepayments, because they are
similar to receivables, should be listed after receivables and before cash.
(c) Current liabilities are listed in the descending order in which payment is due. Since bank overdrafts are
strictly repayable on demand, they are listed first. Then come payables and accruals. In the above example
'Taxation payable' is separately listed after payables, as it is a specific type of payable.
1.16 Working capital, or net current assets
The working capital of a business is the difference between its current assets and current liabilities, ie net current
assets.
In the statement of financial position above, the Ted Hills Hardware Store has net current assets of $(16,900 – 7,300) =
$9,600.
2 The income statement
The income statement is a statement showing in detail how the profit (or loss) of a period has been made.
The owners and managers of a business want to know how much profit or loss has been made, but there is only limited
information value in the figure for profit shown in a statement of financial position.
In order to exercise financial control effectively, managers need to know how much income has been earned, what costs
have been incurred and whether the performance of sales or the control of costs appears to be satisfactory. This is the
basic reason for preparing the income statement.
2.1 The gross profit
Gross profit is the difference between the value of sales (excluding value added tax) and the cost of the goods sold
In a retail business, the cost of the goods sold is their purchase cost from the suppliers. In a manufacturing business,
the cost of goods sold is the cost of raw materials plus the cost of the labour required to make the goods, and often plus
an amount of production
'overhead' costs. This part of the income statement maybe called the trading account.
2.2 Net profit
Net profit can be illustrated by the formula below.
Net profit = Gross profit + Income from other sources – Other business expenses
This part of the income statement may be called the income and expenditure account.
Key term
Key term
Key term
FA
S
T F
O
RWAR
D
57465 www.ebooks2000.blogspot.com
Part A Conceptual and regulatory framework ⏐ 3: An introduction to final accounts 37
2.3 Detail in the income statement
Examples of income from other sources
• Dividends or interest received from investments
• Profits on the sale of non-current assets
• Rental income
• Discounts received from suppliers
Examples of other business expenses
(a) Selling and distribution expenses. These are expenses associated with the process of selling and
delivering goods to customers.
• Salaries of the sales director and sales management
• Salaries and commissions of salesmen
• Travelling and entertainment expenses of salesmen
• Marketing costs (eg advertising and sales promotion expenses)
• Costs of running and maintaining delivery vans
• Discounts allowed to customers (eg 5% discount for cash)
• Bad debts written off (ie when a customer does not pay all they owe)
Discounts and bad debts are described in more detail in later chapters.
(b) Administration expenses. These are the expenses of providing management and administration for the
business.
• Salaries of directors, management and office staff
• Rent
• Insurance
• Telephone and postage
• Printing and stationery
• Heating and lighting
(c) Finance expenses.
• Interest on a loan
• Bank overdraft interest
You should try to group items of expenses (as shown above), but this will be dealt with in more detail in later chapters.
2.4 Example: income statement
On 1 June 20X5, Beppe de Marco commenced trading as an ice cream salesman.
(a) He rented a van at a cost of $1,000 for three months. Running expenses for the van averaged $300 per month.
(b) He hired a part time helper at a cost of $100 per month.
(c) He borrowed $2,000 from his bank and the interest cost of the loan was $25 per month.
(d) His main business was selling ice cream from the van, but he also did some special catering supplying ice
creams for office parties. Sales to these customers were usually on credit.
(e) For the three months to 31 August 20X5, his total sales were $10,000 (cash $8,900, credit $1,100).
58465 www.ebooks2000.blogspot.com
38
3: An introduction to final accounts ⏐ Part A Conceptual and regulatory framework
(f) He purchased his ice cream from a local manufacturer, Palmer Co. The cost of purchases in the three months to
31 August 20X5 was $6,200 and at 31 August he had sold every item of stock. He still owed $700 to Palmer Co
for purchases on credit.
(g) One of his credit sale customers has gone bankrupt, owing Beppe $250. Beppe has decided to write off the debt
in full.
(h) He used his own home for his office work. Telephone and postage expenses for the three months to 31 August
were $150.
(i) During the period he paid himself $300 per month.
Required
Prepare an income statement for the three months 1 June to 31 August 20X5.
Solution
BEPPE DE MARCO
INCOME STATEMENT
FOR THE THREE MONTHS ENDED 31 AUGUST 20X5
$
$
Sales
10,000
Less cost of sales
6,200
Gross profit
3,800
Wages (3 × $100)
300
Van rental
1,000
Van expenses (3 × $300)
900
Bad debt written off
250
Telephone and postage
150
Interest charges (3 × $25)
75
2,675
Net profit (transferred to the statement of financial position)
1,125
Note: The cost of sales is $6,200 even though $700 of the costs have not yet been paid. This will be reflected in the
statement of financial position as a payable. The amount of $300 per month that Beppe paid to himself are drawings and
so will be taken to the capital section of the statement of financial position.
Question
Income statement
On 1 January 20X2, Fred started a dress shop.
(a) He rented a shop at $200 per month and spent $10,000 on fixtures and fittings.
(b) He employed a shop assistant at $1,000 a month.
(c) He bought dresses on credit for $38,000.
(d) He sold three quarters of his inventory for $50,000.
(e) He estimates he has used $2,000 worth of electricity (he has so far received bills for January–September for
$1,400).
(f) Fred estimates that his fixtures and fittings will last 10 years.
Trading
account
Income and
expenditure
account
59465 www.ebooks2000.blogspot.com
Part A Conceptual and regulatory framework ⏐ 3: An introduction to final accounts 39
Required
Prepare an income statement for the year to 31 December 20X2.
Answer
FRED
INCOME STATEMENT
FOR THE YEAR TO 31 DECEMBER 20X2
$
$
Sales
50,000
Less cost of sales (¾ × $38,000)
(28,500
)
Gross profit
21,500
Rent ($200 × 12)
2,400
Depreciation ($10,000 ÷ 10)
1,000
Wages
12,000
Electricity
2,000
17,400
Net profit
4,100
Note: Sales may also be called revenue or turnover.
3 Capital and revenue expenditure
Capital expenditure is expenditure which results in the acquisition of non-current assets, or an improvement in their
earning capacity.
Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business or to maintain the
existing earning capacity of non-current assets.
3.1 Revenue expenditure
Revenue expenditure is charged to the income statement. For example, a business buys ten widgets for $200 ($20 each)
and sells eight of them during an accounting period. It will have two widgets left in inventory at the end of the period.
The full $200 is revenue expenditure, but only $160 is a cost of goods sold during the period. The remaining $40 will be
included in the statement of financial position in inventory – ie as a current asset valued at $40.
3.2 Capital expenditure
A business purchases a building for $30,000. It then adds an extension to the building at a cost of $10,000. The building
needs to have a few broken windows mended, its floors polished and some missing roof tiles replaced. These cleaning
and maintenance jobs cost $900.
The original purchase ($30,000) and the cost of the extension ($10,000) are capital expenditure, because they are
incurred to acquire and then improve a non-current asset. The other costs of $900 are revenue expenditure, because
these merely maintain the building and so its
'earning capacity'. The $40,000 will appear as non-current assets in the
statement of financial position, while the $900 will be shown as an expense in the income statement.
FA
S
T F
O
RWAR
D
60465 www.ebooks2000.blogspot.com