FINANCIAL REPORTING II BACT 304 PREPARATION OF FINANCIAL STATEMENTS LECTURERS: DR. JOHN MACCARTHY & MR. LEXIS TETTEH

Lecture 6-7: Preparation and Interpretation of Financial Statements Overview: What is annual publish report? Who is Responsible for the Preparation of the Financial Statements Accounting concepts (i.e., used to prepare the financial statements) Preparation of SOCI and SOFP

Accounting for Limited Liability Companies What is annual publish report? An annual publish report is a comprehensive report on a company's activities throughout the preceding year.  These are intended to give shareholders and other interested people information about the company's activities and financial performance. The directors of the company are responsible for the preparation and signing of the annual publish report on behalf of the company.

Accounting for Limited Liability Companies Accounting for Limited Liability Companies (cont.) Contents of an annual publish report: Report of the Directors Chairman’s Report Corporate Governance Information Auditor’s Report Financial Statements: Statement of Comprehensive Income; Statement of Financial Position; Statement of Changes in Equity and Statement of Cash Flow Notes to the Financial Statements

Responsibility for the Preparation of the Financial Statements Directors are responsible for preparing financial statements for the company. These includes: Preparing financial statements in compliance with the International financial reporting statements, framework and other regulations Setting up Internal control necessary to enable the preparation of financial statements that are free from material misstatement. The prevention and detection of fraud. Safeguarding the assets of the company.

Accounting for Limited Liability Companies (cont.) What is a limited liability company: It is a company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested. Shareholders of a limited liability company cannot be held personally liable for the company’s debts and liabilities. Presentation of Income Statement According to IFRS Income statement is an aspect of financial statement that lists income, expenses and profit or loss for a given periods of time. IAS 1 requires entities to prepare financial statements to comply with IFRS.

Statement of Comprehensive Income Reporting period: Financial statements should be presented at least annually. A shorter or longer than a year is allowed. Reasons must be assigned for the departure and disclosed in the financial statements. It also requires entities to comply with appropriate accounting policies: Going concern concept: Financial statements should be prepared on a going concern assumption unless management intends to liquidate business. Management should assess all information about the future, which is at least 12 months from the balance sheet data.

Statement of Comprehensive Income (cont.) Accrual concept: Assets and liabilities are recognised when they are receivable or payable rather than when actually received and paid. Consistency concept: Entities should retain their preparation and classification for the successive periods unless alternative would be more appropriate. Materiality concept: Each material class of similar items should be presented separately in the financial statements. Items that are not similar should be disclosed separately. Comparative information: Comparative information relating to the previous period should be reported alongside current period disclosure.

Content of Statement of Comprehensive Income (cont.) Information to be disclosed in the Statement of Comprehensive Income: Revenues Cost of sales Gross profit Operating expenses Operating profit Financial costs Profit before tax Tax expense Profit and loss from ordinary activities Extraordinary items Net profit or loss for the period

Content of Statement of Comprehensive Income (cont.) Extraordinary items: These are events or transactions considered to be abnormal to ordinary company activities and not likely to recur in the future. Example: Sale of property for profit or loss. Revaluation gain or loss related to existing assets. Foreign exchange gain or loss.

Statement of Comprehensive Income Prepare statement of comprehensive income for Lionel’s Limited for the year ending 31st Dec., 2016 from the extract below. Ghc Purchases 50,205 Rent 2,800 Stock 31 Dec 2015 4,300 Interest on loan 1,000 Sales 68,800 Purchase returns 1,300 Sales returns 2,019 Electricity 840 Advertising 1,220 Drawings 6,200 Discount allowed 1,105

Preparation of Comprehensive Income Statement (cont) Interest received 800 Printing and stationery 430 Carriage inwards 169 Subscriptions 200 Carriage outward 839 The loan Ghc10,000 bears interest at 20% a year. The interest is payable semi-annually. Closing stock at 31.12.2016 is Ghc4,920. Included in rent amount is quarter payment ending 28 Feb 2017 for Ghc600 (i.e., from Dec 2016 to Feb 201). Electricity accrued for the period ended 31st Dec 2016 was Ghc103. Subscription include Ghc60 to the Chamber of Commence for the 12-month ending 28 Feb 2017. The interest received is on investment for the 15 months ending on 31st March 2017. Corporate tax is 25%

Preparation of Comprehensive Income Statement (cont) Statement of Comprehensive Income for the Y/E 31/12/2016 Notes Ghc Net sales W1 66,781 Less: Cost of sales (48,454) Gross profit 18,327 Rent (2,800-400) 2,400 Electricity (840+103) 943 Subscription (200-10) 190 Discount allowed 1,105 Advertising 1,220 Printing and stationery 430 Carriage outwards 839 (7,127) Operating profit/(loss) 11,200

Preparation of Comprehensive Income Statement (cont) Finance cost (20% x 10,000) (2,000) Profit/loss before tax 9,200 Other income (12/15 x 800) 640 9,840 Tax @25 (2460) 7380

Preparation of Comprehensive Income Statement (cont) Workings W1: Net sales Sales = 68, 800 Returns = (2,019) Net sales= 66,781 W2: Cost of sales Opening stock 4,300 Purchases 50,205 Purchase returns (1,300) Carriage inward 169 Closing stock 4,920 48,454

Preparation of Financial Position The statement of financial position (SFP) shows the value of the business at a particular time. It contains what the company owns and what it owes to the people. The breakdown of STP is as follows: Current and non-current assets and liabilities. Current assets and noncurrent assets: These are assets that are likely to be realised within the normal operating cycle or 12 month s after balance sheet date. They are held for trading purpose or in cash or cash equivalent other than that the assets are classified as noncurrent assets.

Preparation of Financial Position Current liabilities and noncurrent liabilities: These are liabilities that are likely to be settled within the normal operating cycle or 12 months after balance sheet date. They are held for trading purposes else they classified as non-current liabilities. Long term Investments: These are investments held for over 12 months. These are investments in other companies in the form of shares and debentures. Operating cycle: It is the time between the acquisition of assets for processing and their realisation in cash or cash equivalent. It is the length of time it takes to turn stock back into cash.

Content of Statement of Financial Position (cont.) The items to be included on the face of statement of financial position are: Non-current assets (i.e., Property, plant, and equipment) Investment property Intangible assets Financial assets Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Provisions Liabilities and assets for current tax Deferred tax etc. Issued capital and Reserves

Preparation of Financial Position (cont.) You are given the trial balance of Hammond Limited as on 31st December, 2016 as follows: Dr. Cr. Stated capital (issued at Ghc1 per share) 425,000 Receivables & payables 154,000 90,000 Inventory 31st December 2015 68,000 Bank 210,000 Premises at cost 288,700 Machinery at cost 125,000 Motor vehicle at cost 105,000 Provision for depreciation at (31/12/2015) Premises 54,000 Machinery 36,000 Motor vehicle 21,000 Income surplus at (31/12/2015) 22,000 Capital reserve at (31/12/2015) 30,000

Preparation of Financial Position (cont.) Addition information: Inventory at 31st December 2016 was Ghc88,000 . Motor expenses owing amounted to Ghc150. The directors recommended on interim dividend of 10 pesewas (GhC0.10) per share to be paid in November 2016. This was paid but has not been recorded in the financial records. Directors’ remuneration 76,000 Sales 890,000 Purchases 527,000 Motor expenses 3,800 Wages & salaries 4,600 Repairs to machinery 2,900 Sundry expenses 3,000 1,568,000

Preparation of Financial Position (cont.) Depreciation should be charged at the rates of: Premises 5% on cost Machinery 25% on cost Motor vehicles 25% on cost You are required to draw up the income statement for the year ending 31st December, 2016 and a statement of financial position as at 31 December, 2016.

Practise question Tasty Meals Restaurant Limited has submitted the following Trial balance for the 2016 financial year: Dr. Ghc’000 Cr. Ghc’000 Other operating expenses 987 Donations 24 Staff costs 4,213 Directors remuneration 39 Capital work-in-progress 132 Motor vehicle/Accumulated depreciation 327 182 Equipment & Furniture/Accumulated depreciation 590 163 Computers/Accumulated depreciation 390 133 Land and buildings/Accumulated depreciation 780 83 Corporate tax 180 Accounts payables 17,278 Sales of drinks 243 Sales of foods 7,510

Practise question (cont) Staff advances 1,238 Short term investments: Fixed/ time deposits 1,815 Income surplus (01/01/2015) 1,146 Allowance for doubtful debts (01/01/2015) 614 Statutory Reserves (01/01/2015) 618 Capital surplus 444 Long term Investments: Trade investments 1,343 Purchases 19,593 Opening stock as at (31/12/2015) 3,515 Accounts Receivables 3871 Bank 4,347 Cash in hand 3,820 Stated capital 4,823 Other operating income 3,967 Debenture (10yrs term loan) 10,000 47,204

Practise question (cont) Additional information: Increase allowance for doubtful debts to Ghc852,000. Provide for depreciation at the following rates: Land and buildings 5% on cost Equipment and furniture 20% on cost Computers 33⅓ on cost Motor vehicles 33⅓ on cost Transfer 12½ of net profit after tax to Statutory Reserve Fund Directors have agreed to pay end-of-year bonus to staff estimated at Ghc72,000. This is yet to paid. Dividends from investments 2,383 Other operating income 1,388 Total 47,204

Practise question (cont) The authorised capital is 10,000 equity shares of no par value out of which 6,000 shares have been issued and fully paid. The corporate tax provision made in the 2015 financial statements was Ghc200,000. This was agreed with Ghana Revenue Authority at Ghc220,000 and fully settled in March 2016. Interim tax for 2011 based on self assessment was settled at Ghc160,000. Corporate tax applicable to the bank is 25%. Closing stock is Ghc21,593,000. Provide for audit fees of Ghc60,000 Required: Statement of Comprehensive Income for the year ended 31st December, 2016. Statement of Changes in equity for the ended 31st December, 2016. Statement of Financial Position at 31st December, 2016 Show all workings

Exercise One 1 & 2 on financial statements preparation

Solution to Exercise One The solution Exercise One for FS - Solution.docx

Exercise Two 1 & 2 on financial statements preparation