7 Preparation of Financial Statements with Adjustments 7 Preparation of Financial Statements with Adjustments Examining the preparation of IS and BS from TB

JAN 2010CIMA C2 YUAN LI2 Topics  Suggested approach  Proforma IS  Proforma BS

JAN 2010CIMA C2 YUAN LI3 7.1 Introduction  Adjustments closing inventories at the end of the period, accruals, prepayments, bad debts and allowance for receivables, depreciation

JAN 2010CIMA C2 YUAN LI4 7.2 The trial balance

JAN 2010CIMA C2 YUAN LI5 The TB  Often presented in computer-based assessment (CBA) questions prior to adjustments  Generally, DR=assets (BS) or expenses (IS) and CR=capital (BS); liabilities (BS); or revenue (IS)  Includes all transactions that have already been posted to ledger a/cs  Make sure you know which items are IS and which BS  Review each post-TB adjustment (e.g. accruals/prepayments, depreciation, bad debts, closing inventories) and make the necessary calculations

JAN 2010CIMA C2 YUAN LI6 Study tip  Be aware of time keeping in the CBA. You have less than 2 minutes for each 2 mark question!  Set out your personal working in a neat and methodical manner – this will help you answer the question.

JAN 2010CIMA C2 YUAN LI7 Proforma IS Sales less returnsX Less cost of sales opening inventoriesX purchases less returnsX carriage inwardsX closing inventories(X) Gross profit(X) Less expenses e.g. rent, loan interest (inc. acc/ppy)(X) Discounts allowed and received(X) Carriage outwards(X) Bad debts(X) Depreciation(X) Loss on disposal(X) Net profitX

JAN 2010CIMA C2 YUAN LI8 Study tip Plenty of question practice consolidates knowledge of earlier topics and helps you to learn proformas

JAN 2010CIMA C2 YUAN LI9 Proforma BS Assets$ $Capital and liabilities $ None-current assetsCapitalX buildingsX (X)XProfitX Current assetsDrawings(X) InventoriesXX Receivables (less allowance) XNon-current liabilities X PrepaymentsXLoanX BankXCurrent liabilities XCreditorsX XAccrualsXX X

JAN 2010CIMA C2 YUAN LI10 Practice questions 1.The following is an extract from the trial balance of John’s Joinery Services at 30 April 20x9: Debit ($)Credit ($) Sales123,987 Returns1, Discounts5,6741,318 The figure to be shown in the trading account for net sales is $

JAN 2010CIMA C2 YUAN LI11 Answer $122,647

JAN 2010CIMA C2 YUAN LI12 Practice questions 2. A business has opening inventories of $34,000 and closing inventories of $39,000. purchase returns were $2,300. the cost of goods sold was $104,000, purchases were: Answer : $111,300

JAN 2010CIMA C2 YUAN LI13 Practice questions 3. The following is an extract from the trial balance of a business for its most recent year: Debit ($)Credit ($) Opening Inventories57,000 Sales640,000 purchases475,000 returns6,80045,000 carriage inwards14,200 carriage outwards9,500 You are also told that closing inventories were $53,000 Using some or all of the figures above, the correct gross profit is: $

JAN 2010CIMA C2 YUAN LI14 Answer $144,500

JAN 2010CIMA C2 YUAN LI15 Practice questions 4. The following are the balances on the ledger accounts for Mustafa for the year ended 30 Nov 20x2: Debit ($)Credit ($) Power10,000 rent and local business tax14,000 non-current assets120,000 acc. depreciation on non-current assets 52,500 Gross profit has already been calculated as being $52,000. depreciation is to be calculated 25% on the reducing balance. At the end of the year, heat and light accrued is $2,500, and rent and local business tax prepaid is $3,500. The net profit is $

JAN 2010CIMA C2 YUAN LI16 Answer $12,125

JAN 2010CIMA C2 YUAN LI17 Practice questions 5. The following balances were extracted from the trial balance of all at Aug 20x9. which of these items would be credit balances? Ledger Account$ A. Accumulated depreciation on vehicles at 1 Sept 20x8 25,000 B. Drawings22,000 C. Inventories at 1 Sept 20x816,000 D. Allowance for receivables at 1 Sept 20x75,000 E. Bank overdraft4,000 F. Capital at 1 Sept 20x835,000

JAN 2010CIMA C2 YUAN LI18 Answer A D E F