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

2. 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

3. 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.

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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

12. 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 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%

13. 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, )
2,400
Electricity ( )
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

14. 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
(2460)
7380

15. 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 ,300
Purchases ,205
Purchase returns (1,300)
Carriage inward
Closing stock ,920
48,454

16. 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.

17. 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.

18. 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

19. 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

20. 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 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

21. 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.

22. 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

23. 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

24. 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

25. 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 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

26. Exercise One
1 & 2 on financial statements preparation

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

28. Exercise Two
1 & 2 on financial statements preparation