1. © Pearson Education New Zealand 2007 Contents 1. The Statement of Accounting PoliciesThe Statement of Accounting Policies 2. Balance Day adjustments (review)Balance Day adjustments (review) 3. Income Statement – Service businessIncome Statement – Service business 4. Income Statement – Trading businessIncome Statement – Trading business 5. Balance SheetBalance Sheet 6. Statement of Changes in Cash PositionStatement of Changes in Cash Position End

2. © Pearson Education New Zealand 2007 1 The Statement of Accounting Policies NOTES QUESTIONS Back to Contents

3. © Pearson Education New Zealand 2007 Statement of Accounting Policies Purpose The Statement of Accounting Policies shows the assumptions that have been followed in preparing all of the financial statements for a sole proprietor and how the financial elements have been measured.

4. © Pearson Education New Zealand 2007 Return to 1 Statement of Accounting Policies Layout The layout for the Statement of Accounting Policies is as follows: (Business Name) Statement of Accounting Policies Name and nature Financial statements have been prepared for – list the name of the business and the nature of the entity (e.g. a sole proprietor retail business). Measurement basis The measurement base adopted is Historical cost. Property, plant and equipment Property, plant and equipment are recorded at their original purchase price, less any accumulated depreciation. Depreciation policy Property, plant and equipment are depreciated over their estimated useful lives.

5. © Pearson Education New Zealand 2007 Question: The Statement of Accounting Policies Complete a Statement of Accounting Policies for Graham’s Café.

6. © Pearson Education New Zealand 2007 Answer Graham’s Café Statement of Accounting Policies for the period ended… Name and nature These statements have been prepared for Graham’s Café, a sole proprietor café business. Measurement basis The measurement base adopted is historical cost. Property, plant and equipment Property, Plant and Equipment are recorded at their original purchase price, less any accumulated depreciation. Depreciation policy Depreciation is charged on a straight line basis so as to allocate the cost (less the salvage value) of the Property, Plant and Equipment over its estimated useful life. Return to 1 Statement of Accounting Policies

7. © Pearson Education New Zealand 2007 3 Income Statement – Service business NOTES QUESTIONS Back to Contents

8. © Pearson Education New Zealand 2007 Income Statement – Service business Purpose The purpose of the Income Statement is to show the net profit of the business. A service business is one who offers services to their customers such as: plumbing, legal services, hairdressing, etc.

9. © Pearson Education New Zealand 2007 Return to 3 Income Statement – Service business Layout The layout of an Income Statement for a Service business is as follows: Revenue Operating income (known as fees, or service income) Plus Non-operating income (such as interest, dividends, rent etc.) Less expenses Group One expenses: E.g. a hairdresser might have ‘Cutting & Styling expenses’ Administration expenses: costs associated with the administration of the entity as a whole Finance costs: those expenses incurred in borrowing funds Total expenses = Net profit

10. © Pearson Education New Zealand 2007 Complete the Income Statement for the Service business below: Classify expenses as: Dry-cleaning expenses, Administrative expenses and Finance costs. Question: Income Statement for a Service business

11. © Pearson Education New Zealand 2007 Answer Return to 3 Income Statement – Service business

12. © Pearson Education New Zealand 2007 4 Income Statement – Trading business NOTES QUESTIONS Back to Contents

13. © Pearson Education New Zealand 2007 Income Statement – Trading business Purpose The purpose of the Income Statement is to show the net profit of the business. A trading business buys goods from a supplier and on-sells them at a higher price to customers.

14. © Pearson Education New Zealand 2007 Return to 4 Income Statement – Trading business Layout The layout of an Income Statement for a Service business is as follows: Revenue Operating income (Sales) Less Sales Returns Less Cost of Goods Sold Opening inventory + Purchases – Purchase returns + Costs (Freight inwards, packaging, customs duty etc.) – Closing inventory = Cost of Sales = Gross Profit Plus Non-operating income (such as interest, dividends, rent etc.) Less Expenses Distribution expenses: (costs incurred in transferring the finished goods to the customer) Administration expenses: (costs associated with the administration of the entity as a whole) Finance costs: (those expenses incurred in borrowing funds) Total Expenses = Net Profit

15. © Pearson Education New Zealand 2007 Questions: Income Statement – Trading business 1) Using the trial balance extract below, complete the Trading section of the Income Statement (Sales to Gross Profit).

16. © Pearson Education New Zealand 2007 Answer 1)

17. © Pearson Education New Zealand 2007 2)Complete the Income Statement for the Trading Business below. Classify expenses as: Distribution expenses, Administrative expenses and Finance costs.

18. © Pearson Education New Zealand 2007 Answer Return to 4 Income Statement – Trading business 2)

19. © Pearson Education New Zealand 2007 5 Balance Sheet NOTES QUESTIONS Back to Contents

20. © Pearson Education New Zealand 2007 Balance Sheet Purpose This statement reports the value of the business’s assets, liabilities and equity at a particular point in time. This statement is made up of two parts: 1.Assets minus liabilities 2.Equity – this shows the value of the owner’s share in the business.

21. © Pearson Education New Zealand 2007 Layout The layout of a Balance Sheet is as follows: Current Assets + Non Current Assets Investment Assets Property, Plant and Equipment Intangible Assets Total Assets Less Liabilities Current Assets Non Current Liabilities Total Liabilities = Net Assets * Note: Net Assets Equity and Closing Capital Opening Capital totals must equal. + Net Profit – Drawings = Closing Capital *

22. © Pearson Education New Zealand 2007 Return to 5 Balance Sheet Property, Plant and Equipment Note: The layout is as follows: Property, Plant and Equipment Historical Cost of Asset less Accumulated depreciation = Carrying amount of asset The total carrying amount of the assets is transferred to the Balance Sheet.

23. © Pearson Education New Zealand 2007 Questions: Balance Sheet 1)Complete the Balance Sheet note for Property, Plant and Equipment using the trial balance extract below:

24. © Pearson Education New Zealand 2007 Answers 1)

25. © Pearson Education New Zealand 2007 2)Complete a) the Balance Sheet and b) the Property, Plant & Equipment note using the adjusted trial balance below:

26. © Pearson Education New Zealand 2007 Answers 2)a)

27. © Pearson Education New Zealand 2007 b)

28. © Pearson Education New Zealand 2007 3)Complete a) the Balance Sheet and b) the Property, Plant & Equipment note using the adjusted trial balance below :

29. © Pearson Education New Zealand 2007 3) a) Answers

30. © Pearson Education New Zealand 2007 Return to 5 Balance Sheet b)

31. © Pearson Education New Zealand 2007 2 Balance Day adjustments (Review) Accrued income Prepayments Accrued expenses Income received in advance Depreciation Accounts receivable Accounts payable Purchasing assets on credit Back to Contents

32. © Pearson Education New Zealand 2007 Balance Day adjustments Accrued income Dividends Owing $180 The effect of this Balance Day adjustment on the trial balance is to create a new current asset, Accrued Income for $180, on the debit side of the trial balance and to increase the dividends by $180 on the credit side of the trial balance. 31/3Accrued Income180 Dividends180 Return to 2 Balance Day adjustments

33. © Pearson Education New Zealand 2007 Prepayments Insurance paid in advance $300 The effect of this Balance Day adjustment on the trial balance is to create a new current asset, Prepayments for $300, on the debit side of the trial balance and to decrease (credit) the Insurance paid by $300. 31/3Prepayments300 Insurance300 Return to 2 Balance Day adjustments

34. © Pearson Education New Zealand 2007 Accrued expenses Wages owing $500 The effect of this Balance Day adjustment on the trial balance is to decrease the wages by $500 on the debit side of the trial balance and to create a new current liability, Accrued Expenses for $500, on the credit side of the trial balance. 31/3Wages500 Accrued Expense500 Return to 2 Balance Day adjustments

35. © Pearson Education New Zealand 2007 Income received in advance Fees received in advance $400 The effect of this Balance Day adjustment on the trial balance is to create a new current liability, Income received in advance for $400, on the credit side of the trial balance and to decrease (debit) the Fees by $400. 31/3Fees400 Income received in advance 400 Return to 2 Balance Day adjustments

36. © Pearson Education New Zealand 2007 Return to 2 Balance Day adjustments 31/3Depreciation - Vehicle4 500 Accumulated Depreciation - Vehicle 4 500 The effect of this Balance Day adjustment on the trial balance is to create a new expense, Depreciation - Vehicle for $4 500, on the debit side of the trial balance and to increase (credit) the Accumulated Depreciation - Vehicle by $4 500. Depreciation example

37. © Pearson Education New Zealand 2007 Accounts receivable Credit sales of $540 were made The effect of this Balance Day adjustment on the trial balance is to create a new / increase the existing current asset, Accounts Receivable for / by $540 on the debit side of the trial balance and to increase the Sales on the credit side by $480 and increase (credit) the GST by $60. 31/3Accounts Receivable540 Sales480 GST60 Return to 2 Balance Day adjustments

38. © Pearson Education New Zealand 2007 Accounts payable Purchases of $450 were bought from Stationery Supplies The effect of this Balance Day adjustment on the trial balance is to create a new / increase the existing current liability, Accounts Payable, for / by $450 on the credit side of the trial balance and to increase the purchases on the debit side by $400 and decrease (debit) the GST by $50. 31/3Purchases400 GST50 Accounts Payable / Stationery Supplies 450 Return to 2 Balance Day adjustments

39. © Pearson Education New Zealand 2007 Return to 2 Balance Day adjustments Purchasing Property, Planning, and Equipment on credit Purchased a new office chair $270 from Executive Furnishings The effect of this Balance Day adjustment on the trial balance is to create a new / increase the existing current liability, Accounts Payable, for / by $270 on the credit side of the trial balance and to increase the office equipment on the debit side by $240 and decrease (debit) the GST by $30. 31/3Office chair240 GST30 Accounts Payable / Executive Furnishings 270

40. © Pearson Education New Zealand 2007 6 Statement of Changes in Cash Position NOTES QUESTIONS Back to Contents

41. © Pearson Education New Zealand 2007 Statement of Changes in Cash Position Purpose The Statement of Changes in Cash Position (aka Cash Flow Statement) records the sources and uses of cash during the financial period. A cash flow statement only records cash transactions. Therefore, we need to be able to classify transaction as being cash or credit items.

42. © Pearson Education New Zealand 2007 Return to 6 Statement of Changes in Cash Position Layout The layout of this statement is as follows: Cash was received from: Total cash received Cash was applied to: Total cash paid Net increase / decrease in cash held + Opening bank balance = Closing Bank balance

43. © Pearson Education New Zealand 2007 Question: Statement of Changes in Cash Position

44. © Pearson Education New Zealand 2007 Answer Return to 6 Statement of Changes in Cash Position