1. Manufacturing Accounts
Chapter 21
Manufacturing Accounts

2. notes reference - page 229

3. notes reference - page 229

4. Costs of production Direct costs Indirect costs Variable Fixed
Vary with no. of
goods produced
& hours worked
Not related to
production of
a unit
e.g. raw materials
& labour
e.g. rates
notes reference - page 230

5. Costs of production Total direct costs Total direct + indirect costs
Factory cost of
production +/-
change in WIP
Prime cost
Factory cost
of production
Factory cost of
finished goods
produced
notes reference - page 230

6. Lecture example 1
Manufacturing account for the year ended 31 December 20X1
Raw materials
Opening inventory
7,630
Purchases
18,920
26,550
(7,890)
Less closing inventory
18,660
Factory wages
20,860
39,520
Prime cost
Indirect factory expenses
Electricity (4,620 x ½)
2,310
Rent & rates (5,000 x ½)
2,500
Supervisor’s salary
8,200
Depreciation (plant & machinery)
4,700
17,710
57,230
Factory cost of production
Opening work in progress
4,920
Closing work in progress
(4,540)
380
57,610
Factory cost of finished goods produced
notes reference - page 232

7. Lecture example 1 Income Statement for the year ended 31 December 20X1
Sales
181,820
Opening inventory of finished goods
6,780
Less cost of sales
64,390
Factory cost of finished goods produced
57,610
Less closing inventory of finished goods
(5,430)
58,960
122,860
Gross profit
Selling & distribution costs
Electricity (4,620 x ¼)
1,155
Rent & rates (5,000 x ¼)
1,250
Depreciation (delivery vans)
1,600
Sales commissions
13,680
Salesmen’s salaries
20,000
(37,685)
notes reference - page 233

8. Lecture example 1 Administration expenses Electricity (4,620 x ¼)
1,155
Rent & rates (5,000 x ¼)
1,250
Salaries (41,630 – 8,200)
33,430
Depreciation (fixtures & fittings)
1,420
(37,255)
47,920
Net Profit
notes reference - page 234

9. Interpretation of accounts
Chapter 22
Interpretation of accounts

10. Categories Profitability Liquidity Investors’ ratios Gearing
notes reference - page 239

11. Profitability Profitability ROCE Profits earned in relation to
capital employed
NPM/GPM
Relationship
between costs and
revenue
Asset turnover
Revenue generated by assets employed
Profitability
Return on equity
Return to ordinary shareholders
notes reference - page 241

12. Lecture example 1 Profitability
Return on capital employed
(ROCE)
Profit from operations %
TALCL
790
462
1,801
= 29%
= 25%
Possible reason:
New non-current assets may have
improved efficiency
notes reference - page 241

13. Lecture example 1 Profitability
Return on equity (ROE)
PAT – preference div
OSC + reserves
478
2,190
266
1,401
= 21.8%
= 19%
Possible reason:
Good use of extra capital raised
notes reference - page 241

14. Lecture example 1 Profitability
Asset turnover
Revenue
TALCL
7,180
2,690
5,435
1,801
= 2.7
= 3.02
Possible reason:
New non-current assets bought in year have not had time to create the same rate of revenue
notes reference - page 241

15. Lecture example 1 Profitability
Net profit margin
Profit from operations %
Revenue
790
7,180
462
5,435
= 11%
= 8.5%
Possible reasons:
Higher selling prices
Better cost control
notes reference - page 241

16. Lecture example 1 Profitability
Gross profit margin
Gross profit %
Revenue
1,795
7,180
1,223
5,435
= 25%
= 22.5%
Possible reasons:
Higher selling prices
Better cost/production control
notes reference - page 241

17. Average collection period
Liquidity
Current ratio
Ability to meet short term commitments
Quick ratio
Stricter test of liquidity
Average payment
period
Credit period taken
by the business
Inventory days
Average period that
Inventories are held
Liquidity
Average collection period
Credit period taken by customers
notes reference - page 241

18. Lecture example 1 Liquidity
1 Current ratio CA CL
2,314
965
1,679
704
= 2.4
= 2.4
Comment
A healthy unchanged ratio.
Depends on the industry so comparisons are necessary.
notes reference - page 241

19. Lecture example 1 Liquidity
2 Quick ratio
CA - inventories CL
1,308
965
808
704
= 1.4
= 1.1
Comment
The company’s acid ratio has improved due to an increase in receivables and cash, not inventories
notes reference - page 241

20. Lecture example 1 Liquidity
3 Inventory Days
Inventories x 365 days
Cost of sales
1,006
5,385
871
4,212
= 68 days
= 75 days
Comment
The company holds inventories for less time. May be a reason for the improved margins.
Note - Inventory turnover
Cost of sales
Inventories
5,385
1,006
4,212
871
= 5.35
= 4.84
notes reference - page 241

21. Lecture example 1 Liquidity
4 Receivables days
Trade receivables x 365 days
Credit turnover
948
7,180
708
5,435
= 48 days
= 47 days
Comment
No significant change.
notes reference - page 241

22. Lecture example 1 Liquidity
5 Payables days
Trade payables x 365 days
Credit purchases
653
5,385
516
4,212
= 44 days
= 45 days
Comment
No significant change.
However, payables days less than receivables days which could cause cash flow problems in the future.
notes reference - page 241

23. Operating cycle Receivables Days Inventory Days Payables Days
Cash out
Cash in
notes reference - page 241

24. Gearing Gearing Debt/Equity Shows how the company is financed
Shows risk of shareholders not receiving dividend
notes reference - page 242

25. Lecture example 1 Gearing
1 Gearing ratio
Interest bearing debt
Capital, reserves & debt
500 2,
400 1,
= 18.6%
= 22.2%
Comment
Gearing has decreased due to the
issue of shares.
notes reference - page 242

26. Limitations of ratios Lack of comparability of accounting policies.
Non trading income included in some ratios
Useless in isolation
Cannot compare across industries
Can be manipulated
notes reference - page 242

27. IAS 7: Cash Flow Statements
Chapter 23
IAS 7: Cash Flow Statements

28. XYZ Co – Cash Flow statement (Indirect method)
$000 $000
Cash flows from operating activities
Net profit before taxation 3,570
Adjustment for:
Depreciation 450
Investment income (500)
Interest expense 400
Operating profit before working capital changes 3,920
Increase in trade and other receivables (500)
Decrease in inventories 1,050
Decrease in trade payables (1,740)
Cash generated from operations 2,730
Interest paid (270)
Income taxes paid   (900)
Net cash from operating activities 1,560
notes reference - page 248

29. XYZ Co – Cash Flow statement (Indirect method)
Cash flows from investing activities
Purchase of property, plant and equipment (900)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Dividends paid (1,290)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 290
Cash and cash equivalents at beginning of period (Note) 120
Cash and cash equivalents at end of period (Note) 410
notes reference - page 248

30. Cash flows from operating activities
Cash flows derived from operating or trading activities
Can use:
Direct method
Indirect method (more common in exams)
notes reference - page 249

31. Lecture example 1 Income Tax payable Tax paid 116 bal b/d 168 bal c/d
156 IS
104
272
notes reference - page 249

32. Lecture example 2 Plant and equipment Accumulated depreciation b/d 200
c/d 280
Disposal 20
Disposal 9
b/d 80
c/d 111
Addition 100
Charge 40
300
300
120
120
notes reference - page 250

33. Lecture example 3 Dividends paid
Dividends payable
b/d 35
R Earnings 60
Cash 50
c/d 45 95 95
notes reference - page 252

34. Lecture example 4 $000 $000 Cash flows from operating activities
$000 $000
Cash flows from operating activities
Net profit before taxation 87
Adjustments for:
Depreciation 42
Interest expense 8
Operating profit before working capital changes 137
Increase in trade receivables (168 – 147) (21)
Increase in inventories (214 – 210) (4)
Increase in trade payables (136 – 21) 15
Cash generated from operations 127
Interest paid (8)
Income taxes paid (W1)
notes reference - page 253

35. Lecture example 4 (cont’d) Working 1
Income tax payable
b/d 28
Cash 20
I/S 31
c/d 39 59 59
notes reference - page 253

36. Lecture example 4 (cont’d)
$000 $000
Cash flows from operating activities
Net profit before taxation 87
Adjustments for:
Depreciation 42
Interest expense 8
Operating profit before working capital changes 137
Increase in trade receivables (168 – 147) (21)
Increase in inventories (214 – 210) (4)
Increase in trade payables (136 – 21) 15
Cash generated from operations 127
Interest paid (8)
Income taxes paid (W1)
(20)
Net cash from operating activities 99
notes reference - page 254

37. Lecture example 4 (cont’d) Working 2
Dividends payable
b/d 16
Cash 22
R Earnings 24
c/d 18 40 40
notes reference - page 254

38. Property, plant and equipment (NBV)
Lecture example 4 (cont’d) Working 3
Property, plant and equipment (NBV)
b/d
514
Revaluation 10
Depreciation 42
Cash additions
146
c/d
628
670
670
notes reference - page 254

39. Lecture example 4 (cont’d)
$000 $000
Cash flows from investing activities
Purchase of property, plant and equipment (W3) (146)
Net cash used in investing activities (146)
Cash flows from financing activities
Proceeds from issuance of share capital (320 – 260) 60
Proceeds from issuance of debentures (80 – 50) 30
Dividends paid (W2) (22)
Net cash from financing activities 68
Net increase in cash and cash equivalents 21
Cash and cash equivalents at beginning of year (14)
Cash and cash equivalents at end of year 7
notes reference - page 254

40. Note to the cash flow statement
Cash and cash equivalents
31.12.X X7
$’000 $’000
Cash on hand 7 -
Bank overdraft - (14)
Cash and cash equivalents 7 (14)
notes reference - page 254

41. Lecture example 5 Angus Ltd
Cash flow statement for the year ended 31 December 20X0 $ $
Operating activities
Cash received from customers
(54,000 – 6,700)
47,300
Cash paid to suppliers
(31,000 – 2,500)
(28,500)
Cash paid to & on behalf of employees
(15,000)
Interest paid
(11/12 x 4,800)
(4,400)
(600)
Net cash inflow from operating activities
Cash flow from investing activities
Payments to acquire tangible fixed assets
(40,000)
Cash flow from financing activities
Proceeds from long-term loan
60,000
Issue of ordinary shares
50,000
Repayment of loan
(6,000)
104,000
Increase
in cash balances
63,400
notes reference - page 256

42. Lecture example 5 part (b)
This cash flow statement has been prepared using the
direct
method
notes reference - page 256

43. Income and Expenditure Accounts
Chapter 24
Income and Expenditure Accounts

44. Sources of income Main source of income = subscriptions
Subscriptions received and receivable must
be recorded in the correct period
Subscriptions income in I&E account
= Number of members x membership fees
notes reference - page 263

45. Lecture example 1 Subscriptions account Opening receivables (5 x $100)
500
Opening payables
(2 x $200)
400
(subs in arrears b/d)
(subs in advance b/d)
I & E a/c (subs income)
4,700
Cash
6,000
Closing receivables
(10 x $200)
2,000
Closing payables
(4 x $200)
800
(subs in arrears c/d)
(subs in advance c/d)
7,200
notes reference - page 263

46. notes reference - page 265

47. notes reference - page 265

48. Proforma
notes reference - page 265

49. Life membership subscription
On receipt of the money
Dr Cash
Cr Life membership fund
Two methods of accounting
for life membership sub
T/f to Acc Fund on death of member
Dr Life membership fund
Cr Accumulated fund
Release to I&E a/c over life of member
Dr Life membership fund
Cr I&E account
notes reference - page 266

50. Bar profits & social events
notes reference - page 267

51. Disposal of fixed assets
Non current asset
disposal
Asset had been
depreciated
Asset had not been
depreciated
T/f profit/loss
to I&E a/c
T/f profit/loss
to acc fund
notes reference - page 267

52. Investments & special funds
Investment income recorded in I&E a/c
Profit/loss on sale of investment goes to acc fund
Special fund e.g. to raise money for new boat house
Dr Special fund cash
Cr Special fund account
notes reference - page 267

53. End of day 6 - what to do now…
Reinforce today’s learning
Develop question skills
Course Companion
1.Course notes review
2. Question practice
3. Study text review