Financial statement

Financial Statement Analysis

Table of Contents

Contents

Table of Contents​2

Requirement 1​3

Requirement 2​6

Requirement 3​7

Requirement 4​9

Requirement 5​13

Requirement 6​13

References​14

Requirement 1

Journal entry is the first way to record any transaction. This records transactions in chronological order (WILSON et al., 2010). Process of recoding any transaction starts with journal and ends with financial statement preparation, further process come under the head of analysis of financial transactions. 

Required journal entries

Date	Particulars	Debit	Credit
2.	Sales	£445,000
	Unearned revenue		£445,000
	(Unearned revenue recognized)
3.	Interest Expenditure	£40,000
	Interest payable		£40,000
	(interest expenses recognized)
4.	Dividend expenditure	£50,000
	Dividends payable		£50,000
	(Dividend declared)
5.	Administration expenditure	£30,000
	Outstanding Administration expenditure		£30,000
	(wages recoded)
6.	Bad debts expenditure	£40,750
	Allowance for doubtful debts		£40,750
	(Allowance for doubtful debts recoded)
7.	Loss on inventory revaluation	£10,000
	Inventories		£10,000
	(Loss on inventory revaluation recognized)
8.(a)	Revaluation loss	£100,000
	Leasehold properties		£100,000
	(Revaluation of lease hold properties)
8(b)	sales revenue	£25,000
	Accumulated depreciation on equipment	£60,000
	Loss on sale of equipment	£15,000
	equipment		£100,000
	(Rectification entry passed for sale of equipment)
8(c)	Administration cost- Depreciation	£167,250
	Plant—accumulated depreciation		£66,000
	Equipment—accumulated depreciation		£31,250
	Leasehold property—accumulated depreciation		£70,000
	(Depreciation expenses recorded)
9	Capitalized development expenditure	£225,000
	Administration expenses		£225,000
	( Development cost capitalization rectification) Note: It is assumed that in cost of sales it is included in administration expenditure.
9	Amortization expenditure	£40,000
	Development expenditure accumulated amortization		£40,000
	(Amortization of capitalized development expenditure)

Requirement 2

Income statement is a part of financial statement; it shows the net profit earned by any organization during the period from its operating and non operating activities (Petersen and Plenborg, 2010). Income statement incorporates all revenue income and expenditure. It does not include assertions of capital nature.

Required income statement

Particulars	Amount	Amount
Sales		£4,925,000
Less: COGS
Inventories as at 01 January 2015	£765,000
Purchase (production costs)	£2,573,000
Less: inventories as at 31 December 2015	£ (815,000)
COGS		£2,523,000
Gross profit		£2,402,000
Distribution cost	£19,660
Administrative expenses	£110,250
Interest Expenditure	£40,000
Bad debts expenditure	£40,750
Revaluation loss	£100,000
Loss on sale of equipment	£15,000
Total expenditures expenditure		£255,660
Net profit		£2,076,340

Requirement 3

Balance sheet is a statement which shows the financial position of the organization (Dichev, n.d.). In balance sheet all assets and liabilities of any organization is presented. Balance sheet shows the figures of assets and liabilities of a specified date.

Required balance sheet 

Particulars	Amount	Amount
Assets
Current assets
Inventories		£815,000
Trade receivable	£815,000
Allowance for doubtful debts	£40,750	£774,250
Cash at bank		£249,000
Fixed assets
Land-cost		£3,900,000
Leasehold property—cost	£1,500,000
Leasehold property—accumulated depreciation	£70,000
Less: Revaluation	£100,000	£1,330,000
Plant—cost at 1 January 2005	£1,320,000
Plant—accumulated depreciation	£726,000	£594,000
Equipment—cost—cost at 1 January 2007	£250,000
Equipment—accumulated depreciation	£111,250	£138,750
Capitalized development expenditure—at 1 January 2015	£425,000
Development expenditure —accumulated amortization	£80,000	£345,000
		£8,146,000
Liabilities and shareholders’ equity
Current liabilities
Interest payable		£40,000
Unearned revenue		£445,000
Trade payable		£2,970,000
Outstanding Administration expenditure		£30,000
Long term liability
5% bank loan repayable 2018		£800,000
Shareholders’ equity
Share capital		£1,000,000
Share premium		£500,000
Dividends payable		£50,000
Retained earnings		£2,311,000
		£8,146,000

Requirement 4

Company can use any method out of historical cost or revaluation model for valuation of its fixed assets. In historical cost modal assets are shown with the cost accumulated cost, in revaluation modal assets are shown on the revalued value of asset and depreciation charged on for the remaining useful life of asset on the revalued value. Under revaluation method if due to revaluation asset value increased then revaluation reserve created and if asset value decreased then such deficit first charged from previous revaluation reserve of the same asset then charged as expense from the comprehensive income statement (Iasplus.com, 2017).

In the given question revaluation is done on 31 December 2014, which means remaining life of asset will be depreciated with this revalued amount. So, a journal entry for the revaluation of plant is passed on 31 December 2014, i.e.

Date	Particulars	Debit	Credit
31 Dec 2014	Plant—accumulated depreciation	£660,000
	Plant		£660,000
	(Accumulated depreciation charged from plant)
31 Dec 2014	Plant	£60,000
	Revaluation reserve		£60,000
	(Revaluation of plant recognized)

Remaining life of plant on 1 Jan 2015 is, 

Particulars	Description
Total life of plant	20 Years
Life expired	660000/66000= 10 Years
Remaining life	10 years

So, on 31 December 2015 depreciation will charged on £720,000 for next 10 years with straight line depreciation method, hence journal entry for depreciation of plant is,

Date	Particulars	Debit	Credit
31 Dec 2015	Administration cost- Depreciation	£72,000
	Plant—accumulated depreciation		£72000
	(Depreciation expenditure recognized)

Statement of comprehensive income also get effected from this revaluation hence new comprehensive income statement for year ended on 31 December 2015 is,

Particulars	Amount	Amount
Sales		£4,925,000
Less: COGS		£2,523,000
Gross profit		£2,402,000
Distribution cost	£19,660
Administrative expenses	£116,250
Interest Expenditure	£40,000
Bad debts expenditure	£40,750
Revaluation loss	£100,000
Loss on sale of equipment	£15,000
Other expenditure		£271,660
Net profit		£2,070,340

Statement of financial position will also show changes in some assertion hence the statement of financial position after recognizing revaluation will be,

Particulars	Amount	Amount
Assets
Current assets
Inventories		£815,000
Trade receivable	£815,000
Allowance for doubtful debts	£40,750	£774,250
Cash at bank		£249,000
Fixed assets
Land-cost		£3,900,000
Leasehold property—cost	£1,500,000
Leasehold property—accumulated depreciation	£70,000
Less: Revaluation	£100,000	£1,330,000
Plant—revalued value	£720,000
Plant—accumulated depreciation	£72,000	£ 648,000.00
Equipment—cost—cost at 1 January 2007	£250,000
Equipment—accumulated depreciation	£111,250	£138,750
Capitalized development expenditure—at 1 January 2015	£425,000
Development expenditure —accumulated amortization	£80,000	£345,000
		£8,200,000.00
Liabilities and shareholders’ equity
Current liabilities
Interest payable		£40,000
Unearned revenue		£445,000
Trade payable		£2,970,000
Outstanding Administration expenditure		£30,000
Long term liability
5% bank loan repayable 2018		£800,000
Shareholders’ equity
Share capital		£1,000,000
Share premium		£500,000
Dividends payable		£50,000
Revaluation reserve		£60,000.00
Retained earnings		£2,305,000.00
		£8,200,000.00

Requirement 5

As per IAS 16 depreciation is the way in which depreciable amount of any asset is allocated over the useful life of asset with a systematic allocation (Dichev, n.d.). Depreciable amount can be cost of asset or any other value which is used as a substitution of cost of asset, less salvage value of asset. In depreciation measurement two factors are most important one is useful economic life of asset and other is wearing out of asset.Additionally, useful life of asset does not refers to the life till which asset last it is the life till which asset produce same quantity of goods and services till same quality. As per IAS 16 almost every asset is having a finite useful life, but in real life it is very difficult to arrive at a finite certain useful life of any asset. 

Requirement 6

As per IAS 16 in cost model after the initial reorganization, asset is valued at the cost less depreciation till date and less and impairment loss recognized. As per the same standard under revaluation model, asset is shown at revalued amount i.e. fair value of asset on the date of revaluation less depreciation or impairment loss (Iasplus.com, 2017).

References

• S WILSON, E., RECK, J., KATTELUS, S. and Robbins, W. (2010). Accounting for Governmental and Nonprofit Entities. Issues in Accounting Education, 25(1), pp.176-177. doi: 10.2308/iace.2010.25.1.176

• Petersen, C. and Plenborg, T. (2010). Financial statement analysis. 1st ed. København: Thomson Reuters.

• Valand, P. (2011). A Study Of Financial Statement. Indian Journal of Applied Research, 1(12), pp.8-10.

• Dichev, I. (n.d.). On the Balance-Sheet Based Model of Financial Reporting. SSRN Electronic Journal, 22(4), pp.453-470. Doi: http://dx.doi.org/10.2308/acch.2008.22.4.453

• Iasplus.com. (2017). IAS 16 — Property, Plant and Equipment. [online] Available at: https://www.iasplus.com/en/standards/ias/ias16 [Accessed 8 Mar. 2017].

• Elliott, B. and Elliott, J. (n.d.). Financial accounting and reporting. 1st ed.

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