ADVANCED ACCOUNTING

HANDOUT THREE

PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

Introduction

The Main purpose of this chapter is to explain the requirements of international accounting
standards IAS1 presentation of financial statements. The objective of IAS 1 is to simplify the
overall structure and content of general purpose financial statements and ensure that an
entity’s financial statements for a reporting period are comparable with those of other periods
and with those of other entities.

Learning objectives

At the end of the chapter, students should be able to

 Identify the components of a complete set of financial statements

 Explain the general features of a set of financial statements
 Explain the structure and content of each component of a set of financial statements
 Distinguish between current and non-current assets and between current and non-
current liabilities
 Prepare statement of financial position, a statement of comprehensive income and a
statement of changes in equity, in accordance with the requirements of IAS 1

PREPARATION AND PRESENTATION OF FINACIAL STEMENTS

The preparation and presentation of financial statements is made with the man aim of
conveying information to interested users. The preparation of such statements follows the
application of international accounting standards 1 (IAS1)

Requirements of IAS 1

Financial statements should be clearly identified and distinguished from other information in
the same published document

Each component of the financial statements should be clearly identified. In addition, the
following should be prominently displayed and repeated if necessary for the proper
understanding of the information presented

i). The name of the reporting enterprise or other means of identification

ii). Whether the financial statements cover the individual enterprise or a group of
enterprises
iii). The balance sheet date or the period covered by the financial statements, whichever is
appropriate to the related component of financial statements
iv). the reporting currency
v). The level of precision used in the presentation of figures in the financial statements
In connection with the reporting period, financial statements should least be presented
annually? In case of any changes, then the enterprise should disclose in addition to the period
covered by the financial statements

The reason for a period other than one year being used

Components of financial statements

A complete set of financial statements should include the following components

 Statement of financial position (balance sheet)

 Statement of comprehensive income (income statement)
 Statement of cash flows
 Statement showing either
i All changes in equity or
ii Changes in equity other than raising from capital transactions with owners and
distributors to owners
 Accounting policies and explanatory notes

Statement of financial position

IAS 1 provides guidance on the clarification of assets and liabilities appearing in the
balance sheet

ASSETS

Assets are classified as resources owned by the company or individual or entity and
which have future economic value that can be measured and can be expressed in
monetary terms with the expectation that it will provide a future economic benefit. They
are classified as non-current and current assets. A current asset is one that is expected to
be held for sale, consumption or realized in the normal course of the enterprises operating
cycle

While non-current assets include tangible and intangible, operating and financial assets of
the long term nature. Assets are expected to be used in generating revenue

LIABILITIES

These are future sacrifices of economic benefits that the entity is obliged to make to other
entities as a result of past transactions or other past events, the settlement of it may result
in the transfer or use of assets, provision of services or other yielding of economic
benefits in future

A liability should be classified as a current liability when it’s expected to be settled in the
normal course of the enterprise’s operating cycle or due to be settled within 12 months of
the balance sheet date

All the other liabilities are classified us non-current liabilities

The balance sheet format should be as under

ABC GROUP

STATEMENT OF FINANCIAL POSITION

AS AT 31st DECEMBER 2020

UGX 2020 UGX 2019

ASSETS
NON-CURRENT ASSETS
Property plant and equipment Xxx Xxx
Goodwill Xxx Xxx
Other intangible assets Xxx Xxx
Other financial assets Xxx Xxx
Total non-current assets Xxx Xxx

Current Assets
Inventories Xxx Xxx
Trade Receivables Xxx Xxx
Other receivables Xxx Xxx
Cash and Cash Equivalents Xxx Xxx
Prepayments Xxx Xxx
Total Current Assets Xxx Xxx
TOTAL ASSETS Xxx Xxx

EQUITY AND LIABILITIES

Capital and reserves
Share Capital Xxx Xxx
Retained Earnings Reserves Xxx Xxx
Other Component of Equity Xxx Xxx
Total Reserves and Equity Xxx Xxx

Liabilities
Non-Current Liabilities
Long Term Loans Xxx Xxx
Bonds Xxx Xxx
Debentures Xxx Xxx
Preferred Shares Xxx Xxx
Commercial Papers Xxx Xxx
Total Non- current Liabilities Xxx Xxx

Current liabilities
Trade and other receivables Xxx Xxx
 Bank Overdraft Xxx Xxx
Accrued Expenses Xxx Xxx
Short term Borrowings Xxx Xxx
Short Term Provisions Xxx Xxx
Total Current Liabilities Xxx Xxx
TOTAL EQUITY AND LIABILITIES Xxx Xxx

Statement of comprehensive income (Income Statement)

IAS 1 provides for two formats classifying cost, i.e. classification by function (cost sales
method) and classification by nature. The functional classification is preferred but nature of
expenses method may be ideal for manufacturing organizations

The statement of comprehensive income is usually prepared to show the firm’s level of
performance and the following format should be applied as per IAS 1

Classification of expenses by function

ABC GROUP

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED DECEMBER 2020

UGX 2020 UGX 2019

Revenue Xxx Xxx
Cost Of Sales (xxx) (xxx)
Gross Profit Xxx Xxx
Add: Other Operating incomes Xxx Xxx
Gross Income Xxx Xxx
Distribution Costs (xxx) (Xxx)
Administrative Costs (xxx) (Xxx)
Profit From Operations Xxx Xxx
Finance Costs (xxx) (Xxx)
Income from Associates Xxx Xxx
Profit Before Tax (PBT) Xxx Xxx
Income tax Expense (xxx) (Xxx)
Profit After Tax (PAT) Xxx Xxx
Minority interest (xxx) (Xxx)
Net profit from ordinary activities Xxx Xxx
Extra ordinary terms Xxx Xxx
Net profit/Loss for the period Xxx/(xxx) Xxx/(xxx
Statement of changes in equity

We have sofer seen the formats of the statement of financial position and statement of
comprehensive income now let’s look at the statement of changes in equity

Statement of changes in equity usually shows the movements during the period in all
capital reserves headings which total make up equity of the enterprise. The statement
follows the format below

ABC GROUP

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR TO 31/12/2020

Share capital Retained Revaluation Total Equity

Earnings Reserve
Details UGX “000” UGX UGX “000” UGX “000”
“000”
Bal. at 31/12/2018 Xxx xxx xxx xxx
Changes in equity for 2019
Total comprehensive income xxx xxx
Dividends (xxx) (xxx)
Bal.at 31/12/2019 Xxx xxx xxx xxx

Bal.at 31/12/2019 Xxx xxx xxx xxx

Changes in equity for 2020
Changes in accounting policy xxx xxx
Restated balance Xxx xxx xxx xxx
Issue of share capital Xxx xxx
Revaluation of buildings xxx xxx
Total comprehensive income xxx xxx xxx
Dividends (xxx) (xxx)
Bal. at 31/12/2020 Xxx xxx xxx xxx

Note:

The statement covers two years so that comparative figures can be available. The
adjustments to the operating figures for changes in accounting policy appear first. The
correction of a fundamental error would appear in the same position

The company changed an accounting policy in the year 31/12/2020 and it necessitated an
adjustment to retained earnings brought forward

Other changes in equity during 2020 were as follows

  Share capital increased because of the share issue during the year
 Retained earnings were increased by the profit for the year but were reduced by
dividends paid to shareholders
 The revaluation reserve increased because there was revaluation gain of property
(buildings) during the year. This gain would have been put in the statement of
comprehensive income as other comprehensive income

ILLUSTRATION

The following income statement for the year ended 31/03/2018 has been prepared by the
management of Ople

Details $ 000 Details $ 000

Opening Inventory 500 Sales Revenue 8,500
Purchases 4,400 Closing Inventory 700
Gross profit c/d 4,300
9,200 9,200
Auditors Remuneration 50 Gross Profit b/d 4300
Depreciation: Dividends Received 240
Delivery Van 40
Office Furniture 20
Plant & Machinery 85
Directors Salaries 95
Distribution Salaries 425
Distribution Expenses 970
Hire of plant and machinery 15
Office Expenses 190
Legal Expenses 35
Rent (Ware house) 65
Wages and Salaries 1,200
Net Profit c/d 1,350
4,540 4,540
Provision for tax 380 Net Profit b/d 1,350
Over provision of 30
previous year’s tax
Net Profit After Tax 1,000
1,380 1,380
Additional information

Wages and salaries (other than those for directors) are to be apportioned as follows

 Distribution 80%
 Office Expenses 20%

You are required:

Prepare Ople’s statement of comprehensive income for the year ended 31/03/2018 in
accordance with the requirements of international accounting Standards 1 (IAS 1) using
the function of expenditure method.

SOLUTION

OPLE’S

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31/03/2018

Notes $ 000 $ 000

Sales Revenue 8,500
Cost of Sales (working) 1 (5,270)
Gross Profit 3,230
Distribution Costs (working) 1 (1,490)
Administrative Costs (working) 1 (630)
Operating profit 1,110
Income from investments 240
Profit before tax 1350
Tax based on profit of the year 380
Over- provision for previous year (30) 350
Net profit for the year 1,000
Analysis of costs

Working 1

Details Cost Of Sales Distribution Admn

$ 000 $ 000 $ 000
Purchases (500+4,400-700) 4,200
Audit 50
Depreciation 85 40 20
Salaries 95
Distribution 425
Factory Expenses 970
Hire 15
office expenses 190
Legal expenses 35
Ware house Rent 65
Wages 0:80:20 960 240
5,270 1,490 630
EXAMPLE ONE

BAF 3 Ltd deals in general merchandise. 0n 31/3/2019, the following trail balance was
extracted from their ledger. The authorized share capital is 15,000 ordinary shares of
UGX. 10,000 @

You are required to prepare a statement of comprehensive income and a statement of

financial position together with the accompanying notes in accordance with IAS 1 and
other relevant standards

Details UGX 000 UGX 000

Ordinary Share Capital 10,000
6% Preference Shares 50,000
Land 50,000
Buildings (Cost) 60,000
Motor Vehicle (Cost) 30,000
Accumulated Depreciation
Buildings 12,000
Motor vehicles 5,000
Patents Note 8 30,000
Debtors and Creditors 7,000
Cash 4,600
Bank 1,280
Stock (1/4/2018) 5,200
Goodwill note 8 550
Insurance 1,400
Travel and subsistence 450
Rent note 5 1,200 3,300
Provision for bad debts 1/4/2018 400
7% Debentures 10,000
Purchases 120,000
Carriage inwards 1,700
Carriage Outwards 1,300
Salaries 4,000
Discounts 120 240
Bad Debts 100
Returns 1,500 700
Sales 200,000
License fine 10,000
Retained earnings 1/4/2015 20,000
General reserve 200
Pension Scheme 14,500
 329,120 329,120

Additional information

1. Stock was valued at 31/3/2019 at 7,500,000

2. Included in the respective figures is input VAT of 14,000,000 and output VAT OF
UGX 12,000,000
3. Depreciation is charged using reducing balance method at the following rates
i Buildings 5%
ii Motor vehicle 10%
4. March Salaries 2019 amounting to 1,000,000 were prepaid on 3/4/2019
5. The rent expense was paid for a period up to 30/9/2019
6. Direct write off of bad debts of 200,000 should be made while provision for doubtful
debts should be 5% of debtors
7. The directors proposed to pay preference and ordinary dividend of UGX. 10 per share
8. Goodwill and patent should be amortized over a period of 4 years counting from the
1/4/2018
9. The pension fund is in respect of in house pension scheme operated by company for
the employees
10. The company is involved in environmental projects countywide aimed at conserving
the environment and it offers equal employment opportunities to men and women
11. Debenture interest is outstanding
12. The company was fined for delaying to license the operations of the company as per
the regulations
EXAMPLE TWO:

The following trial balance has been extracted from the books of Wava Company as at
31/03/2018

Details Dr Cr
UGX “000” UGX “000”
Land at cost 120
Building at cost 250
Equipment at cost 196
Vehicle at cost 284
Goodwill cost 300
Accumulated Depreciation at 1/4/2017
Buildings 90
Equipment 76
Vehicles 132
Inventory at 1/4/2017 107
Trade receivables and payables 183 117
Allowance for allowance 8
Bank Balance 57
Corporation Tax 6
Ordinary Shares of 1/= each 200
Retained Earnings at 1/4/2017 503
Sales 1,432
Purchases 488
Directors Fees 150
Wages and Salaries 276
General distribution costs 101
General Administrative expenses 186
Dividend Paid 20
Dividend Received 30
Disposal Of vehicle 10
2,661 2,661

The following information is also available:

1) The company’s non-depreciable land was valued at 300,000/= on 31/3/2018 and this
valuation is to be incorporated into the accounts for the year to 31/3/2018
2) The company’s depreciation policy is as follows
Buildings 4% P.a straight line
 Equipment 40% P.a reducing balance
Vehicles 25% P.a straight line
3) On 1st February 2018, a vehicle used entirely for administrative purposes was sold for
10,000/=. The sale proceeds were banked and credited to a disposal account but no
other entries were made in relation to the disposal. The vehicle had cost 44,000/= in
august 2014. This was the only disposal of non-current asset made during the year to
31st march 2018
4) Depreciation is apportioned as follows

Details Distribution costs Administrative expenses

Buildings 50% 50%
Equipment 25% 75%
Vehicles 70% 30%
5) The company’s inventory at 31 March 2018 is valued at 119,000
6) Trade receivables include a debt of 8,000/=which is to be written off. the allowance
for receivables is to be adjusted to 4% of the receivables which remain after this debt
has been written off
7) Corporation tax for the year to 31 March 2017 was over estimated by 6,000/=. The
corporation tax liability for the year to 31 march 2018 is estimated to be 30,000/=
8) One-quarter of wages and salaries were paid to distribution staff and the remaining
three-Quarters were to administrative staff
9) General administrative expenses include bank overdraft interest of 9,000/=
10) A dividend of 10% per ordinary share was paid on 31 December 2017. No further
dividends are proposed for the year 31 March 2018

Required

Prepare the following financial statements for wava Company in accordance with the
requirements of international accounting standards.

a) A statement of comprehensive income for the year to 31 March 2018

b) A statement of financial position as at 31 March 2018
c) Statement of changes in equity for the year 31 March 2018

The end, Thank you

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