Acf100 Week 7 - Preparing financial statements

• Other areas to practice


  • Double-entry and journals for adjustments
  • Which items usually have a debit or credit balance
  • Key definitions and concepts from Weeks 1 and 2
  • Accruals
  • Prepayments
  • Depreciation/non-current assets
  • Bad and doubtful debts
  • Cost of sales and inventory
• The test will be very time-pressured and you may not finish
• When preparing financial statements from a TB, some of the numbers don't need adjusting, and these numbers can be put into the statements straight away
• You have 100 marks in 60 minutes, this means you should spend 6 minutes on a 10 mark question and 9 minutes on a 15 mark question
• Lecture outline


  • Preparing the financial statements
  • How to incorporate all the adjustments studied so far to produce a statement of profit or loss and a statement of financial position
  • How to show your workings and answer a question (useful for Week 9 test)
  • Internal controls in the accounting system
• Internal controls are used to protect a business from financial mistakes and fraud
• Examples of internal controls


  • Bank reconciliations
  • Control accounts
  • Identifying errors in the trial balance which do and do not cause the trial balance to disagree
  • Use of suspense accounts where the trial balance disagrees
• Preparing the financial statements – one method


  1. Balance off and close ledger accounts at the period end

  2. List all balances in the initial trial balance and check debit and credits are equal

  3. Make adjustments to the trial balance

  4. Prepare financial statements
• Cost of sales (COGS)


  The cost of the inventory sold during the year
• Adjustment for cost of sales, opening and closing inventory


  Adjust inventory to its end of year value and calculate GOGS
• Accruals (accrued expenses)


  Expense that has been used but not paid for at the year end
• Prepayments (prepaid expenses)


  Expense that has been paid for but not used at the year end
• Adjustment for Depreciation (accumulated depreciation)


  1. Calculate this year's depreciation expense and include it in the Income statement

  2. Add this year's depreciation to accumulated depreciation brought forward and include the total in the Balance sheet
• Adjustment for Allowance/Provision for doubtful debts


  1. Calculate the change in the allowance/provision for doubtful debts in the year

  2. Add (deduct) the increase (decrease) in the provision to last year's provision in the I/S
• You can use journals to record the adjustments and post these to a final TB, or use T accounts, or use direct calculations
• For tests and exams, we don't require a specific method of making adjustments but we do require you to show clear workings
• Steps for preparing the financial statements


  1. Go through the additional information and calculate the adjustments required

  2. Produce blank financial statements and add in the adjusted figures

  3. Calculate the profit for the year and add it to retained profit in the balance sheet

  4. Check if the balance sheet balances and use your workings to identify any mistakes
• Cost of sales (COGS) = opening inventory + purchases – closing inventory
• Depreciation expense = 25% x £700m = £175m
• Insurance expense = OB Prepayments + Payments – CB Prepayments
• Rent expense = CB Accrual + Payments – OB Accrual
• Retained profits at beginning + profit for year from I/S – dividend or drawings
• Non-current assets


  Assets that are not expected to be converted into cash within one year
• Cost


  The original purchase price of an asset
• Acc dep


  Accumulated depreciation - the total amount of depreciation charged on an asset over its useful life
• NBV


  Net book value - the cost of an asset minus its accumulated depreciation
• Current assets


  Assets that are expected to be converted into cash within one year
• Inventory


  Goods held for resale
• Trade receivables


  Amounts owed to the business by customers for goods/services provided on credit
• Prepayment


  An expense paid in advance
• Cash


  Money available to the business
• Current liabilities


  Debts that are due to be paid within one year
• Trade payables


  Amounts owed by the business to suppliers for goods/services received on credit
• Accrual


  An expense that has been incurred but not yet paid
• Net current assets


  Current assets minus current liabilities
• Net assets


  Non-current assets minus non-current liabilities
• Equity


  The capital of the business, including share capital and retained profits
• Share capital


  The total value of shares issued by the company
• Retained profits


  Profits retained in the business rather than distributed as dividends
• Calculate retained profit for B/S


  Retained profits at beginning + profit for year from I/S - dividend or drawings