Introduction to Financial Accounting: Income Statement, Statement of Change in Equity, and Balance Sheet

This article covers the preparation of income statement, statement of change in equity, and balance sheet with examples and working notes. It includes solved assignments and essays on financial accounting for students. The article also discusses the key causes of fall in cash held by Mop Limited and the reconciliation of accounts payable control account.

INTRODUCTION TO
FINANCIAL ACCOUNTING

TABLE OF CONTENTS
Question 1........................................................................................................................................3
(a) Preparation of Income Statement and comprehension income statement.............................3
(b) Preparation of statement of change in equity........................................................................4
(c) Preparation of Orb's balance sheet at 31st December 2020...................................................5
Question 2........................................................................................................................................6
Question 3........................................................................................................................................8

Question 1
(a) Preparation of Income Statement and comprehension income statement
Orb's Income Statement (including comprehension income)
For the year ended 31st December 2020
Particulars Details 000 Amount (£) 000
Sales Revenue 5400
Less Cost of sale:
Opening inventory 730
Add Purchase 2950
Add Depreciation on building (note 2) 78
Add depreciation on plant and equipment (note
2)
190
Less Closing inventory 0 -3948
Add recoverable amount Loss of Stock 570
Gross Profit 2022
Operating Income
Allowances for impairment receivables 50
Operating Expenses
Administrative expenses (Note 1) 620
Distribution cost (Note 3) 400
Unrecoverable amount on loss of stock (900 -
570)
330
Research and development (note 4) 120 1470
Net profit before interest and expenses 602
Less Interest expenses -120

Net profit before tax 482
Less Provision on income tax -280
Net profit 202
Add comprehension income 0
Comprehensive income 202
Working Notes:
Note 1
Administration expenses + allowances for receivable recovered - Survey fees + closing accrual
expenses
= 500 + 20 – 40 + 140 = 620
Note 2
Depreciation on Building = 1960/ 25 = 78 (approx)
Depreciation on plant and equipment = 1600 – 650 = 950 * 20% = 190
Note 3
Distribution cost – closing prepayments
= 480 – 80 = 400
Note 4
Research and development expenses – expense on development
620 – 500 = 120
The expenses on research is only allowable expenses to the company not development because
the future product has yet not viable and feasible.
(b) Preparation of statement of change in equity
Particulars Details Amount (£) 000

Ordinary shares of 0.50 each 800
Right issue shares 800/ 0.50 = 1600 share / 4
= 400 shares @ 0.50
200
Share Premium including share premium on
right issue (400 * 0.10)
130 + 40 170
Retained earning opening 890
Net profit 202
Less Dividend paid -60
Closing balance of equity 2202
(c) Preparation of Orb's balance sheet at 31st December 2020
Particulars Details Amounts (£)
ASSETS:
Non-current assets
Plant and equipment 1600
Building 1960
Current assets
Bank a/c Opening + right issue +
receivable allowance
recoverable + loss of stock
recoverable
(550 + 240 + 20 + 570)
1380
Trade receivables 360
Prepayments 80
Total 5380

Equity and liabilities
Current liabilities
Trade payables 410
Accumulated depreciation on
plant and equipment
650 + 190 840
Accumulated depreciation on
building
400 + 78 478
accruals 140
Non-current liabilities
10% loan 1200
Equities (closing balance as
per statement)
2202
Total 5380
Question 2
Mop Ltd
Statement of Cash flows for year ended 31 December 2020
Particulars Amount in £ Amount in £
Cash flow from operating activities
Profit before tax 19100
Adjustments:
Add: Interest expenses 5900
Add: Depreciation 9000
Add: loss on sale of equipment WN1 12000
Add: Non – cash provision 1000

Operating profit before changes in working capital
Increase in inventory -1200
Increase in trade receivables -2600
Increase in trade payables 18600
Cash flow from operations 61800
Less: Income tax paid (9000 + 4000 – 6400) -6600
Net Cash flow from operating activities 55200
Cash flow from investing activities
Purchase of equipment WN1 -107000
Sale of equipment WN1 16000
Net cash used in investing activities -91000
Cash flow from financing activities
Receipt from the issue of new shares WN2 30000
Repayment of 10% loan notes WN3 -10000
Receipt from 8% loan notes WN 3 10000
Less:
Dividend paid WN 4 -5700
Interest paid -5900
Bank overdraft 5600
Net cash flow from financing activities 24000
Decrease in cash and cash equivalents -11800
Cash and cash equivalents at the beginning 11800
Cash and cash equivalents in the end 0
Working notes:
1. Property plant and equipment Account
Particulars Amount Particulars Amount
Opening balance 130000 Depreciation charged 9000
Bank (Sale of equipment) 16000
Purchase of equipment 107000 Loss on sale of equipment 12000

(Balancing figure)
Balance carry forward 200000
2. Shares issued
Beginning of the year = 56000
Shares issued during the year (84000 – 56000) = 28000
End of the year = 84000
Share premium
Balance in the beginning of the year = 22000
Premium received during the year (24000 – 22000) = 2000
Balance at the end of the year = 24000
Total cash receipts from share issue = 28000 + 2000 = 30000
3. Repayment of 10% loan notes and receipt from 8% loan notes
loan repaid = 60000 – 42000
=18000 – amount transfer to current liabilities
= 18000 – 8000 = 10000 (cash outflow)
Cash receipts from 8% loan notes = 10000
4. Retained earnings
Retained earnings in the beginning = 20000
Add: Profit for the year = 15100
Dividend paid (Balancing figure) = 5700
Retained earnings at the end of the year = 29400
b. Key causes of fall in the cash held by Mop limited are as follows:
 Increase in investment in inventories
 Increase in trade receivables between two years which indicates that the company is
facing difficulty in collecting payments from its debtors.

Question 3
a.
Accounts payable control account
Particulars Amount Particulars Amount

Balance brought forward 36000
Purchase day book overcast 700 Invoice omitted 4000
Wrong recording of payment
(940 - 490)
450 Invoice for purchases
wrongly recorded in
purchases returns (2 * 320)
640
Contra entry (cancelling
credit balance with debit
balance)
3300 Payment of invoice made
twice
550
Balance carried forward 36740
41190 41190
b. Reconciliation of the list of balances to the corrected balance on the payables control account
Total of list of individual supplier's balances = 43500
Add: invoice wrongly recorded = 640
Add: Twice payment of invoice = 550
Less: Wrong amount recorded for payment = -450
Less: Contra transaction = -3300
Less: Discount received should be recorded as debit balance (2 * 2100) = -4200
Final balance on the Payables control account = 36740