Financial Accounting: Income Statement, Statement of Financial Position, Inventory Valuation, Receivables and Payables Control Accounts

This article covers various topics related to financial accounting, including income statement, statement of financial position, inventory valuation, and receivables and payables control accounts. It provides solved examples and explanations of each topic. The article is relevant for students studying financial accounting in any college or university.

FINANCIAL ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................1

QUESTION 1
a)
Winston Income Statement
For the year ended 31st December 2018
Particulars Details Amount
Sales Revenue 251800
Less Cost of Sales:
Opening stock 84300
Add Purchase less purchase return
(119850 - 850)
119000
Add Carriage inward 1000
Less Closing stock (91600)
(112700)
Gross Profit 139100
Decrease in allowance for receivable 600
Recovered debt 100
Operating profit 139800
Less Operating expense:
Vehicle expense - prepaid expense 5550
(6000 - 450)
Agent commission + closing
outstanding
2518
(1800 + 718)
Wages and Salaries + closing
outstanding
42000
(40000 + 2000)
Electricity + closing electricity
outstanding – opening owing
5200
(4800 + 1200 - 800)
Interest on loan/ payable 12000
Irrecoverable debt 1100
Depreciation on fixtures 10000
(20000* 50%)
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Depreciation on Vehicle 18500
(74000*25%)
Depreciation on Premises 4000
(400000/100)
Depreciation on Plant 20000
(200000* 10%)
Loss on sale of vehicle 4000
(124868)
Net Profit 14932
Winston Statement of Financial Position
As at 31st December 2018
Particulars Details Amount
Assets
Fixed assets:
Vehicle 80000
Fixtures 40000
Plant & equipment 200000
Premises 400000
Total 720000
Current assets:
Account receivable 25000 + 600 25600
Prepaid vehicle expense 450
Bank 43400
(41000 + 5000 - 2600)
Closing Inventory 91600
Total 161050
Total Assets 881050
Liabilities
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Current liability:
Accounts payable 17300
Interest payable 12000
Electricity payable 1200
Suspense account 96400
Wages and salaries payable 2000
Agent commission payable 718
Provision for depreciation: fixture 30000
(20000 + 10000)
Provision for depreciation: Vehicle 60500
Provision for depreciation: Plant &
equipment
140000
(120000 + 20000)
Provision for depreciation: Premises 44000
(40000 + 4000)
8% Bank Loan 150000
Total 554118
Capital:
Opening capital 345600
Add Net Profit 14932
Less Drawings (33600)
42000*80%
Total 326932
Total Liability 881050
Vehicle account
Particular Debit Particular Credit
Bal B/d 80000 Disposal 6000
Bal c/d 74000
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80000 80000
Provision for depreciation account
Particular Debit Particular Credit
Disposal 6000 Bal b/d 48000
P&L 18500
Bal c/d 60500
66500 66500
Disposal account
Particular Debit Particular Credit
Vehicle 15000 Depreciation 6000
Cash and bank 5000
Loss 4000
15000 15000
b)
Going concern assumption:
This is an assumption which state that the company will last forever. The concept of going
concern plays a significant role in the way assets are treated. The concept of depreciation and
amortization are based on the assumption that a business will continue to perform its operations
in the near future (this period is the next 12 months after an accounting period).
But this does not work in the case of joint venture and contact basis business. It is because they
exist only for specific period of time. For example; Road construction company have a project of
5 year than this exists only for 5 years.
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c)
Advantage of limited liability company:
 Separate and independent legal entity: A company has a separate, independent and
legal existence from its shareholders. This means that it has an identity of its own and can
work independently, accumulate assets and take on debt under its own name. It can even
own immovable property like real estate or buildings.
 Limited liability: The shareholders have limited liability in case the company is sued for
any debts or other encumbrances. The shareholder’s liability is limited to the amount
unpaid on his or her shares.
 Equal rights of ownership: The total ownership of the company is denoted by its share
capital. This is divided into a number of shares, each with equal nominal value. Each of
these shares offers an equal right of ownership.
 Transferability of shares: Any shareholder can transfer his or her ownership by simply
transferring the shares to another person. If the shareholder sells off his or her shares,
then the buyer acquires the same rights of ownership as the original shareholder. This
feature helps the company survive well beyond the lifetime of the shareholder.
Question: B1
a) Calculation of Closing Inventory
(i) First in First out method
Date Material Bought Material Issued Balance
Unit
Cost
Unit
s value Unit Cost
Unit
s value Unit Cost
Unit
s value
17, January 2021 300 20 6,000 300 20 6,000
4, March 2021 350 15 5,250 300 20 6,000
350 15 5,250
9, July 2021 300 10 3000 300 10 3000
350 15 5250
17, September
2021 400 30 12,000 300 10 3000
350 15 5250
400 30 12000
11, December
2021 300 10 3000
350 15 5250
400 15 6000 400 15 6000
Purchases 23,250 Sales
3750
0 Closing inventory 6000
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(ii) Average (AVCO) method
Date Material Bought Material Issued Balance
Unit
Cost
Unit
s value
Unit
Cost
Unit
s value
Unit
Cost Units value
17, January 2021 300 20 6,000 300 20 6000
4, March 2021 350 15 5,250 321.43
3
5 11,250
9, July 2021 321.43 10 3214.3 321.43 25 8,035.71
17, September
2021 400 30 12,000 364.29 55 20,035.71
11, December
2021 364.29 40
14571.
4 364.29 15 5,464.29
Purchases 23,250 Sales 37500 Closing Inventory 5464.29
b) Calculation of gross Profit
(i) First In First Out method
Gross Profit = Sales + Closing Stock – Purchases = 37500 + 6000 – 23250 = 20250
(ii) AVCO method
Gross Profit = 37500 + 5464.29 – 23250 = 19714.29
Profit figure differs between the two methods due to the difference in the value of inventory
obtained by applying two different techniques of inventory valuation. First in first out method
involves inclusion of higher cost of material in the closing stock as the lower costing inventories
are issued first due to its earlier arrival into the stock of the company. While AVCO is an
averaging technique which wipes out the effect of increased cost of inventory and thus leads to
comparatively lower value of inventory. Therefore, when closing stock is higher in value in case
of FIFO method there are higher gross profits and when the value of closing stock is lower in
case of AVCO method there are comparatively lower gross profits.
c) Reasons when product’s NRV is lower than its cost
1. Goods become obsolete
2. Cost increases or sales price dropped.
3. Arrival of new product results in poor demand of the existing products.
QUESTION B3
a)
(I) Receivables Control Account
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Particulars Amount Particulars Amount
Balance B/d 8740 Balance b/d 110
Sales 63950 Cash received from trade
receivables
50800
Return inwards 1100
Bad debts 260
Contra 225
Allowances to customers 175
Amended balance 20020
72690 72690
(ii)Payables Control Account
Particulars Amount Particulars Amount
Balance b/d 90 Balance B/d 4900
Cash to trade suppliers 34950 Purchases 37700
Discount received 980
Return outwards 440 Cash received 90
Amended balance 6230
42690 42690
b)
i) Materiality means any important transaction or event in the context of financial statement
which affects the decision making of the user of the financial statement. That’s why the company
need to resolve it in order to reflect the true and fair view of the financial statement of the
business. The concept of materiality is relative in size and importance. Some financial
information might be material to one company but might be immaterial to another. This is
somewhat obvious when you think about a small company verses a large company.
ii) The example of materiality is:
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A company has a building in a location where the government has announced to start their own
project and want to destroy it. The company after analysing and calculating has found out that
the company will have extra ordinary loss of $500000. The company has a net income of
$1000000. The materiality concept states that this loss is material because the average financial
statement user would definitely be concerned with something that is 50% of net income. That’s
why the company have to disclose this event under the foots to note account.
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REFERENCES
Books and journals
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