chapter 21 manufacturing accounts. slide 2 notes reference - page 229
TRANSCRIPT
Chapter 21
Manufacturing Accounts
Slide 2 notes reference - page 229
MANUFACTURING ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20X8
$ $ Raw materials Opening inventory X Purchases X X Less closing inventory (X) X
Factory wages X Prime cost X
Indirect factory expenses Salaries X Depreciation on plant and machinery X Power X Heating and lighting X Indirect materials X Insurance X X Factory cost of production X Work-in-progress Opening balance X Closing balance (X) X/(X) Factory cost of finished goods produced X
Slide 3 notes reference - page 229
TRADING ACCOUNT £ £
Sales X
Opening inventory of finished goods X Factory cost of finished goods transferred X X Closing inventory of finished goods (X) X Gross profit X
Slide 4 notes reference - page 230
Direct costs
Costs of production
Indirect costs
Variable
Vary with no. ofgoods produced& hours worked
e.g. raw materials& labour
Fixed
Not related toproduction ofa unit
e.g. rates
Slide 5 notes reference - page 230
Total direct costs
Costs of production
Total direct + indirect costs
Factory cost of production +/-
change in WIP
Prime costFactory costof production
Factory cost of finished goodsproduced
Slide 6 notes reference - page 232
Lecture example 1Manufacturing account for the year ended 31 December 20X1Raw materialsOpening inventory 7,630
Indirect factory expensesElectricity (4,620 x ½) 2,310Rent & rates (5,000 x ½) 2,500Supervisor’s salary 8,200Depreciation (plant & machinery) 4,700
Opening work in progress 4,920
Purchases 18,92026,550
Less closing inventory (7,890)18,660
17,71057,230Factory cost of production
57,610Factory cost of finished goods produced
Closing work in progress (4,540)380
Factory wages 20,86039,520Prime cost
Slide 7 notes reference - page 233
Lecture example 1Income Statement for the year ended 31 December 20X1
Selling & distribution costsElectricity (4,620 x ¼) 1,155Rent & rates (5,000 x ¼) 1,250Depreciation (delivery vans) 1,600Sales commissions 13,680
64,390
Factory cost of finished goods produced 57,610
Less closing inventory of finished goods (5,430)58,960
(37,685)
Opening inventory of finished goods 6,780Less cost of salesSales 181,820
122,860Gross profit
Salesmen’s salaries 20,000
Slide 8 notes reference - page 234
Lecture example 1
Administration expensesElectricity (4,620 x ¼) 1,155Rent & rates (5,000 x ¼) 1,250Salaries (41,630 – 8,200) 33,430Depreciation (fixtures & fittings) 1,420
(37,255)
47,920Net Profit
Chapter 22
Interpretation of accounts
Slide 10 notes reference - page 239
Categories
Profitability Liquidity
Investors’ ratios
Gearing
Slide 11 notes reference - page 241
Profitability
ROCE
Profits earned in relation tocapital employed
Return on equity
Return to ordinary shareholders
Asset turnover
Revenuegenerated by assets
employed
NPM/GPM
Relationship between costs and
revenue
Profitability
Slide 12 notes reference - page 241
Lecture example 1 Profitability
790 3655-965
= 29% 462 1,801
= 25%
20X9 20X8
Possible reason:
New non-current assets may have improved efficiency
Return on capital employed(ROCE)
Profit from operations % TALCL
Slide 13 notes reference - page 241
Lecture example 1 Profitability
478 2,190
= 21.8% 266 1,401
= 19%
20X9 20X8
Possible reason:
Good use of extra capital raised
Return on equity (ROE)PAT – preference div OSC + reserves
Slide 14 notes reference - page 241
Lecture example 1 Profitability
7,1802,690
= 2.7 5,4351,801
= 3.02
20X9 20X8
Possible reason:
New non-current assets bought in year have not had time to create the same rate of revenue
Asset turnover
Revenue TALCL
Slide 15 notes reference - page 241
Lecture example 1 Profitability
Profit from operations % Revenue
Net profit margin
790 7,180
= 11% 462 5,435
= 8.5%
20X9 20X8
Possible reasons:
Higher selling pricesBetter cost control
Slide 16 notes reference - page 241
Lecture example 1 Profitability
Gross profit % Revenue
Gross profit margin
1,7957,180
= 25% 1,2235,435
= 22.5%
20X9 20X8
Possible reasons:
Higher selling pricesBetter cost/production control
Slide 17 notes reference - page 241
Liquidity
Current ratio
Ability to meet short term commitments
Average collection period
Credit period taken by customers
Inventory days
Average period thatInventories are held
Average paymentperiod
Credit period takenby the business
Quick ratio
Stricter test of liquidity
Liquidity
Slide 18 notes reference - page 241
Lecture example 1 Liquidity
2,314 965
= 2.4 1,679 704
= 2.4
20X9 20X8
Comment
A healthy unchanged ratio. Depends on the industry so comparisons are necessary.
1 Current ratio
CA CL
Slide 19 notes reference - page 241
Lecture example 1 Liquidity
1,308 965
= 1.4 808704
= 1.1
20X9 20X8
CommentThe company’s acid ratio has improved due to an increase in receivables and cash, not inventories
2 Quick ratio
CA - inventories CL
Slide 20 notes reference - page 241
Inventories x 365 days Cost of sales
Lecture example 1 Liquidity
1,0065,385
= 68 days 871 4,212
= 75 days
20X9 20X8
Comment The company holds inventories for less time. May be a reason for the improved margins.
3 Inventory Days
Cost of sales Inventories
5,3851,006
= 5.35 4,212 871
= 4.84
Note - Inventory turnover
Slide 21 notes reference - page 241
Trade receivables x 365 days Credit turnover
Lecture example 1 Liquidity
948 7,180
= 48 days 708 5,435
= 47 days
20X9 20X8
Comment
No significant change.
4 Receivables days
Slide 22 notes reference - page 241
Trade payables x 365 days Credit purchases
Lecture example 1 Liquidity
653 5,385
= 44 days 516 4,212
= 45 days
20X9 20X8
Comment
No significant change. However, payables days less than receivables days which could cause cash flow problems in the future.
5 Payables days
Slide 23 notes reference - page 241
Operating cycle
Inventory DaysReceivables Days
Payables Days
Cash inCash out
Operating cycle
Slide 24 notes reference - page 242
Gearing
Debt/Equity
Shows how the company is financed
Shows risk of shareholders not receiving dividend
Debt/Equity
Shows how the company is financed
Shows risk of shareholders not receiving dividend
Gearing
Slide 25 notes reference - page 242
Interest bearing debt Capital, reserves & debt
Lecture example 1 Gearing
500 2,190+500
= 18.6% 400 1,401+400
= 22.2%
20X9 20X8
Comment
Gearing has decreased due to theissue of shares.
1 Gearing ratio
Slide 26 notes reference - page 242
Limitations of ratios
• Lack of comparability of accounting policies.
• Non trading income included in some ratios
• Useless in isolation
• Cannot compare across industries
• Can be manipulated
Chapter 23
IAS 7: Cash Flow Statements
Slide 28 notes reference - page 248
$000 $000Cash flows from operating activitiesNet profit before taxation 3,570Adjustment for: Depreciation 450 Investment income (500) Interest expense 400Operating profit before working capital changes 3,920 Increase in trade and other receivables (500) Decrease in inventories 1,050 Decrease in trade payables (1,740)Cash generated from operations 2,730Interest paid (270)Income taxes paid (900)
Net cash from operating activities 1,560
XYZ Co – Cash Flow statement (Indirect method)
Slide 29 notes reference - page 248
Cash flows from investing activitiesPurchase of property, plant and equipment (900)Proceeds from sale of equipment 20Interest received 200Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activitiesProceeds from issuance of share capital 250Proceeds from long-term borrowings 250Dividends paid (1,290)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 290
Cash and cash equivalents at beginning of period (Note) 120Cash and cash equivalents at end of period (Note) 410
XYZ Co – Cash Flow statement (Indirect method)
Slide 30 notes reference - page 249
Cash flows from operating activities
• Cash flows derived from operating or trading activities
• Can use:
– Direct method – Indirect method (more common in exams)
Slide 31 notes reference - page 249
Lecture example 1Income Tax payable
Tax paid 116 bal b/d 168
bal c/d 156 IS 104
272 272
Slide 32 notes reference - page 250
Lecture example 2
b/d 200
c/d 280
Plant and equipmentb/d 80
c/d 111
Accumulated depreciationDisposal 20
300300
Addition 100
Disposal 9
120 120
Charge 40
Slide 33 notes reference - page 252
Lecture example 3 Dividends paid
b/d
c/d
35
45
R Earnings 60
9595
Cash 50
Dividends payable
Slide 34 notes reference - page 253
$000 $000Cash flows from operating activitiesNet profit before taxation 87Adjustments for: Depreciation 42 Interest expense 8Operating profit before working capital changes 137 Increase in trade receivables (168 – 147) (21) Increase in inventories (214 – 210) (4) Increase in trade payables (136 – 21) 15Cash generated from operations 127Interest paid (8)Income taxes paid (W1)
Lecture example 4
Slide 35 notes reference - page 253
Lecture example 4 (cont’d) Working 1
b/d
c/d
28
39
I/S 31
5959
20
Income tax payable
Cash
Slide 36 notes reference - page 254
(20)Net cash from operating activities 99
$000 $000Cash flows from operating activitiesNet profit before taxation 87Adjustments for: Depreciation 42 Interest expense 8Operating profit before working capital changes 137 Increase in trade receivables (168 – 147) (21) Increase in inventories (214 – 210) (4) Increase in trade payables (136 – 21) 15Cash generated from operations 127Interest paid (8)Income taxes paid (W1)
Lecture example 4 (cont’d)
Slide 37 notes reference - page 254
Lecture example 4 (cont’d) Working 2
b/d
c/d
16
18
R Earnings 24
4040
22
Dividends payable
Cash
Slide 38 notes reference - page 254
Lecture example 4 (cont’d) Working 3
Cash additions 146
Depreciation 42
670670
10
Property, plant and equipment (NBV)
Revaluation
b/d 514
c/d 628
Slide 39 notes reference - page 254
$000 $000Cash flows from investing activitiesPurchase of property, plant and equipment (W3) (146)
Net cash used in investing activities (146)
Cash flows from financing activitiesProceeds from issuance of share capital (320 – 260) 60Proceeds from issuance of debentures (80 – 50) 30Dividends paid (W2) (22)
Net cash from financing activities 68
Net increase in cash and cash equivalents 21Cash and cash equivalents at beginning of year (14)Cash and cash equivalents at end of year 7
Lecture example 4 (cont’d)
Slide 40 notes reference - page 254
Note to the cash flow statement
Cash and cash equivalents31.12.X8 31.12.X7
$’000 $’000Cash on hand 7 -Bank overdraft - (14)Cash and cash equivalents 7 (14)
Slide 41 notes reference - page 256
Lecture example 5Angus Ltd
Cash flow statement for the year ended 31 December 20X0
Net cash inflow from operating activities
Cash flow from financing activities
Interest paid
Payments to acquire tangible fixed assetsCash flow from investing activities
Proceeds from long-term loanIssue of ordinary sharesRepayment of loan
Increase in cash balances
(600)(4,400)
(40,000)
60,00050,000(6,000)
63,400
$Operating activitiesCash received from customersCash paid to suppliersCash paid to & on behalf of employees
104,000
(54,000 – 6,700) 47,300(31,000 – 2,500) (28,500)
(15,000)(11/12 x 4,800)
$
Slide 42 notes reference - page 256
Lecture example 5 part (b)
This cash flow statement has been prepared using the direct method
Chapter 24
Income and Expenditure Accounts
Slide 44 notes reference - page 263
Sources of income
• Main source of income = subscriptions
• Subscriptions received and receivable must
be recorded in the correct period
• Subscriptions income in I&E account
= Number of members x membership fees
Slide 45 notes reference - page 263
Lecture example 1
Subscriptions account
Opening receivables
(5 x $100) 500
(subs in arrears b/d)
Opening payables
(2 x $200) 400
(subs in advance b/d)
Closing receivables
(10 x $200) 2,000
(subs in advance c/d)
Closing payables (4 x $200) 800
(subs in arrears c/d)
Cash 6,000I & E a/c (subs income) 4,700
7,2007,200
Slide 46 notes reference - page 265
Income and expenditure account for the year ended ......
INCOME $ $
Subscriptions X Life memberships X *Trading activity profit X Bank interest received X *Surplus on club event X *Profit on sale of fixed asset X
X
EXPENDITURE
Rent X Rates X Electricity X Depreciation X *Loss on trading activity X *Loss on club event X *Loss on sale of fixed asset X
(X)
Surplus/(Deficit) of income over expenditure X/(X)
*=Alternatives
Slide 47 notes reference - page 265
Balance sheet as at
NON-CURRENT ASSETS Cost Accumulated Net book
depreciation value
$ $ $
Fixtures and fittings X X X
Investments X
X
CURRENT ASSETS
Inventory X Trade receivables X Subscriptions in arrears X Prepayments X Cash at bank X
X
CURRENT LIABILITIES
Trade payables X Subscriptions in advance X Accruals X
X
Net current assets X
X
Slide 48 notes reference - page 265
Proforma
FUNDS
Accumulated fund:
Opening balance X
Profit/(loss) on sale of investments X/(X)
Surplus/(deficit) of income over
expenditure for the year X/(X)
X
Life membership fund X
X
Slide 49 notes reference - page 266
Life membership subscription
On receipt of the money
Dr Cash
Cr Life membership fund
Two methods of accountingfor life membership sub
T/f to Acc Fund on death of member
Dr Life membership fund
Cr Accumulated fund
Release to I&E a/c over life of member
Dr Life membership fund
Cr I&E account
Slide 50 notes reference - page 267
Bar profits & social events
$ $ Income Contribution X Net income from bar trading X Income from socials: receipts X less expenses (X) X Miscellaneous income X X
Expenses Ground rent X Rates X Water etc X (X) X
Slide 51 notes reference - page 267
Disposal of fixed assetsNon current asset disposal
Asset had been
depreciated
Asset had not been
depreciated
T/f profit/loss
to I&E a/c
T/f profit/loss
to acc fund
Slide 52 notes reference - page 267
Investments & special funds
Investment income recorded in I&E a/c
Profit/loss on sale of investment goes to acc fund
Special fund e.g. to raise money for new boat house
Dr Special fund cashCr Special fund account
Slide 53
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