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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
V1.0 Visuals Handout Page 1
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Financial Management
Topic 2: Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.2
Scope and CoverageThis topic will cover: Statement of financial position (SoFP) Comparison between SoFP and balance sheet Income statement
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Income statement
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.3
Learning Outcomes for Topic 2By the end of this topic students will be able to: Discuss the preparation of the statement of financial
position and income statement. Prepare the statement of financial position.
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Prepare the statement of financial position. Explain the differences between the balance sheet
and statement of financial position. Prepare the income statement.
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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
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Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.4
Context for the TopicThis topic is concerned with published accounts for companies listed on the UK stock exchange
Must comply with International Financial Reporting Standards (IFRS)
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Standards (IFRS). Remember from Topic 1 not all organisations have
to comply with IFRS (e.g. sole traders).
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.5
Statement of Financial Position Required to be published under IAS 1 Presentation
of financial statements. Equivalent to the balance sheet but may have
differences.
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Reports companys net worth as at last day of accounting period.
Flexible format for companies to choose how to present the required information.
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.6
SoFP: Vertical Format Commonly used in the UK
ASSETS
minus
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LIABILITIES
equals
EQUITY
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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
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Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.7
SoFP: Horizontal Format Commonly used in continental European countries.
EQUITY
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ASSETS plus
LIABILITIES
equals
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.8
SoFP: Alternative Format
ASSETS
Equals
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EQUITY
Plus
LIABILITIES
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.9
SoFP ExampleHead Noise Ltd Statement of financial position as at 31 March 2010
ASSETS 000 EQUITY 000Non-current assets Share capital 8,000Property, plant & equipment 18,720 Retained earnings 8,580Goodwill 700 16,580
19420 LIABILITIESCurrent assets Non-current liabilities
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Inventories 1,270 Long-term borrowings 3,600
Trade receivables 1,350
Cash 260 Current Liabilities2,880 Trade & other payables 1,240
Current tax payable 880
2,120
Total Assets 22,300 Total Equity & Liabilities 22,300
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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
V1.0 Visuals Handout Page 4
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.10
SoFP Example Discussed - 1 This example uses the horizontal format but the
vertical or alternative format would also be acceptable.
Key is that total assets equals total equity and liabilities
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liabilities. Title states:
Financial statement being produced (i.e. SoFP) Company the statement relates to (i.e. Head Noise Ltd) Date financial statement relates to (i.e. 31 March 2010)
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.11
SoFP Example Discussed - 2 Assets and liabilities are both divided into non-
current and current. Each sub-section shows a sub-total (e.g. total non-
current assets, total current assets etc.).
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Other items may be included under each sub-section this is just an example.
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.12
Comparison of Balance Sheet and SoFP
International Accounting Standards refer to the new title of SoFP but still permit companies to use the term balance sheet in their financial statements.F b h h i li i h
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Format may be the same choice lies with individual companies.
Terms adopted must comply with IAS (e.g. receivables, payables and inventory).
So... may be no difference at all!
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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
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Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.13
Income Statement (IS) Required to be published under IAS 1 Presentation
of financial statements. Equivalent to the profit and loss account. Reports on the profit or loss in the period.
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p p p Part of larger comprehensive income statement. Minimum information specified by IAS 1 to be
reported but no mandatory format.
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.14
Income Statement ExampleHead Noise Ltd Income Statement for year ended 31 March 2010
000Revenue 98,763Cost of sales (24,764)Gross Profit 73,999Other income 2,000Distribution costs (26,984)
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Distribution costs (26,984)Administration expenses (38,762)Other expenses (1,026)Profit from operations 9,227Finance costs (2,387)Profit before tax 6,840Tax expense (2,736)Profit for the year from continuing activities 4,104
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.15
IS Example Discussed - 1 This example shows the income statement which
may be shown as a separate statement or part of a larger comprehensive income statement.
Title states: Financial statement being produced (i e IS)
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Financial statement being produced (i.e. IS) Company the statement relates to (i.e. Head Noise Ltd) Period financial statement relates to (i.e. Year ended 31
March 2010) Income and expenses must be clearly distinguished
(e.g. expenses shown in brackets).
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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
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Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.16
IS Example Discussed - 2 Cost of sales is calculated as: 000
Opening inventory 2,037 Plus purchases 24,392 Less closing inventory (1,665)
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Equals cost of sales 24,764 Distribution costs includes costs of delivering goods
to customers. Administration expenses are costs incurred to keep
business going.
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.17
IS Example Discussed - 3 Finance costs include interest paid on loans or
interest received from investments.
All companies must pay a percentage of the profit before tax as corporation tax
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before tax as corporation tax.
Companies would also show any profit or loss from discontinued operations as a continuation of the income statement.
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.18
Preparation of the SoFP and IS This lecture has introduced the concepts and
suggested formats for preparing both the statement of financial position and income statement
Th P i S d i d T i l i
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The Private Study exercises and Tutorial session will build on this introduction to equip you to prepare these financial statements.
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Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement
Financial Management
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Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.19
SummaryIn this lecture we have looked at:
Statement of financial position
Similarities or potential differences between SoFP
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Similarities or potential differences between SoFP and balance sheet
Income statement
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.20
References Weetman, P. (2011) Financial & Management
Accounting: An Introduction. 5th Edition. FT Prentice Hall.
McLaney, E. and Atrill, P. (2010) Accounting: An
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Introduction. 5th Edition. FT Prentice Hall.
Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.21
Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position
and Income Statement
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Any Questions?