lecture 02 - preparation of published financial statements - statement of financial position and...

Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position and Income Statement

Financial Management

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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


Income statement


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.


Prepare the statement of financial position. Explain the differences between the balance sheet

and statement of financial position. Prepare the income statement.





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)


Standards (IFRS). Remember from Topic 1 not all organisations have

to comply with IFRS (e.g. sole traders).


Statement of Financial Position Required to be published under IAS 1 Presentation

of financial statements. Equivalent to the balance sheet but may have

differences.


Reports companys net worth as at last day of accounting period.

Flexible format for companies to choose how to present the required information.


SoFP: Vertical Format Commonly used in the UK

ASSETS

minus


LIABILITIES

equals

EQUITY





SoFP: Horizontal Format Commonly used in continental European countries.

EQUITY


ASSETS plus

LIABILITIES

equals


SoFP: Alternative Format

ASSETS

Equals


EQUITY

Plus

LIABILITIES


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


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





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


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)


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.).


Other items may be included under each sub-section this is just an example.


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


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!





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.


p p p Part of larger comprehensive income statement. Minimum information specified by IAS 1 to be

reported but no mandatory format.


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)


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


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)


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).





IS Example Discussed - 2 Cost of sales is calculated as: 000

Opening inventory 2,037 Plus purchases 24,392 Less closing inventory (1,665)


Equals cost of sales 24,764 Distribution costs includes costs of delivering goods

to customers. Administration expenses are costs incurred to keep

business going.


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


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 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


The Private Study exercises and Tutorial session will build on this introduction to equip you to prepare these financial statements.





SummaryIn this lecture we have looked at:

Statement of financial position

Similarities or potential differences between SoFP


Similarities or potential differences between SoFP and balance sheet

Income statement


References Weetman, P. (2011) Financial & Management

Accounting: An Introduction. 5th Edition. FT Prentice Hall.

McLaney, E. and Atrill, P. (2010) Accounting: An


Introduction. 5th Edition. FT Prentice Hall.


Topic 2 - Preparation of Published Financial Statements: Statement of Financial Position

and Income Statement


Any Questions?

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