Published financial statements of limited companies

Transcription

1 3 Published fiacial statemets of limited compaies this chapter covers... I this chapter we focus o the published fiacial statemets of limited compaies ad look at: the purpose ad compoets of fiacial statemets the format of published fiacial statemets dealig with divideds i the fiacial statemets iterpretatio of the auditors report the accoutig policies followed by a particular compay bous issues ad rights issues of shares Towards the ed of the chapter (page 78) we see how a trial balace for a compay is coverted ito the layout of published fiacial statemets.

2 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 6 1 I N T R O D U C T I O N All limited compaies have shareholders. Each shareholder ows a part of the compay ad, although they do ot take part i the day-to-day ruig of the compay (uless they are also directors), they are etitled to kow the fiacial results of the compay. Every limited compay, whether public or private, is required by law to produce fiacial statemets, which are also available for ayoe to ispect if they so wish. We eed to distiguish betwee the statutory accouts ad the aual report ad accouts. The statutory accouts are required to be produced uder compay law, ad a copy is filed with the Registrar of Compaies where it is available for public ispectio. The aual report ad accouts ofte referred to as the corporate report is available to every shareholder ad cotais: statemet of profit or loss ad other comprehesive icome statemet of fiacial positio statemet of cash flows statemet of chages i equity otes to the fiacial statemets, icludig a statemet of the compay s accoutig policies directors report auditors report D U T I e s a N D R e s P O N s I B I L I T I e s O F D I R e C T O R s The directors of a limited compay are elected by the shareholders to maage the compay o their behalf. The directors are put i a positio of trust by the shareholders to be resposible for the stewardship of the compay s fiacial iformatio. The directors of a limited compay have a duty to esure that the provisios of the Compaies Acts which relate to accoutig records ad statemets are followed. The mai provisios of the Acts are that: a compay s accoutig records must: show ad explai the compay s trasactios disclose with reasoable accuracy at ay time the fiacial positio of the compay

3 6 2 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l eable the directors to esure that the compay s statemets of profit or loss ad other comprehesive icome ad fiacial positio give a true ad fair view of the compay s fiacial positio a compay s accoutig records must cotai: day-to-day etries of moey received ad paid, together with details of the trasactios a record of the compay s assets ad liabilities details of ivetories held at the ed of the year a compay s fiacial statemets must be prepared i accordace with the Compaies Act ad with either UK accoutig stadards or iteratioal fiacial reportig stadards (ote that, i this book, we will study oly fiacial statemets which comply with IFRSs) the directors must report aually to the shareholders o the way they have ru the compay o behalf of the shareholders Every compay director has a resposibility to esure that the statutory accouts are produced ad filed with the Registrar of Compaies withi a set time. The filig deadlies after the ed of the accoutig period are: ie moths for a private limited compay six moths for a public limited compay There are pealties (fies) for late filig ad, if the fiacial statemets are too late, a compay ca be struck off the compaies register. The aual fiacial statemets must be approved by the compay s board of directors ad the copy of the statemet of fiacial positio filed with the Registrar of Compaies must be siged by oe of the directors o behalf of the board. The directors must prepare a directors report this must be approved by the board ad the copy to be filed with the Registrar of Compaies siged o behalf of the board by a director (or the compay secretary). The statutory accouts must be laid before the compay at the aual geeral meetig, ad they must be circulated beforehad to shareholders, debeture holders ad ay other persos etitled to atted the meetig. I a s 1 P R e s e N TaT I O N O F F I N a N C I a L s TaT e M e N T s The objective of this accoutig stadard is to set out how fiacial statemets should be preseted to esure comparability with previous accoutig periods ad with other etities. The stadard states that the objective of fiacial statemets is to provide iformatio about the

4 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 6 3 fiacial positio, fiacial performace ad cash flows of a etity that is useful to a wide rage of users i makig ecoomic decisios. Note that this defiitio is very similar to that stated i the Coceptual Framework for Fiacial Reportig see the defiitio give o page 7 of this book. Fiacial statemets also show the results of maagemet s stewardship of the resources etrusted to it. The statemets provide iformatio about a etity s: assets liabilities equity icome ad expeses, icludig gais ad losses cotributios by, ad distributios to, owers i their capacity as owers cash flows Such iformatio alog with other iformatio i the otes assists users of fiacial statemets i assessig the etity s future cash flows. c o m p l e t e s e t o f f i a c i a l s t a t e m e t s IAS 1 states that a complete set of fiacial statemets comprises: statemet of fiacial positio statemet of profit or loss ad other comprehesive icome statemet of chages i equity statemet of cash flows accoutig policies ad explaatory otes comparative iformatio for the precedig period Note that IAS 1 states that: all of the fiacial statemets are to be give equal promiece the statemet of profit or loss ad other comprehesive icome ca be preseted either as a sigle statemet or as a profit or loss sectio, immediately followed by a separate statemet of comprehesive icome o v e r a l l c o s i d e r a t i o s The fiacial statemets must preset fairly the fiacial positio, fiacial performace, ad cash flows of a etity. The applicatio of iteratioal fiacial reportig stadards supported by appropriate additioal

5 6 4 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l disclosures is presumed to result i fiacial statemets that achieve a fair presetatio. IAS 1 requires that a etity whose fiacial statemets comply with the stadards should make a explicit ad ureserved statemet of such compliace i the otes. IAS 1 requires compliace with a umber of accoutig cocepts (see also pages 20-21) ad other cosideratios: goig cocer whe a etity s fiacial statemets are prepared i accordace with iteratioal fiacial reportig stadards, the presumptio is that the etity is a goig cocer, ie it will ot cease to trade i the immediate future accrual basis of accoutig fiacial statemets, except for cash flow iformatio, are prepared uder the accruals cocept, ie icome ad expeses are matched to the same accoutig period materiality ad aggregatio each material class of similar items is to be preseted separately i the fiacial statemets, eg the classificatio of assets as o-curret ad curret offsettig geerally it is ot permitted to set off assets ad liabilities, or icome ad expeses agaist each other i order to show a et figure, eg cash at bak is ot etted off agaist a bak overdraft frequecy of reportig fiacial statemets are prepared at least aually; however, whe the reportig period chages, the fiacial statemets will be for a period loger or shorter tha oe year ad the etity must give the reaso for the chage ad disclose that the amouts i the fiacial statemets are ot etirely comparable with those of previous periods comparative iformatio a requiremet to show the figures from previous periods for all amouts show i the fiacial statemets i order to help users of the statemets s t r u c t u r e a d c o t e t g e e r a l p r i c i p l e s IAS 1 sets out the detailed disclosures to be show o the face of the statemet of profit or loss ad other comprehesive icome, statemet of fiacial positio, ad statemet of chages i equity. We shall be coverig these later i this chapter. There are some geeral priciples that the stadard requires. These iclude the idetificatio of: the fiacial statemets, which are to be distiguished from other iformatio i the corporate report the ame of the reportig etity

6 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 6 5 whether the fiacial statemets are for a idividual etity or for a group (see Chapter 8) the period covered by the fiacial statemets, eg for the year eded 31 December 20-6 the currecy of the fiacial statemets, s, s, etc the level of roudig used for moey amouts, thousads, millios, etc s TaT e M e N T O F P R O F I T O R L O s s a N D O T h e R C O M P R e h e N s I v e I N C O M e The published statemet of profit or loss ad other comprehesive icome does ot have to detail every sigle overhead or expese icurred by the compay to do so would be to disclose importat maagemet iformatio to competitors. Istead, the mai items are summarised; however, IAS 1 requires that certai items must be detailed o the face of the statemet, icludig: reveue fiace costs share of the profit or loss of associates (see Chapter 8) tax expese other comprehesive icome for the year (eg the revaluatio of property) Further detail may be eeded to give iformatio relevat to a uderstadig of fiacial performace. Note that items of icome ad expese are ot to be preseted as extraordiary items, either o the face of the icome statemet or i the otes. Whe items are material, their ature ad amout is to be disclosed separately. The statemet of profit or loss ad other comprehesive icome shows the: profit or loss total other comprehesive icome comprehesive icome for the year, ie the total of profit or loss ad other comprehesive icome (which is take to the statemet of chages i equity see page 69) Expeses i the statemet of profit or loss ad other comprehesive icome must be aalysed either by ature (raw materials, employee costs, depreciatio, etc) or by fuctio (cost of sales, distributio costs, admiistrative expeses, etc) depedig o which provides the more

7 6 6 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l XYZ PLC statemet of profit or loss ad other comprehesive icome for the year eded 31 December Cotiuig operatios Reveue 30,000 Cost of sales 16,000 Gross profit 14,000 Distributio costs 5,000 Admiistrative expeses 4,000 Profit from operatios 5,000 Fiace costs 1,000 Profit before tax 4,000 Tax 1,500 Profit for the year from cotiuig operatios 2,500 Other comprehesive icome for the year Gai o revaluatio of property 500 Total comprehesive icome for the year 3,000 Notes: IAS 1 does ot permit items of icome ad expese to be described as extraordiary items. All material items of icome ad expese are to be disclosed separately, either o the face of the statemet of profit or loss ad other comprehesive icome or i the otes examples iclude disposals of property, plat ad equipmet, disposals of ivestmets, litigatio settlemets. I this example expeses are aalysed by fuctio cost of sales, distributio costs, admiistrative expeses, etc. This is the aalysis usually used i AAT Assessmets.

8 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 6 7 reliable ad relevat iformatio. The aalysis by ature is ofte appropriate for maufacturig compaies, while the aalysis by fuctio is commoly used by tradig compaies. The example statemet of comprehesive icome of XYZ PLC o the ext page (with sample figures) shows a aalysis by fuctio. Note that AAT Assessmets usually assess aalysis by fuctio. Much of the detail show i the statemet of profit or loss ad other comprehesive icome is summarised. For example: reveue icorporates the figures for sales ad sales returs cost of sales icludes opeig ivetories, purchases, purchases returs, carriage iwards ad closig ivetories distributio costs iclude warehouse costs, post ad packig, delivery drivers wages, ruig costs of vehicles, depreciatio of vehicles, etc admiistrative expeses iclude office costs, ret ad rates, heatig ad lightig, depreciatio of office equipmet, etc It is suggested that you study a recet statemet of profit or loss ad other comprehesive icome for a large public limited compay. The web directory at the begiig of this book lists some sources but all large plcs will have their fiacial statemets available through their websites search for fiacial statemets or ivestor cetre. D e a L I N G W I T h D I v I D e N D s I N F I N a N C I a L s TaT e M e N T s Divideds are distributios to the shareholders, who ow the compay, as a retur o their ivestmet. May compaies pay divideds twice a year a iterim divided, which is usually paid just over halfway through the fiacial year, ad a fial divided which is paid early i the ext fiacial year. The iterim divided is based o the profits reported by the compay durig the first half of the year, while the fial divided is based o the profits reported for the full year. The fial divided is proposed by the directors but has to be approved by shareholders at the Aual Geeral Meetig of the compay. Thus the fiacial caledar for a compay with a fiacial year ed of 31 December 20-9 might take a form as illustrated at the top of the ext page. Oly the divideds paid durig the year ca be recorded i the fiacial statemets (see IAS 10, Evets after the Reportig Period, page 154). I the above example, the divideds paid i April 20-9 (fial divided for the

9 6 8 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l Ja March April August Ja directors propose fial divided for 20-8 fial divided paid for 20-8 directors propose fial divided for 20-9 AGM of the compay approves fial divided for 20-8 iterim divided paid for 20-9 based o reported profit for first half of year previous year) ad August 20-9 (iterim divided for the curret year) are recorded i the fiacial statemets. The proposed fial divided for the year eded 31 December 20-9 is disclosed as a ote to the fiacial statemets, statig that it is subject to approval by the shareholders at the compay s Aual Geeral Meetig. A example of the ote for divideds i the published fiacial statemets of XYZ PLC follows (with sample figures): XYZ PLC DIvIDeNDs Note for published fiacial statemets for the year eded 31 December Amouts recogised as distributios to equity holders durig the year: Fial divided for the year eded 31 December 20-8 of 7.5p per share 450 Iterim divided for the year eded 31 December 20-9 of 2.5p per share Proposed fial divided for the year eded 31 December 20-9 of 8p per share 480 The proposed fial divided is subject to approval by shareholders at the Aual Geeral Meetig ad has ot bee icluded as a liability i these fiacial statemets

10 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 6 9 The amout of 600,000 is show as part of the statemet of chages i equity, ad will also be recorded i the statemet of cash flows (see Chapter 6). The proposed fial divided is show as a ote oly for this year, but will form part of divideds paid for ext year. The reaso for treatig proposed divideds i this way is that, util they are approved at the AGM, they are ot liabilities of the compay ad should ot, therefore, be show i the fiacial statemets. s TaT e M e N T O F C h a N G e s I N e Q U I T Y IAS 1, Presetatio of Fiacial Statemets, requires that a statemet of chages i equity is oe of the compoets of fiacial statemets. As its ame implies, it shows the chages that have take place to the shareholders stake i the compay ot oly the profit or loss from cotiuig operatios, but also other comprehesive icome (such as the gai o the upward revaluatio of property). The iformatio to be give i the statemet of chages i equity is: total comprehesive icome for the period (or profit for the period, if there is o other comprehesive icome) for each item show i the statemet of chages i equity, a recociliatio betwee opeig ad closig balaces which shows the reaso for the chage resultig from profit or loss, other comprehesive icome ad share capital the divideds paid to shareholders durig the period A example statemet of chages i equity of XYZ PLC follows (with sample figures): XYZ PLC statemet of chages i equity for the year eded 31 December 20-9 share share Revaluatio Retaied Total capital premium surplus earigs equity Balace at 1 Jauary , ,400 5,600 Chages i equity Total comprehesive icome* 500 2,500 3,000 Divideds Issue of share capital 1, ,200 Balace at 31 December , ,300 9,200 * Profit for the period, if o other comprehesive icome.

11 7 0 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l s TaT e M e N T O F F I N a N C I a L P O s I T I O N IAS 1, Presetatio of Fiacial Statemets, specifies the items to be show o the statemet of fiacial positio as a miimum. The Stadard does ot, however, state the order i which the items are to be preseted. The items to be show o the face of the statemet of fiacial positio iclude: property, plat ad equipmet ivestmet property itagible assets fiacial assets (excludig ivestmets, cash ad receivables) ivestmets accouted for usig the equity method ivetories trade ad other receivables cash ad cash equivalets trade ad other payables provisios fiacial liabilities tax liabilities issued capital ad reserves I their statemets of fiacial positio, IAS 1 requires most compaies to separate out curret ad o-curret assets ad liabilities. IAS 1 does, however, permit a presetatio based o liquidity where it provides iformatio that is reliable ad more relevat the order of liquidity of assets ad liabilities is ofte used by baks ad other fiacial istitutios. Curret assets are cash or cash equivalets those to be realised, sold or used withi the ormal operatig cycle assets held for tradig ad expected to be realised withi twelve moths All other assets are o-curret. Examples of curret assets are trade ad other receivables, ivetories, ad cash ad cash equivalets. Curret liabilities are: those expected to be settled withi the ormal operatig cycle liabilities held for tradig ad expected to be settled withi twelve moths

12 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 7 1 where the compay does ot have a ucoditioal right to defer paymet beyod twelve moths All other liabilities are o-curret. Examples of curret liabilities are trade ad other payables, tax payable ad bak overdraft. Further detail ca be give either o the statemet of fiacial positio or i the otes. Examples iclude: property, plat ad equipmet may be show by differet classes such as lad ad buildigs, machiery, motor vehicles, office equipmet, etc trade ad other receivables may be split ito amouts due from trade customers, prepaymets, etc ivetories ca be sub-classified ito raw materials, work-i-progress, fiished goods, etc share capital ad reserves ca be show by the various classes of shares ad reserves I particular, IAS 1 requires the followig disclosures about share capital (either o the statemet of fiacial positio or i the otes): the umber of shares authorised (if applicable) the umber of shares issued ad fully paid, ad issued but ot fully paid the par value per share, or that the shares have o par value Tutorial ote: IAS 1 does ot set out a required format for the statemet of fiacial positio. A example of a statemet of fiacial positio of XYZ PLC which complies with IAS 1 is show o the ext page (with sample figures). Here assets are preseted first, balaced agaist equity ad liabilities. It is suggested that you study a recet statemet of fiacial positio for a large public limited compay the web directory at the begiig of this book lists some sources.

13 7 2 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l XYZ PLC statemet of Fiacial Positio as at 31 December assets No-curret assets Itagible Goodwill 50 Property, plat ad equipmet 9,750 9,800 Curret assets Ivetories 1,190 Trade ad other receivables 1,600 Cash ad cash equivalets 10 2,800 Total assets 12,600 equity and LIaBILITIes equity Share capital 4,000 Share premium 400 Revaluatio surplus 500 Retaied earigs 4,300 Total equity 9,200 No-curret liabilities Loa 1,600 1,600 Curret liabilities Trade ad other payables 900 Tax payable 850 Bak overdraft 50 1,800 Total liabilities 3,400 Total liabilities ad equity 12,600 Note: The amouts show for total assets ad total liabilities cofirm the accoutig equatio of assets equals equity plus liabilities, here 12,600 = 9, ,400.

14 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 7 3 D I R e C T O R s R e P O R T The directors report icludes review of the activities of the compay over the past year ad of likely developmets i the future. s TaT e M e N T O F C a s h F L O W s IAS 7 requires that limited compaies must iclude, i their fiacial statemets, a statemet of cash flows, which we will look at i detail i Chapter 6. Such a statemet shows a overall view of moey flowig i ad out durig a accoutig period. It liks profit with chages i assets ad liabilities ad the effect o the cash of the compay. a U D I T O R s R e P O R T Larger compaies must have their fiacial statemets audited by exteral auditors, who are appoited by the shareholders. The auditors report, which is prited i the published fiacial statemets, is the culmiatio of their work. The three mai sectios of the auditors report are: respective resposibilities of directors ad auditors the directors are resposible for preparig the fiacial statemets, while the auditors are resposible for formig a opiio o the fiacial statemets basis of opiio the framework of auditig stadards withi which the audit was coducted, other assessmets, ad the way i which the audit was plaed ad performed opiio the auditors view of the compay s fiacial statemets The opiio is uqualified if the auditors are of the opiio that: the fiacial statemets have bee prepared properly, ad they give a true ad fair view of the compay s affairs i accordace with compay law ad iteratioal fiacial reportig stadards, ad the iformatio give i the directors report is cosistet with the fiacial statemets The auditors report may be qualified if the auditors feel that certai parts of the fiacial statemets have ot bee dealt with correctly ad that this is importat eough to be brought to the attetio of the Registrar of Compaies ad other users of the fiacial statemets, such as ivestors or suppliers. Note that small ad medium-sized private compaies are exempt from audit requiremets.

15 7 4 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l a C C O U N T I N G P O L I C I e s Accoutig policies are the specific accoutig methods selected by the directors ad used by a compay such as the method of depreciatio i the preparatio of fiacial statemets. IAS 1, Presetatio of Fiacial Statemets, requires compaies to disclose the accoutig policies used as part of the otes to the fiacial statemets. I selectig ad applyig accoutig policies: where a accoutig policy is give i a accoutig stadard (IAS ad IFRS) for a particular trasactio, the that policy must apply where there is o accoutig stadard to give guidace, the maagemet of the compay must use its judgemet to give iformatio that is useful to users eg ivestors, leders, creditors i makig decisios A compay selects its accoutig policies to fit the qualitative characteristics of useful fiacial iformatio set out i the Coceptual Framework for Fiacial Reportig (see pages 16-18): relevace givig iformatio to users that is capable of makig a differece i the decisios made by users faithful represetatio givig iformatio to users that is faithful i its presetatio comparability eablig users to make comparisos with iformatio from previous accoutig periods verifiability assurig users that iformatio is faithfully represeted timeliess providig iformatio to users i time to be capable of ifluecig their decisios uderstadability presetig iformatio to users clearly ad cocisely Oce adopted by a compay, accoutig policies are to be applied cosistetly for similar trasactios uless a stadard allows differig policies to be applied to categories of items. Chages of accoutig policies ca oly occur: if the chage is required by a accoutig stadard; or if the chage results i the fiacial statemets providig more relevat iformatio that faithfully represets the effects of trasactios o the fiacial statemets Whe there are chages i accoutig policies, they are to be applied retrospectively. Ay chages require the figure for equity ad other figures from the statemet of profit or loss ad other comprehesive icome ad the statemet of fiacial positio to be altered for previous fiacial statemets subject to the practicalities of calculatig the relevat amouts.

16 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 7 5 N O T e s T O T h e F I N a N C I a L s TaT e M e N T s IAS 1, Presetatio of Fiacial Statemets, requires a umber of otes to the fiacial statemets. These iclude: iformatio about the basis of preparatio of the fiacial statemets ad the specific accoutig policies used disclosure of iformatio required by iteratioal fiacial reportig stadards that is ot already icluded i the statemets of profit or loss ad other comprehesive icome, chages i equity, fiacial positio, or cash flows the provisio of additioal iformatio that is relevat to a uderstadig of the fiacial statemets Notes are to be preseted systematically, with cross-referecig from the fiacial statemets to the relevat ote. Icluded i the otes is to be a summary of sigificat accoutig policies followed, icludig: the measuremet basis (or bases) eg historical cost basis used i preparig the fiacial statemets, ad the other accoutig policies used that are relevat to a uderstadig of the fiacial statemets. With regard to divideds, there must be disclosed i the otes the amout of divideds proposed or declared before the fiacial statemets were authorised for issue but ot recogised as a distributio to shareholders durig the period, ad the related amout per share (see page 68 for a example of this ote). B O N U s I s s U e s a N D R I G h T s I s s U e s Limited compaies ad particularly plcs quite ofte icrease their capital by meas of either bous issues or rights issues of shares. Whilst both of these have the effect of icreasig the umber of shares i issue, they have quite differet effects o the structure of the compay statemet of fiacial positio. b o u s i s s u e s A bous issue is made whe a compay issues free shares to existig shareholders; it does this by usig reserves that have built up ad capitalisig them (ie they are tured ito permaet share capital). The bous issue is distributed o the basis of existig shareholdigs for example, oe bous share for every two shares already held.

17 7 6 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l With a bous issue o cash flows i or out of the compay. The shareholders are o better off: with more shares i issue the stock market price per share will fall i proportio to the bous issue, ie the compay s assets are ow spread amog a greater umber of shares. Bous issues are made i order to ackowledge the fact that reserves belog to shareholders. Ofte a build-up of reserves occurs because a compay has t the cash to pay divideds, so a bous issue is a way of passig the reserves to shareholders. Note that capital or reveue reserves ca be used for bous issues. If there is a choice, the capital reserves are used first this is because it is oe of the few uses of a capital reserve, which caot be used to fud the paymet of divideds. r i g h t s i s s u e s A rights issue is used by a compay seekig to raise further fiace through the issue of shares. Istead of goig to the cosiderable expese of offerig additioal shares to the public, it is cheaper to offer shares to existig shareholders at a favourable price (usually a little below the curret market price). As with a bous issue the extra shares are offered i proportio to the shareholders existig holdig. The shareholder may take up the rights by subscribig for the shares offered; alteratively the rights ca ofte be sold o the stock market. Case Study S e v e R P L C A D w Y e P L C : B o u S I S S u e S A D R I G H T S I S S u e S s i t u a t i o The followig are the summary statemets of fiacial positio of Sever plc ad wye plc: sever Wye o-curret assets 300, ,000 Curret assets (icludig bak) 100, ,000 Total assets 400, ,000 ordiary shares of 1 each 200, ,000 Retaied earigs 200, ,000 Total equity 400, ,000 Sever is plaig a oe-for-two bous issue. wye is seekig fiace for a capital expediture programme through a oe-for-two rights issue at a price of 1.80 per share (the curret market price is 2.10).

18 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 7 7 s o l u t i o After the issues, the statemets of fiacial positio appear as: sever Wye o-curret assets 300, ,000 Curret assets (icludig bak) 100, ,000 Total assets 400, ,000 ordiary shares of 1 each 300, ,000 Share premium 80,000 Retaied earigs 100, ,000 Total equity 400, ,000 The chages are: sever Wye Retaied earigs are reduced by 100,000, whilst share capital is icreased by the same amout; the ordiary share capital is ow more i balace with o-curret assets; o cash has bee received. The bak balace has icreased by 180,000, beig 100,000 shares (assumig that all shareholders took up their rights) at 1.80; share capital has icreased by 100,000, whilst 80p per share is the share premium, ie 80,000 i total. The compay ow has the moey to fiace its capital expediture programme. There are also sigificat retaied earigs which could be used for a bous issue i the future. The statemet of chages i equity for each compay are: sever: statemet of chages i equity share share Retaied Total capital premium earigs At start 200, , ,000 Issue of bous shares 100, ,000 After share issue 300, , ,000 Wye: statemet of chages i equity share share Retaied Total capital premium earigs At start 200, , ,000 Issue of shares at a premium 100,000 80, ,000 After share issue 300,000 80, , ,000

19 7 8 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l P R e Pa R I N G F O R a s s e s s M e N T I AAT Assessmets there are two tasks which require fiacial statemets to be drafted. There are two types of assessmet: either two tasks which use a trial balace as a startig poit, or two tasks which focus o the statemet of cash flows (see Chapter 6). I the case of the former you will be provided with a limited compay s trial balace ad additioal iformatio: i the first task you will be required to draft a statemet of profit or loss ad other comprehesive icome ad a statemet of chages i equity i the secod task you will be required to draft a statemet of fiacial positio For both of these tasks the same trial balace ad additioal iformatio apply. Blak layouts are provided ad, i the AAT Assessmet, you select arrative items from lists ad eter moey amouts ito boxes. Pro-formas for workigs are also provided, as appropriate, i the assessmet ad partial marks ca be obtaied from these i the evet of errors beig made i the mai layouts for the statemets. Note that pro-formas for layouts ad workigs i the format used i AAT Assessmets are provided i the Appedix of this book. I the Case Study which follows we see how the statemet of profit or loss ad other comprehesive icome, the statemet of chages i equity ad the statemet of fiacial positio are prepared from a trial balace ad additioal iformatio ie the two tasks for this type of AAT Assessmet. Note: the secod type of assessmet - which focuses o the statemet of cash flows is described i Chapter 6. Case Study A L B A Y L I M I T e D : P R e PA R I G T H e F I A C I A L S TAT e M e T S F R o M A T R I A L B A L A C e s i t u a t i o You have bee asked to help prepare the fiacial statemets of Albay Ltd for the year eded 30 Jue The compay s trial balace as at 30 Jue 20-2 ad further iformatio is show opposite.

20 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 7 9 albay Ltd Trial balace as at 30 Jue 20-2 Debit Credit Share capital 5,000 Share premium 1,500 Trade ad other payables 1,872 Lad ad buildigs cost 8,500 accumulated depreciatio at 1 July Plat ad equipmet cost 5,800 accumulated depreciatio at 1 July ,900 Trade ad other receivables 4,235 Prepaymets 15 5% bak loa repayable ,000 Cash ad cash equivalets 385 Retaied earigs at 1 July ,875 Iterest paid 200 Sales reveue 25,840 Purchases 12,965 Distributio costs 5,468 Admiistrative expeses 2,933 Ivetories at 1 July ,285 Divideds paid ,411 45,411 Further iformatio: The ivetories at the close of busiess o 30 Jue 20-2 cost 5,162,000. Lad, which is ot depreciated, is icluded i the trial balace at a value of 3,000,000. It is to be revalued at 3,500,000 ad this revaluatio is to be icluded i the fiacial statemets for the year eded 30 Jue Depreciatio is to be provided for the year to 30 Jue 20-2 as follows: Buildigs 2% per aum Straight lie basis Plat ad equipmet 20% per aum Reducig balace basis

21 8 0 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l Depreciatio is to be apportioed as follows: % Cost of sales 40 Distributio costs 40 Admiistrative expeses 20 Trade receivables iclude a debt of 10,000 which is to be writte off. Irrecoverable debts are to be classified as admiistrative expeses. Distributio costs of 18,000 owig at 30 Jue 20-2 are to be provided for. The corporatio tax charge for the year has bee calculated as 1,475,000. All of the operatios are cotiuig operatios. r e q u i r e d (a) Draft the statemet of profit or loss ad other comprehesive icome for Albay Ltd for the year eded 30 Jue (b) Draft the statemet of chages i equity for Albay Ltd for the year eded 30 Jue (c) Draft the statemet of fiacial positio for Albay Ltd as at 30 Jue s o l u t i o (a) albay Ltd statemet of profit or loss ad other comprehesive icome for the year eded 30 Jue Reveue 25,840 Cost of sales 12,364 Gross profit 13,476 Distributio costs 5,762 Admiistrative expeses 3,081 Profit from operatios 4,633 Fiace costs 200 Profit before tax 4,433 Tax 1,475 Profit for the year from cotiuig operatios 2,958 Other comprehesive icome for the year 500 Total comprehesive icome for the year 3,458

22 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 8 1 Workigs Cost of sales 000 opeig ivetories 4,285 Purchases 12,965 Closig ivetories 5,162 Depreciatio *276 Cost of sales = 12,364 * depreciatio: buildigs 5,500 x 2% x 40% = 44; plat ad equipmet ( 5,800 2,900) x 20% x 40% = 232; total 276 Distributio costs 000 Distributio costs 5,468 Accrual 18 Depreciatio *276 Distributio costs = 5,762 * depreciatio as per cost of sales, at 40% admiistrative expeses 000 Admiistrative expeses 2,933 Irrecoverable debt 10 Depreciatio *138 Admiistrative expeses = 3,081 * depreciatio as per cost of sales, but at 20%

23 8 2 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l (b) albay Ltd statemet of chages i equity for the year eded 30 Jue 20-2 share share Revaluatio Retaied Total capital premium surplus earigs equity Balace at 1 July ,000 1,500 3,875 10,375 Chages i equity Total comprehesive icome 500 2,958 3,458 Divideds Issue of share capital Balace at 30 Jue ,000 1, ,208 13,208 (c) albay Ltd statemet of fiacial positio as at 30 Jue assets No-curret assets Property, plat ad equipmet 10,786 Curret assets Ivetories 5,162 Trade ad other receivables 4,240 Cash ad cash equivalets 385 9,787 Total assets 20,573 equity and LIaBILITIes equity Share capital 5,000 Share premium 1,500 Revaluatio surplus 500 Retaied earigs 6,208 Total equity 13,208 No-curret liabilities Bak loa 4,000 4,000 Curret liabilities Trade ad other payables 1,890 Tax liability 1,475 3,365 Total liabilities 7,365 Total equity ad liabilities 20,573

24 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 8 3 Workigs Property, plat ad equipmet 000 Lad ad buildigs value 9,000 Accumulated depreciatio lad ad buildigs 534 Plat ad equipmet cost 5,800 Accumulated depreciatio plat ad equipmet 3,480 Property, plat ad equipmet = 10,786 Trade ad other receivables 000 Trade ad other receivables 4,235 Irrecoverable debt 10 Prepaymet trial balace 15 Trade ad other receivables = 4,240 Trade ad other payables 000 Trade ad other payables 1,872 Additioal distributio costs accrued 18 Trade ad other payables = 1,890 Revaluatio surplus 000 Revaluatio surplus at start of year 0 other comprehesive icome for year 500 Revaluatio surplus = 500 Retaied earigs 000 Retaied earigs at start of year 3,875 Profit for year 2,958 Divideds paid 625 Retaied earigs = 6,208

25 8 4 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l Chapter Summary The aual report ad accouts, or corporate report, is available to every shareholder of a compay. It icludes the fiacial statemets ad the directors report ad auditors report. The directors have a duty ad resposibility to esure that the compay keeps accoutig records ad that fiacial statemets are prepared ad filed with the Registrar of Compaies withi a set time ie moths for private compaies ad six moths for public compaies. IAS 1, Presetatio of Fiacial Statemets, sets out how fiacial statemets should be prepared to esure comparability. IAS 1 requires compliace with a umber of accoutig cocepts ad other cosideratios: goig cocer accruals basis of accoutig cosistecy of presetatio materiality ad aggregatio offsettig frequecy of reportig comparative iformatio For larger compaies, exteral auditors report to the shareholders o the state of affairs of the compay. The directors establish the accoutig policies which the compay follows. Bous issues ad rights issues icrease the umber of shares i issue oly the latter brigs i cash to the compay. Key Terms statutory accouts report ad accouts set of fiacial statemets fiacial statemets required by law, a copy of which is filed at Compaies House, where it ca be ispected the corporate report of the compay which is available to every shareholder IAS 1 states that a complete set of fiacial statemets comprises: statemet of fiacial positio statemet of profit or loss ad other comprehesive icome statemet of chages i equity statemet of cash flows accoutig policies ad explaatory otes comparative iformatio for the precedig period

26 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 8 5 auditors report accoutig policies bous issue rights issue gives the auditors opiio o the compay s fiacial statemets as to whether they give a true ad fair view of the fiacial positio of the compay the specific accoutig methods selected by the directors ad used by a compay i the preparatio of fiacial statemets the capitalisatio of reserves either capital or reveue i the form of free shares issued to existig shareholders i proportio to their holdigs; o cash flows ito the compay the raisig of cash by offerig shares to existig shareholders, i proportio to their holdigs, at a favourable price Activities Blak photocopiable pro-formas i the format used i AAT Assessmets of the statemet of profit or loss ad other comprehesive icome, the statemet of chages i equity, ad the statemet of fiacial positio are icluded i the Appedix it is advisable to elarge them to full A4 size. Blak workigs sheets are also icluded i the Appedix. Pro-formas ad workigs sheets are also available to dowload from which of the followig is icluded uder the headig for equity i a statemet of fiacial positio? 1. retaied earigs 2. share premium 3. bak loas 4. cash ad cash equivalets (a) 1 ad 2 (b) 3 ad 4 (c) 1, 2 ad 4 (d) all of them

27 8 6 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l 3.2 which of the followig does ot ivolve a cash flow? 1. a rights issue of shares 2. repaymet of a bak loa 3. depreciatio of o-curret assets 4. a bous issue of shares (a) 1 ad 2 (b) 3 ad 4 (c) 2, 3 ad 4 (d) all of them 3.3 uder IAS 1, Presetatio of Fiacial Statemets, which of the followig is icluded i a complete set of fiacial statemets? 1. profit or loss ad other comprehesive icome 2. statemet of cash flows 3. statemet of fiacial positio 4. statemet of chages i equity (a) 1 ad 2 (b) 1, 2 ad 3 (c) 1, 2 ad 4 (d) all of them 3.4 uder IAS 1, Presetatio of Fiacial Statemets, which of the followig must be idetified? 1. the ame of the reportig etity 2. the currecy of the fiacial statemets 3. the period covered by the fiacial statemets 4. the level of roudig used for moey amouts (a) oe of them (b) 1, 2 ad 3 (c) 1, 2 ad 4 (d) all of them

28 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s with which of the followig accoutig cocepts ad other cosideratios does IAS 1, Presetatio of Fiacial Statemets require compliace? 1. goig cocer 2. accrual basis of accoutig 3. cosistecy of presetatio 4. offsettig (a) all of them (b) 1 ad 2 (c) 1, 2 ad 3 (d) 1, 3 ad A limited compay has a large oe-off expese item this year. I accordace with IAS 1, Presetatio of Fiacial Statemets, how should this item be preseted i the compay s statemet of profit or loss ad other comprehesive icome ad/or the otes to the fiacial statemets? (a) disclosed as a extraordiary item (b) separate disclosure of the ature ad amout (c) ot disclosed but added i to either distributio costs or admiistrative expeses (d) ot disclosed but deducted from reveue 3.7 At the begiig of its fiacial year o 1 July 20-7, Chapelporth Ltd has issued ordiary share capital of 500,000 ad retaied earigs of 185,000. The compay has made a profit from operatios of 135,000 for the year eded 30 Jue The followig paymets have bee made durig the year eded 30 Jue 20-8: loa iterest 12,500 fial ordiary divided for the year eded 30 Jue ,500 iterim ordiary divided for the half-year eded 31 December ,000 Corporatio tax to be paid for the year eded 30 Jue 20-8 is 48,000. Required: (a) Complete the statemet of profit or loss ad other comprehesive icome from the profit from operatios of 135,000 for the year eded 30 Jue (b) Prepare the statemet of chages i equity for the year eded 30 Jue 20-8.

29 8 8 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l 3.8 Maso Motors Limited is a car dealership with a share capital of 300,000. The followig iformatio is available for the year eded 31 December 20-1: retaied earigs at 1 Jauary 20-1 is 100,000 profit from operatios for the year was 75,000 loa iterest of 5,500 was paid a trasfer to geeral reserve of 20,000 was made corporatio tax of 20,500 is to be paid o the year s profit a iterim divided of 10% was paid o the issued ordiary share capital of 300,000 Required: (a) Complete the statemet of profit or loss ad other comprehesive icome from the profit from operatios of 75,000 for the year eded 31 December (b) Prepare the statemet of chages i equity for the year eded 31 December At the begiig of its fiacial year the equity of Brayford Ltd cosisted of 600,000 ordiary shares of 50p each ad retaied earigs of 150,000. Durig the fiacial year a rights issue of shares was made. The shares were issued o the basis of two ew shares for every five existig shares at the issue price of 70p per share. The issue was fully subscribed. what will be the cash flow from the rights issue? (a) 120,000 (b) 168,000 (c) 300,000 (d) 450, At the begiig of its fiacial year the equity of Carholme Ltd cosisted of 800,000 ordiary shares of 25p each ad retaied earigs of 125,000. Durig the fiacial year a bous issue of shares was made. The shares were issued o the basis of oe ew share for every four shares held. what will be the amouts of (1) share capital ad (2) retaied earigs after the bous issue? (a) (1) 250,000 (2) 75,000 (b) (1) 250,000 (2) 125,000 (c) (1) 200,000 (2) 75,000 (d) (1) 250,000 (2) 175,000

30 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s The equity sectio of the statemet of fiacial positio of Doddigto Ltd at 1 Jauary 20-2 is show below: equity ordiary shares of 50p each fully paid 220,000 Retaied earigs 118, ,000 o 1 ovember 20-2, a rights issue of shares was made. The shares were issued o the basis of oe ew share for every two shares held at a price of 80p per share. The issue was fully subscribed. Durig the year eded 31 December 20-2, divideds paid totalled 45,000. The profit for the year eded 31 December 20-2 from cotiuig operatios was 79,000. Required: Prepare the statemet of chages i equity of Doddigto Ltd for the year eded 31 December use the table provided. Doddigto Ltd statemet of chages i equity for the year eded 31 December 20-2 Balace at 1 Jauary 20-2 share share Revaluatio Retaied Total capital premium surplus earigs equity Chages i equity Profit for the year Divideds Issue of share capital Balace at 31 December 20-2

31 9 0 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l 3.12 The equity sectio of the statemet of fiacial positio of Marti Ltd at 30 Jue 20-4 is show below: equity Share capital 600,000 Share premium 90,000 Retaied earigs 330,000 1,020,000 The ordiary shares have a omial value of 25p each. o 1 Jauary 20-5, a rights issue of shares was made. The shares were issued o the basis of oe ew share for every four existig shares at the issue price of 40p per share. The issue was fully subscribed. Durig the year eded 30 Jue 20-5, divideds paid totalled 220,000. The profit for the year eded 30 Jue 20-5 from cotiuig operatios was 365,000. Required: Prepare the statemet of chages i equity of Marti Ltd for the year eded 30 Jue use the table provided. Marti Ltd statemet of chages i equity for the year eded 30 Jue 20-5 Balace at 1 July 20-4 share share Revaluatio Retaied Total capital premium surplus earigs equity Chages i equity Profit for the year Divideds Issue of share capital Balace

32 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s The followig figures are take from the accoutig records of Boure Ltd at the ed of the fiacial year o 31 December 20-6: Share capital 75,000 Lad ad buildigs at cost 175,000 Accumulated depreciatio of lad ad buildigs to date 10,500 Plat ad equipmet at cost 25,000 Accumulated depreciatio of plat ad equipmet to date 5,000 Ivetories 10,750 Trade ad other receivables 42,500 Trade ad other payables 17,250 Cash ad cash equivalets 1,950 Bak loa (repayable i 20-9) 55,000 Profit for the year from cotiuig operatios 68,200 Corporatio tax charge for the year 14,850 Divideds paid 10,000 Retaied earigs at 1 Jauary ,400 other comprehesive icome for the year 0 Required: Draft the statemet of chages i equity for Boure Ltd for the year eded 31 December 20-6, together with a statemet of fiacial positio.

33 9 2 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l 3.14 You have bee asked to help prepare the fiacial statemets of Dudley Ltd for the year eded 31 March The compay s trial balace as at 31 March 20-1 ad further iformatio is show below. Dudley Ltd Trial balace as at 31 March 20-1 Debit Credit Share capital 60,000 Revaluatio surplus at 1 April ,000 Trade ad other payables 2,140 Lad ad buildigs value/cost 95,000 accumulated depreciatio at 1 April ,000 Plat ad equipmet cost 32,000 accumulated depreciatio at 1 April ,000 Trade ad other receivables 3,520 Accruals 110 6% bak loa repayable ,000 Cash ad cash equivalets 1,742 Retaied earigs at 1 April ,021 Iterest paid 300 Reveue 75,216 Purchases 45,834 Distributio costs 10,272 Admiistrative expeses 8,636 Ivetories at 1 April ,683 Divideds paid 1, , ,487 Further iformatio: The ivetories at the close of busiess o 31 March 20-1 cost 5,129,000. Lad, which is ot depreciated, is icluded i the trial balace at a value of 45,000,000. It is to be revalued at 50,000,000 ad this revaluatio is to be icluded i the fiacial statemets for the year eded 31 March Depreciatio is to be provided for the year to 31 March 20-1 as follows: Buildigs 2% per aum Straight lie basis Plat ad equipmet 25% per aum Reducig balace basis

34 p u b l i s h e d f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s 9 3 Depreciatio is to be apportioed as follows: % Cost of sales 60 Distributio costs 30 Admiistrative expeses 10 Trade receivables iclude a debt of 8,000 which is to be writte off. Irrecoverable debts are to be classified as admiistrative expeses. Distributio costs of 10,000 owig at 31 March 20-1 are to be provided for. The corporatio tax charge for the year has bee calculated as 1,100,000. All of the operatios are cotiuig operatios. Required: (a) Draft the statemet of profit or loss ad other comprehesive icome for Dudley Ltd for the year eded 31 March (b) Draft the statemet of chages i equity for Dudley Ltd for the year eded 31 March (c) Draft the statemet of fiacial positio for Dudley Ltd as at 31 March 20-1.

35 9 4 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s t u t o r i a l 3.15 You have bee asked to help prepare the fiacial statemets of Avazi Ltd for the year eded 31 March The compay s trial balace as at 31 March 20-1 ad further iformatio is show below. avazi Ltd Trial balace as at 31 March 20-1 Debit Credit Share capital 5,000 Share premium 1,500 Retaied earigs at 1 April ,050 Lad ad buildigs cost 7,000 accumulated depreciatio at 1 April ,000 Plat ad equipmet cost 9,000 accumulated depreciatio at 1 April ,000 Trade ad other receivables 3,400 Trade ad other payables 2,400 5% bak loa repayable Cash ad cash equivalets 600 Accruals 190 Iterest paid 40 Reveue 22,400 Purchases 11,500 Distributio costs 3,000 Admiistrative expeses 2,550 Ivetories at 1 April ,200 Divideds paid 1,050 39,340 39,340 Further iformatio: The share capital of the compay cosists of ordiary shares with a omial value of 1. The compay issued 1,000,000 ew ordiary shares durig the year. They had a omial value of 1 but were sold for 1.50 per share. This trasactio is icluded i the balaces i the trial balace above. Lad, which is ot depreciated, is icluded i the trial balace at a value of 2,000,000. The ivetories at the close of busiess o 31 March 20-1 cost 1,315,000.