A common type of question on financial statements provides students with a company’s trial balance for a year together with further information about adjustments that may be required. The student is then asked to prepare one or more of the following financial statements:
- The Statement of Profit or Loss and Other Comprehensive Income
- The Statement of Changes in Equity
- The Statement of Financial Position
In this and the next few webpages we will go through a worked example to illustrate how each of the above Statements are prepared and presented. We will begin with the Statement of Profit or Loss and Other Comprehensive Income.
Illustration scenario
Lucan Ltd’s trial balance as at the company’s year-end of 31/12/X9 is given below together with a series of notes about the company’s finances.
General points about preparing financial statements
- Read the question carefully
- Review the trial balance and identify in which statement each account will be recorded
- Read the additional information provided and identify the accounts that will be directly affected by each note
- Start preparing the requested statement(s) – keep track of which lines of the trial balance and which notes have been dealt with
- Record your workings – there are many entries in the statements that are calculated by combining several numbers. If you just record the overall figure you might make a minor error in which case all the marks for that part of the statement will be lost, whereas you might just lose one mark if you have provided your workings
- Only calculate sub-totals and totals in the Statements after you have recorded the other figures (otherwise you will find yourself re-calculating these amounts several times)
- Do not allow yourself to spend too much time on a single issue. It is better to lose one or two marks because you have ignored an issue you are unfamiliar with than to lose several because you run out of time
The Statement of Profit or Loss and Other Comprehensive Income
We will start by identifying the statements in which each line of the trial balance will be recorded (those relating to the Statement of Profit or Loss and Other Comprehensive Income are highlighted in yellow).
Review of the notes
- Deprecation charges will directly affect the expenses in the Statement of Profit or Loss and the value of property, plant and equipment in the Statement of Financial Position
- £35,000 will be recorded as Cost of Sales (i.e. 50% of £70,000)
- £21,000 will be recorded as Selling & Distribution Expenses (i.e. 30% of £70,000)
- £14,000 will be recorded as Administrative Expenses (i.e. 20% of £70,000)
- Property, plant & equipment will be reduced by £70,000
- A property revaluation will directly affect Other Comprehensive Income, the value of property and the Revaluation Reserve
- Property, plant & equipment will be increased by £520,000 (i.e. the difference between its current carrying value of £280,000 and its fair value of £800,000)
- The gain on revaluation of £520,000 will be recorded in Other Comprehensive Income
- A revaluation reserve of £520,000 will be created
- Closing inventory will affect the calculation of Cost of Sales and will be included in Current Assets
- Inventory will be valued at £233,000 (i.e. £243,000 less £35,000 plus £25,000)
- The year-end accrued expense will affect Cost of Sales and Trade & Other Payables
- Cost of Sales will be increased by £12,000
- Trade & Other Payables will be increased by £12,000
- The doubtful debts will affect Administrative Expenses and Trade & Other Receivables
- Administrative expenses will be reduced by £4,000
- Trade & Other Receivables will be increased by £4,000
- The tax charge and over-provision will affect the Tax in the Statement of Profit or Loss and the Tax in Current Liabilities
- The Tax charge in the Statement of Profit or Loss will be £50,000 (i.e. the current year’s charge of £53,000 less the previous year’s over-provision of £3,000)
- The Tax liability in the Statement of Financial Position will be current year’s tax charge of £53,000
- The issue of shares will affect the Share Capital and Share Premium columns in the Statement of Changes in Equity
- The figures in the trial balance show the position at the end of the year, after the effects of the share issue. When preparing the Statement of Changes in Equity we will have to work backwards to calculate the balances of Share Capital and Share Premium at the start of the year
- The note about the continuing operations will not affect the preparation of these financial statements
Workings – Cost of Sales, Selling & distribution expenses, Administrative expenses and Taxation in the Statement of Profit or Loss & Other Comprehensive Income
In addition to the above, the following entries can be made in the Statement directly from the trial balance:
- Sales revenue of £1,039,000
- Finance costs of £68,000
Once the above have been entered the Statement will appear as follows:
Finally, the different types of profit and total comprehensive income can be calculated and recorded.
The Statement is now complete.
