In this webpage we will continue to use the same example as in our previous two sessions in order to illustrate how to prepare a Statement of Financial Position.
In section 3.09 we identified where the accounts in the trial balance would be recorded and how the notes would affect the figures. These are replicated below with those items in the trial balance relating to the Statement of Financial Position being 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 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
Non-current Assets: Property, plant & equipment
The value of the property, plant and equipment at the end of the year will be calculated using the cost less accumulated depreciation taken from the trial balance less the depreciation mentioned in note 1 and then we would add the gain on the revaluation mentioned in note 2.
Current Assets: Inventories and Trade & Other Receivables
Inventories are calculated as their cost, excluding the cost of the item to be recorded at its net realizable value, plus the item’s net realizable value; £243,000 less £35,000 plus £25,000 that is, £233,000
Trade & Other Receivables will include the figure for this account as taken from the trial balance. It will be reduced by the year-end Allowance for Doubtful Debts account (calculated as the opening balance of £14,000 less the year end reduction in the allowance of £4,000).
Current liabilities: Bank, Trade & Other Payables and Tax
The bank overdraft is taken directly from the trial balance.
Trade & Other Payables are calculated as the balance from the trial balance plus the year end materials accrual.
The Tax liability is calculated as the balance taken from the trial balance less the adjustment for the over-provision for the previous period plus the current year’s corporation tax charge.
The year-end balances of equity can be taken straight from the Statement of Changes in Equity prepared in section 3.10
The above amounts will be entered into the Statement of Financial Position as shown below.
Lastly, the sub-totals can be calculated and recorded in the Statement as shown below.
The Net assets recorded in the Statement should equal the total of Equity and in our above example both are calculated as £1,596,000. If there is a difference the Statement must contain at least one error. If you find that this is the case you should quickly review the figures to check for any obvious mistakes. If no such mistakes are found it is usually best to move on to the next question and only return to the Statement if you have time at the end of the exam.