Chapter # 2 Accounting for Company –

Final Accounts

Sameer Hussain

www.a4accounting.weebly.com

Accounting for Company – Final Accounts

Chapter # 2

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SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:

Accounting for companies. Financial Statements in accordance with International Accounting Standards.

WHAT THE EXAMINER USUALLY ASK?

Income Statement. Statement of Retained Earnings. Balance Sheet.

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FINANCIAL STATEMENTS Financial statement is a written report which quantitatively describes the financial health of a company. Financial statements are usually compiled on a quarterly and annually basis. Financial statements include:

Income Statement. Balance Sheet. Cash Flow Statement. Statement of Changes in Equity. Notes to the Financial Statements.

INCOME STATEMENT Income statement shows the financial performance of the business. It shows the result of operations for a period. It consists of revenue and expenses. When total revenues exceed the total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting amount is net loss.

Name of Company Income Statement

For the Period Ended______ Sales XXX Less: Sales discount XXX Less: Sales returns and allowances XXX (XXX) Net sales XXX Less: Cost of Goods Sold: Merchandise inventory (beg) XXX Add: Net Purchases: Purchases XXX Add: Transportation in XXX Delivered purchases XXX Less: Purchase discount (XXX) Less: Purchase returns & allowances (XXX) Net purchases XXX Merchandise available for sale XXX Less: Merchandise inventory (end) (XXX) Cost of goods sold (XXX) Gross profit XXX Less: Operating Expenses: Office salaries expense XXX Advertising expenses XXX Directors’ fee expenses XXX Auditor’s fee expenses XXX Insurance expense XXX Bad debts expense XXX Depreciation expense XXX Total operating expenses (XXX) Profit/loss from operation XXX/(XXX) Add: Other Income: Commission income XXX Income before income tax XXX Less: Income tax expense (XXX) Net profit/Loss XXX/(XXX)

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BALANCE SHEET Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and owner’s equity on a given date. It is a quantitative summary of company’s financial condition at a specific point in time, including assets, liabilities and net worth. The first part of balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and owner’s equity).

Name of Company Balance Sheet As on _________

Equities Assets Shareholder’s Equity: Fixed Assets: Authorized Capital: Goodwill XXX XXX ordinary shares Plant & equipment XXX @ Rs.xx each XXX Less: All for depreciation (XXX) XXX

Preliminary expenses XXX Issued & Paid-up Capital: Total fixed assets XXX XXX ordinary shares @ Rs.xx each XXX Current Assets: Add: Shares premium XXX Office supplies XXX Less: Shares discount (XXX) Prepaid XXX XXX Merchandise inventory XXX Add: Retained earnings XXX Accounts receivable XXX Add: Reserves XXX Cash/Bank XXX Total shareholder’s equity XXX Total current assets XXX Liabilities: Long-Term Liabilities: Debentures payable XXX Premium on redemption XXX Total long-term liabilities XXX Current Liabilities: Accounts payable XXX Cash dividend payable XXX Stock dividend payable XXX Accrued expenses XXX Unearned income XXX Total current liabilities XXX Total equities XXX Total assets XXX

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STATEMENT OF RETAINED EARNINGS Name of Company

Statement of Retained Earnings For the Period Ended ______

Retained earnings (opening balance) XXX Add: Net income for the period XXX Total retained earning XXX Less: Reserves & Dividends: Reserves XXX Cash dividend XXX Stock dividend XXX Total reserves and dividends (XXX) XXX Less: Dividends: Cash dividend XXX Stock dividend XXX Total dividends (XXX) Retained earnings (ending balance) XXX

ILLUSTRATION # 1: (FINANCIAL STATEMENTS) The pre-closing trial balance of XYZ Ltd. was prepared on 31 March 2009 showed as follows:-

Debit Balances (in Rs.) Credit Balances (in Rs.) Cash 76,000 Accounts payable 167,000 Accounts receivable 50,000 All. for depreciation – Equipment 18,000 Merchandise inventory 51,000 Allowance for bad debts 3,000 Purchases 200,000 Paid-up capital 220,000 Equipment 312,000 Sales 300,000 Insurance expense 2,000 Retained earnings 18,000 Salary expense 11,000 Director’s fee 17,000 Auditor’s fee 7,000

726,000 726,000

Supplementary data for adjustment on June 30, 1993:- (a) Depreciation expense on equipment is estimated for the year at Rs.5,000. (b) The allowance for bad debts is to be increased by Rs.1,000. (c) Appropriate Rs.20,000 for contingencies. (d) Merchandise inventory valued on 31 March 2009 was Rs.40,000.

REQUIRED (a) Prepare Income Statement for the year ended 31 March 2009 and also Statement of

Retained Earnings. (b) Prepare Balance Sheet as of 31 March 2009.

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SOLUTION # 1: XYZ Ltd.

Income Statement For the Period Ended 31 March 2009

Sales 300,000 Less: Cost of Goods Sold: Merchandise inventory (beginning) 51,000 Add: Purchases 200,000 Merchandise available for sale 251,000 Less: Merchandise inventory (ending) (40,000) Cost of goods sold (211,000) Gross profit 89,000 Less: Operating Expenses: Insurance expense 2,000 Salary expense 11,000 Directors’ fee expenses 17,000 Auditor’s fee expenses 7,000 Bad debts expense 1,000 Depreciation expense 5,000 Total operating expenses (43,000) Net profit 46,000

XYZ Ltd. Statement of Retained Earnings

For the Period Ended 31 March 2009 Retained earnings (opening balance) 18,000 Add: Net income for the period 46,000 Total retained earning 64,000 Less: Reserves: Reserve for contingencies (20,000) Retained earnings (ending balance) 44,000

XYZ Ltd. Balance Sheet

As on 31 March 2009 Equities Assets

Shareholder’s Equity: Fixed Assets: Issued & Paid-up Capital: Equipment 312,000 22,000 ordinary shares Less: Allowance for depreciation (23,000) @ Rs.10 each 220,000 Total fixed assets 289,000 Add: Retained earnings 44,000 Add: Reserve for contingencies 20,000 Current Assets: Total shareholder’s equity 284,000 Merchandise inventory 40,000 Accounts rec. 50,000 Liabilities: Less: All for b/d(4,000) 46,000 Accounts payable 167,000 Cash 76,000 Total liabilities 167,000 Total current assets 162,000 Total equities 451,000 Total assets 451,000

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PRACTICE QUESTIONS Question # 1: 2002 – Regular & Private (Advanced & Cost Accounting)–UOK Pak. Company Ltd. was registered with an authorized capital of Rs.5,000,000 divided into 500,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on June 30, 2002:

Title of Accounts Debit Credit Cash in bank 63,000 Accounts receivable 100,000 Allowance for bad debts 3,000 Office supplies 12,000 Merchandise inventory 1.7.01 150,000 Prepaid insurance 8,000 Machinery – cost 1,200,000 Allowance for depreciation – Machinery 120,000 Preliminary expenses 6,000 Accounts payable 30,000 10% Bonds payable 200,000 Paid up capital 800,000 Retained earnings 210,000 Sales revenue 700,000 Interest revenue 7,000 Sales return & allowance 20,000 Purchases 400,000 Transportation – in 40,000 Purchases returns & allowances 30,000 Salaries expenses 50,000 Rent expenses 36,000 Income tax expenses 10,000 Advertising expenses 5,000

2,100,000 2,100,000 Data for Adjustments on June 30, 2002:

(a) Rent expenses for the year amounted to Rs.30,000. (b) Merchandise inventory was valued on June 30, 2002 at Rs.160,000. (c) Provide allowances for depreciation on machinery for the year Rs.80,000. (d) Allowance for bad debts Rs.5,000 for the year. (e) Appropriate Rs.50,000 for plant extension and Rs.40,000 for contingencies. (f) Declared cash dividend @ 10% on capital.

REQUIRED (a) Prepare a classified income statement for the year ended June 30, 2002 and also a

statement of retained earnings. (b) Prepare a balance sheet as of June 30, 2002 in classified form.

Question # 2: 2003 – Regular & Private (Advanced & Cost Accounting)–UOK Mehran Company was registered with an authorized capital of Rs.6,000,000 divided into 600,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on December 31, 2002, the end of the accounting year before the closing process: Debit Balance: Cash Rs.40,000; Accounts receivable Rs.65,000; Merchandise inventory (1.1.2002) Rs.25,000; Machinery – cost Rs.1,500,000; Purchase Rs.480,000; Transportation in Rs.20,000; Salaries expense Rs.58,000; Unexpired insurance Rs.8,000; Rent expense Rs.48,000; Auditor’s fee expense Rs.20,000; Director’s fee expense Rs.18,000 (total Rs.2,282,000).

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Credit Balance: Accounts payable Rs.45,000; Accumulated depreciation – Machinery Rs.140,000; Allowance for bad debts Rs.8,000; 10% Bonds payable Rs.280,000; Paid up capital Rs.1,000,000; Sales revenue Rs.750,000; Retained earnings Rs.59,000 (total Rs.2,282,000). Data for Adjustments on December 31, 2002:

(a) Merchandise inventory at Dec. 31, 2002 was valued at Rs.180,000. (b) Allowance for bad debts to be increased by Rs.2,000. (c) Insurance expired Rs.3,000. (d) Machinery is depreciated by 20% Diminishing Balance Method. (e) Salaries prepaid Rs.8,000. (f) Rent payable Rs.12,000. (g) Provide Rs.20,000 for income tax. (h) Appropriate Rs.10,000 for contingencies.

REQUIRED (a) Prepare Income Statement for the year ended December 31, 2002 and statement of

retained earnings on the same date. (b) Prepare balance sheet as of Dec. 31, 2002 in classified form.

Question # 3: 2004 – Regular (Advanced & Cost Accounting)–UOK Prooj Ltd. was registered with an authorized capital of Rs.3,500,000 divided into Rs.10 shares. The company’s books showed the following balances as on 30th June 2004. Debit Balance: (in Rs.) Plant assets: 3,750,000; Cash: 100,000; Accounts receivable: 162,500; Merchandise inventory (1st July, 2003): 62,500; Sales return: 7,000; Purchases: 1,245,000; Transportation in: 20,000; Salaries expenses: 145,000; Prepaid advertising: 20,000; Director’s fee: 215,000 (Total Rs.5,727,000). Credit Balance: (in Rs.) Sales revenue: 1,875,000; Commission income: 20,000; Accumulated depreciation: 350,000; Retained earnings: 367,500; Paid up capital: 2,500,000; 10% debentures payable: 500,000; Accounts payable: 112,500; Purchases return: 2,000 (Total Rs.5,727,000). Data for Adjustment on 30th June, 2004:

(a) Merchandise inventory valued Rs.45,000. (b) Advertising expired Rs.15,000. (c) Director’s fee commission payable Rs.30,000. (d) Prepaid salaries Rs.25,000. (e) Provide depreciation on plant assets at 5%. (f) Commission earned but not received Rs.5,000. (g) The board of directors resolved:

1. To declare cash dividend 5% on paid up capital. 2. To appropriate for plant expansion Rs.62,500 and for contingency Rs.50,000.

REQUIRED (a) Income statement. (b) Statement of retained earnings (c) Balance sheet in classified form.

Question # 4: 2005 – Private (Advanced & Cost Accounting)–UOK Hammad Hamid Ltd. was registered with an authorized capital of Rs.7,000,000 divided into 700,000 ordinary shares of Rs.10 each. The company books showed the following balances on June 30, 2005. Debit Balance Credit Balance Cash 110,000 Paid up capital 500,000 Accounts receivable 125,000 Retained earnings 50,000 Merchandise inventory 42,000 Accounts payable 50,000 Office supplies 38,000 6% Debentures payable 100,000

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Unexpired insurance 40,000 Accumulated dep. (Plant assets) 50,000 Plant assets 450,000 Accumulated dep. (Vehicles) 75,000 Vehicles 200,000 Purchases return & allowance 30,000 Purchases 205,000 Commission income 90,000 Transportation in 35,000 Sales revenue 400,000 Sales return & allowance 25,000 Salaries expenses 75,000 1,345,000 1,345,000 Data for Adjustment on June 30, 2005:

(a) Office supplies used Rs.24,000. (b) Insurance expired Rs.33,000. (c) 20% Depreciation for the year on written down value on vehicles. (d) Depreciation estimated on plant assets Rs.50,000. (e) Salaries for the period Rs.80,000. (f) Prepaid salaries Rs.5,000. (g) Merchandise inventory Rs.32,000 on 30.6.2005. (h) Provision for estimated bad debts Rs.5,000. (i) Appropriate Rs.40,000 for plant extension and Rs.25,000 for general reserves and

declare cash dividend @ 10% on paid up capital. REQUIRED

(a) Income statement. (b) Statement of retained earnings (c) Balance sheet.

Question # 5: 2005 – Regular (Advanced & Cost Accounting)–UOK Good Luck Ltd. has an issued capital of Rs.5,000,000 divided into ordinary shares of Rs.10 each. The authorized capital is 1,000,000 ordinary shares of Rs.10 each. Following is the company’s trial balance as on December 31, 2004: Sales --- 1,000,000 Purchases 400,000 --- Debenture interest 2,500 --- Director’s remuneration 45,000 --- Selling and distribution expenses 130,000 --- General expenses 143,000 --- Ordinary share capital --- 5,000,000 Share premium --- 50,000 5% Debentures --- 50,000 Plant & machinery cost 4,700,000 --- Motor van at cost 700,000 --- Accumulated dep. Plant & machine --- 140,000 Accumulated dep. Motor van --- 80,000 General reserve --- 90,000 Retained earnings Jan. 1, 04 --- 120,000 Accounts payable --- 60,000 Accounts receivable 190,000 --- Bank balance 204,500 --- Inventory January 1, 2004 50,000 --- Interim dividend 25,000 --- 6,590,000 6,590,000 Additional Information – December 31, 2004:

(a) Merchandise inventory valued at Rs.80,000. (b) Dividend proposed on ordinary shares at 3%. (c) Audit fees for the year estimated at Rs.5,000.

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(d) Provision for depreciation on plant and machinery and motor van is estimated at 10% and 20% per annum respectively.

(e) The directors have recommended to transfer Rs.50,000 to general reserve. REQUIRED

(a) Income statement for the year ended December 31, 2004. (b) Statement of retained earnings. (c) Balance sheet as on December 31, 2004 in a classified form.

Question # 6: 2008 – Private (Advanced & Cost Accounting)–UOK Star Co. Ltd. was registered with capital of Rs.800,000 divided into shares of Rs.10 each. The following are the account balances of the company as on June 30, 2007: Debit Balances: Cash Rs.11,000, Allowance for bad debts Rs.1,000, Marketable securities Rs.6,000, Accounts receivable Rs.22,000, Merchandise inventory Rs.10,000, Machine cost Rs.55,000, Purchases Rs.325,000, Sales returns & allowances Rs.30,000, Office salaries expense Rs.13,000, Sales salaries expense Rs.15,000, Advertising expense Rs.8,000, Office rent expense Rs.24,000, Auditors fees Rs.5,000, Directors fee Rs.14,000, Discount shares Rs.10,000. Credit Balances: Accounts payable Rs.6,000, Debentures payable Rs.5,000, Shares capital Rs.110,000, Sales Rs.400,000, Retained earnings ? Data for Adjustment on June 30, 2007:

1) Merchandise inventory valued at Rs.58,000. 2) Estimated allowance for bad debts Rs.1,300. 3) Depreciation expense for the year Rs.9,000. 4) Prepaid rent Rs.4,000. 5) Declared cash dividend Rs.4,000 & stock dividend Rs.1,000.

REQUIRED Prepare:

(a) As Income Statement for the year ended June 30, 2007. (b) Statement of Retained Earnings. (c) A Balance Sheet as of June 30, 2007 in a classified form.

Question # 7: 2004 – Private (Advanced & Cost Accounting)–UOK Sana Ltd. was registered with a capital 500,000 shares of Rs.10/= per. The unarranged trial balance at 31st December 2004 was as under: Account Titles Debit Credit Cash 120,000 Accounts receivable 155,000 Accounts payable 145,000 Merchandise inventory 125,000 Purchases 1,500,000 Paid up capital 1,800,000 Transportation in 20,000 Salaries expenses 120,000 Sales 1,830,000 Building 1,800,000 Auditors fee 70,000 Furniture 50,000 Retained earnings 225,000 Fire insurance premium 10,000 Utility expenses 30,000

4,000,000 4,000,000

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Data for Adjustment on 31-12-04 1. Merchandise inventory valued at Rs.140,000. 2. Salaries unpaid amounted to Rs.10,000. 3. Accrued utility expenses Rs.5,000. 4. One-fifth of insurance premium is unexpired. 5. Provide depreciation on furniture 20% and on building at 2%. 6. As per board of directors approval:

(a) Reserve for income tax @ 10% of net income. (b) Reserve for contingencies Rs.80,000. (c) Interim dividend declared @ 10% of paid up capital.

REQUIRED (a) Income statement. (b) Statement of retained earnings (c) Balance sheet in classified form.

Question # 8: 2006 – Private (Advanced & Cost Accounting)–UOK The following is the trial balance of Multi Tech Limited as at December 31, 2006: Paid up share capital 1,000,000 Share premium 500,000 Nat income January 1, 2006 700,000 10% Debentures payable 2010 600,000 Plant and assets 3,900,000 Accumulated depreciation 460,000 Merchandise inventory 880,000 Accounts receivable 420,000 Accounts payable 360,000 Purchases and sales 3,650,000 6,540,000 Administrative salaries 500,000 Sales salaries 70,000 Director’s remuneration 160,000 Advertising expenses 280,000 Carriage outwards 100,000 Utility expenses 300,000 Bank overdraft 100,000

10,260,000 10,260,000 Additional Information: The paid-up share capital consists of 100,000 shares of Rs.10 each. Merchandise inventory at December 31, 2006 was Rs.500,000. Estimated tax on profit of the company for the year is Rs.150,000. The directors have proposed final dividend of 10 percent on the ordinary share capital. Depreciation is provided at 10 percent per annum on plant and assets. Allowance for bad debts is to be maintained at 5 percent of the accounts receivable. REQUIRED

(a) Income statement for the year ended Dec. 31, 2006. (b) Statement of retained earnings. (c) Balance sheet as at December 31, 2006.

Question # 9: 2011 – Regular (Advanced & Cost Accounting)–UOK X, Y Company Ltd. was registered with an authorized capital of Rs.8,000,000 divided into 800,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on June 30, 2011: Title of Accounts Debit Credit Cash in bank 94,500 Accounts receivable 150,000

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Title of Accounts Debit Credit Allowance for bad debts 4,500 Office supplies 18,000 Merchandise inventory 1.7.10 225,000 Prepaid insurance 12,000 Machinery – cost 1,500,000 Allowance for depreciation – Machinery 150,000 Preliminary expenses 10,000 Accounts payable 40,000 10% Bonds payable 200,000 Paid up capital 800,000 Retained earnings 310,000 Sales revenue 800,000 Commission on income 706,000 Sales return & allowance 20,000 Purchases 900,000 Transportation – in 40,000 Purchases returns & allowances 40,000 Salaries expenses 40,000 Rent expenses 26,000 Income tax expenses 10,000 Advertising expenses 5,000

3,050,500 3,050,500 Data for Adjustments on June 30, 2011:

(g) Rent expenses for the year amounted to Rs.30,000. (h) Merchandise inventory was valued on June 30, 2011 at Rs.260,000. (i) Provide allowances for depreciation on machinery for the year Rs.135,000. (j) Allowance for bad debts Rs.5,000 for the year. (k) Appropriate Rs.50,000 for plant extension and Rs.40,000 for contingencies. (l) Declared cash dividend @ 10% on capital.

REQUIRED (c) Prepare a classified income statement for the year ended June 30, 2011 and also a

statement of retained earnings. (d) Prepare a balance sheet as of June 30, 2011 in classified form.

Question # 10: 2007 – Regular (Advanced & Cost Accounting)–UOK

DECENT COMPANY LIMITED INCOME STATEMENT

FOR THE YEAR ENDED JUNE 30, 2007 Net sales Rs._______? Cost of goods sold Rs._______? Gross profit (30% of net sales) Rs._______? Operating expenses Rs._______? Operating income (10% of net sales) Rs._______? Interest expense Rs.20,000 Income before income tax Rs._______? Income tax – 25% of income before income tax Rs.25,000 Net income Rs.75,000 REQUIRED Complete the income statement using only the information available.