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MGT101 - Financial Accounting - I - Lecture Handout 38

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FINANCIAL STATEMENTS OF LIMITED COMPANIES

Statement of Changes in Equity

Statement of changes in equity shows the movement in:

  • Share Capital (issued share capital)
  • Share Premium
  • Nature of Reserves created
  • Un-appropriated Profit / Loss
  • Dividend Distributed

Share Premium

Share Premium is the amount received in excess of the face value of the share. Example: if a Rs. 10 share is sold for Rs, 12 then Rs. 2 is share premium. Share Premium can not be distributed among the share holders.
It can be utilized:

  • To issue Bonus Shares
  • To write off Preliminary Expenses
  • To meet the difference of face value and cash received in case of shares issued at discount
  • To meet the expenses of issue of shares
  • For payment of premium on redemption of debentures.

Reserves

Capital Reserve and Fixed Asset Replacement Reserve are used for specific purpose. These are not distributed among share holders. General Reserve and undistributed profit` can be distributed among share holders. Revaluation Reserve is created when an asset is re-valued from cost to market value. Revaluation Reserve can not be distributed among the share holders. It can be utilized for:

  • Setting off any loss on revaluation
  • At the time of disposal of asset, the reserve relating to that asset is transferred to profit& loss account.

Cash Flow Statement

Cash Flow Statement shows the movement of cash resources during the year. It gives information about sources of income and account heads on which this amount is spent. It is an integral part of financial statements.

Notes to the Accounts

Notes to the accounts are the explanatory notes of all the items shown in the profit and loss account and the balance sheet. It is the requirement of the Companies Ordinance and the International Accounting Standards. Following are explained in Notes to the accounts:

  • Nature of business of the company
  • Accounting Policies of the company
  • Details and explanation of items given in the Profit and Loss Account and Balance Sheet.

Debentures

Debentures are acknowledgement of debt, owed by the company to the public at large for a defined period of time, and has a mark up (profit) rate attached to it. Debentures are issued under the common seal (Stamp) of the company. Debenture is an instrument for obtaining loan from general public. Mark up is paid on Debentures which is generally equal to the market rate.

Term Finance Certificate

Term Finance Certificates are issued for a defined period. These are also issued to obtain loan from public at large. Both Debentures and Term Finance Certificates are usually issued by Public Companies.

Illustration

ABC Limited
Trial balance
As on June 30, 2002
Particulars Amount
Dr. (Rs.)
Amount
Cr. (Rs.)
Authorized Share Capital (Face value Rs. 10 each)   1,500,000
Paid up Capital   1,000,000
Share Premium   120,000
General Reserve   48,000
Accumulated profit brought forward   139,750
Opening Stock 336,720  
Sales   4,715,370
Purchases 2,475,910  
Return outward   121,220
Return inward 136,200  
Carriage inward 6,340  
Carriage outward 43,790  
Wages 410,240  
Salesmen Salaries 305,110  
Admin. Wages & salaries 277,190  
Plant And Machinery 610,000  
Motor vehicle hire 84,770  
Provision for Depreciation: Plant & Machinery   216,290
General Selling Expenses 27,130  
General admin. expenses 47,990  
Directors’ Remuneration 195,140  
Rent received   37,150
Trade Debtors 1,623,570  
Cash and Bank balances 179,250  
Trade Creditors   304,570
Bills Payable   57,000
Total 6,759,350 6,759,350

Additional Information

  • Closing stock is valued at Rs. 412,780.
  • Accrue Auditors’ remuneration Rs. 71,000.
  • Dividend is proposed @37.5% for the year.
  • Depreciate plant & machinery @20% on cost.
  • Of the motor hire, Rs. 55,000 is for selling purposes.
  • Directors’ remuneration has been as follows:
    o Chairman
    46,640
    o Managing Director
    51,500
    o Finance Director
    46,000
    o Marketing Director
    51,000
    195,140

You are required to prepare profit & loss account as on June 30, 2002 and balance sheet for the reported period.

Solution

While presenting the financial Statements of the company, balance sheet is presented first and profit & loss account is presented later, but we cannot prepare balance sheet without preparing profit and loss account. So we will prepare profit and loss account first.

Balance Sheet

ABC Limited
Balance Sheet
As At June 30, 2002
Particulars Note  
Fixed Assets at WDV 3-a 271,710
Current Assets
Debtors
Stock in Trade
Cash & Bank Balance
  1,623,570
412,780
179,250
    2,215,600
Current Liabilities
Creditors
Bills Payable
Auditors Remuneration Payable
Proposed Dividend
  304,570
57,000
71,000
375,000
    807,570
Working Capital   1,783,030
Net Assets Employed   1,679,740
Financed By:
Authorized Capital
50,000 Shares of Rs. 10 each
  1,500,000
Paid Up Capital
30,000 Shares of Rs. 10 each
Share Premium
General Reserve
Accumulated Profit and Loss Account
  1,000,000
120,000
48,000
511,740
Total   1,679,740

Profit & Loss Account

ABC Limited
Profit and Loss Account
For the Year Ending June 30, 20-2
Particulars Note Amount Rs. Amount Rs.
Sales
Less: Cost of Goods Sold
1
2
  4,579,170
(2,695,210)

Gross Profit
Add: other income (rent received)
Less: Administrative Expenses 3
Less: Selling Expenses 4
Profit before tax
Less: Tax for the year
Profit after tax
Add: Accumulated Profit b/f

Less: Proposed Dividend @ 37.5%

 

3

4

 

5

 

692,090
482,030

1,883,960

37,150
(1,174,120)
746,990
0
746,990
139,750
886,740

375,000

Net Profit Carried Forward     511,740

Notes to the Accounts

Note # 1 Sale account

Sales

4,715,370
Less: Return in
(136,200)
Net Sales
4,579,170

Note # 2 Cost of goods sold

Opening Stock

336,720
Add: Purchases
2,475,910
Wages
410,240
Less: Returns out
(121,220)
Add: Carriage in
6,340
Less: Closing Stock
(412,780)
Total
2,695,210

Note # 3 Administrative Expenses

Wages & salaries

277,190
Motor Hire
29,770
General Expenses
47,990
> Directors Remuneration:
Chairman
46,640
Managing Director
51,500
Director Finance
46,000
144,140
Auditors Remuneration
71,000
Depreciation Plant & Machinery (Note # 3-a)
122,000
Total
692,090

Note # 3-Fixed Assets

  Cost Rate Opening For the Yr. Closing WDV
Plant & Machinery 610,000 20% 216,290 122,000 338,290 271,710

Note # 4 Selling Expenses

Salesmen salaries

305,110
Carriage out
43,790
General Expenses
27,130
Motor Hire
55,000
Marketing Director’s Remuneration
51,000
Total
482,030

Note # 5 Proposed Dividends

37.5% of 1,000,000 (issued capital)

27,130

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