Financial Accounting for Wamu Traders Limited - Term Paper Example

Financial Accounting Case Study: Wamu Traders Limited Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 19, 02, 2012 Introduction The need to have a complete set of financial statement for business organisation is very critical since it provides information that will assist in evaluating the performance of the enterprise. For the case of Wamu traders the existence of a set of financial records and the absence of the financial statement summary statements like the income statement and balance sheet necessitated proper analysis and making of adjustments so the current records may reflect a true and fair view of the company’s state of affairs as at 30tht September 2000. Problem Statement Wamu Traders limited has an incomplete initial trial balance at the close of the financial year and but there are various adjustments that need to be included before the preparations of the financial statements is initiated. Adjustments touching on depreciation, prepayments and accruals, calculation of dividends and provisions of bad and doubtful debts are done in order to arrive at accurate figures that will be indicative of the actual financial position of the company. Proposed solution summary The proposed solution to handle Wamu Traders case study will entails workings that will ensure that accurate values for the depreciation of freehold buildings, furniture and fittings, provision for bad debts, debtors value and finally accruals and prepayments. After these adjustments have been done, it will be necessary that adjusted trial balance is generated as a basis for the preparation of income statement and Balance sheet. Workings: The question is again fairly straightforward as the final accounts items can be picked from the balances given. 1. Depreciation; Buildings (500,000 X 20%) = 10,000 Fixtures (640,000 X 10%) = 64,000 Calculation of depreciation is based on the given rate of depreciation and this calculated figures will affected the depreciation expense account and the Accumulated depreciation account which is an asset account as indicated is the summary journal entry below; Dr Depreciation of freehold buildings expense account 10000 Cr Accumulated depreciation freehold buildings Account 10000 (Being recognition of depreciation expense for freehold buildings) Dr Depreciation of Fixtures expense account 64,000 Cr Accumulated depreciation Fixtures Account 64,000 (Being recognition of depreciation expense for Fixtures) 2. Provision for doubtful debts Debtor balance 330,000.00 Less Bad Debts (10,000.00) Balance 320,000.00 Provision at 5% 16,000.00 Decrease in provision for bad debts from 18,000 to 16000 indicates a 2000 reduction therefore adding to the income gross income of Wamu Traders limited. Reduction in the provision for bad debts is a gain to Wamu Traders Limited 3. Prepaid establishment expenses This will affect both the income statement and balance sheet reducing expenses and increasing asset by the same figure. Dr Prepaid Establishment expense account 4,000 Cr Establishment expense Account 4,000 (Being recognition of Prepaid Establishment expenses) 4. Accrued Administration expenses This will affect both the income statement and balance sheet increasing expenses and decreasing asset by the same figure. Dr. Administration expense account 7,000 Cr. Accrued Administration expense Account 7,000 (Being recognition of Accrued Administration expenses) 5. Interest on Loan This is based on the agreed rate of 6% and is as follows 6% * 100,000 = 6,000 This will form part of the accruals in the current financial year since it is paid a month after the closure of the financial year hence indicated as follows in the journal below; Dr Loan interest expense account 6,000 Cr Accrued Loan interest expense Account 6,000 (Being recognition of Accrued loan interest expenses) 6. Other Adjustments; This will include the dividends payable to the preference shareholders and ordinary shareholders calculation done after calculation of net profit. Other calculations Income statement Wamu Traders Limited Income Statement For the Year ending 30th September 2000 $ $ Sales 4,800,000.00 Less: Cost of Goods Sold 4,000,000.00 Add Discounts Received 13,000.00 Add Decrease in Provision for Bad debts 2,000.00 0 - 3,985,000.00 GROSS PROFIT 815,000.00 Less Other Expenses Loan Interest 6,000.00 Bad Debts 14,000.00 Discount allowed 5,000.00 Depreciation Buildings 10,000.00 Depreciation of Fixtures and fittings 64,000.00 Establishment expenses 126,000.00 Administration expenses 63,000.00 Selling and distribution expenses 167,000.00 - 455,000.00 NET PROFIT 360,000.00 Less Dividends: Preference 8,000.00 Ordinary 60,000.00 68,000.00 Retained profit for the year 292,000.00 Retained profit B/f 362,000.00 Retained profit C/f 654,000.00 Balance sheet Wamu Traders Limited Balance Sheet As at 30th September 2000 ASSETS $ $ $ Current Assets Bank overdraft (25,000.00) Trade debtors 320,000.00 Less Provision for Doubtful Debts (16,000.00) Stock 560,000.00 Prepaid establishment expenses 4,000.00 0 - 843,000.00 Non-current Assets Freehold Buildings 500,000.00 Less Accumulated Depreciation Building (60,000.00) Fixtures and fittings 640,000.00 Less Accumulated Depreciation Fixtures and fittings (320,000.00) 760,000.00 Goodwill 160,000.00 TOTAL ASSETS 1,763,000.00 LESS LIABILITIES Current Liabilities Trade creditors 148,000.00 Loan Interest payable 6,000.00 Accruals 7,000.00 Dividend payable 68,000.00 - 229,000.00 Non-current Liabilities 6% loan stock 100,000.00 100,000.00 TOTAL LIABILITIES 329,000.00 NET ASSETS 1,434,000.00 Share Capital and Capital Reserves Ordinary shares of Sh.20 each. Fully paid 600,000.00 8% preference shares Sh.20 each. Fully paid 100,000.00 Share premium account 80,000.00 Retained profit 654,000.00 1,434,000.00 Conclusion Financial reporting requires the accountant to ensure that financial transactions are accurately recorded in the period to which they relate so that matching of revenues and expenses is achieved consequently ensuring that accurate profitability measure is achieved. Wamu Traders need for accurate statements should not be clouded therefore in the cash basis concepts where inflows and outflows of cash and cash equivalents might be used as a measure of profitability. References Fabozzi, F., & Peterson, P., 2003. Financial management and analysis. New York: John Wiley and Sons. Helfert, E., 2001. Financial analysis: tools and techniques: a guide for managers. New York: McGraw-Hill. Read More