Financial Accounting - Comprehensive Income Statement - Assignment Example

Comprehensive Income Statement

An income statement for a company or any corporation refers to all the amounts which occurred during a particular accounting period. This period may either be in months, semiannually or yearly. Further, it entails all the expenses, revenues and gains which might have caused stockholders’ equity to change during a given accounting period. The firms’ sales or purchase of stock and declaration of dividend is not part of the comprehensive income statement. Instead, the stock transactions are reported as separate transactions in the statements of changes in shareholders’ equity. An income statement is one of the important statements which a company or any other entity cannot afford to exclude. It forms a basis from which all the other statement are prepared(Ijiri 2014, 265). For instance, elements of the profit and loss accountis used to form a statement of consolidated cash flow, balance sheet among other vital statements. It records the net profits or loss of the company during a particular accounting period. Businesses that are not for profits making, their income statement is a bit different. It capture only sources of income and how such income is spent. Moreover, instead of reporting net profits or loss, it records only a surplus or deficit which is carried to the balance sheet to add up to the accumulated fund. In order to complete this paper, this statement will be prepared using the multiple step approach of accounting.

SP2 COMPANY

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDING 30TH JUNE 2016

PARTICULARS

$ "000"

$ "000"

Sales

$ 88,490.00

Less: Return outwards

$ (6,040.00)

Net sales

$ 82,450.00

Less: Cost of sales

$ 45,300.00

Gross profit

$ 37,150.00

Add: Service revenue

$ 52,600.00

Interest earned during the period

390

Reverse of legal provision

3500

$ 56,490.00

Net Gross Profits

$ 93,640.00

OPERATING EXPENSES

Allowance for doubtful debts

$ 2,360.00

Provision for employee entitlements

$ 1,300.00

Provision for warranty

$ 1,550.00

Warranty expense

$ 4,050.00

Depreciation on building

$ 2,100.00

Depreciation on office furniture and equipment

$ 620.00

Depreciation on machinery

$ 1,970.00

Prepaid expenses: Insurance policy

$ 730.00

Advertising services

$ 2,500.00

Interest expense

$ 640.00

Lease on machinery

$ 620.00

Annual leave expense

$ 612.00

Contribution to subsidize employee

$ 2,000.00

Payment to auditors

$ 910.00

Loss on disposal

$ 400.00

Stock damage

$ 1,200.00

Damage to buildings

$ 870.00

Supersale expenses

$ 480.00

Fine by ACCC

$ 85.00

Total operating expenses

$ 24,997.00

Earning before Tax expense

$ 68,643.00

Corporate Tax 30%

$ 20,592.90

Net profits after tax

$ 48,050.10

Table I: Income Statement

Workings

Nets sales is arrived as follows, gross sales= $88,490-$6,040(returns inwards) =$ 82,450

Statement of Financial Position

The statement of financial position is also referred to as a balance sheet. It is one of the main financial statements which report a company’s assets, liabilities and any differences which may have occurred. The total amounts reported on this statement represent all cash and cash equivalents which may have accrued in that accounting period. Whichever the format used to detail the items of the balance sheet, the basic accounting equation (Assets=Liabilities’ + Equity) must hold. In other words, the double entry system must be utilized to balance off the accounting records. The balance sheet is prepared using the accrual accounting method and represents full disclosure using the AASB101 principles (Hodgson and Russell 2014, 100-110). A balance sheet is a statutory statement which must be prepared and reported especially if it is a public company. A balance sheet is used to represent the company’s financial status at a given time. Investors utilize this statement to gain an insight on the net working capital of the company. In this case, they will be interested to know if the company can pay of both its long term and short term obligations as they fall due. Consequently, one of the importance of the balance sheet is that it can be used as an evidence to acquire a loan from potential investors or lenders.

SP2 COMPANY

STATEMENT OF FINANCIAL POSITION

AS AT 30TH JUNE 2016

NON CURRENT ASSETS

COST

ACCUMULATED DEPRECIATION "000"

NET BOOK VALUE "000"

Land

$ 19,750.00

$ -

$ 19,750.00

Buildings

$ 46,500.00

$ 2,100.00

$ 44,400.00

Machinery

$ 21,670.00

$ 1,970.00

$ 19,700.00

Office furniture and equipment

$ 4,370.00

$ 620.00

$ 3,750.00

Total

$ 87,600.00

CURRENT ASSETS

Inventory (NRV)

$ 16,833.00

Less: damage

$ (1,200.00)

Net inventory

$ 15,633.00

Accounts receivable

$ 12,640.00

Less: provision for doubtful debts

$ (443.00)

Net accounts receivable

$ 12,197.00

prepaid expenses

$ 3,230.00

Cash at bank

$ 7,900.00

Total

$ 38,960.00

LESS: CURRENT LIABILITIES

Accounts payable

$ 10,630.00

provisions: warranty

$ 1,550.00

Employee entitlements

$ 1,300.00

Corporate tax

$ 20,592.90

Total

$ 34,072.90

$ 4,887.10

Suspense

$ 16,903.00

capital employed

$ 109,390.10

FINANCED BY:

Long term bank loan

$ 1,600.00

2,000,000 @1.50 ordinary shares

6,000,000 @3.20

share capital

$ 28,410.00

share premium form bonus issue

$ 4,800.00

Retained earnings brought down

$ 17,210.00

Net profits

$ 48,050.10

General reserve

$ 9,320.00

Total

$ 109,390.10

Table II: statement of financial position

Net Book Value workings

The cost of building= $46,500 -$2,100 (depreciation for the year) = $44,400

The cost of machinery =$21,670- $1,970(depreciation) = $19,700

The cost of equipment = $4,370-$620=$3,750

Corporate tax = 30% *$68,643(Net profits from P&L) =$20,592.90

Net accounts receivable= $ 12,640- $443(provision for doubtful) = $12,197

Statement of changes in Equity

A statement of changes in Equity is also referred to as a statement of retained earning detailing changes in owners’ equity over a given accounting period. This statement records movement in reserves, net earnings and shareholder’s holdings. It comprises net profits attributed to shareholders, increase or decrease in share capital, payments to stockholders’, gains recognized directly in equity and finally changes in the accounting principles and policies. The important of this statement is that it gives at a glance all the items relating to shareholders interest (Collier 2015). For instance, it shows if dividends were paid during that year and how much. Moreover, any changes in retained earnings, general reserve and any transfers which may have occurred in that accounting period. Statement of equity is rarely prepared since most of the items are captured in the balance sheet.

STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

AS AT 30TH JUNE 2016

Retained earnings brought down

$ 25,210.00

Transfer to general reserve

$ 8,000.00

Net retained earnings

$ 17,210.00

Add profits for the year

$ 48,050.10

less dividends

$ 880.00

Retained earnings carried forward

$ 64,380.10

General reserve

$ 9,320.00

share capital

$ 28,410.00

Total shareholder's Equity

$ 102,110.10

Table III: Statement of changes in equity

Workings:

General reserve totals = $1,320 +$8,000 = $9,320 (being a transfer from retained earnings b/d)

Balance in the retained earnings after transfer= $25,210-$8,000= $ 17,210

Total retained earnings C/F= $17,210+ $48,050.10= $65,260.10

Net retained earning minus dividends= $65,260.10- $880= $64,380.10

• Notes to the financial statements

The company has a permanent registered office and it’s a profit making organization. The company’s accounting policies and regulations are full prepared and adhered to AASB 101, AASB 108, AASB 1054 and AASB 137. The financial statements as prepared above were all authorized for issue by the board of directors who are solely accountable to the shareholders of the company. The financial statements have be prepared and reported according to AASB 101 paragraph 54 on a historical basis apart from other disclosures in the accounting policies. AASB 108 also referred to as IAS 8 is designed with the sole aim for making changes in the accounting presentation and errors that may arise (Leo 2015). The AASB 108 supersedes AASB 1031. The main aim is to ensure correction of all prior period errors, accounting for changes in accounting policies and it determines the selection and application of the accounting policies are presented above. For instance, if directors have authorized that depreciation should be accounted for on a reducing balance method then such changes should be incorporated into AASB 108. The policy explains how residual value on disposal, should be treated by adding back to contribute on the company’s profits (Kaplan and Atkinson 2015). Historical costs as indicated are based on a fair value of the market. In determining the fair value, the firm takes into a count all the attributes of liabilities, assets and other items in of the financial statements. The adopted new accounting standards which will be used to account for fixed assets and methods of apportioning dividends is in accordance to paragraph 5-6. The entity reports its inventory based on the net realizable value which is at the lower cost of the market (Leo 2015). On the other hand, items in the statement of comprehensive income has been reported and accounted for using AASB 101 paragraph 81A to 82A expected for nondisclosure items in the income statement. Such items which need not to be disclosed here include all the items related to changes in shareholders’ equity. The policies require that the reporting entity should be committed to satisfy the investors’ interest and measures and substantiate all the investments in terms of fair value basis (Bischof et.al 2014). On the other hand, amendments are being included on the AASB 137for the purpose of incorporating fresh disclosure requirements that accounts for investments. The AASB 1054 is set out in paragraph 16 as an additional disclosure which includes requires and definitions a long side International Financial Reporting Standards IFRS. Moreover, AASB 1054 requires an entity to disclose in the notes purpose for preparing the accounting statements as to whether it is a profit making or non-profit making organization. Such have been provided for just in case debtors do not pay all their dues in time. Damages to fixed assets and stock have been declared as expenses and therefore must appear in the income statement on the section of operating expenses. Corporate tax and other contingent liabilities relating to the employee benefits are accounted for as under AASB 137 that discloses the important policies during the entity reporting period. Moreover, AASB 137 is important in the making of accounting amendments. It is important to note that tax is paid in the year preceding income. Further, if the firm makes a loss on its operating activities, the tax is deferred to a later period payable when the company recognizes profits. Eventually, items in the statement of changes in equity are reported in accordance to AASB 101 paragraph 106. Disclosures relating to prorating of dividends and apportionment of retained earnings are elaborated under this paragraph (106)(Lai et.al 2014 308-327) Disclosure on loans and financial instruments are not accounted for in the preparation and reporting of the financial statements above.

Directors Declarations

The company directors have ascertained that the provisions and financials have been prepared in accordance to s. 286 Act. The true and fare view of the company indicate that the companies affairs are doing well as stipulated in the Australian Accounting Standard Board (AASB). For the purpose of financial reporting, the company will prepare its accounting information and present it in accordance to the policies outlined in the notes to financial statements. The company financial statements have been reported according to International Financial Reporting Standards (IFRS). Moreover, they are accounted for using AASB 101, AASB 1054 and AASB 137 which are policies governing the representation and reporting on the entities performance. Directors declared that a total of $880,000 to be transferred to the general reserve account after the authorization was made. Consequently, company directors have limited the amount of employee annual leave allowances following an extra leave not enshrined in the company’s framework. In the opinion of the directors, the company is stable, viable and expected to operate its affairs at a going concern. Moreover, the profitability of the company is at its best making it possible to pay both its short term and long terms obligations as they fall due. According to (Yang et.al 2014, 372-382) declaration of a company activities and changes must be subjected debate requiring a full resolution to effect changes.

Annual Directors report

The companies deals and operates in a factoring entity and is expected to operate in the same manner through the periods. The company has operated through many changes during this accounting period but it managed to achieve its targets for the accounting period. During this accounting period the company reported net revenues of $82,450 with an operating income before tax of $68,643 from its domestic operations. The board of directors among other stakeholders has expressed their concerned towards the company to work tirelessly to attain the company goals. In this case, some of the changes that took place included appointed of new auditors and chief financial officer to carry on the company’s affairs until further changes. In order to appreciate our shareholders, the directors awarded dividends of $3.20 for every share held to its shareholders (Abraham and Shrives 2014). In this effect, a total $880,000 was declared as dividends to be paid out. Dividends are paid annually based on the net profits of the company. It is proposed that dividends will be paid on an interim basis for every accounting period. Elsewhere, the company is geared towards improving and expanding the business activities. During this accounting period we plan to establish an effective capital working which will see the business improve its cash and cash equivalents. Investing the profits in short term investments is the biggest priority of the firm. The business has a sound financial structure of share capital which is composed of 2,000,000 fully paid ordinary shares at $1.50 and 6,000,000 ordinary shares at $3.20. The firm’s policy is to transfer any excess retained earnings to general reserve for the purposes of capital appraisal plans (Dalal and Sadler 2014). The board wishes to express their sincere gratitude to all stakeholders who have contributed immensely towards the profitability of the company. We have grown the business to a higher level and our strategic plans are to ensure that the firm is positioned strategically for the convenience of our customers and other parties who have interest in the company. With the best strategies put in place, we believe we can compete effectively in the future with other firms operating in the same industry. Moreover, in the AGM it was propose the company will retain future dividends for the coming accounting period in order to plough back the returns. Sincere thanks and gratitude goes to our esteemed customers, staff and other stakeholder who made a contribution in this accounting period ending 30th June 2016.

Annual Auditor’s Report

Audit refers to an independent examination into the books of account to ascertain the true and fair view of the company’s state of affairs. The first auditors of the company are appointed by the company directors to conduct business on before of the shareholders (Porter et.al 2014). However, during the first general meeting of the company, existing auditors can be reappointed or new ones appointed by the shareholders. It is the responsibility of the auditor to ensure that the financial statements are prepared free for any misstatement. After conducting an audit test, the auditor can proof that indeed fraud and other errors did occur. Auditors are expected to be individuals of high caliber who can comprehend information and act independently. In our opinion, the financial statements of the company have been drawn in accordance to ASSB 101 Act and have followed due regulations to the later. These policies have contributed to the firm reporting statements that have meet quality standards. Based on the company’s affairs and a thorough view of the books of accounts the auditors have expressed an unqualified opinion (Amin et.al, 2014, 1-39).This means that they are fully satisfied with the books of accounts which were presented to them by the accountants and directors of the company.

In a nut shell, it is clear that the company has a good profitability index since it can make enough profits to be retained for future investments. On the same note, shareholders have given their best to ensure that the company advances to the next level in terms of expansion and improvement in quality as opposed to their competitors. All financial statements have been prepared in accordance to AASB 101 which regulates how financial reports should be presented to the general public. Moreover, notes to financial statements have been included in the reports to provide details on the accounting policies. Despite that the firm did make a good record in this accounting period, more still have to be done to ensure continues growth in today’s contemporary business. Directors have expressed their confidence in the company to operate for a foreseeable future. Among the strategies which they have promised to achieve in the next financial period is to increase profits through expansion and quality improvements. On the other hand, part of retained profits will be reinvested to improve the firm’s working capital management.