LIVE: FINANCIAL STATEMENTS (ADJUSTMENTS) 17 NOVEMBER 2014 Lesson Description

Transcription

1 LIVE: FINANCIAL STATEMENTS (ADJUSTMENTS) 17 NOVEMBER 2014 Lesson Description In this lesson we will focus on: Understanding the balance sheet of a sole trader The need for adjustments at the end of the financial year Challenge Question 1. Explain the difference between: a) Current assets and non-current assets b) Current liabilities and non-current liabilities 2. What items go in note 7? Reconstruct it in the space below: 3. Where would Bank go if it were in overdraft? Summary At the end of the financial year we prepare two financial statements: o Income statement shows the net profit o Balance sheet shows the statement of financial position ONLY Assets, Liabilities, Capital and Drawings go into the Balance sheet! The Balance Sheet is like a snapshot of the Accounting Equation in a business at the end of the financial year it shows the Assets, Liabilities and Owner s Equity on a certain date It is vitally important to know where everything goes in the balance sheet learn the notes thoroughly: Notes to the balance sheet: Note 3: Fixed assets (to be covered in Grade 11) Note 4: Inventory Trading stock Consumable Stores on Hand P a g e 1

2 Note 5: Trade and other receivables Trade debtors Accrued income Prepaid expenses (Sometimes) Debtors for insurance Note 6: Cash and cash equivalents Bank Petty Cash Cash float Savings account Current portion of fixed deposit Note 7: See challenge question! Note 8: Trade and other payables Creditors Income received in advance Accrued expenses Creditors for salaries SARS (PAYE) UIF Medical aid fund Pension fund Current portion of loan P a g e 2

3 Question 1 Exam Questions (Adapted from IEB Exemplar, 2006, Question 5) Belly Buttons is a business that sells homemade sweets and chocolates. The accountant went on leave before after completing the Balance Sheet for the year end 31 December Required: 1.1. Complete the balance sheet for the year ended 31 December 2006 after taking into account the information that follows. (30) 1.2. Answer the questions that follow. BELLY BUTTONS BALANCE SHEET AS AT 31 DECEMBER 2006 NOTES TO FINANCIAL STATEMENTS P a g e 3

4 Additional Information: 1. A new computer costing R was bought on the last day of the financial year. No entry has been made. 2. A fixed deposit worth R5 000 matured on 1 October Another fixed deposit amounting to R2 500 is due to mature the next financial year. 3. In order to increase sales, the business decided to offer credit facilities in An annual loan repayment of R is made to Ixopo Bank on 1 July 2006 each year. 5. The current ratio for 2006 is 2,5:1. 6. The bank balance increased by R2 660 for the year. There were no changes to petty cash and cash float. 7. The owner withdrew R cash and R1 500 of stock during the year. This was recorded. 8. The trading stock account reflected a balance of R on 28 February However no account has been made for the stock count which took place on the last day of the financial year where stock was valued at R and stationery at R Questions: In 2006 the business decided to offer credit facilities in Briefly comment on the effect that this has on the business s sales and net profit. (4) What control systems should Belly Buttons have in place to ensure that any fixed/tangible assets bought by the business are used in the business and that the manager or any other employee does not take it home for their own use? (4) What is the purpose of doing a stock-take at the end of an accounting period? (2) Answers Challenge Question a) Current assets are either already cash or will be converted into cash within the next 12 months; non-current liabilities are held for longer than a year. b) Current liabilities must be paid off within 12 months whereas non-current liabilities have longer than 12 months before they need to be paid off. Balance at the beginning of the year Net profit for the year Additional capital contributed Drawings for the year Balance at the end of the year 3. It would be shown under current liabilities. P a g e 4

5 Exam Questions 1.1 BELLY BUTTONS BALANCE SHEET AS AT 31 DECEMBER 2006 NOTES TO FINANCIAL STATEMENTS Briefly comment on the effect credit sales has had on the business s sales and net profit. Comments: - profit and sales have increased significantly since last year What control systems should Belly Buttons have in place to control fixed/tangible assets? There should be a fixed asset register showing the details of each fixed/tangible asset. Make up list make sure the value of each item is on list and this agrees to the value of fixed/tangible assets in general ledger. P a g e 5

6 When a fixed/tangible asset is ordered it should be authorised. A physical count of assets should be done periodically. Each fixed/tangible asset should be marked with a number. When employees leave the businesses premises security personnel could do spot checks to see that employees do not take business assets home. Any other acceptable answer. 2 answers X 2 marks What is the purpose of doing a stock-take at the end of an accounting period? To check whether book value of stock agrees with physical value of stock. To calculate stock deficits. Any other acceptable answer. 2 answers X 2 marks P a g e 6