Income statements 02 Introduction Generating as much profit as possible (known as profit maximization) is often seen as the main objective for many businesses. It is possible that a business has other objectives, such as growth or survival, but it is likely that profit will feature in the minds of the managers of a business when asked what they would like to achieve. Calculation of this profit will be important for the following reasons: A business may need to raise external finance (eg in the form of a bank loan) and the lender will want some reassurance that any debt will be repaid and may want to see if the business is currently profitable or is likely to be profitable in the near future. Profit allows a business to grow. Profits mean more funds can be reinvested within the business over time and expansion will take place. Tax paid by a company will be based on the level of profits earned for a year (though a sole trader will pay income tax rather than a tax levied purely on profits). The overall profit of a business is calculated in an income statement. An income statement is one of the financial statements produced by a business at the end of the financial year (though it can be produced for shorter periods if the owners of the business so wish). Calculating profit Although the overall profit or loss earned by the business is calculated in the income statement, it makes sense first of all to explore what we mean by the term profit. Accounting for Non-Accountants_print-ready.indb 23 10/6/2014 3:34:40 PM
24 Accounting for Non-Accountants In these examples we will make the assumption that the accounting records we look at are those of a trader. A trader will generate profits through the buying and selling of finished goods which require no further production. Any profit would be calculated as the difference between what a firm earns in income after the deduction of all its expenses for a specified period of time. Obviously profit would be generated if the total of income were greater than the total of expenses. A loss occurs where expenses total more than the level of income. The profit would mean that the firm had earned more than it spent and is therefore left with more than it started the period of time with. This means that the firm has grown (it is possible that a profitable firm does not grow if the owner withdraws the profit, but this will explored when we look at balance sheets). For most businesses, the income would be the revenue earned from sales made during that period. This may be supplemented by other forms of income, such as rent received, commission earned or income from investments made by the firm. Although overall profit is important, it is also important to know the size of the profit made on the actual sales that have been made before any other expenses are deducted. As a result, there are two measures of profit which are commonly used and understood. These are: Gross profit Net profit Profit earned by the firm s trading through buying and selling goods Profit remaining after all expenses have been deducted Gross profit Gross profit is the profit earned by the firm on its main trading operations. The section of the income statement where gross profit is calculated is known as the trading account. Gross profit is measured by the dif ference between the sales revenue earned by the firm and the cost of the goods sold. Gross profit = Sales revenue Cost of goods sold Sales revenue Sales revenue simply measures the amounts that the firm has received or is owed for goods sold during the year. It may also appear simply as Sales, Turnover or even Revenue. Cost of goods sold The cost of goods sold is calculated by comparing the value of goods sold by the firm with how much those goods actually cost the business. This is not the same as the amount spent on purchasing inventory, because the firm is likely to have unsold inventory left at the end of the period. Any unsold inventory is not counted as part of the cost of goods sold. Accounting for Non-Accountants_print-ready.indb 24 10/6/2014 3:34:40 PM
Income Statements 25 Example 2.1 During the year to 31 March 2017, a firm earns 50,000 sales revenue. During the year it spent 24,000 purchasing goods for resale. Inventory as at 1 April 2016 was valued at 8,500 and by the end of the year this had risen to 9,900. Trading account for year ended 31 March 2017 Sales 50,000 Less Cost of goods sold: Opening inventory 8,500 Purchases 24,000 32,500 Less Closing inventory 9,900 22,600 Gross profit 27,400 Given that the gross profit is calculated as the profit made only on the buying and selling of goods, it is possible that a firm earns a gross profit but still ends up with a net loss. It is also possible but unlikely that the business makes a gross loss, which would make it highly unlikely that they would make anything other than a net loss. Further complications A new business will not have any inventory on hand at the start of the period. However, any business which has existed for more than one trading period will have inventory on hand at the start of the period as well as at the end. This opening inventory will need to be added on to the amount for purchases in the cost of goods sold calculation. It is perfectly normal that a business will find that inventory purchased is not suitable and will be returned either to the business by customers or by the business to the original suppliers. In either case, these returns will need deducting from the respective sales or purchases figure in the trading account. Returns inwards (or Sales returns) would be deducted from the sales figure. Returns outwards (or Purchase returns) would be deducted from purchases. Both of these deductions would appear in the trading account. In addition, costs for the transportation of goods into the firm, known as carriage inwards, may also be included in the cost of goods sold calculation. Carriage outwards the cost of transporting finished goods to customers would appear along with all other expenses as it is not connected with the purchase of the goods themselves. The following example incorporates these further adjustments to the trading account. Accounting for Non-Accountants_print-ready.indb 25 10/6/2014 3:34:40 PM
26 Accounting for Non-Accountants Example 2.2 The following data relates to the year ended 31 December 2019. Sales 99,200 Purchases 65,100 Returns inwards 1,190 Returns outwards 550 Carriage inwards 1,975 Opening inventory 11,230 Closing inventory 13,460 The trading account would appear as follows: Trading account for year ended 31 December 2019 Sales 99,200 Less Returns inwards 1,190 Net turnover 98,010 Less Cost of goods sold: Opening inventory 11,230 Add Purchases 65,100 76,330 Add Carriage inwards 1,975 78,305 Less Returns outwards 550 77,755 Less Closing inventory 13,460 64,295 Gross profit 33,715 Net profit The net profit of the business will be found once all further incomes and expenses have been dealt with. Although income from sales revenue will be the main source of income for the business, it is perfectly normal for there to be other sources of income which would count towards the overall profits of the business. These incomes will be added on to the gross profit. Other expenses incurred by the business will be deducted at this stage to give the net profit for the business. These expenses will be connected with the operations of the business, such as the costs relating to the staffing costs, power costs and general administration of the business. Accounting for Non-Accountants_print-ready.indb 26 10/6/2014 3:34:40 PM
Income Statements 27 The income statement As stated earlier, the income statement is the financial statement which calculates the overall profit or loss earned by the business for a particular period of time. Alternative names for the income statement are the profit and loss account, the statement of comprehensive income, and, more recently, the statement of profit or loss. It is commonplace to produce a full income statement based on a trial balance. The trial balance consists of the balances from the double-entry ledger accounts. However, we will not use all the items in the construction of the income statement. At this stage we are only interested in the balance from the accounts that correspond with either an income for the firm or an expense. The other balances listed in the trial balance (shown in light grey in Example 2.3) are not needed for the income statement but will be used in the construction of another financial statement the balance sheet. A full income statement is illustrated in the following example. Example 2.3 Trial balance as at 31 December 2016 Dr Cr Sales 124,500 Purchases 76,800 Inventory as at 1 January 2016 8,940 Machinery 15,000 Fixtures and fittings 8,450 Trade receivables 9,876 Trade payables 5,676 Bank overdraft 5,344 Electricity 1,630 Wages and salaries 21,340 General expenses 3,450 Advertising 274 Capital 35,000 Drawings 11,500 Maintenance 2,890 Commission received 2,130 Equipment 12,500 172,650 172,650 Inventory on hand as at 31 December 2016 was valued at 7,652. Accounting for Non-Accountants_print-ready.indb 27 10/6/2014 3:34:41 PM
28 Accounting for Non-Accountants Income statement for the year ending 31 December 2016 Sales 124,500 Less Cost of goods sold Opening inventory 8,940 Add Purchases 76,800 85,740 Less Closing inventory 7,652 78,088 Gross profit 46,412 Add: Commission received 2,130 48,542 Less Expenses Electricity 1,630 Wages and salaries 21,340 General expenses 3,450 Maintenance 2,890 Advertising 274 29,584 Net profit 18,958 As we can see, the firm makes an overall profit of 18,958. This is the surplus of overall income over the expenditure for the same period. This does not mean that the firm has money available equivalent to this amount. This idea, that profit and cash are identical, is a common misunderstanding made by students new to the subject. The profit that the firm has made could easily have been already spent on buying inventory to generate further sales and profits. It could also have been used to acquire new assets to help the firm become more productive. The differences between cash and profit are explored in Chapter 17. Classification of expenditure One of the reasons why cash and profit are not identical is covered by the decision made as to what to include when constructing the income statement. It is important that only the relevant incomes and expenses are included in the calculation of profit or loss. We want the statement to show the true incomes and expenses that were incurred by the firm in this period. The correct recording of expenses is easy with some examples. For example, Accounting for Non-Accountants_print-ready.indb 28 10/6/2014 3:34:41 PM
Income Statements 29 wages, insurance and heating costs can be easily linked to the correct accounting period; for instance, wages are specifically paid for a period of time. However, for some expenses this is less obvious. To solve this issue, expenses are classified into two categories: revenue expenditure and capital expenditure. Revenue expenditure Revenue expenses are those which are incurred on a day-to-day basis and are related to the running of the business. These expenses are used up in the accounting period and do not add value to the non-current assets of the business. Common examples of revenue expenditure would include purchases of inventory, wages and salaries, advertising and other general expenses associated with running the business. Capital expenditure Capital expenditure involves the purchase or acquisition of non-current assets and some of the costs associated with getting the assets into working condition. These assets will normally be expected to last for a number of accounting periods and will not therefore belong to one period in particular. As a result, this expenditure will not appear directly in the income statement in the way that revenue expenditure does. This may seem odd how can an item of expenditure not appear as a deduction against the revenue earned by the firm? Capital expenditure will appear in the income statement but it is dealt with through the process of depreciation, which is covered in Chapter 4. Capital and revenue receipts Incomes can be classified in the same way. Capital receipts and capital incomes are those which are not generated in a particular period of time (in that they are one-offs rather than earnings from a particular period). Examples of capital receipts would include loans taken by the firm, share issues, and sales of fixed assets. Revenue incomes are the incomes generated which relate to a particular period of time. Sales would be the main example of revenue income. Other examples of revenue income would include rent received and commission received. Accounting for Non-Accountants_print-ready.indb 29 10/6/2014 3:34:41 PM
30 Accounting for Non-Accountants Review questions 1 From the following data, produce a trading account for the year ended 31 December 2016. Solution Opening inventory 8,750 Closing inventory 9,230 Purchases 64,300 Sales 97,400 Trading account for the year ended 31 December 2016 Sales 97,400 Less Cost of goods sold Opening inventory 8,750 Add Purchases 64,300 73,050 Less Closing inventory 9,230 63,820 Gross profit 33,580 2 From the following data, produce a trading account for the year ended 31 December 2017. Solution Opening inventory 12,181 Closing inventory 31,905 Purchases 76,878 Sales 154,544 Trading account for the year ended 31 December 2017 Sales 154,544 Less Cost of goods sold Opening inventory 12,181 Add Purchases 76,878 89,059 Less Closing inventory 31,905 57,154 Gross profit 97,390 Accounting for Non-Accountants_print-ready.indb 30 10/6/2014 3:34:41 PM
Income Statements 31 3 The following data relate to the year-end balances for the business of J Holloway. From this data construct the income statement for the year ended 31 December 2015. Solution Sales 100,000 Purchases 68,000 Opening inventory 5,400 Closing inventory 7,250 Carriage inwards 460 Rent 7,000 Insurance 2,100 Wages and salaries 18,500 Heating and lighting 870 J Holloway Income statement for the year ended 31 December 2015 Sales 100,000 Less Cost of goods sold Opening inventory 5,400 Add Purchases 68,000 73,400 Add Carriage inwards 460 73,860 Less Closing inventory 7,250 66,610 Gross profit 33,390 Less Expenses: Rent 7,000 Insurance 2,100 Wages and salaries 18,500 Heating and lighting 870 28,470 Net profit 4,920 Accounting for Non-Accountants_print-ready.indb 31 10/6/2014 3:34:42 PM
INDEX NB: page numbers in italic indicate figures or tables accounting concepts 91 100 see also accounting standards accruals/matching 93 consistency 92 93 going concern 92 historical cost 96 materiality 94 money measurement 94 95 objectivity 95 96 prudence 92 realization/recognition 95 review questions for 97 100 separate entity 94 and standards 96 97 see also accounting standards accounting equation 3 4, 34, 39, 40, 122, 298, 320 accounting for other business organizations see also individual subject entries incomplete records 118 24 manufacturing organizations, accounts for 101 04 not-for-profit organizations see not-for-profit organizations, accounting for partnerships see partnerships, accounting for review questions for 125 33 accounting ratios 349 76 efficiency 356 61 asset turnover/links with profit margin 356 58 examples for 358, 360 61 inventory turnover 358 59 trade payables days 359 60 trade receivables days 359 gearing ratios 364 67 example for 365 ideal size of 366 67 and interest cover 367 investor ratios 367 70 dividend cover 368 69 dividend yield 369 dividends per share 368 earnings per share 368 example for 370 price/earnings ratio 369 70 and limitations of ratio analysis 371 72 liquidity 361 64 acid test ratio 362 63 current ratio 361 62 example for 363 64 profitability 350 56 example of 354 56 profit margins 352 54 return on capital employed (ROCE) 351 return on equity (ROE) 351 52 review questions for 373 76 types of 350 accounting standards 96 97, 313 31 see also United Kingdom (UK) Accounting Standards 96 97 current applicable 328 29 international accounting standards 328 29 UK GAAP standards 329 Financial Reporting Standard for Smaller Entities (FRSSE) 324 28 and micro-entities 328 Financial Reporting Standards (FRSs) 97, 315, 329 General Accepted Accounting Principles (GAAP) 96 new UK GAAP 321 22, 322 UK GAAP 313 15, 314 IASB conceptual framework 317 20 International Accounting Standards (IASs) see subject entry International Financial Reporting Standards (IFRSs) 97 new FRSs see financial reporting standards (new) used in the UK recent progress towards a single set of 321 review questions for 330 31 Statements of Recommended Practice (SORPs) 315 Statements of Standard Accounting Practice (SSAPs) 97, 315 UK accounting framework 97 Accounting for Non-Accountants_print-ready.indb 377 10/6/2014 3:35:58 PM
378 Index activity-based costing (ABC) (and) 157 58, 158 cost drivers 157 cost pools 157 evaluated 158 assets 3, 34 37 see also depreciation current 35 37, 229 bank and cash balances 36 37 inventory 36 other outstanding balances 36 short-term investments 37 trade receivables/debtors 36 non-current 34 35 intangible 34 35, 324 investments 35 schedule of 305 tangible 34 auditors 285 86 and the Bannerman ruling 286 list of 286 average cost method (AVCO) 295 balance sheet 27, 116, 117, 123, 211, 216, 218, 288 89, 297 98, 325 26, 328, 333 35, 338 46, 351, 371 72 adjustments 50 51, 51 construction of 320 content of 34 39 assets 34 37 see also subject entry capital of limited company 39 capital for sole trader 39 liabilities 37 39 see also subject entry and depreciation 54 55, 57, 71 72, 91, 94, 96 format of 40, 41, 42 of limited companies 271 73 for partnerships 108, 108, 110 review questions for 43 46 bank reconciliation statements 74 79 see also checking the double-entry system break-even analysis (and) 167 74 break-even chart 168 69, 169 calculating the break-even output level 170 71 costs in the break-even model 168, 168 examples 170, 172, 173 limitations of 173 74 margin of safety 172 revenue in the break-even model 167, 167 budget, types of 211 20 cash 211 14, 216 example for 212 14 master 216 example for 217 20 production 214, 216 example for 215 budgeting 207 28 explanation of 220 24 example for 221 24 incremental 225 and purpose of budgets see budgets, purpose of review questions for 226 28 and types of budget see budget, types of zero-based 225 26 budgets, purpose of 207 11 control 210 coordination 210 forecasting 208 09 motivation 210 11 planning 209 business costing 135 63 absorption costing (and) 140 51, 146 examples for 142, 143 full costing 141 global overhead recovery rates 142 44 multi-department overhead recovery rates 144 recovery of overheads 142 underabsorption and overabsorption of overheads 150 51 allocation of absorption costs to cost centres 144 50 absorption of overheads into cost units 149 allocation of direct costs 145 apportionment of overheads 145 46, 146 examples for 147 48, 150 reapportionment of overheads 146 cost behaviour 136 39, 138, 139 direct costs 136 37 fixed costs 137 38, 138 indirect costs 137 variable costs 139, 139 cost centres and cost units 136 costing methods 151 59, 152 activity-based costing 157 58, 158 batch costing 152 contract costing 153 55 examples for 153, 154, 155, 156 job costing 152 life-cycle costing 159 Accounting for Non-Accountants_print-ready.indb 378 10/6/2014 3:35:58 PM
Index 379 process costing/work in progress 155 service costing 156 target costing 159 principles for 140 principles and methods of 139 40 review questions for 160 63 capital 3 4, 33, 34, 72, 101, 105, 106, 116, 123 24 budgets 261 expenditure 29, 51, 55, 94, 113, 212 fixed 229 working 94 see also working capital management capital investment appraisal (and) 245 64 accounting rate of return (ARR) 251 52 evaluated 252 example for 252 capital investment 245 46 discounted cash flow (and) 252 56, 253, 254 choosing discount factors 254 example of 255 weighted average cost of capital (WACC) 255 56 discounted payback 260 61 example for 260 61 internal rate of return (IRR) 258 60, 259 evaluated 260 example for 258 59 investment appraisal evaluated (and) 261 capital budgets 261 economic climate 261 methods of investment appraisal 248 net cash flow and investment appraisal 247 48 net present value (NPV) 256 57, 258 59 evaluated 257 example for 256 57 payback 249 51 evaluated 250 51 examples for 249, 250 relevant costs and benefits 246 47 review questions 262 64 cash flow statement 56 see also statement of cash flows checking the double-entry system (by/with) 69 90 bank reconciliation statements 74 79 examples for 76 78, 79 control accounts 79 80 correction of errors 69 74 see also trial balance examples for 71, 72 73, 73 74 purchases ledger control accounts 81 83 example for 82 reconciliation of control account totals 83 85 example for 83 84 review questions for 85 90 sales ledger control accounts 80 81 example for 80 81 Companies House 266, 286 consumer motives 208 contingent liabilities 295 96 debt 56 57, 239 42 definition of micro-entity 328 depreciation (and) 51 56 the balance sheet 54 55 cost of an asset 52 disposal of non-current assets 55 56 examples of 53, 54, 55, 56 expected useful life of asset 52 method of 52 54 reducing balance 53 54 straight-line 53 residual value of asset 52 dividend(s) 279, 286, 303, 338 39, 351 52, 365 70 cover 368 69 per share 368 69 yield 369, 370 double-entry system see checking the double-entry system economic climate 257, 261 European Union (EU) companies 287 International Financial Reporting Standard for Small and Medium Sized Entities 324 listed companies and international accounting standards 97 listed groups of companies 321 FIFO (first in, first out) 295 figures accruals and prepayments on the balance sheet 51 balance sheet extract for a partnership 108 balance sheet of not-for-profit organization 117 Accounting for Non-Accountants_print-ready.indb 379 10/6/2014 3:35:58 PM
380 Index figures cont. balance sheet at year end (typical) 42 balance sheets, alternative methods of presentation for 41 balancing off double-entry accounts 10 the break-even chart 169 break-even model: total costs 168 break-even model: total revenue 167 costing methods 152 double-entry account presentation (example) 6 estimating the IRR graphically 259 The Financial Reporting Council 314 fixed costs 138 the IFRS Foundation 316 inventory, constant and uniform demand for 235 inventory costs 234 multi-column cashbook 5 receipts and payments account 4 rules used in double-entry bookkeeping 7 standards: reviews of standards by comparison with actual data 193 stepped fixed costs 138 statement of affairs 117 three-column account (example) 16 treatment of discounts in the income statement 58 trial balance (example) 14 variable costs 139 working capital cycle 230 financial crisis (2008) 261, 277 financial record keeping 3 21 balancing accounts 10 13, 10 example of 11 13 daybooks 15 16 double-entry bookkeeping 6 10, 6, 7 examples of 7, 8, 9 1 ledgers 15 modern double-entry bookkeeping 16, 16 review questions for 17 21 single-entry bookkeeping 4 6, 4, 5 problems with 5 6 trial balance 13 14, 14 Financial Reporting Council (FRC) 314 15, 314 see also accounting standards financial reporting standards (new) used in the UK 322 24 FRS 100 Application of Financial Reporting Requirements 323 FRS 101 Reduced Disclosure Framework 323 FRS 102 Financial Reporting Standard applicable in UK and Ireland 323 further adjustments to income statement 47 67 accruals concept 47 48 accruals and prepayments 48 51, 51 and balance sheet adjustments 50 51, 51 examples of 48 49, 49, 50 allowance for doubtful debts 57 bad debts 56 57 depreciation 51 56 see also subject entry discounts 57, 58 example for 58 61 review questions 62 67 G20 countries 321 goodwill 324 HM Revenue and Customs 38 IASB conceptual framework 91, 317 20 concept characteristics 318 20 comparability 319 faithful representation 319 relevance 318 19 timeliness 319 understandability 319 20 verifiability 319 elements of financial statements 320 balance sheet construction 320 income statement construction 320 need for 317 18 income statements (and) 23 31 calculating profit 23 26 see also profit, gross and profit, net examples for 25, 26 reasons for 23 classification of expenditure 28 29 capital 29 and capital and revenue receipts 29 revenue 29 example of income statement 27 28 review questions for 30 31 incomplete records 118 24 calculating profit from capital 123 24 control accounts 118 examples of 118 19, 121, 122, 123 24 Statements of Affairs 122 23 and use of mark-up and margin 120 21 intangible assets 34 35, 95, 290 92, 324, 339, 372 Accounting for Non-Accountants_print-ready.indb 380 10/6/2014 3:35:58 PM
Index 381 International Accounting Standards (IASs) 97, 315 17, 316, 329 IAS 1: Presentation of financial statements 287 89, 298, 301 02, 307 08, 310 and concepts to be applied 288 IAS 2: inventories 294 IAS 7: statement of cash flows 304, 335, 338 IAS 16: property, plant and equipment 289, 290 IAS 18: revenue 299 300 IAS 27: consolidated and separate financial statements 294 IAS 28: investments in associates 294 IAS 37: provisions, contingent liabilities and contingent assets 295 IAS 38: intangible assets 290, 292 IAS 40: investment property 290 International Accounting Standards Board (IASB) 91, 97 Conceptual Framework see IASB conceptual framework 91, 317 international accounting standards 316 International Financial Reporting Standards (IFRS) Foundation (and) 315 16, 316, 328 framework for 321 IFRS 5: non-current assets held for sale and discontinued operations 293 interpretation of variances 202 interrelationships of variances 203 04 example of 203 04 labour variances 196 example of 196 materials variances 194 95 example of 195 overhead variances 200 02 example of 201 02 review questions for 205 06 sales variances 199 200 example of 199 200 inventory (and) 232 38, 235 costs involved with holding 233 economic order quantity (EOQ) 234 optimal levels (and) 233 37, 234, 235 buffer inventory 237 bulk discounts 236 examples for 235, 236 just-in-time 237 38 reorder level 237 reasons for holding 233 investment appraisal see capital investment appraisal investments 293 94 in associates 293 94 in subsidiaries 294 Ireland 324 J Sainsbury plc 301 02 just-in-time systems 237 38 legislation (UK) Companies Act (2006) 266 Companies Acts 323 Late Payment of Commercial Debts (Interest) Act (1998) 241 Limited Liability Partnership Act (2000) 109 liabilities 3 4, 37 40, 72, 110, 116, 122 24, 295, 302, 320, 339, 350 contingent 305 current 37 38, 229, 232, 271, 288 89, 338, 361 63, 365 accruals 38 bank overdraft 37 taxation owing 38 trade payables 37 limited 265 66 long-term 38 non-current 270, 271, 289, 335, 351, 364 65 debentures 38 39 limited companies 265 81 see also published accounts of the limited company bonus issues 278 79 example of 278 documents needed for setting up 266 financial statements of see limited companies: financial statements limited liability 265 66 review questions for 280 81 rights issues 276 77 example of 277 share capital and dividends 268 70 see also shares example of 269 types of 266 67 see limited company, types of limited companies: financial statements 270 76 balance sheet 271 capital 271 capital reserves 272 76 examples for 273, 274 76 revaluation 273 share premium account 273 examples of 273, 274 76 income statements 270 71 revenue reserves 272 Accounting for Non-Accountants_print-ready.indb 381 10/6/2014 3:35:58 PM
382 Index limited company, types of 266 67 private 267 private limited by guarantee 267 private unlimited 267 public 266 67 liquidity 35, 229 30, 277, 289, 361, 374, 375 ratios 232, 350, 361 64, 371 manufacturing organizations, accounts for 101 04 cost of manufacturing completed goods 103 example for 103 04 factory overheads 102 03 prime cost 102 marginal costing and decision making (and) 165 89 break-even analysis see subject entry closing unprofitable business segment 183 85 example of 183 85 comparison: marginal and absorption costing 186 87 advantages/disadvantages of absorption costing 186 advantages/disadvantages of marginal costing 186 87 contribution 166 make-or-buy decisions 177 80 example of 178 79 optimum production plans 174 77 example of 175 77 review questions 187 89 special order decisions 180 82 example of 181 82 uses of marginal costing 166 Memorandum of Association 266, 268 mortgages 3, 38, 364 not-for-profit organizations, accounting for 109 17, 110 and balance sheets 116, 117 examples of 111, 112 13, 113 16 and income (from) 110 16 bar trading account 112 13 income and expenditure account 113 16 life membership subscriptions 111 12 member subscriptions 110 partnerships, accounting for (and) 105 09 balance sheets 108, 108 current and capital accounts 106 08 example for 107 08 features of partnership agreement 105 06 interest on capital 105 interest on drawings 106 partnership salaries 105 06 profit sharing ratio 106 limited liability partnership (LLP) 109 see also legislation (UK) profit, gross (and) 24 26, 120 complications 25 cost of goods sold 24 25 examples for 25, 26 margin 352 53 sales revenue 24 profit, net 26, 39, 106, 151, 272, 351, 353 profit margin(s) 159, 352 57 provisions 212, 295 96, 299, 334, 337, 371 published accounts of the limited company 283 312 annual return 283 84 auditor s report 285 86 see also auditors annual report contents 284 85 directors report 286 87 notes to financial statements 304 09 examples for 305 06, 307 09 published financial statements (IAS 1) 287 302 see also standards continuing operations 300 example of 304 layout of profit or loss statement and other comprehensive income 301 revenue and cost of sales 299 300 share of profit in associates or joint ventures 300 301 statement of changes in equity 302 04 review question for 310 12 statement of cash flows (IAS 7) 304 statement of changes in equity 302 04 example for 304 statement of financial position 288 98 assets classified as held for sale 293 biological assets 290 content of 289 equity 296 intangible assets 290 92 inventories 294 95 investments 293 94 presentation of (under IAS 1) 296 98 provisions 295 96 research and development expenditures 292 Accounting for Non-Accountants_print-ready.indb 382 10/6/2014 3:35:58 PM
Index 383 tangible assets 289 90 tax assets and liabilities 295 statement of profit or loss and other comprehensive income 298 99 Registrar of Companies 286 sales forecasting 208 share capital and dividends 35, 38 39, 255, 266 70 see also dividends and shares shares 268 70, 273, 276 78, 283 84, 287, 293 94, 296, 339, 368 70 bonus issue 278 79 cumulative preference 270 examples for 269 ordinary 268 69, 271 preference 269, 271 standard costing (and) 191 206 see also standard costs flexible budgets 197 99 examples of 197, 198 99 interpretation of variances 202 interrelationships of variances 203 04 example of 203 04 labour variances 196 example of 196 materials variances 194 95 example of 195 overhead variances 200 02 example of 201 02 fixed overhead 200 01 variable 200 review questions for 205 06 sales variances 199 200 example of 199 200 types of variance 194 see also variance(s) variance analysis: adverse (A) and favourable (F) 193 94 standard costs 191 93, 193 attainable standard 192 93 basic standard 192 current standard 192 ideal standard 192 standards see accounting standards; International Accounting Standards (IASs) and International Financial Reporting Standards (IFRS) Foundation statement of cash flows (and/from) 333 48 differences between cash and profit 333 35 capital expenditure 334 loans and non-current liabilities 335 non-cash adjustments to profit 334 overtrading 334 examples for 340 44 financing activities 339 foreign exchange transactions 339 investing activities 338 39 operating activities 336 38 direct method for 336, 338 example for 337 indirect method for 336 38 interest and dividends 338 reconciliation of cash balances 340 review questions for 345 48 stock exchanges 268, 283, 321, 322 Deutsche Bourse 287 London Stock Exchange 287 tables differences in measures of profit and loss 110 effect of compound interest of 10 per cent per annum 253 options for accountings tandards 322 range of discount rates 254 typical bases of apportionment 146 trade payables 37, 79, 81 82, 220, 230, 242 43, 336, 338, 359 62 trade receivables (and) 36, 57, 70, 79 80, 220, 222 23, 227, 230, 238 43, 336 38, 359 62 aged debtors schedule 239 40 avoiding late payments and bad debts 242 cash discounts 240 41 credit checks 240 days 359 debt factoring: recourse/non-recourse 241 invoice management 238 39 late payments legislation 241 see also legislation (UK) trial balance (and) 13 14, 14, 16, 27 28, 33, 45, 58, 69 73 errors not affecting the agreement 70 71 errors that do affect the agreement 71 72 examples for 71, 72 73 United Kingdom (UK) see also financial reporting standards (new) used in the UK accounting framework in 97 Accounting Standards Board (ASB) 321 GAAP 321, 324 Accounting for Non-Accountants_print-ready.indb 383 10/6/2014 3:35:58 PM
384 Index United Kingdom cont. replacement of GAAP framework of SSAPs and FRSs in 322 23 United States (US) accounting standards (GAAP) 321 Financial Accounting Standards Board (FASB) 317, 321 Securities and Exchange Commission (SEC) 321 value added tax (VAT) 5, 240, 299 variance analysis: adverse (A) and favourable (F) 193 94 variance(s) 193 96, 199 206, 210 see also standard costing examples for 195, 196, 201 02 interpretation of 202 04 labour 196 materials 194 95 overhead 200 202 review questions for 205 06 sales 199 200 example of 199 200 sub- 194 weighted average cost of capital (WACC) 255 56, 366 67 working capital management (and) 229 44 ideal size of working capital 232 and liquidity ratios 232 inventory 232 38, 234, 235 see also subject entry managing cash 243 review questions for 244 trade payables 242 43 see also subject entry trade receivables 238 42 see also subject entry working capital cycle 229 31, 230 example for 231 Accounting for Non-Accountants_print-ready.indb 384 10/6/2014 3:35:58 PM