CHAPTER 7
Preparing financial statements
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Contents
Constructing financial statements
 Accounting adjustments
 Uses of financial statements

Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Constructing financial statements



Start with aggregate transaction data
from the accounting database at the
end of the accounting period
Quantify the adjustments necessary to
convert the data to reflect GAAP
Bring aggregates and adjustments
together in the approved statement
format
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Extended trial balance



A trial balance is the listing of all the balances
on all the general ledger accounts at the end
of the accounting period
At year-end, the trial balance data will be
refined through the year-end adjustments
In the extended trial balance, the ledger
balances and adjustments are added
mathematically and the adjusted balance is
entered in the income statement column or in
the balance sheet column
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Extended trial balance format
Ledger
balances
D / C
€
€
+
Adjustments =
D / C
€
€
Profit and
loss
or
D / C
€
€
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Balance
sheet
D / C
€
€
Year-end adjustments
1.
2.
3.
4.
5.
Calculation of cost of goods sold
Adjustments for accruals and deferrals
Charging annual depreciation
Updating provisions
Reviewing assets for potential
impairment
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Worked example –Trial balance
Mornington Crescent Emporium SA
Trial balance as at 31 December 20X1
Assets
Land
Equipment (at cost)
Accumulated depreciation
Inventory at 1 Jan. X1
Trade receivables
Bank
Financing
Share capital
Retained profits
Trade payables
Sales
Purchases
Salaries and wages
Rent
Insurance
Legal & professional expenses
Telephone
Light and heat
€
30,000
15,000
-4,500
13,250
23,000
18,560
95,310
50,000
10,500
16,850
193,000
–145,000
–15,325
–10,000
–2,500
–1,250
–345
–620
95,310
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Extended trial balance worksheet
Trial
balance
Premises
Equipment (at cost)
Accumulated
depreciation
Inventory at 1 Jan X1
Trade receivables
Bank
Prepaid expenses
30,000
15,000
Totals
95,310
Share capital
Retained profits
Profit for year
Trade payables
Sales
Purchases
Salaries and wages
Rent
Insurance
Legal & prof. exp.
Telephone
Light & heat
Accrued expenses
50,000
10,500
Short-term provision
Provision expense
Depreciation expense
Profit
Totals
-4,500
13,250
23,000
18,560
16,850
193,000
–145,000
-15,325
-10,000
-2,500
-1,250
-345
-620
95,310
Adjustments
Income
statement
Balance
sheet
30,000
15,000
(h)-1,500
(a)+900
-6,000
14,150
23,000
18,560
2,500
(b)+2,000
(c)+500
+1,900
(a)+900
(b)+2,000
(c)+500
(f)-2,000
(d)-80
(e)-50
(d)+80
(e)+50
(f)+2,000
(g)+1,000
(g)-1,000
(h)-1,500
+1,900
97,210
193,000
–144,100
-15,325
-8,000
-2,000
-3,250
-425
-670
50,000
10,500
(i) 16,730
16,850
-1,000
-1,500
(i)-16,730
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
2,130
1,000
97,210
Income statement for the year ended 31 December
20X1 (format for use internally)
Mornington Crescent Emporium SA
€
Sales
Cost of goods sold
Salaries and wages
Rent
Insurance
Light and heat
Depreciation expense
Provision expense
Legal and professional
Telephone
Audit
Net income
15,325
8,000
2,000
670
1,500
1,000
1,250
425
2,000
€
193,000
(144,100)
48,900
(32,170)
16,730
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Income statement for the year ended 31 December
20X1 (published format)
Mornington Crescent Emporium SA
€
Revenue
Cost of goods sold
Personnel costs
Other operating costs
(excluding depreciation and provisions)
Depreciation expense
Provision expense
Profit before interest and tax
15,325
14,345
1,500
1,000
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
€
193,000
(144,100)
48,900
(32,170)
16,730
Balance sheet as at 31 December 20X1
Mornington Crescent Emporium SA
€
€
Non-current assets
Premises
Equipment (at cost)
less accumulated depreciation
Current assets
Inventory
Trade receivables
Prepaid expenses
Bank
Total assets
Equity
Share capital
Retained earnings
30,000
15,000
(6,000)
14,150
23,000
2,500
18,560
9,000
39,000
58,210
97,210
50,000
10,500
16,730
27,230
77,230
Current liabilities
Short-term provisions
Trade payables
Accrued expenses
Total equity and liabilities
1,000
16,850
2,130
97,210
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Additional accounting adjustments

Interest expense adjustments


Income tax adjustments


Accrual adjustments at year-end
Year-end accruals for estimated income tax on
annual pre-tax profit
Dividend


Charged directly against reserves/retained profits
in shareholders’ equity
Dividends declared after balance sheet date may
not be recognised as a liability because they do
not constitute a present obligation at balance
sheet date
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Presentation of interest and income tax expense
The deduction of interest and tax expense normally
figures separately in the income statement:
Profit before interest and tax
XXXXX
Finance costs (Interest expense)
(XXXX)
Profit before tax
XXXXX
Income tax expense
(XXXX)
(Net) Profit for the period
XXXX
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Income statement for the year ended
31 December 20X1
Mornington Crescent Emporium SA
€
Revenue
Cost of goods sold
Personnel costs
Other operating costs
(excluding depreciation and provisions)
Depreciation expense
Provision expense
Allowance for doubtful debts
Profit before interest and tax
15,325
14,345
1,500
1,000
230
Interest expence
Profit before tax
Income tax expense
(Net) Profit for the period
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
€
193,000
(144,100)
48,900
(32,400)
16,500
(500)
16,000
(4,800)
11,200
Balance sheet as at 31 December 20X1
Mornington Crescent Emporium SA
€
Non-current assets
Premises
Equipment (at cost)
less accumulated depreciation
Current assets
Inventory
Trade receivables
less impairment allowance
Prepaid expenses
Bank
Total assets
Equity
Share capital
Retained earnings
Non-Current liabilities
15,000
(6,000)
14,150
23,000
(230)
2,500
18,560
10,500
11,200
€
30,000
9,000
39,000
57,980
96,980
40,000
21,700
61,700
Long-term debenture
10,000
Short-term provisions
Trade payables
Accrued expenses
Taxes payable
1,000
16,850
2,630
4,800
Current liabilities
Total equity and liabilities
96,980
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts
Uses of financial statements






To measure how much dividend might be
paid
To provide reassurance of a company’s
financial strength to creditors
To provide a basis for measuring future
growth for stock market analysis
To measure management performance in a
principal/agent context
To provide a basis of taxation of the company
To give employees an idea of the company’s
strength
Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5
© 2005 Peter Walton and Walter Aerts