Financial Statement Handout Asad

EXCELLENCE

FINANCIAL STATEMENTSFinancial statement is a written report which quantitatively describes the financial health of a company. This includes an income statement, balance sheet, cash flow statement and statement of changes in equity. Financial statements are usually compiled on a quarterly and annually basis. Financial statements consist of five Components:

1. Income Statement.

2. Balance Sheet.

3. Cash Flow Statement.

4. Statement of Changes in Equity.

5. Notes to the Financial Statement.

INCOME STATEMENT Income statement shows the financial performance of the business. It shows the result of operations for a period. It consists of revenue and expenses. When total revenues exceed the total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting amount is net loss. Format of Income Statement:

Name of Business Income Statement

For the Period Ended _______ Sales XXX

Less: Sales discount (XXX)Less: Sales returns and allowances (XXX)

Net sales XXXLess: Cost of Goods Sold:

Merchandise inventory (beg) XXXAdd: Net Purchases:

Purchases XXXAdd: Transportation in XXXDelivered purchases XXXLess: Purchase discount (XXX)Less: Purchase returns & allowances (XXX)

Net purchases XXXMerchandise available for sale XXXLess: Merchandise inventory (end) (XXX)

Cost of goods sold (XXX)Gross profit / loss XXX/(XXX)Less: Operating Expenses:

Office salaries expense XXXInsurance expense XXXAdvertising expense XXXUtilities expense XXXSupplies expense XXXBad debts expense XXXOffice rent expense XXXRepair expense XXXDepreciation expense XXX

Total operating expenses (XXX)Profit/loss from operation XXX/(XXX)Add: Other Income:

Commission income XXXIncome before income tax XXX

Less: Income tax expense (XXX)Net profit/Loss XXX/(XXX)

XI COMMERCE ACCOUNTING of 10 By: Muhammad Asad AliMBA (Finance), MA (Eco), (CA)

EXCELLENCE

CLOSING ENTRIES Closing entries are made at the end of an accounting period to close off the revenue and expense ledgers to the income summary account (expense and summary account or profit and loss account). Revenue and expenses are Nominal accounts for the period that is why they are required to be closed to get the net profit or loss. Format of Closing Entries:

Name of Business

Closing Entries For the Period Ended _____

Entry to close all expenses:

Expense and revenue summary DR. Merchandise inventory (beg) CR. Purchases CR. Sales return and allowances CR. Sales discount CR. Transportation – in CR. Salaries expense CR. Depreciation expense CR. Bad debts expense CR. Rent expense CR. Office supplies expense CR. Insurance expense CR. Interest expense

(To close the various expense account) Entry to close all revenue:

CR.

Sales DR. Merchandise inventory (end) DR. Rent income DR. Commission income DR. Purchase returns and allowances DR. Purchase discount DR. Expense and revenue summary CR.(To close the various income accounts)

Entry to transfer net profit to capital account: Expense and revenue summary DR. Capital CR. (To record the transfer of net profit to the capital account) Entry to transfer net loss to capital account: Capital DR. Expense and revenue summary CR. (To record the transfer of net loss to the capital account) Entry to close drawings account into capital account: Capital DR. Drawings CR. (To close the drawings account)


EXCELLENCE

ILLUSTRATION # 1: (Income Statement & Closing Entries without Adjustments)

The following is an alphabetical list of the selected balances of Mirza Sports Shop on September 30, 2001: Depreciation expense – Equipment 500 Inventory: October 1, 2000 22,500 Purchases 75,000 Purchase discount 1,500 Purchase return & allowances 2,500 Rent expense 6,000 Salaries expense 9,000 Sales 115,000 Sales discount 2,100 Sales return & allowances 3,900 Supplies expense 800 Transportation in Ending inventory is valued at Rs.25,800.

4,200

REQUIRED (i) Prepare a multi-step income statement.

(ii) Prepare closing entries.

SOLUTION # 1: MIRZA SPORTS HOP INCOME STATEMENT

FOR THE PERIOD ENDED 30 SEPTEMBER 2001 Sales 115,000Less: Sales discount 2,100Less: Sales returns and allowances 3,900 (6,000)Net sales 109,000Less: Cost of Goods Sold:

Merchandise inventory (beg) 22,500Add: Net Purchases:

Purchases 75,000Add: Transportation in 4,200Delivered purchases 79,200Less: Purchase discount (1,500)Less: Purchase returns & allowances (2,500)

Net purchases 75,200Merchandise available for sale 97,700Less: Merchandise inventory (end) (25,800)

Cost of goods sold (71,900)Gross profit 37,100Less: Operating Expenses:

Depreciation expense 500Rent expense 6,000Salaries expense 9,000Supplies expense 800

Total operating expenses (16,300)Net profit 20,800


EXCELLENCE

MIRZA SPORTS SHOP CLOSING ENTRIES

FOR THE PERIOD ENDED 30 SEPTEMBER 2001 Date Particulars P/R Debit Credit

1 Expense and revenue summary 124,000 Merchandise inventory (Beginning) 22,500 Purchases 75,000 Transportation in 4,200 Depreciation expense 500 Rent expense 6,000 Salaries expense 9,000 Supplies expense 800 Sales return and allowance 3,900 Sales discount 2,100 2

(To close the various expenses accounts) 115,000 Sales

Purchase discount 1,500 Purchase return and allowances 2,500 Merchandise inventory (Ending) 25,800 Expense and revenue summary 144,800 3

(To close the income account) 20,800 Expense and revenue summary

Capital (To close the expense & revenue summary account)

20,800

BALANCE SHEET Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and owner’s equity on a given date. It is a quantitative summary of company’s financial condition at a specific point in time, including assets, liabilities and net worth. The first part of balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and owner’s equity).


Drawings –Net Profit

Capital + Long Term Liabilities

Current Liabilities +

Contra Assets –Fixed Assets

Current Assets +

Owner’s Equity + Liabilities = Assets

Balance Sheet

EXCELLENCE

Format of Balance Sheet:

Name of Business Balance Sheet

As on ________ Assets Equities

Current Assets: Liabilities: Cash XXX Current Liabilities: Accounts receivable XXX Accounts payable XXXLes: All. for bad debts (XXX) XXX Notes payable XXXMerchandise inventory XXX Accrued expenses XXXPrepaid expenses XXX Unearned income XXXOffice supplies XXX Total current liabilities XXXAccrued income XXX Long Term Liabilities Total current assets XXX Long term loan XXXFixed Assets: Total long term liabilities XXXEquipment XXX Total liabilities XXXLess: All. for dep. (XXX) Owner’s Equity: Total fixed assets XXX Capital XXX

Add: Net profit XXXLess: Drawings (XXX) XXX

Total assets XXX Total owner’s equity XXX

OPENING ENTRIES Opening entry is made to record the opening balances of accounts in a business. All the assets and liabilities must be entered into the accounts, together with the owner’s equity. Opening entry is made on the first day of new accounting period.

Format of Closing Entries: Name of Business Opening Entries

For the Period Opening _____

Cash DR.

Accounts receivable DR.Merchandise inventory DR.Office supplies DR.Prepaid expenses DR.Accrued income DR.Fixed assets DR.

Accounts payable CR.Accrued expenses CR.Unearned income CR.Allowance for bad debts CR.Allowance for depreciation CR.Other current liabilities CR.Long term liabilities CR.

Capital CR.


EXCELLENCE

ILLUSTRATION # 2: (Balance Sheet & Opening Entries without Adjustments) Tariq & Company prepared the following adjusted trial balance data at June 30, 1995. Use the following selected data to prepare a Classified Balance Sheet as on June 30, 1995 and Opening Entries as on July 1, 1995.

Cash 15,000 Accounts receivable 25,000 Allowance for bad debts 1,000 Furniture 20,000 Allowance for depreciation – Furniture 2,000 Prepaid insurance 2,000 Office supplies 1,500 Tariq Capital 44,500 Tariq Drawings 6,000 Accounts payable 24,000 Notes payable 2,000 Rent payable 1,000 Commission receivable 1,000 Merchandise inventory (30.6.95) 22,000

Net income 18,000

SOLUTION # 2: TARIQ & COMPANY

BALANCE SHEET AS ON 30 JUNE 1995

ASSETS EQUITIES

Current Assets: Liabilities: Cash 15,000 Accounts payable 24,000 Accounts receivable 25,000 Notes payable 2,000 Les: All. for bad debts Merchandise inventory

(1,000)

24,000 22,000

Rent payable Total liabilities

1,000 27,000

Prepaid insurance 2,000

Office supplies 1,500 Owner’s Equity: Commission receivable Total current assets

1,000 Capital 44,500 Add: Net profit 18,000

62,500

65,500

Fixed Assets: Less: Drawings (6,000) Furniture 20,000 Total owner’s equity 56,500 Less: All. for dep. (2,000)

Total fixed assets Total assets

18,000

Total equities 83,500 83,500


EXCELLENCE

TARIQ & COMPANY OPENING ENTRIES

FOR THE PERIOD OPENING 1 JULY 1995 Date Particulars P/R Debit Credit

July 1 Cash 15,000 1995 Accounts receivable 25,000 Merchandise inventory 22,000 Prepaid insurance 2,000 Office supplies 1,500 Commission receivable 1,000 Furniture 20,000 Allowance for bad debts 1,000 Allowance for depreciation 2,000 Accounts payable 24,000 Notes payable 2,000 Rent payable 1,000

Capital (To open the various assets and equities account)

56,500

ILLUSTRATION # 3: (Income Statement & Balance Sheet with Adjustments) Following is the pre-closing trial balance of Yasir & Co. on December 31, 2010:

Account Titles Debit Credit

Cash Rs.300,000

Accounts receivable 20,000

Merchandise inventory 100,000

Prepaid advertising 90,000

Fixed Assets 180,000

Cost of goods sold 700,000

Salaries expense 55,000

Supplies expense 15,000

Rent expense 40,000

Accounts payable Rs.100,000

Unearned commission 50,000

Yasir, Capital 250,000

Sales 1,100,000

1,500,000 1,500,000 Additional Information for Adjustments: (a) Commission income is unearned to the extent of Rs.15,000.(b) Supplies used during the year Rs.3,000(c) Commission receivable for the year Rs.14,000.(d) Prepaid rent Rs.25,000. (e) Salaries payable for the year amounted to Rs.5,000. (f) Advertising prepaid Rs.43,000.

REQUIRED (1) Prepare Income Statement for the year ended on Dec. 31, 2010.

(2) Prepare Balance Sheet as on Dec. 31, 2010.


EXCELLENCE

SOLUTION # 3: YASIR & CO.

ADJUSTING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER 2010

Date Particulars P/R Debit Credit

1 Unearned commission 15,000 Commission income 15,000 2

(To adjust the commission income) 12,000 Supplies

Supplies expense 12,000 3

(To adjust the supplies expense) 14,000 Commission receivable

Commission income 14,000 4

(To adjust the accrued commission income) 25,000 Prepaid rent

Rent expense 25,000 5

(To adjust the rent expense) 5,000 Salaries expense

Salaries payable 5,000 6

(To adjust the unpaid salaries) 47,000 Advertising expense

Prepaid advertising (To adjust the prepaid advertising)

47,000

YASIR & Co.

INCOME STATEMENT FOR THE PERIOD ENDED DECEMBER 31, 2010

Sales 1,100,000 Less: Cost of goods sold (700,000) Gross profit 400,000 Less: Operating Expenses:

Salaries expense (55,000 + 5,000) 60,000 Supplies expense (15,000 – 12,000) 3,000 Rent expense (40,000 – 25,000) 15,000 Advertising expense (90,000 – 43,000) 47,000

Total operating expenses (125,000) Profit from operation 275,000 Add: Other Income:

Commission income (15,000 + 14,000) 29,000 Net profit 304,000


EXCELLENCE

YASIR & Co.BALANCE SHEET

AS ON DECEMBER 31, 2010 ASSETS EQUITIES

Current Assets: Liabilities: Cash 300,000 Accounts payable 100,000Accounts receivable 20,000 Unearned commission 35,000

Merchandise inventory Prepaid advertising

100,00043,000

Salaries payable Total liabilities

5,000

140,000Supplies 12,000 Owner’s Equity:

Commission receivable 14,000Capital Add: Net profit

250,000304,000

Prepaid rent Total current assets Fixed Assets

25,000 Capital Add: Net profit Total owner’s equity

250,000304,000

554,000

694,000180,000

Total assets 694,000 Total equities 694,000

Practice questions Question # 1:Each of the six horizontal lines in the following table represent a separate set:

Beginning Inventory

Net Purchases

Ending Inventory

Cost of Goods Sold

Gross Profit (Loss)

Net Sales

1. 10,000 50,000 ? 40,000 ? 65,000

2. 12,000 ? 10,000 ? 20,000 70,000

3. ? 72,000 18,000 ? 20,000 95,000

4. ? 50,000 15,000 55,000 ? 50,000

5. 20,000 70,000 ? 82,000 (2,000) ?

6. 22,000 ? 18,000 72,000 28,000 ?

REQUIRED Copy the above table and fill in the missing amounts, showing computations.

Question # 2: The following extracts are related to Mr. Tariq after adjustments at June 30, 2009:

Sales 250,000 Salaries expense 10,000

Inventory beginning 10,000 Bad debts expense 3,000

Purchases 53,000 Purchase returns 1,000

Commission income 1,000 Depreciation expense 5,000

Sales discount 5,000 Utility expense 4,000

Allowance for bad debts 11,000 Inventory ending 15,000

Rent expense payable 11,000 Tariq Drawings 19,000

REQUIRED Necessary closing entries. An Income Statement for the year ended June 30, 2009.


EXCELLENCE

Question # 3: The following are the incorrect closing entries, prepared by an in-experienced accountant at the end of the year ended December 31, 2007:

Date Particulars PR. Debit Credit2007Dec 31 Sales 250,000

Sales discount 5,000Open inventory 10,000Allowance for bad debts 6,000Drawings 1,000Purchases 53,000

Income summary 325,000Income summary 26,000

Ending inventory 15,000Commission income 1,000Salaries expense 10,000Depreciation expense 5,000Utility expense 4,000Bad debts expense 3,000Allowance for depreciation 20,000

REQUIRED (a) Prepare FOUR correct closing entries.

(b) Prepare an Income Statement for the year ended December 31, 2007.

Question # 4: Amjad & Co. shows the balances of the following accounts at December 31, 2011: Advertising expense Rs.30,000; Wages expense Rs.5,750; Supplies expense Rs.7,500; Bad debts expense Rs.1,000; Allowance for depreciation – Equipment Rs.20,000; Utilities expense Rs.1,400; Insurance expense Rs.15,000; Interest expense Rs.300; Income tax expense Rs.28,000; Commission income Rs.275,000 which includes Rs.50,000 as advance commission; Drawings Rs.5,000; Accrued expenses Rs.5,000 and Accrued income Rs.3,000.

REQUIRED Prepare closing entries in General Journal.


Financial Statement Handout Asad

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