Review of 2 nd Exam

1. Review of 2nd Exam

2. Trial Balance to Final Accounts Using a Worksheet Summary of Accounting Cycle Balance Sheet & Income Statement Closing the Books Steps in preparation Preparing financial statements Preparing adjusting entries Preparing closing entries Posting closing entries Preparing a closing trial balance Reversing entries Correcting entries Current assets Non Current Assets Current liabilities Non Current liabilities Owner’s equity Revenues & Expenses

3. Using a Worksheet What is a Worksheet? • A multiple-column form used in preparing financial statements. (Often an Excel Spreadsheet) • Not a permanent accounting record. • Five step process. • Use of worksheet is optional.

4. The Steps in a Work Sheet

6. Account Debit Credit Account Debit Credit

7. T-Account Account Name Assets Expenditure Liabilities Income 7

8. Adjustment 1 • Depreciation for the year has to be made on Plant & Machinery based on 10% reducing Balance. • Cost to date is 300,000 • Less: Depreciation to date 70,000 • Net 230,000 • 10% reducing Balance = 23,000

9. Adjustment 1 Depreciation of Plant & Machinery Depreciation of $23,000.added to accumulated amount Depreciation of $23,000 as a charge in the income statement

10. Adjustment 2 • Depreciation for the year has to be made on Vehicles based on 10% reducing Balance. • Cost to date is 65,000 • Less: Depreciation to date 26,000 • Net 39,000 • 10% reducing Balance = 3,900

11. Adjustment 2 Depreciation of Vehicles Depreciation of $3,900.added to accumulated amount Depreciation of $3,900 as a charge in the income statement

12. Adjustment 3 • Depreciation for the year has to be made on Computer Equipment based on 3 years Straight line with no scrap value. • Cost is 40,000 • Less: Scrap Value nil • Net 40,000 • Divide by Useful Life (£ years) = 13,333

13. Adjustment 3 Depreciation of Computers Depreciation of $13,333.added to accumulated amount Depreciation of $13,333 as a charge in the income statement

14. Adjustments 4 (Part One) • Closing Inventories at 31st Dec 2010 • These have been assessed at $155,000 • First we need to take out the opening inventory and take it to the COGS as this has been consumed in the year.

15. Adjustment 4 Reverse out the Opening Inventories Remove the opening inventories to COGS The opening inventories have been consumed to the need to be taken to COGS

16. Adjustments 4 (Part Two) • Now we need to introduce the ending inventory. • This will be an asset in the balance sheet and reduce COGS as this represents inventories that have yet to be consumed.

17. Adjustment 4 Reverse out the Opening Inventories Introduce the Closing Inventories as a Current Asset Reduce COGS as these inventories have not been consumed

18. Adjustments 5 • An accounts receivable of €2,000 is bad and will not be paid. • It therefore fails the “ASSET TEST”. It has no present or future value. • It must be taken out of the Balance Sheet and take to the Income Statement as it has been consumed.

19. Adjustment 5 Reduce AR by €5000 as no longer passes asset A bed Debt of €5,000 has to be provided for in the Income Statement

20. Now Extend the TB to the Closing TBSimply add or subtract across the page

21. Adjustments 6 • Included in Overheads is €1,000 for insurance that has not yet been consumed. • It passes the asset test in that it has some future economic value. • We need to reduce overheads and introduce a current asset

22. Extend TB to Closing TB

23. Now - Split BetweenThe Balance Sheet andThe Income Statement

25. Note Differences • The difference between the figures on the total Income Statement = €102,767 • And the Balance Sheet is the same. • This represents the Profit or Loss for the year. • But we have some additional adjustments to make….

26. Additional Adjustment Tax • Taxation – we can only calculate that now as we know what the profit is. • Tax is 50% of the profits. • So as the profit is €102,767 • Tax is €51,384

28. Finally, A Dividend • A dividend of 10 cents per share. • There are 100,000 shares of €1 each • So dividend would be €10,000

30. But there is still a difference • There is now a profit of €41,383. • This represents the retained profit for the year. • This belongs to the shareholders. • It now has to be added to the Retained Reserves.

31. The New Ideas Company Income Statement For the year Ended 31st December 2010 Revenues 1,175,000 Less Cost Of Goods Sold 921,000 Gross Profit 254,000 Less Overheads 99,000 Bad Debts 2,000 Depreciation 40,233141,233 EBIT 112,767 Interest 10,000 Profit Before Tax 102,767 Tax 51,384 Dividends 10,000 Net Retained income €41,383

32. Prepare a Balance Sheet as at 31st December 2010.

33. Balance Sheet of New Ideas CompanyAs at 31st December 2010 Current Assets Current Liabilities Cash at Bank 5,000 Accounts Payable 79,000 Accounts Receivable 148,000 Dividends Payable 10,000 Inventories 155,000 Tax Payable 46,384 Sundry Prepayment 1,000 Note 5,000 of the tax is deferred. The balance will be current Total Current Assets 309,000 Total Current Liabs 135,384 Non Current Assets Non Current Liabilities Plant & Machinery – Cost 300,000 Deferred Tax 5,000 Less: Depn 93,000 Long Term Loan 90,000 Net Plant & Machinery 207,000 Vehicles – Cost 65,000 Less: Depn 29,000 Equity Net Vehicles 36,000 Shares 100,000 Computers– Cost 40,000 Retained Reserves BF 196,000 Less: Depn 13,333 Retained Profit for Yr 41,383 Net Computers 26,667 Total Liabs & Equity 577,767 Total Assets 577,767

34. Question 6 - Gross Profit % • The Ratio is one of the most important of all. • Gross profit is divided by total sales Gross Profit __________________ Total Sales 254,000 ______________ 1,175,000 22% = =

35. Question 7 • Many got this wrong. • Remember that what you have sold is what represents what has been consumed. • If you sell 120 units then you must match the cost of those 120 units. You may have bought or produced more… • Here we bought 130. That means that we have 10 left in inventories.

36. So. • Sales - 120 at $180 21,600 • COGS – 120 at 100 12,000 • Gross Profit is 9,600

37. Bye for now! Please ensure you Prepare for next session I’m ready forsome leisure time.