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Financial Statement Analysis Assignment Help

This is a solution of Financial Statement Analysis Assignment Help which discuss preparations of asset register along with necessary journal entries.

Task 1:

1.1 Preparations of asset register along with necessary journal entries:

Machinery and Equipment Account:

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
30.06.13 Machinery 42000 30.06.13 Depreciation 6300
30.06.13 Equipment 41500 30.06.13 Depreciation 9112.5

Debtor Account:

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
30.06.13 To balance b/d 17400 30.06.13 By bad debts 1320

Provision for doubtful debts Account:

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
30.6.13 By P/L 870

General Journal Entries for Balance day Adjustments:

Date Particulars Amount

DR(RS)

Amount

CR(RS)

30.06.13 Depreciation A/c                                                         dr

To Machinery A/c

6300  

6300

30.06.13 Depreciation A/c                                                        dr

To Equipment A/c

9112.5  

9112.5

30.06.13 Bad debts A/c                                                            dr

To debtors A/c

1320  

1320

30.06.13 Outstanding wages A/c                                              dr

To Wages A/c

50  

50

30.06.13 Prepaid expense A/c                                                    dr

To Advertising A/c

150  

150

30.06.13 Profit and loss A/c                                                      dr

To Provision for doubtful debts A/c

870  

870

30.06.13 Annual Leave A/c                                                       dr

To Wages A/c

1323  

1323

30.06.13 Commission A/c                                                       dr

To Commission accrued A/c

600  

600

30.06.13 Stock A/c                                                                    dr

To increase in stock A/c

600  

600

30.6.13 Total 20325.5 20325.5

1.2Preparation of financial statements and Notes to account of SCEI:

 Final General Ledger Accounts:

A/c No Particulars Amount (Dr) Amount (Cr)
1 Equity 15648
2 Assets 394687.5
3 Liabilities 1567750
Net profit: 222289.5

Profit and loss statement

For the year ended 30.6.13:

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
30.6.13 By Gross profit 330732
30.6.13 To rent 4500 30.6.13 By GST receivable 750
30.6.13 To advertising 750 30.6.13 By commission received 690
30.6.13 To insurance 10800 30.6.13 By discount received 1800
30.6.13 To wages 13320 30.6.13
30.6.13 To Telephone 180 30.6.13
30.6.13 To depreciation 6300 30.6.13
30.6.13 To depreciation 9112.5 30.6.13
30.6.13 To GST 3000 30.6.13
30.6.13 To provision for bad debt 870 30.6.13
30.6.13 To provision for annual leave 600 30.6.13
30.6.13 Too bad debts 4320 30.6.13
30.6.13 To condemnation 55800 30.6.13
30.6.13 To rates 1500 30.6.13
To discount allowed 600
30.6.13 To Net profit 222289.5
30.6.13 Total 333942 Total 333942

Balance sheet

As on 30.6.13

Liabilities Amount(Rs) Assets Amount(Rs)
Capital 16308 Machinery 35700
Add: Net Profit 222289.5 Equipment 32387.5
Less: Drawings 660 Plant 186000
Outstanding expenses 23250 Condemnation 55800
Creditors 13500 Prepaid Expenses 150
Mortgage 120000 Commission Receivable 690
Cash Balance 600
Bank Balance 65552
Debtors 14808
Stock 3000
Total 396487.5 Total 396487.5

Notes on Account:

  1. Depreciation on machinery:

Since as per balance day adjustments, machinery needs to be depreciated @ 15 percent per annum the same has been calculated and subtracted from the value of the machinery. The depreciation amount remains the same as under straight line method, the amount of depreciation is fixed unlike reducing balance method (Alghalith, 2014).

  1. Depreciation on Equipment:

The depreciation under equipment is slightly different from the one provided under machinery. As under this case, the depreciation is provided as per reducing balance method, which is calculated on the yearend balance of the respected assets. As under balance day adjustments it has been said to provide 22.5 percent of deprecation to equipments, the same has been done on the yearend balance of the same and shown in the balance sheet (Bragg, 2013).

  1. Additional bad debt:

As per the record of trial balance, additional bad debts are yet to be recorded and deducted from the overall balance of the debtors. The overall balance of bad debts is 4320 out of which 60 percent, which is 2592 is considered as fully bad debt; the same has been deducted from the balance of the debtors and shown in the balance sheet (Clarke, 2015).

  1. Additional wages:

It is not to be mentioned that profit and loss statement and overall financial statements use to prepare on accrual basis, and thus this adjustments needs to be considered in order to reflect actual gross profit and overall net profit of SEIC. Talking about the accounting calculation, the additional amount has been added to the overall account of wages and is listed under outstanding expenses under liability side (Fager, 2015).

  1. Prepaid advertising:

Prepaid expenses are treated as assets as here the owner make advance payment to different parties for future transaction and dispose the future liabilities. By making advance payment, owner uses to shift the particular liability to the other side and record the same under assets. This is the only reason why the same has been recorded under assets side of balance sheet (Gleeson-White and Harcourt, 2012).

  1. Provision for bad and doubtful debts:

The same is deducted from the overall balance of debts as this portion also indicates the risk of recovering the authorized payments from the debtors. Talking about accounting calculation, apart from 522 the debtors has been deducted by extra 5 percent as risks of recovering the amount is very high and strong. Thus, the final balance of debtors has been shown after proper deduction of provision for doubtful debts (Hampton, 2015).

  1. Annual Leave:

As per the adjustments of balance daybook, it is indicated to provide 10 percent of wages under Annual leave; the same has been done and shown under profit and loss account. The same happened because of incorrect recording by the financial professionals in Trial balance.

  1. Commission revenue:

As said earlier, that the overall preparation of financial statements should be done on accrual basis, 600 of receivable commission has been recorded under profit and loss account and balance sheet so to determine appropriate net profit and balance the value of assets and liabilities.

  1. Increase in stock:

The balance of stock under trial balance shows that the same is standing with 2400. As per the instruction or adjustments of balance daybook, the same needs to be recorded only after applying an upwards increment of 600 which is done in an appropriate way (Harrison, 2012).

Other Adjustments:

 Condemnation to building is an extra ordinary item and comes under operating level of the company. On the other hand, it is the practice of the company to proportionate the value of fixed depreciation and wages into administration and sales by 80 and 20 percent. Thus, both the matters were taken into consideration and applied in the required way.

Ledger Accounts

As on 01.07.13

Particulars Amount (Dr) Particulars Amount (Cr)
Machinery 35700 Creditors 13500
Equipment 32387.5 Capital 15648
Debtors 14808 Mortgage 120000
Cash 600 Outstanding Expenses 23250
Bank 65552 Net Profit 222289.5
Stock 3000
Plant 186000
Accrued incomes 690
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Task 2:

Part 1: Calculation of depreciation and sale of Clippers assets:

Asset Account for the last quarter:

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
1.4.13 Gardening Equipment 13171.5 30.6.13 By Depreciation 639.5
1.4.13 Vehicles 56276.25 30.6.13 By Depreciation 6276.25
1.4.13 Computer Equipments 2266.25 30.6.13 By Depreciation 453.25

 Calculation of depreciation of disposal asset:

Particulars Amount (Dr) Particulars Amount (Cr)
To balance b/d 1160.78 By Depreciation 232.16
       

General Journal Worksheet:

Date Particulars Account Folio Debit $ Credit $
1.7.12 To balance b/d     1160.78
30.6.12 By Depreciation     232.16
30.6.12 By sale     500
30.6.12 By loss on sale     428.62

Part 2: Preparation of general journal entries:

Date Particulars Account Folio Debit $ Credit $
30.6.13 To depreciation     7369
30.6.13 To prepaid insurance     330
28.6.13 To prepaid advertising     131.82
30.6.13 To bed debt     220
28.6.13 To wages     90
30.6.13 To revenue     600
Total     7679 14112

 Adjustment under General ledger:

Particulars Amount

(Dr)

Amount

(Cr)

Assets:

Prepaid Advertising

Prepaid Insurance

Depreciation

 

 

 

7369

131.82

 

330

 

Incomes:

Revenue

 

600

Expenses:

Bad debts

Wages

 

220

90

Adjustments under Trial Balance:

Particulars Amount

(Dr)

Amount

(Cr)

Depreciation 7369
Bad debts 220
Wages 90
Revenue 600
Prepaid Advertising 330
Prepaid Insurance 131.82

 Part 3: Preparation of balance sheet and income statement:

Income statement

For the year ended 30 June 2013

Revenue: Amount Amount Amount
Gardening services 56127 56127
Landscaping services 13745 13745
Handyman services 31691 31691
Prepaid expenses 461.82 461.82
Accrual revenue for gardening services 600 600
Total 102624.8
Expenses:
Advertising 1432 1432
Gardening supplies 3939 3939
Depreciation 639.5 639.5
Depreciation 6276.3 6276.25
Depreciation 453.25 453.25
Insurance 660 660
Interest paid 115 115
Accounting fees 662 662
Maintenance of equipment 1260 1260
Office supplies 1022 1022
Superannuation 97 97
Wages and salaries 3510 3510
Outstanding Expenses 7769 7769
Bad debts 220 220
Loss on sale 428.62 428.62
Total 27461.62
Net Profit/ Net loss before tax 75163.2

Balance Sheet

For the year ended 30th June 2013

Assets Amount $ Amount $ Amount $
Gardening Equipment     12532
Vehicles     50000
Computer Equipment     4041
Prepaid Expenses     461.82
Accrual revenues     600
Cash and Bank balance     28158
Total     95792.8
     
Liabilities    
B Capital     36733
B Drawings     (45690)
D Capital     36733
D Drawings     (45690)
Net Profit     75163.2
Outstanding expenses     7769
Creditors     30744.4
Total     95792.8

Calculations: Refer Appendix

Task 3:

3.1 Definition of Asset, Liability, Expense, Accounting equation, methods of depreciation, double entry book keeping principles and accruals:

Asset:

Any investment, property etc owned by any respective individual than that particular return on investment and property are the asset of the individual. On a general note, asset defines the ownership of any individual towards a particular property or investment. Relating the same in accounting performance, there are two types of assets such as fixed and variable (Higson, Nokes and Tulloch, 2014). Examples and explanation each of these two assets is given as follows:

Fixed assets:  Building and Land

Land and building are considered as fixed asset under accounting as both of this property is attached to their position permanently and never shifted from the respective original space. Thus these assets have more importance and relevance in accounting management unlike variable expenses as the lasting of these assets is comparatively more.

Variable Assets: Debtors, Bank balance, ownership of small and temporary equipment etc

The list of variable assets is never ending in accounting. These types of assets arise and dissolve on a daily basis and are very common in accounting practices. Since debtors, bank balance, cash balance etc use o fluctuate every second in business, this is the only reason why these assets are considered as variable assets. Moreover, the use of these assets is also very much required in business to perform the daily operations (Hodge, 2013).

Liabilities:

This is the adverse side of assets as the same displays the payment to be made by the owner to respective suppliers and staff from whom services had been rend. Both assets and liabilities are very much important in business to calculate the overall position and determine the level of profitability. Just like assets, liabilities are also divided into many categories such as:

Current liabilities:

Current liabilities are comprises of creditors, outstanding expenses etc which occurs almost regularly in business while dealing with many suppliers or dealers. Since it is very much important in the business to perform the day-to-day transaction, the managers and financial auditing team need to take the products on credit from suppliers or retain the wages, which should be paid to the labours. Thus, the occurrence of current liability is very common and ordinary (Lechter, 2011).

Non-current liabilities:

These types of liabilities are generally carried from years to years and are considered to be off long term. Examples of non-current liabilities are bonds payable, long-term borrowings or leases, product warranties in case the same is provided.

Expense:

The above term does not have any introduction, as the same is very much common in both commercial and non-commercial life. Without expense, there can be no income. Every business manufactures product or deliver services with the help of necessary operations, which is not possible without expense. It is the responsibility of the owners to pay appropriate amount of attention towards different operations and allocate the expenses in a proper way so to recover good income in the coming period (Liapis and Kantianis, 2015). The occurrence of expense is very much regular in accenting and without expense, it would become impossible for the financial planning professionals to present the necessary profit and loss and calculate the overall position of the organization. In addition, expenses are also divided into two categories such as:

Fixed Expense:

This expense remains the same and does not with the level of outcome. Examples of some fixed expenses are rent, electricity etc. Moreover, the owner should try to decrease the overall figure of fixed expense in order to derive good income and profit.

Variable Expenses:

This type of expenses fluctuates with the level of outcome and comprises of raw materials, labour, wages etc. In fund accounting both of these expenses are divided into the categories of trading and profit and loss statement and helps to determine gross and net profit of the company (Rai, 2013).

Accounting Equation:

This equation helps in the preparation of financial statements as it provides the base of double entry system. The main purpose of this equation is to display that assets are acquired either through debts or by shareholders money. Accounting equation is very much necessary and required for every business to calculate the necessary ratios and find the actual position of the business. The concept of accounting equation is described under:

Asset = Liabilities + Shareholders Equity

Also the overall presentation of balance sheet is nothing but clear display of this equitation as both assets and liabilities sides are balanced and remain same at the end of financial year (Rana, 2010). Another presentation of accounting equation is shown as under:

Liabilities = Assets – Shareholders Equity and Shareholders’ Equity = Assets – Liabilities

Moreover, in order to follow double entry book keeping system while preparing the financial statements it is very much important for each and every organization to understand the importance and requirement of this accounting equation.

Example of accounting equation is as follows:

Liabilities Amount Assets Amount
Shareholders’ Equity 750000 Plant and Machinery 100000
Creditors 75000 Stock 50000
Total 150000 Total 150000

Methods of calculating depreciation:

Generally there are five types of methods through which depreciation can be calculated however in corporate world; only two types of methods are used such as Straight line method and Reducing balance method. The basic meaning of providing depreciation is deduction in the value of assets for each financial year because of wear and tear of the same (Stockwell, 2011).

Straight Line Method:

Calculating depreciation through this method is very easy and simple. However, in order to imply this method it is very much important for the owner to predict the life of the assets and then divide the same with the cost of the asset.  The depreciation under this method remains constant every year as rate of depreciation remains the same.

Example: Machinery Acquired for 10000, life is 5 years.

Machinery Account

Particulars Amount (Dr) Particulars Amount (Cr)
To balance b/d 10000 By depreciation 2000
To balance b/d 8000 By depreciation 2000
To balance b/d 6000 By depreciation 2000
To balance b/d 4000 By depreciation 2000
To balance b/d 2000 By depreciation 2000

Reducing Balance Method:

Under this method, depreciation is calculated on the carried forward balance of the asset every year. Practically reducing balance method is more useful than straight line method as depreciation is provided as per the ratio of usage (Stott and Truman, 2010).

Example: Machinery acquired 10000 rat of depreciation 10 percent

Machinery Account

Particulars Amount (Dr) Particulars Amount (Cr)
To balance b/d 10000 By depreciation 2000
To balance b/d 8000 By depreciation 800
To balance b/d 7200 By depreciation 720
To balance b/d 6480 By depreciation 648
To balance b/d 5832 By depreciation 583.2

Prepayments and Accruals:

The overall preparation of financial statements and other statements have to follow certain accounting standards and laws which clearly state that the same have to prepared on accrual basis. Since we all know that the overall structure of financial statements is comprises of assets and liabilities or income and expenses, by following accrual basis of accounting, companies would be able to record all the upcoming liabilities and expense and thus would be aware about the same. On the other hand, recording of prepayments is equally necessary, as it would decrease the level of liability of the companies in the coming period.  Prepayments are assets of the company and accounting treatment is equal to that of outstanding expenses (Suntheim, n.d.2012).

Double entry book keeping principles:

As stated in the name, this principle indicates that each and every transaction should have tow effects on the accounts unlike single entry system. By following this principle, it would be easy for the financial professionals to prepare the necessary accounts and simultaneously it would be equally good for the investors and shareholders to understand the presented financial statements. The main principle of double entry book keeping system is debit the receiver and credits the giver and based on these two factors debit and credit effect are analysed in the financial statements. Some examples are as follows:

P Ltd purchased machinery through loan

Debit effect – Asset Acquired

Credit effect- Loan Liability

Journal Entry:

Asset A/c                                          dr

To Loan

xxx

xxxx

M Ltd Pay 5000 to his creditor R Ltd

Debit Effect- Cash Expense

Credit Effect- Asset Decreased by 5000

Journal Entry:

R ltd A/c                                              dr

To Cash

5000

5000

3.2 Relevant journal entries and Necessary Accounts:

Date Particulars Amount (Dr) Amount (Cr)
1 Jan 2013 Computer A/c                                  dr

Land and building A/c                    dr

Stock Control A/c                            dr

To Capital

 

3000

220000

20000

 

 

 

 

243000

2 Aug 2013 Purchases A/c                                 dr

To creditor A/c

2000

 

 

2000

3 Aug 2013 Computer A/c                                 dr

To Cash

1500  

1500

31 Aug 2013 Drawings A/c                                dr

To Bank

1200

 

 

1200

31 Aug 2013 Bank Loan A/c                               dr

To Cash

20000  

20000

30 Aug 2013 Stock A/c                                       dr

To Cash

To Creditors

2000  

1000

1000

xxx Stock A/c                                       dr

To Advertising

2000  

2000

                                                   General Ledger Account:

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
1.7.13 To bank 1000 1.7.13 By bank 2000
2.7.13 To purchases 2000 2.7.13 By creditors 1000
Total 3000 Total 3000

Profit and Loss Account:   

Date Particulars Amount (Dr) Date Particulars Amount (Cr)
Xxx To cost of sales 15000 Xxx By sales 20000
Xxx To wages 2000 Xxx
Xxx To Gross Profit 3000 Xxx
Xxx Xxx By Gross Profit 3000
Xxx To advertising 1000 Xxx
Xxx To rent 2000 Xxx
Xxx To promotions 1000 Xxx
Xxx To other expenses 500 Xxx By Net Loss 1500
Total 4500 Total 4500

                                                      Balance Sheet

Assets: Amount Amount
Debtors 15000 15000
Stock 15000 15000
Cash at bank 15000 15000
Total 45000
Liabilities:
Capital 20500 20500
Less: Net Loss (1500) 1500
Creditors 6000 6000
Loan from Bank 20000 20000
Total 45000

3.3 Regulations and code of practices, which are relevant in the financial service industry:

Following is the list of regulation and codes of practices, which are very much necessary while working under financial risk industry:

Code of practices:

  • Consent from stakeholders while structuring organizations rules
  • Availability of appropriate provisions and standards for different issues, matters etc
  • Proper control and track of departments after regular intervals
  • Ethical behaviour from each and every professionals

Regulations:

  • Appropriate standards should be implied in each and every department
  • Proper disclosure is required in Notes on Account in case of any accounting or material change
  • Do not use the concept of window dressing for more than 2 years
  • Auditor should be appointed to check the financial statements of the organizations
  • Mandatory to prepare the financial statements every year
  • Double Entry book keeping should be followed and accounts are prepared in T format

3.4 Explanation of two types of balance day adjustments:

Two types of balance day adjustments are accrual day adjustments and deferral day adjustments (Whitehead, 2014).

Accrual adjustments:

Under this type of adjustments assets and revenue of respective organization increases or enhances. Examples are as follows:

  • Interest accrued but not recorded of $250
  • Commission accord but not recorded of $500

Since it is very much important for each and every company to follow the accrual basis of accounting, the same is only possible by adjusting the transaction listed under balance day book.

Deferral adjustments:

It is totally different for accrual adjustments as here the overall value of asset or income decrease or lower down. Examples are as follows:

  • Commission paid $750
  • Interest paid &100

Deferral adjustments hold equivalent importance when it comes to preparation of financial statements and other necessary accounts. Otherwise double entry book keeping principles would be breached.[ Also Read this Communication Theories Assignment]

Moreover, list of some other adjustments are depreciation Estimation and Accounting Error correction (Joong-Hyun Lee, 2010).

References

Books:

  • Bragg, S. (2013). Accounting best practices. Hoboken, N.J.: John Wiley & Sons p.787
  • Clarke, E. (2015). Accounting. South Melbourne, Vic.: Thomson p.545
  • Harrison, I. (2012). Introducing accounting for AS. London: Hodder Education p.333
  • Higson, C., Nokes, S. and Tulloch, D. (2014). The information audit and information asset register. London: Rivington p.987

Journals:

  • Alghalith, M. (2014). Alternative theory of asset pricing. J Asset Manag, 10(2), pp.73-74.
  • Fager, C. (2015). Professional liability and potential liability. Neurosurgery, 16(6), pp.866???72.
  • Gleeson-White, J. and Harcourt, G. (2012). Double Entry Book Keeping: A Conversation. The Economic and Labour Relations Review, 23(3), pp.89-104.
  • Hampton, C. (2015). Estimating and Reporting Structural Equation Models with Behavioral Accounting Data. Behavioral Research in Accounting, 27(2), pp.1-34.

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