Unit 2 FINANCIAL STATEMENTS FOR A SOLE TRADER AFTER ADJUSTMENTS
Key Unit competence: To be able to prepare financial statements of asole trader after adjustments.
Introductory activity
Joyce, a sole trader in Remera, she records her business transactions
daily. After preparing the trial balance for the year 2022, she found out
some additional information which caused the trial balance to be adjusted
following the accounting cycle. The step of accounting cycle after adjustedtrial balance is to prepare financial statements.
Required:
a) As a professional accountant, advice Joyce (sole trader) on the
main financial statements that can be prepared for the proper
books of accounts of her business.
b) Show the main elements of each financial statement to be preparedby Joyce.
2.1. Income statement/ Statement of Profit or Loss afteradjustments
Learning Activity 2.1
ABC business has been performing well almost for five years since 2016
and currently it is experiencing a drop/loss in their profits according to
the financial performance for the year 2021. Apart from this drop, after
deep checking, some additional information needs adjustments. Owners
are complaining about the current performance of their business. As an
accountant of ABC Business, explain to the owners about the performanceof their business.
a) The loss for the period can be identified using which component of
financial statement?b) Show the main parts/components of statement of profit or Loss.
As seen in Senior 4 unit 10, at the end of year, every business must ascertain itsnet profit/loss. This is done in two stages.
1. Finding out the Gross Profit / Gross Loss which is got with Trading
Account2. Finding out the Net Profit / Loss which is got with Profit or Loss Account
2..1.1.Determination of Gross Profit /Gross Loss after adjustments
The entries/items that will appear in the Trading Account to ascertain the GrossProfit/Loss will be: (some items will be debited while other will be credited)
i. Items to be debited
1. Opening stock
It speaks of the inventory that was on hand at the start of the prior accounting
year. Opening stock is the quantity of an item present at the start of a new period
for keeping inventory. It contains the worth of the goods that the companydeals in and serves as the opening stock for the current accounting year.
2. Purchases
It refers to the value of goods (in which the concern deals) which are purchased
either on cash or on credit for the purpose of resale. The balance of purchases
account, appearing in the trial balance, reflects the total purchases made during
the accounting period. While dealing with purchases, we must bear in mind the
following aspects:
a) Purchase of capital asset should not be added with the purchases. If it
is already included in purchases, it should be deducted immediately.
b) If goods are purchased for personal consumption and they are added
with the purchases, they should be excluded. These types of purchases
should be treated as drawings.
c) If some of goods purchased are still in transit at the year-end, it is
better to debit stock-in-transit Account and credit Cash or Supplier’sAccount.
d) If the amounts of purchases include goods received on consignment, on
approval or on hire purchase, these should be excluded from purchases.
e) Cost of goods sent on consignment must be deducted from thepurchases in case of trading concern.
3. Sales return/ Return Inwards
In the books of account, Returns Inwards Account or Sales Returns Account
is debited and buyer’s account is credited. It appears on the debit side of Trial
Balance. We can show the sales returns in Trading Account in two ways. It may
be shown by way of deduction from sales in the Trading Account. An alternative
way to show the sales returns is in the debit side of the Trading Account.
4. Direct expenses/carriage inwards
These types of expenses are directly incurred in connection with purchases,
procurement or production of goods. These expenses are directly related to the
process of production. They also include expenses that bring the goods up to
the point of sale.
ii. Items to be credited
1. Sales
It refers to the sale of goods in which the business deals and includes both
cash and credit sales. It does not include sale of old, obsolete or depreciated
assets, which were acquired for utilization in business. However, goods sent to
customers on approval basis, free samples and sales tax, if any, included in thesales figure should be excluded.
2. Purchases returns
It may come about that due to some reasons: the goods are sent back to the
supplier. In that case, the supplier is debited in the books of accounts and
purchases returns or returns outwards are credited. It appears on credit side in
the trial balance. There are two ways of showing the purchases returns in the
income statement. It may be shown by way of deduction from purchases in the
income statement. An alternative way is to show the purchases returns in thecredit side of the income statement.
3. Closing stock
It refers to the value of goods lying unsold at the end of any accounting year.
This stock at the end is called closing stock and is valued at either cost or market
price, which is lower. The trial balance generally does not include closing stock.
Therefore, the following entry is recorded to incorporate the effect of closingstock in the income statement;
Dr. Closing Stock A/C
Cr. To Trading A/C
However, if closing stock forms a part of Trial Balance, it will not be transferred
to Income Statement but taken only to the statement of Financial Position. In
case of the goods that have been dispatched to customers on approval basis,such goods should be included in the value of closing stock.
Ascertain the Gross Profit or Loss
After recording the above items in the respective sides of the income
statement, the balance is calculated to ascertain Gross Profit or Gross Loss.
As seen in Senior 4, if the total of credit side is more than that of the debit side,
the excess represents Gross Profit. Conversely, if the total debit side is more
than that of the credit side, the excess represents Gross Loss. Remember thatthe Gross profit is ascertained using the Trading Account.
TRADING ACCOUNT (HORIZONTAL FORMAT)
Name of the company (date/month/year)
Or
TRADING ACCOUNT (HORIZONTAL FORMAT)
Name of the company (date/month/year)
TRADING ACCOUNT (VERTICAL FORMAT)
Illustration1
From the following details draw up the trading account of Mr Kamanda for theyear ended 31st December 2022, which was his first year in business.
Mr Kamanda
Trading Account for the year ended 31 December 2022
Mr. Kamanda
Trading Account for the year ended 31 December 2022
Illustration 2
The following details for the year ended 31st March 2022 are available for
Bosco’s business. Draw up the Trading account of Bosco for that year.
Bosco
Trading Account for the year ended 31 March 2022
Determination of net profit (or Loss) after adjustments
After ascertaining the gross profit, the subsequent step is to ascertain net profit
or net loss during an accounting period. The net income/profit is measured by
matching revenues and expenses. Net income is the difference between totalrevenues and total expenses.
a) Items to be debited to the Income Statement
i. Management expenses
These are the expenses incurred for carrying out the day-to-day administration
of a business. Expenses under this head include office salaries, office rent andlighting, printing and stationery, telegrams, telephone charges etc.
ii. Selling and distribution expenses
These expenses are incurred for selling and distribution of products and
services, as the name indicates, they comprise of commissions and salaries ofsalesmen, advertising expenses, packaging, bad debts etc.
iii. Maintenance Expenses
These expenses are incurred for maintaining the fixed assets of the
administrative offices in a good condition. They include expenses towardsrepairs and renewals.
iv. Financial expenses
These expenses are incurred for arranging finances necessary for running the
business. These include interest on loans, discount on bills, brokerage and legalexpenses for raising loans etc.
v. Abnormal losses
Some abnormal losses may arise during the accounting period. All types of
abnormal losses are treated as unusual expenses and debited to Profit and Loss
Account. Examples are stock lost by fire but not covered by insurance, loss onsale of machinery, cash defalcation etc.
vi. Wages and salaries earned by the worker-whether paid or not
N.B: To ascertain the amount of expenses to be debited to the income statement,
four types of events are essentially considered and then cash payment is madein connection with these events they are as under:
Expenses incurred and paid out in that year: those will be debited to theincome statement.
Expenses incurred but not paid out, partly or fully, during the current year
(outstanding expenses): on the date of the final accounts, those are in form of
both the expenses and a liability and they exist without having been recorded
in the books of accounts. For recording it, the following entry is to be passed:
• Dr. Expenses A/C Dr. (will be shown in the income statement account)
• Cr. Outstanding Expenses A/C (will appear in the liabilities side ofstatement of Financial Position)
• Expenses paid for during the current year, but not incurred as
yet, partly or fully (prepaid expenses): these are assets and will beshown in the Statement of Financial Position.
• Expenses of the current year, likely to arise in subsequent period:
in such case, we make a provision for the anticipated loss and a charge
is created against the profit for the current period. This provision is
shown as either a liability or contingent asset, i.e. it appears in the
statement of Financial Position as a deduction from some other assets.The best example of this anticipated expense is Provision for Bad Debt.
a) Items to be credited to the Income Statement
i. Other incomes
Sometimes a business might generate some profits, which is not due to the sale
of its goods or services because the business may have some other source of
financial income. The examples are discount or commission received.
ii. Non-trading Income
The business may have various transactions with the bank. At the end of the
year, the business may earn some amount of interest, which will find a place in
the profit & Loss Account as non-trading income. The business may have some
investment outside the business in the form of shares, debentures or units. All
sorts of gains obtained from such kinds of investments are considered as nontrading
income and are treated accordingly.
iii. Abnormal gains
There may be capital gains arising during the course of the year, e.g. profit
arising out of sale of a fixed asset. The profit is shown as a separate income
on the credit side of the Profit & Loss Account. We must remember that all
incomes from the abnormal gains or other incomes should be credited to the
Profit &Loss Account if they arise of accrues during the period. Similarly, income
received in advance should be deducted from the income.
Ascertaining the net Profit &Loss
Once the respective accounts are transferred from trial balance to income
statement, gross profit/ loss ascertained and all adjustments are taken care of,
the income statement will now be balanced. The totals of incomes and expenses
are computed and the difference between these totals is either a net profit or
net loss. If the total of expenses exceeds the total of incomes, there is a net Loss,
whereas when the total of incomes exceeds the total of expenses, there is a netprofit. Net profit/ loss is the last item to be recorded in income statement.
When the Profit and loss account shows a net profit, we pass the followingentry:
Dr. Profit &Loss A/C
Cr. Net Profit A/C
If the Profit and Loss Account shows a net loss, the entry will be reserved.
Format of income Statement
The Formats of Statement of Profit or Loss was discussed in S4 Unit 10
Illustration 1
The following trial balance was extracted from the books of Mugabe, a soletrader as at 31st August 2022.
Additional information
1. Inventory as at 31st August 2022 was valued at FRW 3,690,000
2. Allowance for bad debts is to be adjusted at 10 % of debts
3. Goods which costed FRW 300,000 had erroneously been invoiced to a
customer for FRW 400,000 and had been accounted for in sales
4. Electricity accrued as at 31st August 2022 was FRW 130,000 and
prepaid rates amounted to FRW 210,000 as at 31st August 2022
5. Stock of stationery as at 31st August 2021 was FRW 230,000
6. Depreciation is to be provided on pro rata basis as follows:
• Motor vehicles 20% on reducing balance method
• Plant and machinery 25% on reducing balance
7. A motor vehicle was sold on credit on 1st December 2021 for FRW
458,000. The motor vehicle had been bought on 1st June 2020 for FRW
1,000,000 the sale had not been recorded to the ledger., proportionatedepreciation is applicable until disposal date
8. During the year, Mugabe took goods worth FRW 350,000 from the
business for his own use.
Required: Prepare Income Statement/ Statement of Profit or Loss for theyear ended 31st August 2022
Solution
Workings:
1. Provision for bad debts = 7,300,000*10% = 730,000
Increase in previous for bad debts = 730,000 - 530,000 = 200,000
2. Motor vehicle depreciation:
1st period of 3 months 20%*1,000,000*3/12 50,000
2nd period full year 20%*(1,000,000 - 50,000) 190,000
3rd period 20% (1,000,000-50,000 - 190,000) *3/12 38,000
278,000
NBV = 1,000,000 – 278,000 = 722,000
Mugabe Income statement/ statement of Profit or Loss for the year ended
31st August 2022
Illustration 2
The following trial balance was extracted from the books of MIRIMO, a sole
trader for the year ended 31st December 2020FRW ‘000
Additional information:
1. Stock as at 31st December 2020 was valued at FRW 1,760,000
2. Depreciation on fixtures and fittings and motor vehicle is to be provided
at the rate of 5% and 10 % per annum respectively
3. Rates prepaid as at 31st December 2020 amounted to FRW 25,600,000
4. Unexpired insurance as at 31st December 2020 is to be made at FRW 4Million.
5. Additional FRW 1,758,240 Discount received is to be madeRequired:
Prepare Statement of Profit or Loss for the year ended 31st December 2020
Solution
MIRIMO
Statement of Profit or Loss for the year ended 31December 2020
Illustration 3
The following balances were extracted from ENOCK’s accounting books at theend of the financial year on 30th June 2020.
Additional information
a) Stock of goods in trade was valued at FRW 1,800,000 at the end of the
year
b) FRW 300,000 of the carriage relates to purchases and the balance
relates to sales
c) Enock receives a commission of 1% of gross purchases. The outstanding
balance of the commission for the year ended is to be received on 5th
day of the following financial year.
d) The provision for bad debts is to be reduced by 10% of the trade
debtor’s figure
e) Rent was paid on the first day of the financial year to cover a period of
18 months.
f) The loan from cousin was acquired on 1st January (within the financial
year), it is at interest rate of 20% per annum. Interest due for the period
is outstanding.
g) Vehicles are to be depreciated by 20% per annum on reducing balance
method and furniture and fittings by 10% per annum on cost.
h) Prepaid insurance of FRW 1,000,000 expired on 30th June 2020 (thelast day of the financial year).
Required:
a) a) Journal entry to record adjusting information c-h
b) b) Statement of Profit or Loss (Income Statement) for the year ended
30th June 2020.
Solution:
Enock
Journal entries to record Adjusting information on 30/6/2020
Enock
Statement of Profit or Loss for the year ended 30/6/2020
Income statement/ Statement of Profit or Loss in service firms
The income statement/ Statement of Profit or Loss for service sector firms e.g.
banks; insurance companies, etc are simple to draw up as it does not containthe trading Account. Their formats are shown as follows:
Statement of Profit or Loss
Illustration 4
Peter, a consultant in accountancy services prepared the following trial balancefor his Door way consultancy for the financial year ended 31/8/2019
Information for adjustments at the end of the year
1. Consultancy fees of FRW 2,000,000 which were unearned were earned
on 31/8/2019. The trial balance does not reflect this information.
2. Customers who were provided with services during the year ended
to June 2019 amounting to FRW 3,500,000 were not yet invoiced by
31/8/2019.
3. Hand count of office supplies on 31/8/2019 revealed that office supplies
worth FRW 500,000 remained in inventory
4. Depreciate Furniture and fittings and motor vehicles by 10% on cost
5. Loan interest for one year accrued
6. Electricity bills amounting to FRW 1,500,000 remained outstanding on
31/8/2019
7. A provision of corporation tax to be paid at the rate of 30% of pre-tax netprofit should be made.
Required:
Statement of Profit or Loss of Peter’s Consultancy at the end of the FinancialYear on 31/8/2019
Solution
Door way Consultancy Income Statement/ Statement of Profit or Loss for
the period ended 31/8/2019
Application activity 2.1
Mr Amandi has been trading for some years as Wine merchant. The
following list of balances has been extracted from his ledger as at 30 April2020, the end of his financial year.
Additional information:
a) Stock at the close of business was valued at FRW 17,750.
b) Insurance has been prepaid by FRW 1,120
c) Heating and lighting is accrued by FRW 1,360
d) Rates have been prepaid by FRW 5,435
e) The provision for bad debts is to be adjusted so that it is 3% of trade
debtors
REQUIRED: Prepare Mr Amandi’s trading, profit and Loss account for the yearended 30 April 2020.
2.2. Balance sheet (statement of Financial position) afteradjustments
Learning Activity 2.2
A local business located in Nyabihu District owned by Annette collects and
distributes Irish potatoes. At the end of 2022, while closing the financial
period, Annette was not aware on the statement to be prepared. You are
asked
1. To advise her on which statement to be prepared in order to knowthe financial position of her business.
Learning Activity 2.2
A Statement of Financial Position is a summary of the financial balances of a sole
proprietorship, business partnership or a company. It is a statement that helps
us to establish the financial position of a business enterprise on a particular
date, i.e. on a date when financial statements or final accounts are prepared or
books of accounts are closed.
In facts, this statement treats the balances of all those ledger accounts that have
not yet been squared up. These accounts relate to assets owned, expenses due
but not paid, incomes accrued but not received or certain receipts which are
not due or accrued. In other words, it deals with all those real and personal
accounts which have not been accounted for in trading or Profit & Loss accounts.
Therefore, an important feature of a statement of financial position is to showthe exact financial picture of a business concern on a particular date.
2.2.1. Difference between trial balance and Statement of FinancialPosition
2.2.2. Preparation and presentation of statement of Financial
position
The process of preparation and presentation of statement of financial positioninvolves two steps:
• Grouping
• Marshalling
Grouping
In the first step, the different items to be shown as assets and liabilities in the
Statement of Financial Position are grouped appropriately. For this purpose,
items of similar nature are grouped under one head so that the Balance Sheet
could convey an honest and true message to its users. For example, stock,
debtors, bills receivables, bank, cash in hand etc. are grouped under the
heading current Assets and land and Building, plant and Machinery, Furniture
and fittings, tools and equipment under Non-Current Assets. Similarly, sundry
creditors for goods must be shown separately and distinguished from moneyowing, other than due to credit sales of goods.
Marshalling
The second step involves marshalling of assets and liabilities. This involves
a sequential arrangement of all the assets and liabilities in the statement ofFinancial Position. There are two methods of presentation:
• The order of liquidity
• The order of permanence
Under liquidity order, assets are shown on the basis of liquidity or reliability.
These are rearranged in an order of most liquid, more liquid, liquid, least liquid
and not liquid (fixed) assets. Similarly, liabilities are arranged in the order in
which they are to be paid or discharged.
Under order of permanence, the assets are arranged on the basis of their useful
life. The assets predicted to be most fruitful for the business transaction for
the longest duration will be shown first. In other words, this method puts the
first method in the reverse gear. Similarly, in case of liabilities, after capital,
the liabilities are arranged as long term, medium term, short term and currentliabilities. This is the commonly used method.
Classification of assets
1. Non-current assets
2. Intangible assets
3. Current assets
4. Fictitious assets
5. Wasting assets
6. Contingent assets
i. Non-current assets
These are those assets, which are acquired for the purpose of producing Goods
or rendering services. These are not held for resale in the normal course of
business. Fixed assets are used for the purpose of earning revenue and hence
these are held for a longer duration. Investment in these assets is known as‘Sunk Cost”. All fixed assets are tangible by nature.
ii. Intangible assets
Intangible assets are those capital assets, which do not have any physical
existence. Although these assets cannot be seen or touched, they are long lasting
and prove to be profitable to owner by virtue of the right conferred upon them
by mere possession.
They also help the owner to generate income. Goodwill, trademarks, copyrightsand patents are the example of intangible assets.
iii. Current assets
Current assets include cash and other assets, which are converted or realized
into cash within a normal operating cycle or say, within a year.Current assets are also known as Floating Assets or Circulating Assets.
iv. Liquid or quick assets
These are current assets that can be converted into cash at a very short notice
or immediately, without incurring much loss or exposure to high risk. Quick
assets can be worked out by deducting Stock (raw materials, work-in-progressor finished goods) and prepaid expenses out of total current assets.
v. Fictitious assets
These are the non-existent worthless items which represent unwritten-off
losses or costs incurred in the past, which cannot be recovered in future or
realized in cash. Examples of such assets are preliminary expenses (formation
expenses), advertisement expense, underwriting commission, discount on
issue of shares and debentures, Loss on issue of debentures and debit balance
of income statement account. These fictitious assets are written off or wipedout by debiting them to income statement account.
vi. Wasting assets
An asset that has a limited life and therefore windless in value over time it is
called wasting asset. This type of asset has a limited useful life by nature and
depletes over a limited duration. These assets become worthless once their
utility is over or exhausts. During the life of productive usage, assets of this type
produce revenue, but eventually reach a state where the worth of the assets
begins to diminish. Such assets are natural resources like timber and coal, oil,mineral deposits etc.
vii. Contingent assets
Contingent assets are probable assets, which may or may not become assets,
as that depends upon occurrence or non-occurrence of a specified event or
performance or non-performance of a specified act. For example, a suit is
pending in the court of law against ownership title or a disputed property. If
the business does not win the lawsuit, it will not have ownership rights of the
property; it will be of no use to it. However, if it wins, the contingent asset will
become the asset of the concern. Such assets are shown by means of footnotesand hence do not form part of assets shown in the Balance Sheet.
Besides this, hire- purchase contract, uncalled share capital etc… are otherexamples of contingent assets.
Classification of liabilities
i. Non-current liabilities/long-term liabilities
ii. Current liabilities
iii. Contingent liabilities:
Contingent liability is an actual liability but anticipated (probable) liability
which may or may not become payable. It depends upon the occurrence of certain
events or performance of certain acts. If a parent guarantees a daughter’s first
car loan, the parent has a contingent liability. Contingent liabilities are shownas footnotes under the statement of financial position.
Illustration1. From illustration 2 in 2.1., prepare Mirimo’s Statement ofFinancial Position
Solution
MIRIMO
Statement of Financial Position
2.2.3. Prepare the Statement of Financial Position showing
working capital and capital employed
Types of capital
Different types of capital can be calculated as below:
i. Capital net worth/owned = total assets + total liabilities. The capital net
worth is also referred to as net worth or net assets
ii. Working capital = current assets – current liabilities
Working capital = capital employed –fixed assets
iii. Capital employed = total fixed assets + working capital or
Capital employed = owner’s equity + Long term liabilities
Illustration 2
Prepare the Statement of Financial Position of Enock for the period ended
31/6/2020 from illustration 3 in 2.1.
Solution
ENOCK
Statement of Financial Position as at 31/6/ 2020
Application activity 2.2
1. At 31st March 2022 Shalon was owed FRW 47,744,000 by her
customers. At the same date her allowance for receivables was
FRW 3,500,000. How should these balances be reported on Shalon’s
Statement of Financial position?
i. FRW 44,244,000 as a current asset
ii. FRW 3,500,000 as a current asset and FRW 47,744 as a current
liability
iii. FRW 47,7444 as a current asset and FRW 3,500,000 as a current
liability
iv. FRW 51,244,000 as a current asset
2. From the illustration 4 in 2.1. Prepare door Consultancy BalanceSheet as at 31/8/2019
2.3. Cash-Flow Statement (Statement of Cash-Flow)
Learning Activity 2.3
Visit your neighboring company and ask the accountant to show you theschool financial Statements.
a) Check on them differently and find which statement that showsthe movement of cash.
b) You will find different parts and elements in the statement of cash
flow. How do we call the cash that are coming in business, cash thatare going out the business and their difference?
Learning Activity 2.3
In senior four, the direct method of cash flow statement was discussed on, thatis why only indirect method will be seen.
Rules of preparing statement of cash flow in indirect method
Although the Financial Accounting Standard Board favors the direct method for
preparing the statement of cash flows, most companies do not use the direct
method opting instead for the indirect method because it is easier to prepare
and provides less detailed information to competitors.Under the indirect method, the cash flow statement begins with net income
on an accrual basis with assumption that net income equals cash and
subsequently adds and subtracts non-cash items to reconcile to actual cash
flows from operations. An increase in an asset account is subtracted for net
income, and an increase in a liability account is added back to net income.
The following rules can be followed to calculate Cash Flows from Operating
Activities when given only a two-year comparative balance sheet and theNet Income figure.
– Decrease in non-cash current assets are added to net income
– Increase in non-cash current asset are subtracted from net income
– Increase in current liabilities are added to net income
– Decrease in current liabilities are subtracted from net income
– Expenses with no cash outflows are added back to net income
(depreciation and/or amortization expense are the only operating
items that have no effect on cash flows in the period)
– Revenues with no cash inflows are subtracted from net income
– Non-operating losses are added back to net income– Non-operating gains are subtracted from net income
It is important to understand why certain items are added and otherssubtracted. Note the following points:
a) Depreciation is not a cash expense, but is deducted in arriving at
profit. It makes sense, therefore, to eliminate it by adding it back.
b) By the same logic, a loss on disposal of a non-current asset (arising
through under provision of depreciation) needs to be added back
and a profit deducted.
c) An increase in inventories means less cash you have spent cash on
buying inventory.
d) An increase in receivables means the company’s debtors have not
paid as much and therefore there is less cash.
e) If we payoff payables, causing the figure to increase, again we haveless cash.
Rules (Financing Activities)
Finding the Cash Flows from Financing Activities is much more intuitive and
needs little explanation. Generally, the things to account for are financingactivities:
• Include as outflows, reductions of long term note payable (as would
represent the cash repayment of debt on the balance sheet)
• Or as inflows, the issuance of new notes payable
• Include as outflows, all dividends paid by the entity to outside parties
• Or as inflows, dividend payments received from outside parties
• Include as outflows, the purchase of notes stocks or bonds
• Or as inflows, the receipt of payments on such financing vehicles.
• In the case of more advanced accounting situations, such as when
dealing with subsidiaries, the accountant must:
• Exclude intra-company dividend payments.• Exclude intra-company bond interest
Preparation of Statement of Financial Statement using indirect methodFormat of cashflow statement (indirect method)
N.B Further details on components of cash flow (cash flow from operating
activities, cash flow from investing activities and financing activities) arediscussed in Senior 4 unit 10.
Illustration 1
The following are balance sheets of Neema private ltd for the years ended 31stDec 2003 and 2004 respectively
Balance sheet/ statement of financial position as at 31st Dec 2003
Neema private ltd
Balance sheet/ Statement of Financial Position as at 31st Dec 2004
i. A piece of land was sold in July 2004 for FRW 610,000 and investment in
October 2004 for FRW 175,000
ii. Some motor vehicle was bought in 2004 for FRW 520,000. No furniturewas bought or sold during the year
iii. Profit before tax for the year ended on31 December 2004 was FRW
200,000
Required: Statement of Cash Flow to explain the change in cash
Solution
Adjustments:
a) Gain on disposal (land) = 610,000-(1,500,000-1,200,000) = 610,000-300,000=310,000
b) Loss on disposal (investment) = 200,000 - 175,000 = 25,000
c) Depreciation on furniture= 100,000-40,000=60,000
d) Depreciation on Motor Vehicle= 520,000-(880,000-550,000) =190,000
Neema private ltd
Statement cash flow (indirect method)
Dells Company started its business on 1st July 2014 and it is operating its
business activities nearby your school. At the 30 June, its accountant presentedthe business’s Balance Sheet for two years (2014 and 2015) which follows:
Required: Prepare Dells Statement of Cash Flow for the year ended 30 June
2015 using indirect method.
Answer
Application activity 2.3
1. Outline the uses of statement of cash flow to the visited business.
2. Maria is a sole trader who prepares his accounts annually to 30 April. Hissummarized balance sheets for the last two years are shown:
Balance sheets as at 30 April
You are required to prepare the statement of Cash Flow as at 30 April 2015
Skills Lab
After visiting any neighboring sole proprietorship business and checkingits financial statements,
1. Outline different Financial Statements prepared by a sole trader
2. Discuss about the use of financial statements to the visited business
3. As an accountant, advice the sole traders on the impact of negligencein the preparation of Financial Statements.
End unit assessment 2
After visiting any neighboring sole proprietorship business and checkingits financial statements,
1. Outline different Financial Statements prepared by a sole trader
2. Discuss about the use of financial statements to the visited business
3. As an accountant, advice the sole traders on the impact of negligencein the preparation of Financial Statements.
End unit assessment 2
1. Explain three reasons why the amount of cash flow of a business
entity might differ from the profit generated by the business entity
during the same period.
2. The book keeper of Mella Enterprise Ltd prepared the following trialbalance for the financial year ended31st march 2020
