Chapter: 07

Preparation and Presentation of Financial statements

To provide information to the interested users companies prepare a set of financial

statements. As external users have to rely only these statements, they should be
prepared with great care so that information provided therein is consistent,
comparative, relevant, reliable and finally easily understandable. Hence before
preparing these statements, account must know all relevant standards (national and
international). Hence a BBA student should well known about the components of
financial statements and how they are prepared and presented. A well understanding
of these statements will help the students to carefully analyze information presented
in income statements and to make decision.

1. Definition of Financial Statements

We have already learned that the objective of accounting is to provide necessary

information to the interested users. Now the question is how to provide this
information to the interested users. Accountant in an organization prepares a set of
financial statements to provide information to the users so that they can make
decisions. The IASC has, in its ‘Framework on Preparation and Presentation of
Financial Statements for Business Enterprises’ issued in 1989 stated

“Financial statements portray the financial effects of transactions and other

events by grouping them into broad classes according to their economic
characteristics. These broad classes are termed as the elements of financial
statements.”

Elements of Financial statements: Assets, Liabilities, Equity, Revenues, Expenses.

2. Components of Financial Statements:

A set of financial statements is prepared to provide information to the users. These

statements along with short description are stated below:
I. Income Statement and a statement of comprehensive income: Income
statement presents the result of operations of an entity for a specific period of
time.
II. Balance Sheet: Balance sheet reports the financial position of a business at a
certain date.
III. Statement of Cash Flows: It report cash inflows and outflows by grouping
them into operating, investing and financing activities.
IV. Statement of Changes in Equity:
V. Notes comprising a summary of accounting policies and other explanatory
notes.

3. Objective of financial statements:

International Accounting standard committee (IASC) in its framework for the
preparation and presentation of Financial Statements issued in 1989 has stated the
objective of financial statements in the following words:

“The objective of financial statements is to provide information about the

financial position, performance and changes in financial position that is
useful to a wide range of users in making economic decisions.”

4. Framework for the preparation and presentation of financial statements by

IASC
1) Objectives: Previously discussed.
2) Users: Investors, Creditors, Suppliers, Government, Customers,
Employees etc.
3) Underlying Assumptions: Accrual basis and going concern.
4) Qualitative Characteristics: Understandability, Relevance, Materiality,
Reliability, Faithful presentation, Neutrality, Prudence, Completeness
and Comparability.
5) Elements of Financial statements: Assets, Liabilities, Equity, Income
Expenses.
Format of the Income Statements: Multiple-step income statement.

Name of the Company

Income Statement
For the period ended------------
Particulars Taka Taka Taka
Sales Revenue:
Sales XXX
XXX
Less: Sales returns & allowance
XXX XXX
Sales discount XXXX
Net Sales
Less: Cost of Goods Sold:
Beginning / Opening inventory XXX

Purchases XXXX
XXX
Less: Purchases return and allowance
XXX
Purchases discount XXX
XXX
Add: Freight In/ Transportation In
XXX
Add: Wages
Cost of goods available for sale XXXX

Less: Ending / Closing inventory XXX

XXXX
XXXX
Gross Profit

Less: Operating Expenses:

a) Selling and Distribution Expenses:

Advertisement XXX
XXX
Sales Commission
XXX
Carriage outward
XXX
Bad Debts
XXX
Depreciation on Delivery Van XXXX

b) Administrative and Office Expenses:

Salaries XXX
Office Expenses XXX
Administrative Expenses XXX
 Office Rent XXX

Insurance XXX
XXX
Repairs
XXXX XXXX
Depreciation of Furniture/ Building etc.

Add: Operating / Other incomes

Gains from disposals XXX
XXX
Interest income
XXX
Dividend income XXXX

Less: Non-operating / Other expenses

Bank Charges XXX
Donation XXX

Preliminary Expense XXX

XXX
Loss on sale of any fixed assets
XXX
Accrued interest on Notes Payable
XXXX
Add: Non-operating / Other incomes
Interest Received XXX
Dividend Received XXX

Commissioned Received XXX

XXX
Bad Debts Recovered
XXX
Profit on sale of any fixed assets
XXX
Apprenticeship Premium received XXX
Apprenticeship Premium received XXX
XXXX

Net Income / Profit before Tax XXXX

Less: Income Tax ( %) XXXX

Net Income after Tax or Net Profit XXXX

Balance Sheet: The balance sheet is a listing of the organization’s assets,
liabilities, and owners’ equity at a point in time. In this sense, the balance sheet is
like a snapshot of the organization’s financial position, frozen at a specific point in
time.

The balance sheet is sometimes called the Statement of financial position because it
summarizes the entity’s resources (assets), obligations (liabilities), and owners’
claims (owner’s equity) or Net worth. The key to understanding a balance sheet is the
simple formula as: Assets = Liabilities + Net Worth.

The standard classifications of a balance sheet are given as a following format:

Name of the Company

Balance Sheet
As at......
Assets and Liabilities & Owner’s Equity Taka Taka Taka
Assets
Current Assets:
Cash in Hand XXX
Cash at Bank XXX

Accounts Receivable XXX

XX
XXX
Less: Allowance forbad debts
Notes Receivable XXX
Prepaid Expenses XXX

Supplies on Hand XXX

XXX
Ending Inventories
XXXXX
Total Current assets
Investment:
Investment in share and Debentures XXX
XXX
Investment in Govt. Bonds
XXXX
Fixed Assets:
Land XXX

Building
XXX
 Less: Accumulated Depreciation XXX
XXX

Equipment
XXX
Less: Accumulated Depreciation XXX XXX
XXXX

XXXX
Total Assets
Liabilities and Owner’s Equity:
Current Liabilities
Notes Payable
XXX
Accounts Payable
XXX
Tax Payable XXX
Dividend Payable XXX
Unearned Income XXX
XXX
Long-term Liabilities:
Mortgage Loan /Bank Loan XXX
Bond payable XXX
Debenture XXX
XXX
Owner's (Stockholders' / Shareholders')
Equity:
Owner's Equity XXX
XXX
Retain Earnings
XXX
Reserve Fund XXX
Total Liabilities & Owner's Equity XXXX
 Problems & Solution
Problem-1
The following Trial Balance related to Green Trading House as at 31 st December,
2015.

Green Trading House

Trial Balance
December 31, 2015.
Particulars Debit Credit
Taka Taka
Sales 180000
Sales Return 5000
Purchases 95000
Carriage in 4000
Stock (01.01.2015) 10000
Wages 20000
Administrative Expenses 25000
Insurance 3000
Selling and Distribution Expenses 10000
Purchase Return 2500
Drawing 10000
Capital 150000
Premises 120000
Equipment 20000
Accounts Receivable 15000
Accounts Payable 10000
Cash 7000
Allowance for Bad Debt 1500

At the end of the year, the following information is available:

1) Tk 1000 of the wages relates to the next accounting period.
2) Tk 2000 accrued for administrative expenses.
3) Equipment is to be depreciated by Tk 4000.
4) Ending stock is estimated to have cost Tk 8000.
5) Raise the allowance for bad debt to 2% of net sales.
6) The owner withdrew goods costing Tk 5000 for personal use but not
recorded.

Required: a) A Multiple-step Income Statement.

b) Owner’s Equity Statement.
c) Classified Balance Sheet.
Solution:

a) Green Trading House

Income Statement
For the year ended 31st December, 2015
Particulars Tk Tk Tk
Sales Revenue:
Sales 180000
Less: Sales Return 5000
Net Sales 175000

Less: Cost of Goods sold:

Stock (01.01.2015) 10000
Purchase 95000
Less: Purchase Return 2500
92500
Less: Withdrew for personal use 5000
87500
Add : Carriage In 4000 91500

Materials Available for sale 101500

Less: Ending Stock 8000
93500

Wages 20000
Less: Wages paid in advance 1000
19000
Gross Profit 62500
Less: Operating Expenses:
a) Selling and Distribution Expenses: 10000
Selling and Distribution Expenses 2000
Bad Debt Expenses(3500-1500)
12000
b) Administrative and Office Expenses:
25000
Administrative Expenses 2000
Add: Accrued Expenses 27000
Insurance 3000
4000
Depreciation on Equipment
34000
Add: Operating Income
--------
Less: Non-Operating Expense --------
 ---------
Add: Non-Operating Income

Net Profit
16500

b) Green Trading House

Owner’s Equity Statement
For the year ended 31st December, 2015.

Particulars Tk Tk
Capital 150000
Add: Net Income 16500
166500
Less: Drawing 10000
Goods withdrew for personal use 5000
15000
151500

c) Green Trading House

Balance Sheet
As at 31st December, 2015
Assets and Liabilities Tk Tk Tk
Assets:
Current Assets: 7000
Cash
Accounts Receivable 15000
Less: Allowance for Bad Debt 3500
Wages paid in advance 11500
Ending Stock 1000
8000
27500
Fixed Assets: 120000
Premises
Equipment 20000
Less: Depreciation 4000 16000
136000
Total Assets
163500

Liabilities and Owner’s Equity:

Current Liabilities:
Accounts Payable 10000
Accrued Administrative Expense
150000
Owner’s Equity: 12000
Capital 16500
Add: Net Income 166500

Less: Drawing 15000

10000
Withdrew goods for personal use
5000
151500
Total Liabilities & Owner’s Equity
163500

Problem # 2: The trial balance of Dazzle Fashion House contained the following
accounts at December 31, 2010 the end of the year as:

Accounts Title Debit Taka Credit

Taka
Cash 28, 700 -------
Accounts receivable 33, 700 -------
Merchandise inventory 45, 000 -------
Store supplies 5, 500 -------
Store equipment 85, 000 -------
Accumulated depreciation-store equipment --------- 18, 000
Delivery equipment 48, 000 -------
Accumulated depreciation-Delivery equipment -------- 6,000
Notes payable -------- 51, 000
Accounts payable -------- 48, 500
Capital -------- 1, 10, 000
Drawing 12, 000 --------
Sales -------- 7, 59, 200
Sales return & allowance 4, 200 --------
Cost of goods sold 4, 97, 400 --------
Salaries expense 1, 40, 000 ---------
Advertising expense 26, 400 ---------
Utilities expense 14, 000 --------
Repair expense 12, 100 --------
Delivery expense 16, 700 ---------
Rent expense 24, 000 --------
Totals 9, 92, 700 9, 92, 700
Adjustments data:
a. Store supplies on hand totaled Tk.3, 500
b. Depreciation is Tk.9, 000 on the store equipment and Tk.7, 000 on the delivery
equipment.
c. Interest of Tk.11, 000 is accrued on notes payable at December 31.
d. Merchandise inventory actually on hand is Tk.44, 000.
e. Salaries expense is 70% selling and 30% administrative.
f. Tk.30, 000 of notes payable are due for payment next year.

Instructions:
 An Income Statement in multiple-step form.
 Balance Sheet as on December 31, 2010

Problem # 3: The Trial Balance of Graham wholesale Company contained the

following accounts at December 31, the end of the company fiscal year.

GRAHAM WHOSALE COMPANY

Trial Balance
December 31, 2010
Accounts Title Debit Credit
(Taka) (Taka)
Cash 25, 400 -------
Accounts receivable 37, 600 -------
Merchandise inventory 90, 000 -------
Land 92, 000 -------
Building 1, 97, 000 -------
Accumulated depreciation-Building -------- 54, 000
Equipment 83, 500 --------
Accumulated depreciation-Equipment -------- 42, 200
Notes payable -------- 50, 000
Accounts payable -------- 37, 500
Capital -------- 2, 67, 00
Drawing 10, 000 -------
Sales -------- 9, 04, 100
Sales discount 4, 600 -------
Cost of goods sold 7, 09, 900 --------
Salaries expense 69, 800 --------
Utilities expense 19, 400 --------
Repair expense 5, 900 --------
Gas and oil expense 7, 200 --------
Insurance expense 3, 500 --------
 Totals 13, 55, 800 13, 55, 800

Adjustment data:
1. Depreciation is Tk.10, 000 on building and Tk.9, 000 on equipment.
2. Interest of Tk.7, 000 is due and unpaid on notes payable at December 31.
3. Merchandise inventory actually on hand is Tk.49, 200.
4. Salaries are 80% selling and 20% administrative.
5. Tk.15, 000 of the notes payable are payable in next year.

Required:
 An Income Statement in multiple-step form.
 Balance Sheet as on December 31, 2010

Problem # 4: The following balances are extracted from the ledger of General
Company as at June 30. 2011.

Accounts Title Taka Accounts Title Taka

Capital 2, 80, 000 Cash 30, 000
Sales 3, 70, 000 Opening inventory 14, 000
Purchases return 5, 000 Insurance 3, 600
Accounts payable 36, 000 Office supplies 2, 800
Notes payable 6, 000 Rent 1, 200
Purchases 3, 20, 000 Salaries 6, 400
Sales return 1, 200 Drawings 1, 800
Accounts receivable 1, 00, 000 Advertisement 3, 000
Furniture 1, 20, 000 Delivery expenses 7, 000
office equipment 82, 000 Freight in 4, 000

The following adjustments are to the made on June 30, 2011:

i. Inventory at closing Tk.61, 000.

ii. Unexpired insurance Tk.400.
iii. Accrued salaries Tk.1, 600.
iv. Depreciation to be provided: 5% on furniture & 10% on office equipment.
v. Office supplies on hand Tk.800.
vi. The inventory in the end include goods worth Tk.1, 500 for which bill have
neither been received nor accounted for.
vii. Goods costing Tk.250 were taken by the owner for personal use and no record
of it was maintained in the books of accounts.
Required:
 An Income Statement in multiple-step form.
 Balance Sheet as on June 30, 2011

Problem # 5: From the following information prepare an Income Statement and a

Balance Sheet as at 31st December 2010:

Particular Taka Particular Taka

Accounts Receivable 48, 000 Capital 50, 000
Notes Receivable 13, 795 Reserve for bad debt 3, 000
Goodwill 40, 000 Mortgage loan 6% (1/1/02) 45, 000
Machinery 60, 000 Accounts Payable 12, 080
Opening inventory 27, 860 Notes payable 8, 150
Cash 7, 840 Commission 2, 850
Manufacturing expense 8, 000 Sales 1, 22, 040
Wages 4, 340 Returns outwards 5, 000
Salaries 540
Postage and telegram 950
Rent 460
Stationary and printing 170
General expense 180
Purchase 29, 860
Interest on mortgage loan 1, 125
Returns inward 3, 500
Bad debt 1, 500
Totals 2, 48, 120 Totals 2, 48, 120

Other information:
1) Closing inventory valued Tk.15, 000.
2) Provision for bad debt @3% and discount on accounts receivable @2%.
 3) Depreciation on machinery @7.5%.
4) Unpaid bills for purchases amounted to Tk.3, 500.
5) Intangible assets if any are to be written off to the extant of 25%.

Required:
 An Income Statement in multiple-step form.
 Balance Sheet as on December 31, 2010

Note-`1
Bad debt (old)----------------------------------1500
+ Reserve for Bad debt ( New)--------------- 1411
---------
2911
- Reserve for Bad debt ( New)------------ 3000
-------------
(89)
Problem # 6: The following data are related to the NEW LIFE & FOO
PRODUCTS, you are required to prepare an Income Statement, Statement of
Owner’s Equity and a Balance Sheet as at 31st December 2010.

Details Taka Details Taka

Cash 2, 850 Sales revenue 6, 10, 050
Accounts receivable 4, 600 Sales discounts 77, 400
Notes receivable 8, 000 Sales returns & allowance 24, 800
Inventory 40, 500 Interest revenue 4, 400
Supplies 650 Purchases 39, 845
Prepaid insurance 1, 200 Purchases discounts 40, 000
Furniture and Fixtures 33, 200 Purchases return & 16, 100
Accumulated depreciation 2, 400 allowance 8, 500
Accounts payable 47, 000 Fright in 3, 600
Unearned sales revenue 2, 000 Rent expense 3, 800
Notes payable-long term 12, 000 Interest expense 2, 000
Capital 25, 000 Freight out 3, 000
Withdrawals 34, 100 Gain on disposal on 1, 000
equipment
Loss on sales of fixes assets

Additional data:

a. Interest revenue earned but not yet collected Tk.400.

b. Supplies on hand Tk.100.
c. Prepaid insurance expired during the year Tk.1, 000.
d. Depreciation for the current year Tk.600.
 e. Unearned sales revenue earned during the year Tk.1, 300.
f. Interest expense incurred but not yet paid Tk.200.
g. Inventory on hand Tk.42, 000.
h. Accrued salaries on 31st December: Sales salaries Tk.2, 800 & Office salaries
Tk.1, 300
Required:
 An Income Statement in multiple-step form.
 Balance Sheet as on December 31, 2010