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CHAPTER 7 Preparing financial statements

CHAPTER 7 Preparing financial statements. Contents. Constructing financial statements Accounting adjustments Uses of financial statements. Constructing financial statements. Start with aggregate transaction data from the accounting database at the end of the accounting period

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CHAPTER 7 Preparing financial statements

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  1. CHAPTER 7Preparing financial statements

  2. Contents • Constructing financial statements • Accounting adjustments • Uses of financial statements

  3. Constructing financial statements • Start with aggregate transaction data from the accounting database at the end of the accounting period • Quantify the adjustments necessary to convert the data to reflect GAAP • Bring aggregates and adjustments together in the approved statement format

  4. Extended trial balance • A trial balance is the listing of all the balances on all the general ledger accounts at the end of the accounting period • At year-end, the trial balance data will be refined through the year-end adjustments • In the extended trial balance, the ledger balances and adjustments are added mathematically and the adjusted balance is entered in the income statement column or in the balance sheet column

  5. Extended trial balance format

  6. Year-end adjustments • Calculation of cost of goods sold • Adjustments for accruals and deferrals • Charging annual depreciation • Updating provisions • Reviewing assets for potential impairment

  7. Worked example –Trial balance

  8. Extended trial balance worksheet

  9. Income statement for the year ended 31 December 20X1 (format for use internally)

  10. Income statement for the year ended 31 December 20X1 (published format)

  11. Balance sheet as at 31 December 20X1

  12. Additional accounting adjustments • Interest expense adjustments • Accrual adjustments at year-end • Income tax adjustments • Year-end accruals for estimated income tax on annual pre-tax profit • Dividend • Charged directly against reserves/retained profits in shareholders’ equity • Dividends declared after balance sheet date may not be recognised as a liability because they do not constitute a present obligation at balance sheet date

  13. Presentation of interest and income tax expense The deduction of interest and tax expense normally figures separately in the income statement:

  14. Income statement for the year ended 31 December 20X1

  15. Balance sheet as at 31 December 20X1

  16. Uses of financial statements • To measure how much dividend might be paid • To provide reassurance of a company’s financial strength to creditors • To provide a basis for measuring future growth for stock market analysis • To measure management performance in a principal/agent context • To provide a basis of taxation of the company • To give employees an idea of the company’s strength

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