Income Statement And Balance Sheet For The Internal Accounting Essay

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1.0 Introduction

This assignment is discussed about Principles of Accounting. Account is the practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records, performing internal audits, reporting and analyzing financial information to the management, and advising on taxation matters. It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. Accounting provides information on the resources available to a firm, the means employed to finance those resources, and the results achieved through their use.

Task 1 is described about the five different users and their needs for Continental Limited financial statements. Furthermore, the author will explain the five regulatory characteristic of these financial statements that will provide useful information to the users.

Task 2 is about prepared the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 for the internal use by company directors and management. And show the necessary workings.

Task 3 is about prepared the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 for the internal use by company directors and management. And show the necessary workings.

Task 4 is about based on the income statement and balance sheet made in task 2 and 3, calculate the appropriate accounting ratios for year ending 31 Dec 2010 and compare them with the industry averages provided to assess the profitability and liquidity of Continental Limited.

Therefore, there are six sections in this assignment which are introduction to explain about the whole assignment, the five different users of task 1 and their needs for Continental Limited financial statements, and explain five regulatory characteristics of these financial statements that will provide useful information to the users. Task 2 is about prepare the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 for the internal use by company directors and management, and shows the necessary workings. Task 3 is about prepare the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in the accepted format for external reporting or publication, and shows the necessary workings. Task 4 is about based on the income statement and balance sheet made in task 2 and 3 calculate the appropriate accounting ratios for year ending 31 Dec 2010 and compare them with the industry averages provided to assess the profitability and liquidity of Continental Limited.

2.0 Five Different Accounting Users

The accounting users are separate to internal users and external users. The internal users are the people within the organization. The external users are the people outside the organization. The accounting users are using the accounts to derive financial information for their needs. The accounting users are the employees of the company, suppliers or creditors, customer or debtors, providers of finance to the company such as banks and other financial institution, government agencies and etc. As summarized below:

Employees of the company: These are the people employed by the company to carry out the business activities. The employees need the accounting information about the company's financial situation because their future careers and the size of their wages and salaries depend on it.

Suppliers or Creditors: Suppliers and trade creditors are provide trading goods or services to the company on credit. These are people who require information that helps them understand and assess the business's short-term liquidity. They need accounting information about the company's ability to pay its debts for ensuring their collection from the company.

Customer or Debtors: The customers and trade debtors are the people who purchase goods or services provided by the company. These are people who require information about the ability of the business to survive and prosper. They need accounting information about the company's financial stability to ensure that the company is a secure source of supply and no danger of having to close down.

Providers of finance to the company such as banks and other financial institution: They provide loan and overdrafts for the company to finance business activities. They need accounting information about the company's financial status to ensure that the company is able to keep up with interest payments and eventually to repay the principal amount of loan advanced.

Government Agencies: The government agencies and departments are interested in accounting information. These are the people who need accounting information about the business activities of enterprises for the allocation of resources and national statistical.

3.0 Income statement and balance sheet for the internal

The task 2 is about prepared the income statement and the balance sheet (Appendix A & B) of Continental Limited for year ending 31 December 2010 for the internal use by company directors and management. The information of working in the assignment, as summarized below:

3.1 The Information of Working (a)

In the closing stock at 31 December 2010 should be recorded at cost or net resale value which is the lower. Obviously, the cost RM65000 is less than the net resale value RM70000, the cost of RM65000 should be closing stock value where put in the trading account of income statement and under the current asset in balance sheet.

3.2 The Information of Working (b)

The following is recorded the receipt from cash sale, out of which payments were made for purchase of goods RM4000, stationery RM700 and electricity bill RM300.

Cash account

2010 RM 2010 RM

31 Dec Sales 5000 31 Dec Purchase 4000 4000

31 Dec Stationery 700

31 Dec Electricity 300

5000 5000

Sales in trading account of income statement:

RM360000 from trial balance + RM5000 = RM365000.

Purchase in trading account of income statement:

RM200000 from trial balance + RM4000 = RM204000.

Stationery as expense put in the Profit and Loss account of income statement = RM700.

Electricity and water in Profit and Loss account of income statement:

RM7000 from trial balance + RM300 = RM7300.

3.3 The Information of Working (c)

Accrual for a salesman's commission RM1500 and prepayment for an office staff salary RM2000 at 31 December 2010.

Sales commission as expense put in Profit and Loss account of income statement:

RM 18000 paid from trial balance + RM1500 = RM19500.

Therefore, accrued sales commission RM1500 is recorded under the current liability in balance sheet.

Office salaries as expense put in the Profit and Loss account of income statement:

RM28000 paid from trial balance - RM2000 prepaid at the end of year = RM26000.

Therefore, prepaid office salary RM2000 is recorded under the current asset in balance sheet.

3.4 The Information of Working (d)

Debtor account

201 RM 2010 RM

1 Jan Balance b/d 75000 31 Dec Bad debts 5000 4000

31 Dec Balance c/d 70000

75000 75000

2011

1 Jan Balance b/d 7000

Bad debts account

2010 RM 2010 RM

31 Dec Debtor 5000 31 Dec Profit and Loss 5000 4000

Provision for bad debts closing balance = 10% x Debtor closing balance RM70000 = RM7000

Provision for bad debts account

2010 RM 2010 RM

31 Dec Closing balance c/d 7000 1 Jan Opening balance b/d 5000

31 Dec Increase difference 2000

7000 7000

3.5 The Information of Working (e) and (f)

Vehicles account

2010 RM 2010 RM

31 Dec Opening balance b/d 300000 1 Jan Vehicle disposal a/c 50000

31 Dec Increase difference 250000

300000 300000

2011

Jan 1 Balance b/d 250000

Provision for depreciation on vehicle account

2010 RM 2010 RM

1 Jan Vehicle 12500 1 Jan Opening balance b/d 60000

(Cost sold RM50000 x 5% x 5 years 1 Jan Depreciation as expense put

from 1 Jan 2005 to 1 Jan 2010) in Profit and Loss account

31 Dec Balance c/d 60000 (Vehicles closing balance

RM250000 x 5%) 12500

72500 72500

2011

1 Jan Balance b/d 60000

Vehicles disposal account

2010 RM 2010 RM

31 Dec Balance c/d 54000 1 Jan Opening balance b/d 40000

31 Dec Depreciation as expense put in

Profit and Loss account 14000 54000 54000

2011

1 Jan Balance b/d 54000

3.6 The Information of Working (g)

Taxation charge RM 15300 is deducted from net profit at the bottom of income statement. It is also recorded as accrued taxation RM15300 under the current liability in balance sheet.

3.7 The Information of Working (h)

Proposed dividend to be deducted from net profit at the bottom of income statement: 2% x RM500000 Share capital from trial balance = RM10000.

Then, the proposed dividend RM10000 is recorded under current liability in balance sheet.

3.8 The Calculation for the Income Statement

Income statement of Continental Limited for year ending 31 Dec 2010 for internal use by company directors and management

RM

RM

RM

Sales

365000

Less Return inwards

10000

Net Sales

355000

Less: Cost of Sales

Opening Stock

50000

+ Purchase

204000

Less Return outwards

-15000

+ Carriage inwards

5000

194000

Less Closing stock

-65000

-179000

Gross Profit

176000

Add: Income

Dividend received

5000

181000

Less: Expenses

Stationery

700

Office electricity

7300

Office salaries

26000

Sales commission

19500

Bad debts

5000

Increase in provision for bad debts

2000

Loss on disposal of vehicle

2500

Depreciation on vehicles

12500

Depreciation on premises

14000

Vehicle expenses

12000

Interest charges

3000

-104500

Net Profit

76500

Less Taxation charge

-15300

Less Proposed dividend

-10000

Profit for the year

51200

Add Retained earnings brought forward

100000

Retained earnings carried forward

151200

3.9 The Calculation for the Balance Sheet

The Balance Sheet of Continental Limited as at 31 Dec 2010 for Internal Use

RM

RM

RM

Fixed assets/ Non-current assets

Office premises at cost

350000

(-) Provision for depreciation on premises

-54000

296000

Vehicles at cost

250000

(-) Provision for depreciation on vehicles

-60000

190000

Long-term investments

100000

586000

Current assets

Closing stock

65000

Debtors

70000

(-) Provision for bad debts

-7000

63000

Bank

42000

Prepaid office salary

2000

172000

758000

Issued share capital

Share capital

500000

Add: Reserve

Retained earnings carried forward

151200

Shareholders' equity

651200

Add: Long term liabilities/ Non-current liabilities

Loan

55000

Add: Current liabilities

Creditors

25000

Accrued sales commission

1500

Accrued taxation

15300

Proposed dividend

10000

51800

758000

4.0 The Income Statement and Balance Sheet for External Report

This task is about the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in the accepted format for external reporting or publication. The author needs to classify the expenses from income statement of task 2 into distribution costs and administrative expenses as follows, after done the income statement and balance sheet.

4.1 From the Income Statement of Task 2

Distribution costs (RM) Administrative expenses (RM)

Stationery - 700

Office electricity and water - 7300

Office salaries - 26000

Sales commission 19500 -

Bad debts 5000 -

Increase in provision for bad debts 2000 -

Loss on disposal of vehicles 2500 -

Depreciation on vehicles 12500 -

Depreciation on premises - 14000

Vehicle expenses 12000 - .

Total 53500 48000

4.2 The Calculation for Income Statement

The Income Statement of Continental Limited for year ending 31 Dec 2010 for External Reporting

RM

RM

Turnover

355000

Cost of sales

-179000

Gross Profit

176000

Distribution costs

53500

Administrative expenses

48000

-101500

Operating profit

74500

Dividend received

5000

79500

Interest charges

-3000

Profit on ordinary activities before taxation

76500

Taxation charge

-15300

Profit on ordinary activities after taxation for the year

61200

Proposed dividend

-10000

Retained profit for the year

51200

Retained profit brought forward

100000

Retained profit carried forward

151200

4.3 The Calculation for Balance Sheet

The Balance Sheet of Continental Limited for the year ending 31 Dec 2010 for External Reporting

RM

RM

RM

Fixed Assets

Tangible Assets:

Premises

296000

Vehicles

190000

486000

Investment:

Long term investment

100000

586000

Current Assets

Stock

65000

Debtors

63000

Prepaid office salary

2000

130000

Cash at bank

42000

172000

Less Creditors: Amounts Falling Due Within One Year

Creditors

25000

Accrued sales commission

1500

Accrued taxation

15300

Proposed dividend

10000

-51800

Net Current Assets

120200

Total Assets Less Current Liabilities

706200

Less Creditors: Amount Falling Due After More Than One Year

Loan

55000

651200

Capital and Reserves

Called up share capital

500000

Profit and Loss account

151200

651200

5.0 The Comparison for the Accounting Ratio

The task 4 is about calculate the appropriate accounting ratios for year ending 31 December 2010 and compares them with the industry averages provided to assess the profitability and liquidity of continental limited.

5.1 The Table of Ratio Calculation

Ratio with formula Ratio calculation for year 2010 Industry Average

(a) Gross Profit x 100 176000 x 100 = 49.57 % > 30%

Net Sales 355000

(b) Operating Profit x 100 74500 x 100 = 20.98% > 18%

Net Sales 355000

(c) Net Profit + Interest charges 76500 + 3000 = 11.26% > 9%

x 100 x 100

Total assets - current liabilities 758000- 51800

= Capital employed = 706200

(d) Current asset 172000 = 3.32: 1 > 2: 1

Current liabilities 51800

(e) 365 days 365 days = 117.36 days > 90 days

Cost of sales 179000

Stock turnover 57500

=Stock Turnover times =3.11 times

(f) Debtor ratio x 365 days 63000 x 365 days = 64.77 days > 45 days

Net credit sales 355000

(g) Creditor ratio x 365 days 25000 x 365 days = 48.28 days < 60 days

Purchase- Return outwards 204000-15000

=Net credit purchase =189000

5.2 The Profitability of Continental Limited

(a) The percentage of gross profit on sales in the ratio calculation for the year 2010 which is 49.57% higher percentage than the industry average 30%. So, based on this, we can know that the gross profit on sales in ratio calculation for the year 2010 are more effective and efficient than the industry averages, because it can control its purchase cost by making the purchase at lower cost from supplier and efficient in controlling its production cost by the effective use of materials and labor to reduce its production cost rather than industry average.

(b) The percentage of operating profit on sales in the ratio calculation for the year 2010 is 20.98% which is more than industry average 18%. From the ratio comparison, the higher an expense to sales ratio indicates that the company is ineffective in its expenditures control caused higher expenses incurred to reduce its net profit earning. In opposition, the industry average ratio is lower expense to sales ratio indicates that the company is effective in costs control caused lower expenses to incurred to increase its net profit earning.

(c) The return on capital employed (ROCE) in the industry average is 9%, and the return on capital employed (ROCE) in the ratio calculation for the year 2010 is 11.26%, which is higher than the industry average percentages. In this ratio calculation for the year 2010 showed that the higher return on capital employed (ROCE) indicates higher net profit generated from the capital employed in production and business activities to increase the production and sales volume as well as to increase the net profit earning. Furthermore, the lower of the industry average is the lower return on capital employed (ROCE) indicates lower net profit generated from the capital employed for ineffective use of capital employed in production and business activities to reduce production and sales volume as well as to reduce net profit earning.

5.3 The Liquidity of Continental Limited

(d) The comparison between the ratio for year ending 31 December 2010 and the industry averages which the former is higher than the latter. Because, the current ratio of the year ending 31 December 2010 is 3:.32: 1 higher than industry average which is 2:1.

(e) The stock turnover period for the year ending 31 December 2010 is 117.36 days which more than the industry average because it only 90 days. Obviously, the longer stock turnover period indicate slow stock turnover in business where goods purchased are kept in stock for long time and then slowly taken out for resale so that the stock is accumulated to tie up money, causing short term problem.

(f) The calculation ratio for the year end 31 December 2010 is 64.77 days which longer than the industry average which is 45 days only. From the ratio comparison, the longer debtor collection period for year end 31 December 2010 indicate that company has given longer credit time to allow debtor owning, causing longer time taken by company to collect money slowly from debtors, so that larger debtor balance is accumulated to tie up money, bringing to shortage of money for paying back liabilities and facing short term financial problem.

(g) The result ratio for year end 31 December 2010 is 48.28 days which is shorter than the industry average which is 60 days. Thus, the shorter creditor payment period indicate that company has obtained shorter credit time for owning and paying to creditors so that company needs to pay creditor in time, causing smaller creditor accumulated and short term financial problem for shortage of money to pay back creditor.

6.0 Conclusion & Recommendation

In the conclusion, through doing this assignment, the author has learned and knew the accounting have many different users and different way to use of accounting information. In the task 2 and task 3, the income statement and balance sheet can help the different users to know the companies are earning (profit) or losing (loss). So, the company can based on this to decide hire more employees or reduce the employees. Otherwise, the accounting got many advantages, such as, assistance to management; the accounting can provide the information to the management to facilitate it to do its work properly. The information can helps in the Planning, Decision making and Controlling and etc; the evidence in the court, the systematic record of transactions can help the users to be evidence in the courts. At last, the accounting is very important, because it can help users to provide the information to the management and etc, so without accounting, will cause us vey inconvenience in the daily life.

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