Income Statement And Balance Sheet Of Continental Limited Accounting Essay

Published:

In this principles accounting assignment I have four task question and I need to find research and answer. In task 1, I need describe and define five type of different users of accounting such as managers of the company, employees of the company, creditors, customer and investors. Beside that, I also need to explain five types of regulatory characteristics that relevance, timely, accuracy, comparability and understandability.

In task 2, I want to prepare the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 for the imternal use by company director and management. And in task 3, I need to 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.

At the last, for task 4 I have to compare the accounting ratios of Continental Limited against the industry average to gauge how profitable and to find out the liquidity for the company. With the accounting ration which is derived from the Balance sheet and Income statement, it is to find out crucial quantitative information about the company.

Content Page

Lady using a tablet
Lady using a tablet

Professional

Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

Introduction 4

Accounting users 5

The Five Different Users 5-6

The Five Regulatory Characteristics 6-7

Income statement and balance sheet of Continental Limited 8

3.1 Working for task 2 8-12

3.2 Income statement of Continental Limited for year

ending 31 Dec 2010 for internal use 14-15

Balance sheet of Continental Limited as

at 31 Dec 2010 for internal use 15-16

4.0 Income statement and balance sheet

of Continental Limited for external reporting or publication 17

4.1 Working for task 3 18

4.2 Income statement of Continental Limited for

year ending 31 Dec 2010 for external reporting 19-20

4.3 Balance sheet of Continental Limited for the year

ending 31 Dec 2010 for external reporting 21-22

The appropriate accounting ratios and compare

them with the industry averages 23

Content Page

5.1 Table of ratio calculation 23-24

5.2 Profitability of Continental Limited 25

5.3Liquidity of Continental Limited 26

6.0 Conclusion 27

7.0 References 28-29

1.0 Introduction

Accounting is based on the study of financial activities and cost data collection, classification, formed on the basis of comprehensive analysis and interpretation of information systems to assist in decision-making, an applied science in order to effectively manage the economy, it is the composition of the social sciencespart, is also an important management discipline. Accounting is the conditions of commodity production, we study how the value of activities in the process of reproduction measurement, recording and forecasts based on economic information based financial information (indicators), supervision, control value activities to promotethe process of reproduction, and constantly improve the economic efficiency of an economic management disciplines. It is a the accounting practice activities to be systematized and structured, and the formation of a complete set of accounting theory and methodology.

2.0 Accounting users:

Accounting information helps users make better decisions financial. The users of financial information may be internal or external to the organization. There are internal users (people within the organization) and also external users (people outside the organization) who use accounts to derive financial information for their needs. In this accouting users, that have five different users that is management, employee, creditor or suppliers, investor and customer.

2.1 The five different users

In this five users, it categerise to two types that is internal and external. For the internal users of accounting information included management and employees. Management is to analyze the performance of the organization and the situation and take the necessary measures to improve the business results. These are people appointed by the company's owners to surpervise the day-to-day activities of the company. They need accounting information about the company's financial situation as it is currently and as it is expected to be in the future to enable them to manage the business efficiently and to take effective control and planning decideions. For the employees is to assess the profitability of the company and its impact on their future pay and job security. And employees these are people employed by the company to carry out business activivies. They need accounting information about the company's financial situation because their future careers and the size of their wages and salaries depend on it.

Lady using a tablet
Lady using a tablet

Comprehensive

Writing Services

Lady Using Tablet

Plagiarism-free
Always on Time

Marked to Standard

Order Now

While, in external users of accounting information included creditor, investors and customers. In the first, creditor is to determine the solvency of the organization. Credit terms are set according to the evaluation of the financial health of its customers. Creditors are suppliers and providers of financing such as banks and they need accounting information about the company's ability to pay its debts for ensuring their collection from the company. And investors is to analyze the feasibility of investing in the company. Investors want to make sure that they can get a reasonable return on their investment before committing financial resources for the company. For customers mean able to assess the financial situation of your provider is necessary for a stable source of supply regulators term. In long past is to ensure that disclosure of the information society is in conformity with accounting rules and regulations established to protect the interests of stakeholders who rely on the information in the formation of them.

2.2 The five regulatory characteristics

In this five regulatory characteristics, it will provide useful information to the users. The five regulatory characteristics is relevance, timely, accuracy, comparability and understandability.

A qualitative characteristic of accounting, the relevance is associated with timely, useful and it have a predictive value, and will make a difference to a decision maker. The financial accounts prepared based on accounting concepts and policies should present relevant financial information which is capable of influencing the economic decision of the users. Therefore, the information presented by the financial accounts should be relevant to the decision making of the users.

Whether the financial account information is relevant or not to the decision making of users, it depends on whether the financial acounts are made to present information in time or not when it is needed for decision making. If the accounts are prepared to provide required information in time, it is relavant to the decision making of the users. If Acounts are not willing to provide information in time, is not relevant to the decision-making process of the user. Term of understandability is that indicates that the information is expressed in terms that allow users to perceive its significance. This financial accounts is prepared based on the accounting concepts should be capable of being understood by the user who have reasonable knowledge of business, economic ativities and accounting.

Accuracy is the correction of an accounting entry such as account balance, the invoice declaration, also called financial fair representation. The concept refers to an accounting objective which fully reflects the theme and enhances all the facts in question, including all aspects of economic transactions and events. And comparability is helped when companies use similar accounting procedures, measurement concepts, classification, basic formats of financial statements and methods of communication. And financial accounts made ​​on the basis of the accounting concepts should be comparable to previous years' accounts and comparable with other companies.

3.0 Income statement and balance sheet of Continental Limited

In this task, the author must find and collect all the data for the calculation of the income statement and balance sheet of Continental Limited. Therefore, the author must done and be prepare for the following income statement and balance sheet. The income statement and the balance sheet is prepared for internal use.

3.1 Working for task 2

Working for note (a)

Closing stock should be recorded at cost or not resale value which one is lower. Since cost RM 65000 < net resale value RM 70000, the cost RM 65000 should be closing stock value put in the trading account of income statement and under the current asset in the balance sheet.

Working for note (b)

Cash account

RM RM

Sales (Difference) 5000 Purchase 4000

Stationery 700

Electricity 300

5000 5000

Sales in trading account of income statement =RM360000 from TB + RM5000 =RM365000

Purchase in trading account of income statement =RM200000 from TB + RM4000 =RM204000

Stationery as expense put in P/L account of income statement =RM700

Electricity &water in P/L account of income statement =RM7000 from TB +RM300 =RM7300

Working for note (c)

Sales commission as expense put in P/L account of income statement

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

=RM18000 paid from TB +RM1500 accrued at end of year =RM19500

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

Office salaries as expense put in P/L account of income statement

=RM28000 paid from TB -RM2000 prepaid at end of year =RM26000

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

Working for note (d)

Debtor account

RM RM

Balance b/d (from TB) 75000 Bad debts 5000

Balance c/d 70000

75000 75000

Balance b/d 70000

Bad debts account

RM RM

Debtor 5000 P/L account 5000

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

Provision for bad debts account

RM RM

31 Dec 2010 Closing balance c/d 7000 1 Jan 2010 Opening balance b/d 5000

Increase difference 2000

(As expense put in P/L account)

7000 7000

1 Jan 2011 Balance b/d 7000

Working for note (e) and (f)

Vehicles account

RM RM

Balance b/d (from TB) 300000 Vehicle disposal a/c (cost sold) 50000

Balance c/d 250000

300000 300000

Balance b/d 250000

Provision for depreciation on vehicle account

RM RM

Vehicle disposal account 12500 1 Jan 2010 Opening balance b/d 60000

Depreciation as expense put in P/L 12500

Account

31 Dec 2010 Balance c/d 60000

72500 72500

1 Jan 2011 Balance b/d 60000

Vehicle disposal account

RM RM

Vehicle cost sold 50000 Provision for depreciation on vehicle 12500

sold

Proceeds from disposal 35000

of vehicle (TB)

Difference for Loss on disposal 2500

of vehicle

50000 50000

Provision for depreciation on premises account

RM RM

Balance c/d 54000 1 Jan 2010 Opening balance b/d 40000

Depreciation as expense put 14000

in P/L account

54000 54000

Balance b/d 54000

Working for note (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.

Working for note (h)

Proposed dividend to be deducted from net profit at the bottom of income statement

=2% x RM500000 Share capital from TB =RM10000

Then, the proposed dividend RM 10000 is recorded under current liability in balance sheet.

3.2 Income statement of Continental Limited for year ending 31 Dec 2010 for internal use

RM RM RM

Sales (RM 360000 + RM 5000) 365000

Less Return inwards (10000)

Net sales 355000

Less Cost of sales / Cost of goods sold:

Opening stock 1 Jan 2010 50000

+Purchase (RM 200,000 + RM 4,000) 204000

-Return outwards (15000)

+Carriage inwards 5000 194000

-Closing stock (65000) (179000)

Gross profit 176000

Add Incomes:

Dividend received 5000_

181000

Less Expenses:

Stationery 700

Office electricity & water (RM 7000 + 300) 7300

Office salaries (RM 28000 - RM2000) 26000

Sales commission (RM 18000 + RM 1500) 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

Interest charges 3000

(104500)

Net profit 76500

Less Taxation charge (15300)

Less Prepaid dividend (10000)

Retained profit for the year 51200

+Retained earnings brought forward 100000

Retained earnings carried forward 151200

3.3 Balance sheet of Continental Limited as at 31 Dec 2010 for internal use

RM RM RM

Fixed assets/Non-current assets

Office premises at costs 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

Trade debtors 70000

-Provision for bad debts (7000)

63000

Bank 42000

Prepaid office salary 2000

172000

758000

Issued share capital:

Share capital 500000

Reserves:

Retained earnings (carried down from income statement) 151200

651200

Long-term liabilities/Non-current liabilities:

Loan 55000

Current liabilities:

Trade creditors 25000

Sales commissions accrued 1500

Taxation accrued 15300

Proposed dividend 10000_

51800

758000

4.0 Income statement and balance sheet of Continental Limited for external reporting or publication

Income statement are usually contains information about the benefits, costs and net income that the information has been collect for a given period of time. Net profit occurs when the benefits out weigh of the costs operation. A net loss occurs when the operating costs out weigh the benefits. In addition, the budget is a declaration of a state in financial institution. In addition, this the income statement and balance sheet is prepared for external information.

4.1 Working for task 3:

Distribution cost Administrative expense

RM RM

Stationery - 700

Office electricity & water - 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 vehicle 12500 -

Depreciation on premises - 14000

Vehicle expenses 12000 -

Total 53500 48000

4.2 Income statement of Continental Limited for year ending 31 Dec 2010 for external reporting

RM RM

Net sales / Turnover 355000

Cost of sales (179000)

Gross profit 176000

Less Distribution cost 53500

Administrative expenses 48000

(101500)

Operating profit 74500

Dividend received 5000_

79500

Interest charges (3000)

Profit on Ordinary activities before taxation 76500

Taxation charges on profit (15300)

Profit on Ordinary activities after taxation 61200

Dividend Proposed (10000)

Retained profit for the year 51200

Retained earnings brought forward 100000

Retained earnings carried forward 151200

4.3 Balance sheet of Continental Limited for the year ending 31 Dec 2010 for external reporting

RM RM RM

Tangible Fixed Assets:

Premises 296000

Vehicles 190000

486000

Long term investment 100000

586000

Current Assets:

Stocks 65000

Debtors 63000

Prepaid office salary 2000

130000

Cash at bank 42000

172000

Creditors: Amount falling due within one year

Creditors 25000

Accrued sales commissions 1500

Accrued taxation 15300

Proposed dividend 10000

(51800)

Net current assets 120200

Total assets less current liabilities 706200

Creditors: Amount 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 appropriate accounting ratios and compare them with the industry averages

Accounting reports is expressed and counted on the basis of accounting resulting from the balance sheet and accounts of the company. Accounting reports used to interpret the financial statements to evaluate the performance of the business. Others the report of the accounts can be compared between companies, industries, different periods of time for a company and a private company and its industry average.

5.1 Table of ratio calculation

Ratio With Formula

Ratio Calculation for Year 2010

Industry Average

Percentage of Gross Profit on Sales:

= 49.58%

30%

Percentage of Operating Profit on Sales:

= 20.99%

18%

Return on Capital Employed (ROCE):

= 11.26%

9%

Current Ratio:

=3.32:1

2:1

Stock Turnover Period:

= 3.11 times

= 117.36 days

90 days

Debtors Collection Period:

=64.6 days

45 days

Creditors Payment Period:

=48.18 days

60 days

5.2 Profitability of Continental Limited

The percentage of gross profit to sales for Continental Limited is 49.58% more than the industry average in 30%. Most of the gross profit on sales indicates gross profit increased by Continental limited sales. This shows that the Continental Limited is effective and efficient control of the acquisition costs to make the purchase from a provider frem the lower cost and has control of the production costs for the effective use of materials and labor to reduce the cost of production and to increase the gross profit. In addition, the percentage of operating income on sales for Continental Limited is 20.99% more than the industry average is 18%. The increase in operating income on sales indicate a higher net profit from the sales continental limited by effective control over expenditure, to reduce costs to increase net profit, evidenced by lower expenses sales ratio. Therefore, the return on capital employed (ROCE) for Continental Limited is 11.26% more than the industry average is 9%. The higher return on capital employed indicates higher the net income generated by invested capital for the effective use of capital employed in productive activities that sell to increase the volume of production and sales, and to increase the net profit.

5.3Liquidity of Continental Limited

The liquidity ratio to 3.32:1 limited Continental is higher than the industry and the average is 2:1. 'S largest current assets can be used to fund current liabilities, indicating that the limited Continental and financially has their stability that able to fund its short-term debts. The rotation period of the stock Continental Limited for 117.36 days is higher than the industry average is 90 days. This period has the highest turnover indicates a rapid turnover of the limited supplies from assets as the acquired Continental in which the shares were sold out so quickly that the action does not accumulate and the money is not tied to the action.

Moreover, the Debtors Collection for the Continental Limited is around 64.6 days higher than the industry averages in 45 days. The higher debtor's collection period indicate that Continental Limited has given longer credit time to allow debtor owes, and it will cause longer time taken by Continental Limited to collect money slowly from debtors so that the larger debtor balance is accumulated to tie up money and facing short-term financial problem. In addition, The Creditors Payment Period for the Continental Limited is around 48.18 days lower than the industry averages is 60 days. The lower the creditor's payment period indicate that Continental Limited has obtained shorter credit time for owing and paying for creditors so that Continental Limited needs to pay back the creditor very fast, and it will cause smaller credit balance and accumulated in short-term financial problem for shortage of money to pay back creditor.

6.0 Conclusion

From this assgnemtn, I have learned the fundamental issues within the principals of accountng such as the importance of financial douments and the users that would require such such documents. Besides that, the balance sheet and income statement is explained for both internal usage and external usage. Finally the accounting ratios is compared with the industry average to find out the profiatbility and liquidity of the Oontinental Limited company. For task 1, the users and characteristics of financial documents are discussed and explained. For task 2, the balance sheet and in come statement is discussed for internal usage while in task 3 these two documents for external usage is discussed and explained. For the final task, the accounting ratio and profitability and liquidity of the company is discussed and explained.