A company has more than one type of equity. In this first section of work, finance and retained earnings are introduced as equity accounts for a company.
Contributed Equity
An entity operating as a company is different from the sole traders studied at Level
One and Two. A company, like a sole trader, has equity, but the company’ equity is no longer called “capital”.
The owners of the company are shareholders. Their ownership is represented by the number of shares they own in the company. Contributed equity is the dollar value of those shares. When a company is first formed there are usually only a few owners
(shareholders). They agree to the number of shares they have and the initial share price, which represents their initial investment in the company.
Example____________________________________________________________
Top company Ltd was formed by three friends who agreed to each contribute
$200,000 cash to form the company. It was agreed that each friend would receive
100,000 shares and the fair value of those shares was $2 each.
The general journal entry to show the company formation is:
Date Particulars
1/4/2011 Bank
Contributed Equity
(To record the issue of 300,000 shares at a fair value of $2 per share)
Dr
600,000
Cr
600,000
Bank is the debit entry because the company’s asset bank is increase by the total cash contributed by each owner.
Contributed equity is the credit entry because it is an equity account increasing by the dollar amount of the share issue.
The contributed equity ledger account after the issue follows:

Date Particulars Dr Cr
1/4/2011 Bank
Balance
600,000 600,000 Cr
Raising Additional Capital
In the future Top Company Ltd can go to the public to raise additional cash through a share issue. To do this the company is legally required to prepare a prospectus and investment statement. The prospectus contains information about the securities being offered, the terms of the offer, and information about the issuer ( Top Company
Ltd ). The investment statement tells potential investors about the returns they will get, the charges they will have to pay and whether there is a “cooling off” period, during which time a change of mind regarding investing can be made.
Companies such as Top Company Ltd use a share broker to raise cash from the public. A share broker buys and sells financial securities, such as shares in companies, on behalf of clients and investors. In Top Company Ltd ’s case the share broker uses the prospectus and investment statement to find clients and investors to buy the shares the company is offering.
Investors wishing to buy shares in Top Company Ltd apply to buy shares and send payment with their application form to the share broker who is acting on behalf of
Top Company Ltd . The application form is included as part of the prospectus.
After the “close off” date for application the share broker transfers the money collected, the brokerage fee for the service they provided, to Top Company Ltd . The bank account is again debited and contributed equity is credited.
The prospectus cost and legal fees associated with the share issue are also accounted for which involves debiting contributed equity and crediting bank.
The brokerage fee, prospectus, and legal costs all relate directly to the issue of the share and are a legal requirement of issuing shares to the public. The share issue could not take place without them, so they are deducted from contributed equity.
Example____________________________________________________________
Top Company Ltd is looking to expand in the next 12 months and is raising capital from the public. It is using the share broking firm Fastbroking for a public share issue of 200,000 shares with a fair value of $3 per share. Fastbroking charges a brokerage fee of 5% of the share issue. Applications close on the 1 June 2013 with applicants to pay in full on application for shares. The legal and prospectus costs are $10,000 and $12,000 respectively and were paid on 30 June 2013. The shares were issued and money from the share issue was paid by Fastbroking on 15 June 2013.
Date Particulars Dr Cr
15/6/2013 Bank
Contributed Equity
570,000
570,000

(To record the public share issue of 200,000 shares at a fair value of $3 per share less brokerage fee)
Date Particulars
30/6/2013 Contributed Equity
Bank
(To record the prospectus and legal costs)
Dr
22,000
Cr
22,000
The contributed equity debit entry represents the total of the prospectus and legal costs.
Date Particulars
1/4/2011 Bank
15/6/2013 Bank
30/6/2013 Bank
Dr
22,000
Cr
600,000
570,000
Balance
600,000 Cr
1,170,000 Cr
1,148,000 Cr
Accounting for dividends and taxation has an impact on the equity of the business through a new equity account- retained earnings. “Retained Earnings” represents the after tax profits the company has earned that have not been shared out to the owners as dividends. The following retained earnings ledger account shows the impact that after tax profit and dividends have on retained earnings.


Date
The income summary entry represents after tax profit and it has increased the retained earnings balance because profits increase equity in the business.
The two dividend entries have reduced retained earnings and therefore equity, because this represents the sharing of profit to shareholders.
Dividends for a company are the same as drawings for a sole trader.
Particulars Dr Cr Balance
1/4/2013 Balance 100,000 Cr
31/3/2014 Income Summary
Interim Dividend
Final Dividend
25,000
45,000
90,000 190,000 Cr
165,000 Cr
120,000 Cr

Note: The opening Balance for retained earnings is the figure from the trial balance because no transactions that affected retained earnings took place during the year.
Taxation
A company is a separate legal entity, which means its profits can be taxed. The effect of taxation on a company’s income statement can be seen in the following summarised income statement for Top Company’s Ltd.
Revenue 975,000
Total expenses
Profit before Tax
850,000
125,000
Income Tax Expense 35,000
Profit for the year 90,000
There is now an income tax expense entry, which is deducted from the profit before tax to determine the profit for the year figure, i.e. the after tax profit of $90,000. As a sole trader the profit figure reported would have been $125,000, because the business could not be taxed due to it not being a separate legal entity. The $90,000 is the amount that is credited to the retained earnings ledger account.
Provisional and Terminal Taxation
In the following trial balance extract:

Income summary represents the before-tax profit

The provisional taxation paid, of $20,000, represents income tax that has been paid in instalments by Top Company Ltd
NZ $
Provisional Taxation Paid 20,000 Contributed Equity
(500,000 fully paid shares)
Retained Earnings
NZ $
1,148,000
100,000
Income Summary 125,000
The Inland Revenue Department (IRD) requires companies to make provisional taxation payments based on what the expected taxation bill is likely to be. This helps companies to avoid large taxation bills at the end of the year because they can pay taxation as they are earning income through the year. There are three payments made in a year. Companies with balance on 31 March have the following payment dates:

28 August

15 January

7 May

Thus at balance day (31 March 2014) Top Company Ltd had made two provisional taxation payments totalling $20,000. A third payments of $10,000 would be made on
7 May.
The actual taxation (income tax expense) on the profit for the year earned by Top
Company Ltd is $35,000. It is calculated using the company taxation flat rate of 28% and the profit before the tax amount; e.g. 0.28 x $125,000 = $35,000. This is the figure reported in the Income Statement. This is not the same as the amount provisionally paid at balance day. Thus at balance day Top Company Ltd owes the
IRD $15,000 ($35,000 - $20,000).
The general journal entries relating to taxation on balance day are as follows.
General Journal
Date Particulars Dr Cr
31/3/2014 Income Summary 35,000
Taxation Payable 35,000
(To record taxation payable)
 This journal entry records the taxation expense as “taxation payable” because this is the amount owed to the IRD.

Income summary is debited because the taxation expense is reducing the profit of the company.
Date Particulars Dr Cr
31/3/2014 Taxation Payable 20,000
Provisional Tax Paid 20,000
(To reduce taxation payable by provisional tax paid)

This journal entry reduces the amount of taxation payable to the IRD by the amount provisionally paid. At this time the balance in the provisional taxation paid account would be zero.
After these general journal entries, the provisional taxation paid and the taxation payable accounts would look like the following.
Date Particulars Dr Cr Balance
31/3/2014 Balance
Taxation Payable 20,000
20,000 Dr
0

Date Particulars
31/3/2014 Income Summary
Provisional Taxation Paid
31/3/2014 Income Summary
Dr
20,000
Cr
35,000
90,000
Balance
35,000 Cr
15,000 Cr
Note: When all three provisional taxation payments are accounted for ($30,000) Top
Company Ltd will owe the IRD only $5,000. This $5,000 is referred to as terminal tax and must be paid by 7 February the following year. The $15,000 represented what is owed at balance day and is reported as the current liability taxation payable.
The following general journal entry would then record the after tax profit in the retained earnings ledger account.
Date Particulars Dr Cr
Retained Earnings 90,000
(To record after tax profit in retained earnings)
The income summary account is debited to close it to zero; i.e. with all the income and expenses transferred to it (including the taxation expense) the account would have a credit balance that represents the after tax profit. Thus debiting it closes this account as well.
Retained earnings is credited because the after tax profit increases equity.
Dividends are a company’s equivalent to drawings for a sole trader. The amount of dividend paid is determined by the company’s board of directors and does not usually require approval by the shareholders, unless the company constitution requires this.
The dividend declared by the board is given as cents per share figure. Therefore the more shares a shareholder has in the company, the bigger the total dividend the shareholder receives. This more profitable the company, the greater the likelihood that the dividend declared will be bigger, because most companies have a policy on the percentage of the profit shared out as a dividend.
The Companies Act 1993 states that a dividend can be paid for any amount at any time if it first passes the solvency test . The solvency test requirement means that after a dividend is paid:

The company would still be able to pay its debts as they become due in the normal course of the business and

 The value of the company’s assets is greater than its liabilities, including contingent liabilities.
In reality, companies are likely to pay a dividend twice in the year. These dividends are referred to as the interim dividend and final dividend. The interim dividend is declared and paid half way through the year and is based on the profit from the half year financial statements, whereas the final dividend is declared and paid after balance day, once the year ended financial statements have been completed. Thus in the year ended 31 March 2014, the interim dividend for 2014 and the declared final dividend for 2013 are recorded in the general ledger accounts of Top Company
Ltd for that year, because the 2013 final dividend was declared during the 2014 financial reporting period. The 2014 final dividend was declared after balance day so it is recorded in the general ledger accounts for the 2015 financial statements.
The following example helps to show how to account for dividends.
Example____________________________________________________________
The following information relates to Top Company Ltd for the year ended 31 March
2014.

A final dividend of 15 cents per share for the year ended 31 March 2013 was declared on the 5 April 2013. The dividend was to be paid on 22 April 2013.

An interim dividend of 5 cents per share was declared on 12 October 2014, with payment to shareholders to be made on 28 October 2014.

A final dividend of 12 cents per share for the year ended 31 March 2014 was declared on 8 April 2014. The dividend was to be paid on 25 April 2014.
The general journal entries for the payment of the dividends at the time they were paid are as follows.
Date Particulars Dr Cr
22/4/2013 Final Dividend (2013) 45,000
Bank 45,000
(To record payment of final dividend)

Final dividend is a debit entry because it is reducing equity and bank is credited because the asset bank is reduced in order to pay the final dividend to shareholders.

The amount of the final dividend is determined by the dividend per share declared and the number of shares issued at the time of the dividend declaration: i.e. 15 cents x 300,000 shares .
This final dividend relates to 2013 but is recorded and reported in 2014 because it was declared (22 April 2013) in the 2014 financial year for Top Company Ltd .
Date Particulars Dr Cr

25,000 22/4/2013 Interim Dividend (2014)
Bank 25,000
(To record payment of interim dividend)
Interim dividend is a debit entry because it is reducing equity and the bank is credited because the asset bank is reduced in order to pay the interim dividend to shareholders.

The amount of interim dividend is determined by the dividend per share declared and the number of shares issued at the time of the dividend declaration; i.e. 5 cents x 500,000 shares.
The general ledger accounts for final dividend and interim dividend after they have been paid back look like the following.
Final Dividend (2013)
Date Particulars Dr Cr Balance
22/4/2013 Bank
Interim Dividend (2014)
45,000 45,000 Dr
Date Particulars Dr Cr Balance
28/10/2013 Bank 25,000 25,000 Dr
The trial balance at the end of the year would now have dividend information in it.
NZ $ NZ $
Provisional Taxation Paid 20,000 Contributed Equity
(500,000 shares)
45,000 Retained Earnings
1,148,000
Final Dividend (2013) 100,000
Interim Dividend (2014) 25,000 Income Summary 125,000
At the end of the financial year 31 March 2014 (balance day) the following general journal entries are completed to close the dividend accounts and update retained earnings.
Date Particulars Dr Cr
31/3/2014 Retained Earnings 45,000
Final Dividend (2013)
(To close final dividend 2013)
45,000

Date Particulars
31/3/2013 Retained Earnings
Dr
25,000
Cr
Interim Dividend (2014) 25,000
(To close interim dividend 2014)
Cr
The effect of these general journal entries is shown in the final dividend and interim dividend accounts that follow.
Final Dividend (2013)
Date Particulars Dr Balance
22/4/2013 Bank 45,000 45,000 Dr
45,000 0 31/3/2014 Retained Earnings
Interim Dividend (2014)
Date Particulars
28/10/2013 Bank
Dr
25,000
Cr Balance
25,000 Dr
31/3/2014 Retained Earnings 25,000 0
There are no general journal or general ledger account entries for the year ended 31
March 2014 for the following information, because it does not relate to this period since it was declared after balance day.
“A final dividend of 12 cents per share for the year ended 31 March 2014 was declared on 8 A pril 2014. The dividend was to be paid on 25 April 2014.”
However, as this information is relevant it would be used as part of a note to the
Statement of Financial Position.
Land Revaluation Surplus and Building Revaluation Surplus
Land revaluation surplus and building revaluation surplus are also equity accounts for a company.
Land and buildings are assets that can appreciate or depreciate in value over time.
Because of this, New Zealand Generally Accepted Accounting Practices (NZGAAP) allows companies to report land and buildings at a revalued amount in the Statement of Financial Position. With the revaluation, the amount reported better reflects the fair value of land and buildings. In the Level 3 Accounting course only an appreciation in value is assessed.

To report land and buildings at a revalued amount, the company must use an independent registered valuer. The independent valuer provides a report to the company, determining the valuation of the land and buildings based on the purchase and sale of land and buildings in the area where the company has its land and buildings.
Land Revaluation
NZ $ NZ $
Land 200,000 Contributed Equity
(500,000 shares)
1,148,000
Retained Earnings 100,000
The land figure in the trial balance, of $200,000, is the historical cost of the land. Top
Company Ltd used an independent valuer to determine the current market value of the land. The independent valuer has determined a valuation of $235,000 based on the market value of surrounding land. This is yet to be recorded by Top Company
Ltd .
The following is the general journal entry required to record the valuation of the land.
Date Particulars Dr Cr
31/3/2013 Land
Land Revaluation Surplus
35,000
35,000
(To record the revaluing of land to an independent current market value)

Land is debited by $35,000 to increase it to the revalued amount.
 The equity account ‘Land Revaluation Surplus’ is created and credited for the unrealised gain.
The Land and Land Revaluation Surplus accounts after the revaluation will look like the following.
Land
Date Particulars
1/4/2013 Balance
Dr Cr Balance
200,000 Dr
31/3/2014 Land Revaluation Surplus
Land Revaluation Surplus
Date Particulars
35,000
Dr Cr
235,000 Dr
Balance

31/3/2014 Land 35,000 35,000 Cr
Top Company Ltd now has three equity accounts- contributed equity, retained earnings and land revaluation surplus.
Building Revaluation
A revaluation of buildings is not as simple as a land revaluation because of depreciation. The building’s future economic benefit is consumed each year
(depreciated) and therefore before it can be revalued the carrying amount of the building must be determined. This is because the carrying amount reflects the future economic benefit yet to be consumed at balance day based on the original cost. In the land revaluation, its original cost was also its carrying amount because no future economic benefit had been consumed; i.e. land is not depreciated. Therefore, to determine accurately the building revaluation surplus, the independent valuation is compared against the carrying amount of the buildings. This requires depreciation to be recorded for the current year, because the building has been used over the year, before the carrying amount can be determined at the date of revaluation.
NZ $ NZ $
Land 1,148,000
Buildings
200,000 Contributed Equity
(500,000 shares)
400,000 Retained Earnings 100,000
Accumulated
Depreciation- Buildings
16,000

The independent valuer that Top Company Ltd used has determined the current market value of the buildings to be $420,000 based on the market value of surrounding buildings.

Depreciation on buildings is 2% p.a. straight-line and has yet to be recorded.
To determine the amount of the buildings revaluation surplus, first record the depreciation for the buildings for the year ended 31 March 2014.
$400,000 x 0.02 = $8,000
This must be added to accumulated depreciation.
$16,000 + $8,000 = $24,000
The accumulated depreciation is then subtracted from the building cost to determine the carrying amount.
$400,000 - $24,000 = $376,000
The carrying amount is now subtracted from the independent valuer’s valuation.

$420,000 - $376,000 = $44,000
This $44,000 is the building revaluation surplus, i.e. the unrealised gain on buildings from the valuation.
The general journal entries to record the revaluation of the buildings are as follows.
Date Particulars Dr Cr
31/3/2013 Depreciation- Buildings
Accumulated Depreciation- Buildings
8,000
8,000
Date
(To record depreciation on buildings)
Particulars
31/3/2013 Accumulated Depreciation- Buildings
Dr
24,000
Cr
Buildings
(To transfer accumulated depreciation to buildings)
Date Particulars
31/3/2013 Buildings
Dr
24,000
24,000
Cr
Buildings Revaluation Surplus 24,000
(To record Buildings Revaluation Surplus)

Accumulated Depreciation is debited $24,000 as it is being closed to zero because of the revaluation. Depreciation in the future will be determined using
$420,000, i.e. the new valuation of buildings.

Buildings is credited $24,000 as it is reduced by the accumulated depreciation to show the carrying amount of buildings at the time of revaluation.

Buildings is debited $44,000 to increase the value of buildings recorded in the general ledger to the amount determined by the independent valuer.

The equity account building revaluation surplus is created and credited for the unrealised gain.
The general ledger accounts affected by the revaluation will look like the following.
Buildings
Date Particulars Dr Cr Balance
1/4/2013 Balance 400,000 Dr

31/3/2014 Accumulated Depreciation-
Buildings
Building Revaluation Surplus 44,000
Building Revaluation Surplus
Date Particulars Dr
31/3/2014 Buildings
Accumulated Depreciation- Buildings
Date Particulars Dr
1/4/2013 Balance
31/3/2014 Depreciation- Buildings
24,000
Cr
44,000
376,000 Dr
420,000 Dr
Balance
44,000 Cr
Cr
8,000
Balance
16,000 Cr
24,000 Cr
Building
Depreciation- Buildings
Date Particulars
31/3/2014 Accumulated Depreciation-
Buildings
24,000
Dr
8,000
Cr
0
Balance
8,000 Dr
Income Summary 8,000
Top Company Ltd now has four equity accounts- contributed equity, retained earnings, land revaluation surplus and buildings revaluation surplus.
Financial Assets for the purpose of this study notes are limited to shares in companies listed on the New Zealand Stock Exchange (NZSX). Companies such as
Top Company Ltd can hold shares in other companies as a form of short term investment. These shares are reported as financial assets because there is an intention to trade them and because of this they are classified as a current asset.
Financial assets are revalued to their current market value each balance day so they are reported at their fair value. In a situation where the current market value is:

Greater than the original cost, the increase is reported as income; the income is called increase in fair value of financial assets

Less than the original cost, the decrease is reported as an expense; the expense is called decrease in fair value of financial assets

Shares in The Warehouse
NZ $
14,000 Contributed Equity
(500,000 shares)
NZ $
1,148,000
Retained Earnings 100,000

The shares in The Warehouse are reported as financial assets. On 31 March
2014, the market value of the shares, which is deemed to be their fair value, is
$15,000.
Date Particulars Dr Cr
31/3/2013 Shares in The Warehouse 1,000
Increase in fair value of financial assets 1,000
Date
(To record shares in The Warehouse at fair value)

The current market value of the shares is above what they had been previously reported at by $1,000 ($15,000 - $14,000); thus is unrealised gain is reported as “Increase in fair value of financial assets” (an income).

Increase in fair value of financial assets is a credit entry because it is income increasing.

Shares in The Warehouse is debited because it is an asset increasing.
The general ledger accounts affected by the revaluation of shares in The Warehouse would look like the following after the revaluation.
Shares in The Warehouse
Particulars
31/3/2014 Balance
Dr Cr Balance
14,000 Dr
1,000 15,000 Dr Increase in fair value of financial assets
Increase in fair value of financial assets
Date Particulars Cr Balance Dr
31/3/2014 Shares in The Warehouse 1,000 1,000 Cr
Income Summary 1,000 0

The income summary entry is because income and expense accounts are closed at the end of the year; thus to close an income accounts it must be debited.

If the current market value of the shares in The Warehouse had been $12,000 on balance day then the general journal and general ledger accounts would have looked like the following.
Date Particulars Dr Cr
31/3/2013 Decrease in fair value of financial assets
Shares in The Warehouse
2,000
(To record shares in The Warehouse at fair value)
Shares in The Warehouse
Date Particulars Dr
31/3/2014 Balance
Cr
2,000 Decrease in fair value of financial assets
Decrease in fair value of financial assets
Date Particulars Dr Cr
31/3/2014 Shares in The Warehouse 2,000
2,000
Balance
14,000 Dr
12,000 Dr
Balance
2,000 Dr
Income Summary 2,000 0
A company’s constitution will allow it to buy back or repurchase shares from existing shareholders. There are a number of reasons for a share buyback. Two possibilities are:

An unhappy shareholder asking for the shares to be bought back

To prevent a takeover
As this is a distribution to stakeholders, the company must again pass the solvency test for the repurchase to takeover.
The typical general journal entry to record a repurchase of shares looks like the following.
Date Particulars Dr Cr
15/7/2013 Contributed Equity
Retained Earnings
30,000
10,000

Bank 40,000
(To record the repurchase of shares at a fair value)
In the general journal above, shares that had originally been issued for $30,000 had been repurchased for a fair value of $40,000. Thus contributed equity is debited
$30,000 because equity is reduced and the bank is credited $40,000 for the amount spent on the repurchase; i.e. the asset bank is decreasing. Retained earnings is debited $10,000 because the fair value to repurchase the shares is higher than they were originally issued for.
If the situation related to Top Company Ltd , the general journal entry could represent the following event.

On 17 May 2014 Top Company Ltd repurchased 10,000 shares that had originally been issued at $3 a share for a fair value of $4 a share.
After the share repurchase, Top Company Ltd contributed equity and retained earnings general ledger accounts would look like the following.
Contributed Equity
Date Particulars Cr Balance Dr
1/4/2011 Bank 600,000 600,000 Cr
15/6/2013 Bank 570,000
30/6/2013 Bank 22,000
1,170,000
Cr
1,148,000
Cr
17/5/2014 Bank 30,000 1,118,000
Cr
Retained Earnings
Date Particulars
1/4/2013 Balance
31/3/2014 Income Summary
Interim Dividend
Final Dividend
Dr
25,000
45,000
Cr
90,000
Balance
100,000 Cr
190,000 Cr
165,000 Cr
120,000 Cr
17/5/2014 Bank 10,000 110,000 Cr
Note: If the fair value of the repurchase was less than the original issue purchase, i.e. $25,000 then retained earnings would be credited $5,000 instead.

Weighted Average Issue Price
Sometimes the question in the examination does not give the original issue price.
Then the weighted average issue price is needed. There is usually enough information in the trial balance to determine this price. All that is needed are the total dollar value of all shares issued and the number of shares.
Example____________________________________________________________
NZ $ NZ $
Contributed Equity
(500,000 shares)
2,000,000

On 27 April 2014 Happy Ltd repurchased 20,000 shares for a fair value of $5 a share.
The weighted average share issue price is: 2,000,000 / 500,000 = $4
The general journal entry for this share repurchase is now:
Date Particulars Dr Cr
31/3/2013 Contributed Equity 80,000
20,000
100,000
Retained Earnings
Bank
(To record the repurchase of shares at a fair value)
Revenue
Other Income
Total Income
NZ $
XX
XX
NZ $
XXX
Less Expenses
List Expenses from the trial balance and/ or additional information.
May include:

Cost of Goods Sold
Directors’ Fees

Donations
 Auditor’s Remuneration

Other expenses from the trial balance and/ or additional information


Finance Costs
Total Expenses
Profit before tax
Income Tax Expense
Profit for the year
Other Comprehensive Income
Gain on revaluation of Land
Gain on revaluation of buildings
Other Comprehensive income for the year
XX
XX
XX
XX
XX
XX
XX
XX
XX
Total Comprehensive income for the year XXX
There are notes to the Statement of Comprehensive Income for revenue, other income, auditors’ remuneration, and finance costs. The Level 3 Appendix indicates the format for these notes is as follows.
NZ $
Revenue
Sales/ Fees XX
Other Income
Dividends Received XX
Increase in fair value of financial assets
Auditors’ Remuneration
XX
XXX
XXX
XXX
XX
XXX
XXX


Fees for Audit

Fees for Assurance and Related Services

Fees for Tax Advice and Planning

Fees for Other Services (Suitably Described)
Finance Costs
XX
XX
XX
XX
XXX
Interest on Mortgage
Interest on Overdraft
XX
XX
NZ $ NZ $
XXX
The presentation of the Statement of Comprehensive Income/ Income Statement at
Level 3 has the following key differences from the Income Statement prepared at
Levels 1 and 2.

Revenue and Other Income are the main incomes reported and they have notes to explain their makeup.

Expenses are listed and not classified apart from the finance costs. Finance costs represents any interest cost for the company and there is a note for them.

The Level 3 appendix indicates that like expenses can be combined and reported as one total. This includes depreciation and different wages or salaries, so depreciation on buildings and depreciation on office equipment are not reported separately, but as one total.
 There is now a note for auditors’ remuneration, because it is a legal requirement to disclose this separately.

The Statement of Comprehensive Income now has taxation information reported because the company is a separate legal entity that can be taxed.

Other Comprehensive Income is included, which represents the amount by which land and buildings were revalued. These amounts are reported as gains.

Other Income includes the increase in fair value of financial assets.

A decrease in the fair value of financial assets is reported in the expenses.
NZ $
Current Assets
Accounts Receivable
Financial Assets
XX
XX
List XX

Non-current Assets
Property, plant and equipment
List
Total Assets
Less Liabilities
Current Liabilities
Taxation Payable
List
Non-current Liabilities
Debentures
List
Total Liabilities
Net Assets
Equity
Contributed Equity
Land Revaluation Surplus
Building Revaluation Surplus
Retained Earnings*
XX
XX
Total Equity
The following are important points to remember about the Statement of Financial
Position.
*Retained Earnings can be calculated by using the trial balance figure plus profit for the year minus dividends.

Equity for a company is different from that of a sole trader. This can be seen above where equity comprises contributed equity, land revaluation surplus, building revaluation surplus and retained earnings.
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX


There is a new current liability, taxation payable to report. In the example for
Top Company Ltd taxation payable was the difference between the taxation expense and what had been provisionally paid, i.e. $15,000.

Financial assets are reported as a current asset.
Notes to the Statement of Financial Position
The notes to the Statement of Financial Position include:
Accounts Receivable
Accounts Receivable XX
Less allowance for Doubtful Debts
Property, Plant and Equipment
XX
XXX
Land Buildings
For the year ended 31 March 20--
Opening Carrying Amount
Additions
NZ $
XX
NZ $
XX
PPE
Item 1
NZ $
XX
PPE
Item 2
NZ $
XX
XX
Disposals
Depreciation
Revaluation
Closing Carrying Amount
As at 31 March 20--
Cost or Valuation
Accumulated Depreciation
Carrying Amount
Financial Assets
Balance at the beginning of the year
Increase (decrease) in fair value of financial assets recognised in profit or loss
XX
XXX
XX
XX
XXX
(XX)
XX
XXX
XX
XX
XXX
XX
XX or (XX)
(XX)
XXX
XX
XX
XXX
(XX)
(XX)
XXX
XX
XX
XXX
Total
NZ $
XX
XX
(XX)
(XX)
XX
XXX
XX
XX
XXX

Balance at the end of the year XXX
Financial Assets comprise shares in XYZ Ltd
Debentures
Debentures are secured by a floating charge over assets except land and buildings.
The rate of interest is xx % p.a. The maturity date is October 20--.
Contributed Equity
# of shares NZ $
Balance at 1 April 20--
Shares Issued
Shares Repurchased
XX
XX
(XX)
XX
XX
(XX)
Balance at 31 March 20--
Distributions
XX
Cents per
Share
XX
NZ $
Final Dividend
Interim Dividend
Total Dividends Paid
Share Repurchase
X
X
X
XX
XX
XX
XX
Total Distributions XX
Dividends declared after reporting due
On <date> directors proposed a final dividend for 20
—of xxc per share totalling $xx to be paid on <date>.
Notes both <date>s are after the date of the Statement of Financial Position.
Points to remember about the property, plant and equipment note include the following.

Additions recorded at GSTexclusive cost as this is also the carrying amount for the new asset.

Disposals are recorded using carrying amount.


Any asset that is revalued has zero accumulated depreciation.
 Complete the ‘as at’ section first.
 Make sure closing carrying amounts for ‘as at’ and ‘for year ended’ are equal.
 Enter all the information for the ‘for year ended’ before working out opening carrying amount.

Opening carrying amounts for assets that have no additions or disposals can be worked out from the information in the trial balance before it is adjusted; i.e. cost
– accumulated depreciation.

Opening carrying amounts for assets that have additions or disposals can be worked out by starting from the closing carrying amount and working backwards doing the following: subtract revaluation, add the disposal, subtract the addition, add the depreciation.
Balance Day and Other Events
In the examination for Level 3 Accounting it is a requirement to produce the
Statement of Comprehensive Income and Statement of Financial Position after allowing for any of the following additional information:

Invoices on hand for income/ assets/ expenses

Accrued expenses/ accrued income

Prepayments/ Income in advance

Inventory shortages/ revaluation

Depreciation- either straight line or diminishing value

Bad and/or doubtful debts including an adjustment to the allowance for doubtful debts

Revaluation of financial assets, e.g. shares in other companies/ term investments

Revaluation of land and/or buildings upwards only

Share issue for cash may include issue through a share broker

Share Repurchase

Dividends paid and/or proposed

Taxation Expense
The easiest way to ensure accurate preparation of the financial statements is to adjust the trial balance for the additional information that relates to balance day. The following bullet points from above require the balance day adjustments to the trial balance:

Invoices on hand for income/ assets/ expenses

Accrued expenses/ accrued income

Prepayments/ Income in advance

Inventory shortages/ revaluation

Depreciation- either straight line or diminishing value

Bad and/or doubtful debts including an adjustment to the allowance for doubtful debts

Revaluation of financial assets, e.g. shares in other companies/ term investments

Revaluation of land and/or buildings upwards only

Taxation Expense

The following bullet points involve events that took place during the year and their effect are usually already recorded on the trial balance. However, information is given about them because they can affect certain notes to the financial statements:

Share issue for cash may include issue through a share broker

Share Repurchase

Dividends paid and/or proposed
Additional information will also be provided for any additions or disposals of property, plant and equipment during the year that needs to be reported in the PPE note.
Carrying amount information is provided for any disposals. Information to determine the GST-exclusive cost for any additions is provided.
There are three key rules to follow when adjusting the trial balance to get the correct figures to report in the financial statements.
1. Ask yourself how much the amount should be that is being reported for the current period; i.e. how much should interest on loan be, or how much should the allowance for doubtful debts be?
2. Remember that all income and expenses are reported exclusive of GST.
3. Adjust GST only for an invoice or bad debts. Do not adjust GST on a prepayment or income in advance, because the IRD is happy for GST to be reported when payment is made or received.
The trial balance and additional information for Top Company Ltd for the year ended
31 March 2014 is used to illustrate how to prepare the Statement of Comprehensive income and Statement of Financial Position with notes.
NZ $ NZ $
Accounts Receivable
Advertising
25,960
25,000
Accounts Payable
Accumulated
Depreciation- Buildings
15,000
16,000
Auditors’ Remuneration
12,000 6,650 Accumulated
Depreciation- Office
Equipment
Bad Debts 4,000
Bank
Buildings
Cost of goods sold
Directors’ Fees
805 Accumulated
Depreciation- Shop
Equipment
544,380 Allowance for Doubtful
Debts
400,000 Contributed Equity
(500,000 Shares)
453,000 Debentures
10,000 GST
300
1,148,000
60,000
3,000

Donations
Electricity
Final Dividend (2013)
Insurance
Interest on Debentures
Interim Dividend (2014)
Inventory
Land
Loss on sale of shop equipment
Office Equipment
Office Expenses
Office Staff Wages
Provisional Tax Paid
Rates
Sales Staff Wages
Shares in The Warehouse
5,000
15,000
45,000
4,500
5,500
25,000
50,000
200,000
1,200
35,000
12,000
95,000
20,000
16,000
175,000
14,000
Interest Received
Rent Received
Retained Earnings
Sales
Shop Equipment
Term Deposit (4.5% p.a. matures 2018)
40,000
100,000
2,329,075 2,329,075
Additional Information

Sales Staff Wages owing $2,500.

Invoice on hand dated 29 March 2014 for March electricity $1,794 including
GST.

Writes off bad debts $690 including GST.

Adjust allowance for doubtful debts to 2% of accounts receivable.

Depreciation on buildings is 2% p.a.; depreciation on office equipment is 10% diminishing value; depreciation on shop equipment is $2,000 for the year.

Interest is owed to Top Company Ltd on the term deposit.

Top Company Ltd has received rent in advance. Monthly rental is $2,875 including GST.
4,125
32,500
100,000
939,500


An annual insurance premium of $1,600 excluding GST was paid 11
December 2013.

Inventory that cost $12,000 is to be written down to its net realisable value of
$9,000.
 One month’s interest is owing on the debentures. The interest rate is 10% p.a. and the maturity date is 16 September 2020.

An independent valuation accepted by the Board has determined that land be valued at $235,000 and buildings at $420,000, their current market values as determined by surrounding land and buildings.

The shares in The Warehouse are reported as financial assets. On 31 March
2014 the market value of the shares, which is deemed to be their fair value, is
$15,000.

Taxation expense for the year is $35,000.

A final dividend of 12 cents per share for the year ended 31 March 2014 was declared on 8 April 2014. The dividend is to be paid on 25 April 2015.
 Auditors’ Remuneration is made up of $8,000 audit fees and $4,000 taxation advice and planning.

During the year shop equipment that had cost $5,000 with a carrying amount of $4,000 had been sold. New shop equipment that cost $10,350 including
GST was purchased. This information has already been recorded on the trial balance.

During the year 200,000 shares were issued to the public. Each share cost
$3. The brokerage fee on the issue was 5%. The legal and prospectus costs were $10,000 and $12,000 respectively. The interim dividend was paid after the share issue.
The relevant additional information will be used to adjust the trial balance as follows.
The adjustments are in bold.
Remember that the trial balance should still balance after each adjustment is completed.
NZ $ NZ $
Accounts Receivable Accounts Payable
Advertising
Auditors’ Remuneration
25,690
-690
25,000
12,000
Accumulated
Depreciation- Buildings
Accumulated
Depreciation- Office
Equipment
15,000
+1,704
16,000
+8,000
-24,000
6,650
+2,835
Bad Debts 805
+600
Accumulated
Depreciation- Shop
Equipment
4,000
+2,000

Bank
Buildings
Cost of goods sold
Directors’ Fees
Donations
Electricity
Final Dividend (2013)
Insurance
Interest on Debentures
Interim Dividend (2014)
Inventory
Land
Loss on sale of shop equipment
Office Equipment
Office Expenses
Office Staff Wages
Provisional Tax Paid
Rates
Sales Staff Wages
Shares in The Warehouse
Shop Equipment
544,380 Allowance for Doubtful
Debts
400,000
-24,000
+44,000
453,000
+3,000
10,000
Contributed Equity
(500,000 Shares)
Debentures
GST
300
+200
1,148,000
60,000
3,000
-234
-90
5,000
15,000
+1,560
Interest Received
Rent Received
4,125
+375
32,500
-2,500
45,000
4,500
5,500
Retained Earnings
Sales
Accrued Expense
25,000
50,000
Income/ Rent in Advance +2,000
Land Revaluation Surplus +35,000
+44,000 200,000 Building Revaluation
Surplus
1,200 Increase in Fair Value of
Financial Assets
+1,000
35,000 Taxation Payable
100,000
939,500
+2,500
+500
12,000
95,000
20,000
+35,000
-20,000
16,000
175,000
14,000
40,000

Term Deposit (4.5% p.a. matures 2018)
Doubtful Debts
100,000
Depreciation- PPE
+200
+2,000
+2,835
+8,000
+375 Accrued Income
Prepayment
Taxation Expense
+1,200
+35,000
2,329,075 2,329,075
1. Sales Staff Wages owing $2,500. a. Sales Staff Wages must be increased by $2,500. It should be $177,500 because it is an expense that is owed. The current liability accrued expense is created on the credit side of the trial balance with $2,500 recorded.
2. Invoice on hand dated 29 March 2014 for March electricity $1,794 including GST. a. An invoice for an expense requires accounts payable being increased by the full amount of $1,794.
b. Electricity must be increased by the GST-exclusive amount of $1,560 because it should have been $16,560.
c. GST is reduced by $234 as GST can be claimed back on expenses.
3. Writes off bad debts $690 including GST. a. Bad debts must be increased by the GST-exclusive amount of $600 because it should be $1,405.
b. Accounts receivable is reduced by the full amount of $690.
c. GST is reduced by $90 because when the sale was originally made,
$90 was added to the GST liability, but now that it is part of a bad debts
Top Company Ltd does not receive the GST from the customer so it is no longer liable for it as a payment to the IRD.
4. Adjust allowance for doubtful debts to 2% of accounts receivable.
The allowance for doubtful debts should now be $25,000 (accounts receivable after bad debt) x 0.02 = $500, so the allowance must be increase by $200 because there is already a balance of $300.
A doubtful debt expense needs to be created for $200.
Note: This is not a bad debt because the debtor who will not pay what they owe has not been identified; but history has shown that 2% of outstanding

accounts receivable do not pay and because the sale was in this period the doubtful debt that arises from it should be reported in this period.
5. Depreciation on buildings is 2% p.a.; depreciation on office equipment is
10% diminishing value; depreciation on shop equipment is $2,000 for the year. a. Depreciation property, plant and equipment is created and the amount for each item is recorded against it- buildings $8,000; office equipment
$2,835; shop equipment $2,000.
b. Accumulated depreciation for each item is increased by the amount.
Diminishing value depreciation calculation is carrying amount x rate; thus for office equipment depreciation is (35,000 – 6,650) x 0.1 = $2,835.
6. Interest is owed to Top Company Ltd on the term deposit. a. Interest received must be increased by $375 because it should be
$4,500. To work out how much interest, you need the term deposit amount ($100,000) and the interest rate (4.5%). $100,000 x 0.045 =
$4,500, the interest earned on the term deposit.
b. Because it is an income that is owed, the current asset accrued income is created on debit side of the trial balance with $375 recorded.
7. Top Company Ltd has received rent in advance. Monthly rental is $2,875 including GST. a. Rent received must be reduced by $2,500 because the GST exclusive income for the year should be $30,000 since the rent excluding GST is
$2,500 per month: 12 x 2,500 = $30,000.
b. Because rent is an income for Top Company Ltd and it has been received in advance, the current liability income/ rent received in advance is created on the credit side for the amount of $2,500.
c. GST is not changed because IRD is happy with how GST has been reported.
8. An annual insurance premium of $1,600 excluding GST was paid 11
December 2013. a. In a situation like this the insurance expense must be reduced, because too much is currently being reported. Only 4 months
(December, January, February, March) of a full year’s insurance has been sued at balance day, so 8 months has been prepaid. Therefore insurance must be reduced by $1,200 ($1,600 x 0.66) so the total insurance expense for the year is $3,300.
b. A prepayment for $1,200 must be recorded on the debit side of the trial balance for the current asset created.
c. GST is not changed because IRD is happy with how GST has been reported.
9. Inventory that cost $12,000 is to be written down to its net realisable value of $9,000. a. The inventory asset must be reduced by $3,000 because it should be
$47,000 since some inventory has a net realisable value below cost.

b. Cost of goods sold is increased by $3,000 because the amount inventory is written down to (to recognise its net realisable value) is expensed against cost of goods sold.
10. One month’s interest is owing on the debentures. The interest rate is
10% p.a. and the maturity date is 16 September 2020. a. Interest on debentures must be increased by $500 because it should be $6,000. To work out how much interest, you need the debenture amount ($60,000) and the interest rate (10%). $60,000 x 0.10 =
$6,000, the interest on debentures for the year.
b. Because it is an expense that is owed, the current liability accrued expense is increased by $500.
c. Be careful not to add the $6,000 you have calculated to the $5,500.
Remember the requirement is to report the interest for the year, which is $6,000; at balance day the company owes only $500.
11. An independent valuation accepted by the Board has determined that land be valued at $235,000 and buildings at $420,000, their current market values as determined by surrounding land and buildings. a. This is an event that we have previously recorded in the general journal and general ledger but in the examination it may only be required to be reported in the financial statements.
b. Land be increased by $35,000 to report its new fair value of $235,000.
c. The equity account land revaluation surplus $35,000 must be created on the credit side of the trial balance. If there were already an amount there, the $35,000 would be added to it.
d. The $35,000 will also be repor ted in ‘other comprehensive income’ as a gain on revaluation of land. e. Accumulated depreciation buildings is reduced by $24,000 to make the balance zero.
f. Buildings is reduced by the accumulated depreciation amount of
$24,000 to determine the carrying amount.
g. Buildings and building revaluation surplus are both increased by
$44,000, which is the difference between the new valuation and the carrying amount of the buildings ($420,000 - $376,000) h. The $44,000 will also be reported in ‘other comprehensive income’ as a gain on revaluation of buildings.
12. The shares in The Warehouse are reported as financial assets. On 31
March 2014 the market value of the shares, which is deemed to be their fair value, is $15,000. a. This is another even previously recorded in the general journal and general ledger but in the examination it may be required to be reported only in the financial statements.
b. Shares in The Warehouse must be increased by $1,00 to report them at their fair value of $15,000.
c. Increase in fair value of financial assets $1,000 is recorded on the credit side of the trial balance to report the unrealised gain.
13. Taxation expense for the year is $35,000.

a. Create taxation expense $35,000 on the debit side of the trial balance.
b. Create a taxation payable $35,000 on the credit side of the trial balance to represent the current liability for taxation.
c. Decrease provisional tax paid by $20,000 so that its balance is zero.
d. Decrease taxation payable by the $20,000 from the provisional tax paid, which leaves the tax liability to be reported as a current liability.
The rest of the additional information has already been recorded in the trial balance during the year but will be used in the notes to the financial statements.
Note: In a situation where the allowance for doubtful debts needed to be adjusted to
$200, the doubtful debt expense would have been $100.
After the trial balance adjustments, the Statement of Comprehensive Income and
Statement of Financial Position including notes for Top Company Ltd would look like the following.
NZ $ NZ $
Revenue
Other Income
939,500
35,500
Total income
Less Expenses
975,000
Advertising
Bad Debts
Cost of Good’s Sold
Directors’ Fees
Donations
Electricity
Insurance
Loss on sale of shop equipment
Depreciation- PPE
Wages
Rates
Doubtful Debts
Auditor’s Remuneration
25,000
1,405
456,000
10,000
5,000
16,560
3,300
1,200
12,835
272,500
16,000
200
12,000

Office Expenses
Finance Costs
Total Expenses
Profit before Taxation
Taxation Expense
Profit for the year
Other Comprehensive Income
Gain on Revaluation of Land
Gain on Revaluation of Buildings
Other Comprehensive Income for year
Total Comprehensive Income for year
Notes to Statement of Comprehensive Income
Revenue
Sales
Other income
Interest Received
Increase in Fair Value of Financial Assets
Rent Received
Auditor’s Remuneration
Audit Fees
Taxation Advice and Planning
Finance Costs
Interest on Debentures
12,000
6,000
35,000
44,000
850,000
125,000
35,000
90,000
79,000
169,000
NZ $
939,500
4,500
1,000
30,000
35,500
8,000
4,000
12,000
6,000

Note that the total for depreciation and the total for wages have been reported in the
Statement of Comprehensive Income.
NZ $ NZ $
Current Assets
Accounts Receivable
Financial Assets
24,500
15,000
Inventory
Accrued Income
Prepayment
Bank
47,000
375
1,200
544,380
632,455
Non-Current Asset
Property, plant and equipment
Investment Assets
Term Deposit
Total Assets
Less Liabilities:
Current Liabilities
Taxation Payable
Accrued Expense
Income in Advance
Accounts Payable
GST
Non-Current Liabilities
Debentures
Total Liabilities
714,515
100,000
15,000
3,000
2,500
16,794
2,676
814,515
1,446,970
39,970
60,000
99,970

NET ASSETS
Equity
Retained Earnings
Contributed Equity
1,347,000
120,000
1,148,000
Land Revaluation Surplus
Building Revaluation Surplus
35,000
44,000
1,347,000
Points to remember

Retained Earnings can be calculated by opening balance + profit for the year
– dividends. This is exactly what happens in the retained earnings general ledger account.

The intangible asset goodwill could also be reported in non-current assets.

Do not forget to include taxation payable.
Accounts Receivable NZ $
Accounts Receivable
Less allowance for doubtful debts
Property, Plant and Equipment
25,000
500
24,500
For the year ended 31 March 20--
Land Buildings Office
Equipment
Shop
Equipment
NZ $ NZ $ NZ $ NZ $
Total
NZ $
Opening Carrying Amount
Additions
Disposals
Depreciation
Revaluation
Closing Carrying Amount
384,000 200,000
0 0
0
(8,000)
44,000 35,000
0
0
420,000 235,000
28,350
0
0
(2,835)
25,515
31,000 643,350
9,000 9,000
(4,000) (4,000)
(2,000) (12,835)
79,000
34,000 714,515

As at 31 March 20--
Cost or Valuation
Accumulated Depreciation
Carrying Amount
Financial Assets
420,000
0
420,000
235,000
0
235,000
35,000
(9,485)
25,515
NZ $
Balance at beginning of year
Increase in fair value of financial assets recognised in profit and loss
14,000
1,000
Balance at end of year 15,000
Financial Assets comprise shares in The Warehouse Ltd
Debentures
Debentures are secured by a floating charge over assets except land and buildings.
The rate of interest of 10% p.a. The maturity date is 16 September 2020.
# of shares NZ $
Balance at 1 April 20-- 300,000 600,000
40,000 730,000
(6,000) (15,485)
34,000 714,515
Shares Issued
Shares Repurchased
Balance at 31 March 20--
Distributions
Final Dividend
Interim Dividend
Total Dividends Paid
200,000
(0)
500,000
Cents per
Share
15
5
548,000
(0)
1,148,000
NZ $
45,000
25,000
70,000
Share Repurchase 0
Total Distributions 70,000
Dividends declared after reporting date
On 8 April 2014 directors proposed a final dividend for 2014 of 12 cents per share totalling $60,000 to be paid on 25 April 2014.

Points to Remember
Points to remember about contributed equity and distributions include the following.

The share issue amount of $548,000 is the amount of the share issue after the brokerage fee, legal and prospectus costs. Remember the additional information: 200,000 shares were issued to the public. Each share costs $3.
The brokerage fee on the issue was 5%. The legal and prospectus costs were
$10,000 and $12,000 respectively. Thus $600,000 - $30,000 (brokerage fee) -
$10,000 - $12,000 = $548,000.

The trial balance tells you that there are 500,000 shares at the end of the year, which is after the share issue. Thus at the start of the year there were fewer shares on the issue; i.e. 300,000.

To work out the dividends per share when it is not given, you need to know the total value of the dividend and the number of shares issued at the time of the dividend. For example, final dividend (2013) totalled $45,000 and at the time of the dividend 300,000 shares were issued; thus $45,000 / 300,000 =
0.15 or 15 cents per share.

The additional information told us that the interim dividend was paid after the share issue, so the dividend per share is $25,000 / 500,000 shares = 0.05 cents or 5 cents.

The information for the dividends declared after reporting date note can be found in the additional information. All that must be added it is the total of the dividend; e.g. in the note above at the time the dividend of 12 cents per share was declared there were 500,000 shares on issue, therefore 0.12 x 500,000 =
$60,000.
Share Repurchase and Contributed Equity and Distributions
If we assume the following share repurchase had happened during the year ended
31 March 2014 in January then the ‘Contributed Equity and Distributions’ note would look a little different. The changes are in bold.
Top Company Ltd repurchased 10,000 shares that had originally been issued at $3 a share for a fair value of $4 a share.
# of shares NZ $
Balance at 1 April 20--
Shares Issued
Shares Repurchased (
300,000
200,000
10,000)
600,000
548,000
(30,000)
Balance at 31 March 20--
Distributions
1,118,000
NZ $
Final Dividend
Interim Dividend
Total Dividends Paid
490,000
Cents per
Share
15
5
45,000
25,000
70,000

Share Repurchase 40,000
Total Distributions 110,000
Dividends Declared after Reporting Date
On 8 April 2014 directors proposed a final dividend for 2014 of 12 cents per share totalling $58,800 to be paid 25 April 2014.
Points to note

The share repurchase figure in the contributed equity section is the original cost of the shares issued, i.e. 10,000 x $3.

The share repurchase figure in the distributions section is the amount paid to repurchase the shares, i.e. 10,000 x $4.

The total value of the dividend declared after balance day is now $58,800 as there are only 490,000 shares issued after the repurchase.
Purpose and Layout of the Statement
The third financial statement examinable is the Statement of Cash Flows. The purpose of this statement is to show users where cash has come from during the year and what it was spent on. This statement is purely about cash; it does not matter if the cash was received from income or from the sale of an asset or from taking out a loan and it also does not matter whether cash was spent on expenses or on the purchase of assets or repayment of a loan, and so on.
There are three sections to the Statement of Cash Flows: Operating, Investing and
Financing.

In each section the cash received (cash provided from) and cash spent (cash applied to) are reported separately to determine the net cash inflow/ outflow for that section.

The net cash inflows/ outflows for the three sections are added to determine the net increase or decrease in cash for the year. This figure should also be the difference between the opening and closing bank balances. A Statement of Cash Flows is usually correct if this is the case.

There should be no non-cash items in this statement (e.g. depreciation, losses and gains.
Following is a typical layout of a completed Statement of Cash Flows.
NZ $ NZ $
Cash flows from operating activities
Cash was provided from
Cash from customers
Cash from dividends
670,000
14,000 684,000

Cash was applied to
Cash paid to suppliers
Cash paid for expenses
Cash paid for interest
Cash paid for taxation
Net cash inflow from operating activities
Cash flows from investing activities
Cash was provided from
Cash from sale of equipment
Cash from term deposit
Cash was applied to
Cash paid for equipment
Cash paid for buildings
Net cash outflow from investing activities
Cash flows from financing activities
Cash was provided from
Cash from share issue
Cash from debentures
Cash was applied to
Cash dividends
Cash paid for loan
Cash paid for share repurchase
Net cash inflow from financing activities
Net increase/ decrease in cash held
Add bank balance at beginning
Bank Balance at end
Operating Activities
Inflows:
587,000
97,000
42,000
160,000
(118,000)
250,000
145,000
105,000
84,000
12,000
96,000
350,000
200,000
12,000
25,000
12,000
30,000
60,000
100,000
150,000
100,000
80,000
25,000
40,000

- R eceipts from customer
- O ther Income
Outflows:
- I nterest Paid
- S uppliers
- W ages
- O ther Expenses
- T axation
Investing Activities
Inflows:
- S ale of PPE
- S ale of Investment (Shares and Term Deposit)
Outflows:
- P urchase of PPE
- P urchase of Investment (Shares and Term Deposit)
Financing Activities
Inflows:
- I ssue of Shares
- L oan
Outflows:
- P ayment of Dividends
- R epayment of Loan
- R epurchase Shares
Information from the Statement of Comprehensive Income/ Income Statement,
Statement of Financial Position and notes to the financial statements are used to prepare the Statement of Cash Flows. There is quite a bit of working involve in the accurate preparation of the Statement of Cash Flows and space is provided in the examination paper for working. All working should be shown because it is marked.
GST is ignored in the Statement of Cash Flows.
Preparing the statement
The following information for First Class Ltd will be used to demonstrate how to prepare the Statement of Cash Flows for the year ended 31 March 2014.
Note NZ $
Revenue
Other Income
Cost of Goods Sold
1
2
2,500,000
5,000
2,556,000
1,600,000

Depreciation- Property, plant and equipment
Bad Debts
Loss on Sale of Delivery Vehicle
Other Expenses
Doubtful Debts
Less Finance Costs
Profit before tax
Income Tax Expense
Profit for the period
Other Comprehensive Income
Gain on Land Revaluation
Total Comprehensive Income
Notes to Statement of Comprehensive Income
1. Revenue
Sales
2. Other income
Dividends Received
Increase in Fair Value of Financial Assets
Rent Received
Discount Received
3. Finance Costs
Interest on Mortgage
Statement of Financial Position
Current and Non-Current Assets
Notes
3
NZ $
71,000
9,000
6,000
533,000
1,000
45,000
291,000
75,000
216,000
80,000
296,000
2,500,000
12,000
10,000
26,000
8,000
45,000
NZ $ 2013 NZ $ 2014

Bank
Prepayment- Other Expense
Accounts Receivable
Inventory
Financial Assets
Accrued Income- Dividends
Term Deposit
Property, Plant and Equipment
Total Assets
Current and Non-Current Liabilities
Accounts Payable
Accrued Expenses- Interest
Income in Advance- Rent Received
Taxation Payable
Mortgage
Total Liabilities
Net Assets
Equity
Contributed Equity
Land Revaluation Surplus
Retained Earnings
Total Equity
Notes and Additional Information
4. Accounts Receivable
Less Allowance for Doubtful Debts
4
21,000
6,000
40,000
64,000
35,000
10,000
58,000
85,000
80,000
3,000
90,000
7,000
20,000 15,000
5 1,035,000 1,147,000
1,269,000 1,447,000
14,000
3,000
4,000
20,000
8,000
2,000
12,000 18,000
451,000 400,000
484,000 448,000
785,000 999,000
562,000 662,000
30,000 110,000
193,000 227,000
785,000 999,000
Notes NZ $ 2013 NZ $ 2014
42,000 61,000
2,000
40,000
3,000
58,000

5. Property, Plant and Equipment
For the year ended 31 March 2013
Cost or Valuation
Accumulated Depreciation
Carrying Amount
Land Equipment
NZ $ NZ $
300,000 650,000
0 (130,000)
300,000 520,000
Delivery
Vehicles
NZ $
255,000
(40,000)
215,000
Total
NZ $
1,205,000
(170,000)
1,035,000
As at 31 March 2014
Cost or Valuation 380,000 700,000 280,000 1,360,000
Accumulated Depreciation 0 (143,000) (70,000) (213,000)
Carrying Amount 380,000 557,000 210,000 1,147,000
A delivery vehicle costing $45,000 with a carrying amount of $17,000 was sold for cash during the year.
Operating Activities
To prepare the operating activities section of the Statement of Cash Flows, the focus is on the Statement of Comprehensive Income/ Income Statement and the
Statement of Financial Position’s current assets and current liabilities. The goal is to take the appropriate information from the Statement of Comprehensive Income/
Income Statement and convert it into cash information, because the information from this statement has been prepared on the accrual basis.
Operating activities always has cash from customers/ accounts receivable as one of the sources of Cash Provided From. There could also be cash from interest or dividends or rent to be reported as part of cash received in operating activities.
Under the Cash Applied To heading there is usually cash paid to suppliers/ accounts payable, cash paid for interest, cash paid for taxation and cash paid for expenses. Sometime expenses are split and reported separately.
To calculate the amounts to report in the Statement of Cash Flows, four general ledger accounts must be reconstructed:

Accounts Receivable

Inventory

Accounts Payable

Taxation Payable

Certain income and expense accounts need the effects of the following balance day adjustments removed to determine their cash value:

Accrued Expense

Accrued Income

Prepayment

Income in Advance
Cash Provided from
Cash from Customers or Cash from Accounts Receivable
This requires the reconstruction of the accounts receivable account. It involves the opening and closing amounts from accounts receivable, sales, bad debts and discount allowed. If a note is given for accounts receivable, always use the accounts receivable from the note- not the figure from the statement.
Accounts Receivable
Date Particulars Dr Cr Balance
1/4/2013 Balance 42,000 Dr
31/3/2014 Sales 2,500,000 2,542,000 Dr
Discount Allowed/ Bad Debts 9,000 2,533,000 Dr
Bank 2,472,000 61,000 Dr

Always start with the opening Balance

Treat all sales as credit sales and debit the ledger account because sales increases what is owed to First Class Ltd.

Credit the ledger account for bad debts and discount allowed, because they reduce the account without any cash being received. If this is not done, too much cash is reported as being received. In this example there is only a bad debt.

Enter the closing balance and then work out the difference between the last balance and the closing balance; i.e. $2,533,000 - $61,000 = $2,472,000. This is the figure to be reported in the Statement of Cash Flows as ‘cash from customers’ or ‘cash from accounts receivable’.
Cash from Dividends Received
The Statement of Comprehensive Income includes ‘other income’ and there is a cash flow associated with it. In this example other income comprises of discount received, increase in fair value of financial assets and dividends received. Discount received and increase in fair value of financial assets and non-cash items; they are bookkeeping entries to record and event where no cash changed hands. Discount received represents the fact that the amount owed to a supplier was reduced by this amount- no cash changed hands. The increase in fair value of financial assets was due to a revaluation of shares at balance day and there is to recognise an unrealised gain- again, there is no cash flow. However, dividends received involves a cash flow that must be reported in the Statement of Cash Flows.

Since dividends received has been adjusted, as evidenced by accrued income- dividends in the Statement of Financial Position, we cannot simply put $12,000 into the Statement of Cash Flows. The effects of accrued income must be addressed to ensure the correct figure is reported by doing the following:
Dividends Received $12,000
Less closing accrued income (2014)
Add opening accrued income (2013)
$7,000
$3,000
$8,000
Thus cash from dividends received is $8,000 in the Statement of Cash Flows.
Reasons for this working are as follows:

On balance day, because of the accrual basis, $7,000 (closing accrued income) was added to dividends received because it was owed. However, because no cash has been received, the closing accrued income is subtracted to reverse this effect, as the cash received this year is needed for the Statement of Cash Flows.

The cash owed from the opening accrued income ($3,000) would have been received early in the year but not reported as income because of the accrual basis. Thus it needs to be added to show the cash received during the year.
When working out the cash to be reported ALWAYS SUBTRACT the CLOSING
ACCRUED amount and ADD the OPENING accrued amount.
Cash from rent received
Due to the fact that rent received has been adjusted as evidenced by ‘income in advance- rent received’ in the Statement of Financial Position, we cannot simply put
$26,000 into the Statement of Cash Flows. The effects of the income in advance must be addressed to ensure the correct figure is reported by doing the following:
Rent Received $26,000
Less closing income in advance (2014)
Add opening income in advance (2013)
$4,000
$2,000
$24,000
Thus cash from rent received is $24,000 in the Statement of Cash Flows.
Reasons for this working are as follows:

On balance day $2,000 (closing income in advance) was subtracted from rent received because of the accrual basis, as it related to income for next year. It must be added back because it was cash received this year and must be reported in the Statement of Cash Flows.

The opening income in advance ($4,000) was added to rent received at the start of the year but no cash was received this year; it was received in the

previous year. Thus it is subtracted to show cash received form rent only this year in the Statement of Cash Flows.
When working out the cash to be reported ALWAYS SUBTRACT the OPENING
INCOME IN ADVANCE amount and ADD the CLOSING income in advance amount.
Cash Applied to
Cash paid to suppliers/ accounts payable
Calculating this amount involves the reconstruction of the inventory and accounts payable ledger accounts.
Inventory
Date Particulars Dr Cr Balance
1/4/2013 Balance 64,000 Dr
31/3/2014 Cost of Goods Sold 1,600,000 1,536,000 Cr
Accounts Payable 1,621,000 85,000 Dr

Always start with the opening balance

Credit the ledger account for cost of goods sold because inventory is reduced each time it is sold. This creates a credit balance. Remember this is a summary of what happened in the year, so we can have a credit balance in the inventory account. (In reality, inventory would have been purchased before it ran out.)

Enter the closing balance and then work out the difference between the last balance and the closing balance, i.e. $1,536,000 Cr to $85,000 Dr is a difference of $1,621,000. This figure is the amount of inventory purchased in
2013 and it is assumed to have been purchased on credit. This figure is transferred to the accounts payable ledger account.
Date Particulars
1/4/2013 Balance
Dr Cr Balance
14,000 Cr
31/3/2014 Inventory
Discount Received 8,000
1,621,000 1,635,000 Cr
1,627,000 Cr
Bank 1,607,000 20,000 Cr

Always start with the opening balance

Credit the inventory purchased for the year from the inventory ledger account reconstruction.

Debit the ledger account for discount receive because it reduced the account without any cash being paid. If this is not done, too much cash is reported as being paid.

Enter the closing balance and then work out the difference between the last balance and the closing balance, i.e. $1,627,000 - $20,000 = $1,607,000. This

is the figure to be reported in the Statement of Cash Flows as cash paid to suppliers or cash paid to accounts payable.
Cash paid for expenses
Interest and taxation expense are reported separately and all other cash expenses can be reported as cash paid for expenses/ cash paid for general expenses/ cash paid for other expenses, etc. In this example it is ‘cash paid for other expenses’.
It should be noted that depreciation, doubtful debts, bad debts and loss on sale of delivery vehicle are not included as they are non-cash expenses. However, they can sometimes be used in working, as was the case with bad debts. Note that any gains on the sale of any item are also non-cash.
Due to the fact that ‘other expenses’ has been adjusted, as evidenced by
‘prepayments- other expenses’ in the Statement of Financial Position, we cannot simply put $533,000 into the Statement of Cash Flows. The effects of the prepayment must be addressed to ensure the correct figure is reported, by doing the following:
Other Expenses $533,000
Less opening prepayment (2013) $6,000
Add closing prepayment (2014) $10,000
$537,000
Thus cash paid for other expense is $537,000 in the Statement of Cash Flows.
Reasons for this working are as follows:
 On balance day $10,000 (closing prepayment) was subtracted from ‘other expenses’ because of the accrual basis, as it related to an expense for next year. It must be added back because it was cash payment made in this year and must be reported in the Statement of Cash Flows.
 The opening prepayment ($6,000) was added to ‘other expenses’ at the start of the year but no cash payment was made this year; it was made in the previous year. Thus it is subtracted to show only cash payments for other expenses this year in the Statement of Cash Flows.
When working out the cash to be reported ALWAYS SUBTRACT the OPENING
PREPAYMENT amount and ADD the CLOSING prepayment amount.
Cash paid for interest on mortgage
Since ‘interest on mortgage’ has been adjusted, as evidenced by ‘accrued expense- interest’ in the Statement of Financial Position, we cannot simply put $45,000 into the Statement of Cash Flows. The effects of the accrued expense must be addressed to ensure the correct figure is reported by doing the following:
Interest on Mortgage $45,000
Less closing accrued expense (2014) $8,000

Add opening accrued expense (2013) $3,000
$40,000
Thus cash paid for interest on mortgage is $40,000 in the Statement of Cash Flows.
Reasons for this working are as follows:

On balance day, because of the accrual basis $8,000 (closing accrued expense) was added to ‘interest on mortgage’ as it was owing. However, because no cash payment has been made, subtracting the closing accrued expense reverses this effect because the cash figure is needed for the
Statement of Cash Flows.

The cash owing from the opening accrued expense would have been paid earlier in the year but not reported as an expenses (not part of the $45,000) because of the accrual basis. Thus it needs to be added to show the cash paid during the year.
When working out the cash to be reported ALWAYS SUBTRACT the CLOSING
ACCRUED amount and ADD the OPENING accrued amount.
Cash paid for taxation
Calculating this amount involves the reconstruction of the taxation payable ledger account.
Taxation Payable
Date Particulars
1/4/2013 Balance
Dr Cr Balance
12,000 Cr
31/3/2014 Taxation Expense 75,000 87,000 Cr
Bank 69,000 18,000 Cr
Always start with the opening balance

Credit the ledger account for taxation expense because this is what is owed.

Enter the closing balance and then work out the difference between the last balance and the closing balance; i.e. $87,000 - $18,000 = $69,000. This figure is the amount paid in taxation for the year.
After the various calculations have been made, the operating activities section of
First Class Ltd’s
Statement of Cash Flows would look like the following:
Cash flows from operating expenses
Cash was provided from
Cash from customers
Cash from dividends received
2,472,000
8,000

Cash from rent received
Cash was applied to
Cash paid to suppliers
Cash paid for other expenses
24,000
1,607,000
537,000
2,504,000
Cash paid for interest on mortgage
Cash paid for taxation
40,000
69,000 2,253,000
Net cash inflow from operating activities
251,000
Investing Activities
When preparing the investing activities section of the Statement of Cash Flows, the focus shifts to the non-current assets in the Statement of Financial Position. The cashflow information relating to the buying and selling of property, plant and equipment and investments is reported here.
Most of the information for working out the figures to report comes from the property, plant and equipment note. Working may require reconstruction of a ledger account, the comparison of both years’ figures and the use of gain or loss information on an item of property, plant and equipment sold.
Cash provided from
This is usually from cashing in an investment or from the sale of an item of property, plant or equipment.
Cash from term deposit
NZ $ 2013 NZ $ 2014
Assets
Term Deposit 20,000 15,000
In this situation, First Class Ltd has cashed in $5,000 of a term deposit (a term deposit is an investment) which results in a cash inflow for the business. Look at the difference in the two years’ term deposit amounts to determine how much to report.
Cash from sale of delivery van
When working out the cash from the sale of a property, plant and equipment asset, the following working should be used:
Carrying amount + gain on sale (or
– loss on sale) = cash from sale.
The Statement of Comprehensive Income will have information on the gain or loss from the sale or disposal and additional information will be provided on the carrying amount of the asset disposed of or sold.

The additional information for First Class Ltd stated that a delivery vehicle costing
$45,000 with a carrying amount of $17,000 was sold for cash during the year. The
Statement of Comprehensive Income has reported a loss on sale of $6,000.
Thus, using the recommended working:
Carrying Amount $17,000
Loss on sale $6,000
= cash from sale $11,000
The cash from the sale of the delivery van is $11,000.
Cash Applied to
This is usually from the company making an investment, i.e. making or increasing a term deposit, or from the purchase of an item of property, plant or equipment.
If
First Class Ltd’s term deposit had increased to $30,000 in 2013, the $10,000 difference would have been reported in the ‘cash applied to’ section of investing activities.
The following property, plant and equipment note will be used to determine the amounts spent on new property, plant and equipment.
Property, Plant and Equipment
Land Buildings Delivery
Vehicles
As at 31 March 2013
Cost or Valuation
NZ $
300,000
NZ $
650,000
NZ $
255,000
Total
NZ $
1,205,000
Accumulated Depreciation
Carrying Amount
As at 31 March 2014
Cost or Valuation
Accumulated Depreciation
0 (130,000)
300,000
380,000
520,000
700,000
0 (143,000)
(40,000)
215,000
280,000
(70,000)
(170,000)
1,035,000
1,360,000
(213,000)
Carrying Amount 380,000 557,000 210,000 1,147,000
Cash paid for buildings
To determine how much was spent on buildings in 2014, work out the difference between the cost or valuation for buildings between 2013 and 2014. Buildings has

increased from $650,000 to $700,000, thus First Class Ltd spent $50,000 on buildings in 2014. There is no gain on revaluation on buildings reported or an increase in building revaluation surplus, so the increase is not due to a revaluation.
Buildings can have increased only because more were purchased. Thus cash paid for buildings is $50,000.
Cash paid for delivery vehicles
Determining how much was spent on the delivery vehicles in this example is not as easy as determining the amount for buildings, because during the year a delivery vehicle was sold. To allow for this effect of this, it is important to reconstruct the delivery vehicle ledger account.
Delivery Vehicles
Date Particulars Dr Cr Balance
1/4/2013 Balance 255,000 Dr
31/3/2014 Disposal (Cost) 45,000 210,000 Dr
Bank 70,000 280,000 Dr

Always start with the opening balance

Credit the cost of delivery vehicle sold to remove it from the ledger account.

Enter the closing balance and then work out the difference between the last balance and the closing balance; i.e. $280,000 - $210,000 =
$70,000. This figure is the amount spent on delivery vehicles for the year and the ledger account is debited for this amount.
A reconstruction of a property, plant and equipment asset ledger account to determine how much was spent on it is only needed when the asset has also been sold during the year; e.g. disposal and purchase in 2014.
Note: Land has increased by $80,000 but it is not included in the Statement of Cash
Flows because it is the result of a revaluation recognising the unrealised gain on land of $80,000. This can be seen in the Statement of Comprehensive Income’s
‘Other Comprehensive Income’ and in the increase in the land revaluation surplus by
$80,000 in the Statement of Financial Position.
After the various calculations have been made, the investing activities section of First
Class Ltd’s
Statement of Cash Flows would look like the following:
Cash flows from investing activities
Cash was provided from
Cash from term deposit
Cash from sale of delivery vehicle
5,000
11,000 16,000

Cash was applied to
Cash paid for buildings
Cash paid for delivery vehicles
50,000
70,000 120,000
Net cash outflow from investing activities
(104,000)
Sometimes the asset that is sold or disposed of is not sold for cash but is traded in .
This has a significant impact on the Statement of Cash Flows. Firstly, there is no cash received, because a trade-in reduces the purchase cost. Secondly it affects the account reconstructed. The delivery vehicle ledger account and Statement of Cash
Flows extract that follow demonstrate this.
Instead of the delivery van being sold for $11,000 cash, and $11,000 trade-in is received.
Delivery Vehicles
Date Particulars
1/4/2013 Balance
Dr Cr Balance
255,000 Dr
31/3/2014 Disposal (Cost)
Trade-in 11,000
45,000 210,000 Dr
221,000 Dr
Bank 59,000 280,000 Dr

Debit the account for the trade-in because it is reducing the cost of the new delivery van.

Enter the closing balance and then workout the difference between the last balance and the closing balance; i.e. $280,000 - $221,000 = $59,000. This figure is the amount spent on delivery vehicles for the year and the ledger account is debited for this amount.

The trade-in has reduced the amount spent on delivery vehicles by $11,000, i.e. $59,000 now instead of $70,000 if cash had been received instead.
Cash flows from investing activities
Cash was provided from
Cash from term deposit 5,000
Cash from sale of delivery vehicle
Cash was applied to
Cash paid for buildings
Cash paid for delivery vehicles
50,000
59,000 109,000

Net cash outflow from investing activities
(104,000)
Note: There is no cash provided from the sale or disposal of the delivery vehicle because it was traded in.
Financing Activities
To prepare the financing activities section of the Statement of Cash Flow, the focus shifts to non-current liabilities and equity in the Statement of Financial Position.
The cashflow information relating to the raising of and payment of long term debt, share issues, share repurchases and dividends is reported here.
Statement of Financial Position extract for First Class Ltd as at 31 March 2014:
NZ $ 2013 NZ $ 2014
Liabilities
451,000 400,000 Mortgage
Equity
Contributed Equity
Retained Earnings
562,000
193,000
662,000
227,000
Land Revaluation Surplus 30,000 110,000
Cash Provided From
This is usually from raising or taking out long term debt such as mortgages, loans and debentures, or from a cash share issue.
Cash from share issue
In the above situation
First Class Ltd’s contributed equity increased by $100,000.
Working out the difference between the dollar values over the two years is all that is required. Thus cash from share issue is reported as $100,000. This is treated as a cash share issue because no information is provided to indicate anything other than a cash issue.
Only reconstruct the contributed equity account is there is also a share repurchase in the year. This will be addressed later in the notes.
There is no increase in mortgage reported so there is no cash inflow from mortgage in 2014.
Cash Applied To
This is usually from the company’s repaying long term debts such as mortgages, loans and debentures or from a share repurchase or payment of dividend.

Cash paid for mortgage
The difference between the 2013 and 2014 figures determines the amount to be reported. The mortgage decreased from $451,000 to $400,000 because of a
$51,000 payment made by First Class Ltd. Thus cash paid for mortgage is $51,000.
Cash paid for dividends
To determine the amount to be reported as cash paid for dividends, the retained earnings ledger account must be reconstructed. The profit for the year figure of
$216,000 from the Statement of Comprehensive Income is used in this reconstruction.
Retained Earnings
Date Particulars Dr Cr Balance
1/4/2013 Balance 193,000 Cr
31/3/2014 Income Summary 216,000 409,000 Cr
Dividends 182,000 227,000 Cr

Always start with the opening balance.

Credit the profit for the year (income summary), $216,000 to retained earnings because it increase equity.

Enter the closing balance and then work out the difference between the last balance and the closing balance, i.e. $409,000 - $227,000 = $182,000. This figure is the amount spent on dividends for the year and the ledger account is debited for this amount because it is reducing equity.
Note: Land revaluation surplus and building revaluation surplus are not included in the Statement of Cash Flows because they involve book-keeping entries to record unrealised gains; i.e. there is no cash associated with this kind of event.
After the various calculations have been made, the financing activities section of
First Class Ltd’s Statement of Cash Flows would look like the following:
Cash flows from financing activities
Cash was provided from
Cash from share issue
Cash was applied to
100,000
Cash paid for mortgage
Cash paid for dividends
51,000
182,000 233,000
Net cash outflow from financing activities
(133,000)
The compete Statement of Cash Flows for First Class Ltd without the trade in would look like the following:

Cash flows from operating expenses
Cash was provided from
Cash from customers
Cash from dividends received
Cash from rent received
Cash was applied to
Cash paid to suppliers
Cash paid for other expenses
Cash paid for interest on mortgage
Cash paid for taxation
Net cash inflow from operating activities
Cash flows from investing activities
Cash was provided from
Cash from term deposit
Cash from sale of delivery vehicle
Cash was applied to
5,000
11,000
Cash paid for buildings
Cash paid for delivery vehicles
Net cash outflow from investing activities
Cash flows from financing activities
Cash was provided from
Cash from share issue
Cash was applied to
50,000
70,000
Cash paid for mortgage
Cash paid for dividends
Net cash outflow from financing activities
51,000
182,000
2,472,000
8,000
24,000 2,504,000
1,607,000
537,000
40,000
69,000 2,253,000
251,000
16,000
120,000
100,000
233,000
(104,000)
(133,000)

Net cash increase
Add bank balance at beginning
14,000
21,000
Bank balance at end 35,000
A share repurchase has an impact of the ‘Cash was applied to’ section of the financing activities in the Statement of Cash Flows.
NZ $ 2013 NZ $ 2014
Equity
Contributed Equity
Retained Earnings
562,000
193,000
662,000
227,000
Land Revaluation Surplus 30,000 110,000
Additional Information
During the year 10,000 shares were repurchased at a fair value of $3 per share. The shares when issued had an initial fair value of $2 each.
The contributed equity and retained earnings accounts must be reconstructed to determine what is reported in the Statement of Cash Flows.
Contributed Equity
Date Particulars Dr Cr Balance
1/4/2013 Balance 562,000 Cr
31/3/2014 Bank 20,000 542,000 Cr
Bank 120,000 662,000 Cr

Always start with the opening balance.

Debit the contributed equity for the original cost of shares being repurchased
($20,000) with the particular bank. The debit entry is because there is a reduction in contributed equity; equity is decreasing.

Enter the closing balance and then work out the difference between the last balance and the closing balance. i.e. $662,000 - $542,000 = $120,000. This figure is the amount received for the share issue during the year and the ledger account is credited for this amount because it is increase equity.
Retained Earnings
Date Particulars Dr Cr Balance
1/4/2013 Balance 193,000 Cr

31/3/2014 Income Summary
Bank 10,000
216,000 409,000 Cr
399,000 Cr
Dividends 172,000 227,000 Cr

Always start with the opening balance.

Credit the profit got the profit for the year (income summary) $216,000 to retained earnings because it increase equity.

Debit retained earnings for the $10,000 with particular bank. This represents the difference in the price paid to repurchase the 10,000 shares ($3) and the original issue price ($2), i.e. ($3 - $2) x 10,000 shares = $10,000.

Enter the closing balance and then work out the difference between the last balance and the closing balance, i.e. $399,000 - $227,000 = $172,000. This figure is the amount spent on dividends for the year and the ledger account is debited for this amount because it is reducing equity.
Cash paid for share repurchase
There is also an extra outflow of cash in the Statement of Cash Flows. The $30,000 spent to repurchase the 10,000 shares must be reported as cash paid for share repurchase.
The financing activities section of
First Class Ltd’s
Statement of Cash Flows would now look like the following after the share repurchase:
Cash flows from financing activities
Cash was provided from
Cash from share issue
Cash was applied to
120,000
Cash paid for mortgage
Cash paid for share repurchase
Cash paid for dividends
51,000
30,000
172,000 253,000
Net cash outflow from financing activities
(133,000)
The net cash outflow is unchanged at $133,000, but the amount for the share issue and dividend have changed as a result of the share repurchase and there is now an extra entry for the cash spent on the repurchase.