Financial Statements- Level 3 91406 NCEA

advertisement
Class Notes
Accounting Level 3 Externals
91406- Financial Statements
Equity
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
Dr
Cr
600,000
Contributed Equity
600,000
(To record the issue of 300,000 shares at a fair
value of $2 per share)
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
15/6/2013 Bank
Dr
Cr
570,000
Contributed Equity
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
Dr
30/6/2013 Contributed Equity
Cr
22,000
Bank
22,000
(To record the prospectus and legal costs)
The contributed equity debit entry represents the total of the prospectus and legal
costs.
Date
Particulars
1/4/2011
Cr
Balance
Bank
600,000
600,000 Cr
15/6/2013 Bank
570,000
1,170,000 Cr
30/6/2013 Bank
Dr
22,000
1,148,000 Cr
Retained Earnings
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.


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.
Date
Particulars
1/4/2013
Balance
Dr
Cr
Balance
100,000 Cr
31/3/2014 Income Summary
90,000
190,000 Cr
Interim Dividend
25,000
165,000 Cr
Final Dividend
45,000
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
850,000
Profit before Tax
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
Provisional Taxation Paid
NZ $
20,000
Contributed Equity
(500,000 fully paid
shares)
Retained Earnings
Income Summary
NZ $
1,148,000
100,000
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
31/3/2014 Income Summary
Cr
35,000
Taxation Payable
35,000
(To record taxation payable)


Date
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.
Particulars
Dr
31/3/2014 Taxation Payable
Cr
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
31/3/2014 Balance
Taxation Payable
Balance
20,000 Dr
20,000
0
Date
Particulars
Dr
31/3/2014 Income Summary
Provisional Taxation Paid
Cr
Balance
35,000
35,000 Cr
20,000
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
31/3/2014 Income Summary
Retained Earnings
Dr
Cr
90,000
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.
Final and Interim Dividends
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
22/4/2013 Final Dividend (2013)
Dr
Cr
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
22/4/2013 Interim Dividend (2014)
25,000
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
22/4/2013 Bank
Cr
45,000
Balance
45,000 Dr
Interim Dividend (2014)
Date
Particulars
Dr
28/10/2013 Bank
Cr
25,000
Balance
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)
1,148,000
Final Dividend (2013)
45,000
Retained Earnings
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
31/3/2014 Retained Earnings
Final Dividend (2013)
(To close final dividend 2013)
Dr
Cr
45,000
45,000
Date
Particulars
Dr
31/3/2013 Retained Earnings
Cr
25,000
Interim Dividend (2014)
25,000
(To close interim dividend 2014)
The effect of these general journal entries is shown in the final dividend and interim
dividend accounts that follow.
Final Dividend (2013)
Date
Particulars
22/4/2013 Bank
Dr
Cr
45,000
31/3/2014 Retained Earnings
Balance
45,000 Dr
45,000
0
Cr
Balance
Interim Dividend (2014)
Date
Particulars
28/10/2013 Bank
31/3/2014
Retained Earnings
Dr
25,000
25,000 Dr
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 April 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.
More on Equity
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 $
Land
200,000
NZ $
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
31/3/2013 Land
Cr
35,000
Land Revaluation Surplus
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
31/3/2014 Land Revaluation Surplus
Dr
Cr
Balance
200,000 Dr
35,000
235,000 Dr
Land Revaluation Surplus
Date
Particulars
Dr
Cr
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
200,000
Contributed Equity
(500,000 shares)
1,148,000
Buildings
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
31/3/2013 Depreciation- Buildings
Cr
8,000
Accumulated Depreciation- Buildings
8,000
(To record depreciation on buildings)
Date
Particulars
Dr
31/3/2013 Accumulated Depreciation- Buildings
Cr
24,000
Buildings
24,000
(To transfer accumulated depreciation to
buildings)
Date
Particulars
Dr
31/3/2013 Buildings
Cr
24,000
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
1/4/2013
Balance
Dr
Cr
Balance
400,000 Dr
31/3/2014 Accumulated DepreciationBuildings
Building Revaluation Surplus
24,000
44,000
376,000 Dr
420,000 Dr
Building Revaluation Surplus
Date
Particulars
Dr
31/3/2014 Buildings
Cr
Balance
44,000
44,000 Cr
Cr
Balance
Accumulated Depreciation- Buildings
Date
Particulars
1/4/2013
Balance
Dr
16,000 Cr
31/3/2014 Depreciation- Buildings
Building
8,000
24,000
24,000 Cr
0
Depreciation- Buildings
Date
Particulars
31/3/2014 Accumulated DepreciationBuildings
Income Summary
Dr
Cr
8,000
Balance
8,000 Dr
8,000
Top Company Ltd now has four equity accounts- contributed equity, retained
earnings, land revaluation surplus and buildings revaluation surplus.
Financial Assets
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
NZ $
Shares in The Warehouse

Date
14,000
NZ $
Contributed Equity
(500,000 shares)
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.
Particulars
Dr
31/3/2013 Shares in The Warehouse
Cr
1,000
Increase in fair value of financial assets
1,000
(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
Date
Particulars
Dr
Cr
31/3/2014 Balance
Increase in fair value of
financial assets
Balance
14,000 Dr
1,000
15,000 Dr
Increase in fair value of financial assets
Date
Particulars
Dr
31/3/2014 Shares in The Warehouse
Income Summary

1,000
Cr
Balance
1,000
1,000 Cr
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
31/3/2013 Decrease in fair value of financial assets
Cr
2,000
Shares in The Warehouse
2,000
(To record shares in The Warehouse at fair
value)
Shares in The Warehouse
Date
Particulars
Dr
Cr
31/3/2014 Balance
Balance
14,000 Dr
Decrease in fair value of
financial assets
2,000
12,000 Dr
Cr
Balance
Decrease in fair value of financial assets
Date
Particulars
31/3/2014 Shares in The Warehouse
Income Summary
Dr
2,000
2,000 Dr
2,000
0
Share Repurchase & Buyback
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
15/7/2013 Contributed Equity
30,000
Retained Earnings
10,000
Cr
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
1/4/2011
Dr
Cr
Balance
Bank
600,000
600,000 Cr
15/6/2013 Bank
570,000
1,170,000
Cr
30/6/2013 Bank
22,000
1,148,000
Cr
17/5/2014 Bank
30,000
1,118,000
Cr
Retained Earnings
Date
Particulars
1/4/2013
Balance
Dr
Cr
Balance
100,000 Cr
31/3/2014 Income Summary
90,000
190,000 Cr
Interim Dividend
25,000
165,000 Cr
Final Dividend
45,000
120,000 Cr
10,000
110,000 Cr
17/5/2014 Bank
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
31/3/2013 Contributed Equity
80,000
Retained Earnings
20,000
Cr
Bank
100,000
(To record the repurchase of shares at a
fair value)
Statement of Comprehensive Income
NZ $
NZ $
Revenue
XX
Other Income
XX
Total Income
Less Expenses
List Expenses from the trial balance and/ or additional
information.
May include:
XXX
Cost of Goods Sold
XX
Directors’ Fees
XX

Donations
XX

Auditor’s Remuneration
XX

Other expenses from the trial balance and/ or
additional information
XX


XX
Finance Costs
XX
Total Expenses
XXX
Profit before tax
XXX
Income Tax Expense
XX
Profit for the year
XXX
Other Comprehensive Income
Gain on revaluation of Land
XX
Gain on revaluation of buildings
XX
Other Comprehensive income for the year
XXX
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
XX
XXX
Auditors’ Remuneration

Fees for Audit
XX

Fees for Assurance and Related Services
XX

Fees for Tax Advice and Planning
XX

Fees for Other Services (Suitably Described)
XX
XXX
Finance Costs
Interest on Mortgage
XX
Interest on Overdraft
XX
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 $
NZ $
Current Assets
Accounts Receivable
XX
Financial Assets
XX
List
XX
NZ $
XX
XXX
Non-current Assets
Property, plant and equipment
XX
List
XX
XX
XXX
Total Assets
XXX
Less Liabilities
Current Liabilities
Taxation Payable
XX
List
XX
XX
XXX
Non-current Liabilities
Debentures
XX
List
XX
XX
XXX
Total Liabilities
XXX
Net Assets
XXX
Equity
Contributed Equity
XX
Land Revaluation Surplus
XX
Building Revaluation Surplus
XX
Retained Earnings*
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.
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
XX
XXX
Property, Plant and Equipment
Land Buildings
PPE
Item 1
PPE
Item 2
Total
NZ $
NZ $
NZ $
NZ $
NZ $
XX
XX
XX
XX
XX
Additions
XX
XX
Disposals
(XX)
(XX)
(XX)
(XX)
For the year ended 31 March 20-Opening Carrying Amount
Depreciation
Revaluation
(XX)
(XX)
XX
XX
XXX
XXX
XXX
XXX
XXX
Cost or Valuation
XX
XX
XX
XX
XX
Accumulated Depreciation
XX
XX
XX
XX
XX
XXX
XXX
XXX
XXX
XXX
Closing Carrying Amount
XX
As at 31 March 20--
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
XX or (XX)
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--
XX
XX
Shares Issued
XX
XX
(XX)
(XX)
XX
XX
Cents per
Share
NZ $
Final Dividend
X
XX
Interim Dividend
X
XX
Total Dividends Paid
X
XX
Shares Repurchased
Balance at 31 March 20-Distributions
Share Repurchase
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 GST-exclusive 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
25,960
Accounts Payable
15,000
Advertising
25,000
Accumulated
Depreciation- Buildings
16,000
Auditors’ Remuneration
12,000
Accumulated
Depreciation- Office
Equipment
6,650
Bad Debts
805
Accumulated
Depreciation- Shop
Equipment
4,000
Bank
544,380
Allowance for Doubtful
Debts
300
Buildings
400,000
Contributed Equity
(500,000 Shares)
1,148,000
Cost of goods sold
453,000
Debentures
60,000
Directors’ Fees
10,000
GST
3,000
Donations
5,000
Interest Received
4,125
Electricity
15,000
Rent Received
32,500
Final Dividend (2013)
45,000
Retained Earnings
100,000
Insurance
4,500
Sales
939,500
Interest on Debentures
5,500
Interim Dividend (2014)
25,000
Inventory
50,000
Land
200,000
Loss on sale of shop
equipment
1,200
Office Equipment
35,000
Office Expenses
12,000
Office Staff Wages
95,000
Provisional Tax Paid
20,000
Rates
16,000
Sales Staff Wages
175,000
Shares in The Warehouse
14,000
Shop Equipment
40,000
Term Deposit (4.5% p.a.
matures 2018)
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.










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
25,690
-690
Accounts Payable
15,000
+1,704
Advertising
25,000
Accumulated
Depreciation- Buildings
16,000
+8,000
-24,000
Auditors’ Remuneration
12,000
Accumulated
Depreciation- Office
Equipment
6,650
+2,835
Bad Debts
805
+600
Accumulated
Depreciation- Shop
Equipment
4,000
+2,000
Bank
544,380
Allowance for Doubtful
Debts
300
+200
Buildings
400,000
-24,000
+44,000
Contributed Equity
(500,000 Shares)
1,148,000
Cost of goods sold
453,000
+3,000
Debentures
60,000
Directors’ Fees
10,000
GST
3,000
-234
-90
Donations
5,000
Interest Received
4,125
+375
Electricity
15,000
+1,560
Rent Received
32,500
-2,500
Final Dividend (2013)
45,000
Retained Earnings
100,000
Insurance
4,500
Sales
939,500
Interest on Debentures
5,500
Accrued Expense
+2,500
+500
Interim Dividend (2014)
25,000
Income/ Rent in Advance
+2,000
Inventory
50,000
Land Revaluation Surplus
+35,000
Land
200,000
Building Revaluation
Surplus
+44,000
Loss on sale of shop
equipment
1,200
Increase in Fair Value of
Financial Assets
+1,000
Office Equipment
35,000
Taxation Payable
+35,000
-20,000
Office Expenses
12,000
Office Staff Wages
95,000
Provisional Tax Paid
20,000
Rates
16,000
Sales Staff Wages
175,000
Shares in The Warehouse
14,000
Shop Equipment
40,000
Term Deposit (4.5% p.a.
matures 2018)
100,000
Doubtful Debts
+200
Depreciation- PPE
+2,000
+2,835
+8,000
Accrued Income
+375
Prepayment
+1,200
Taxation Expense
+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 reported 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 $
Revenue
Other Income
NZ $
939,500
35,500
Total income
975,000
Less Expenses
Advertising
25,000
Bad Debts
1,405
Cost of Good’s Sold
Directors’ Fees
456,000
10,000
Donations
5,000
Electricity
16,560
Insurance
3,300
Loss on sale of shop equipment
1,200
Depreciation- PPE
12,835
Wages
272,500
Rates
16,000
Doubtful Debts
Auditor’s Remuneration
200
12,000
Office Expenses
Finance Costs
12,000
6,000
Total Expenses
850,000
Profit before Taxation
125,000
Taxation Expense
35,000
Profit for the year
90,000
Other Comprehensive Income
Gain on Revaluation of Land
35,000
Gain on Revaluation of Buildings
44,000
Other Comprehensive Income for year
79,000
Total Comprehensive Income for year
169,000
Notes to Statement of Comprehensive Income
NZ $
Revenue
Sales
939,500
Other income
Interest Received
4,500
Increase in Fair Value of Financial Assets
1,000
Rent Received
30,000
35,500
Auditor’s Remuneration
Audit Fees
8,000
Taxation Advice and Planning
4,000
12,000
Finance Costs
Interest on Debentures
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
24,500
Financial Assets
15,000
Inventory
47,000
Accrued Income
375
Prepayment
1,200
Bank
544,380
632,455
Non-Current Asset
Property, plant and equipment
714,515
Investment Assets
Term Deposit
100,000
814,515
Total Assets
1,446,970
Less Liabilities:
Current Liabilities
Taxation Payable
15,000
Accrued Expense
3,000
Income in Advance
2,500
Accounts Payable
16,794
GST
2,676
39,970
Non-Current Liabilities
Debentures
60,000
Total Liabilities
99,970
NET ASSETS
1,347,000
Equity
Retained Earnings
120,000
Contributed Equity
1,148,000
Land Revaluation Surplus
35,000
Building Revaluation Surplus
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
25,000
Less allowance for doubtful debts
500
24,500
Property, Plant and Equipment
Land Buildings
Office
Shop
Equipment Equipment
NZ $
Total
NZ $
NZ $
NZ $
NZ $
384,000
200,000
28,350
Additions
0
0
0
9,000
9,000
Disposals
0
0
0
(4,000)
(4,000)
Depreciation
(8,000)
0
(2,835)
Revaluation
44,000
35,000
420,000
235,000
For the year ended 31 March 20-Opening Carrying Amount
Closing Carrying Amount
31,000 643,350
(2,000) (12,835)
79,000
25,515
34,000 714,515
As at 31 March 20-Cost or Valuation
Accumulated Depreciation
Carrying Amount
420,000
235,000
35,000
40,000 730,000
0
0
(9,485)
(6,000) (15,485)
420,000
235,000
25,515
34,000 714,515
Financial Assets
NZ $
Balance at beginning of year
14,000
Increase in fair value of financial assets recognised in profit and
loss
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
Shares Issued
200,000
548,000
(0)
(0)
500,000
1,148,000
Cents per
Share
NZ $
15
45,000
5
25,000
Shares Repurchased
Balance at 31 March 20-Distributions
Final Dividend
Interim Dividend
Total Dividends Paid
70,000
Share Repurchase
Total Distributions
0
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--
300,000
600,000
Shares Issued
200,000
548,000
Shares Repurchased
(10,000)
(30,000)
Balance at 31 March 20--
490,000
1,118,000
Cents per
Share
NZ $
15
45,000
5
25,000
Distributions
Final Dividend
Interim Dividend
Total Dividends Paid
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.
Statement of Cash Flows
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
670,000
Cash from dividends
14,000
684,000
Cash was applied to
Cash paid to suppliers
350,000
Cash paid for expenses
200,000
Cash paid for interest
12,000
Cash paid for taxation
25,000
Net cash inflow from operating activities
587,000
97,000
Cash flows from investing activities
Cash was provided from
Cash from sale of equipment
12,000
Cash from term deposit
30,000
42,000
Cash was applied to
Cash paid for equipment
60,000
Cash paid for buildings
100,000
Net cash outflow from investing activities
160,000
(118,000)
Cash flows from financing activities
Cash was provided from
Cash from share issue
150,000
Cash from debentures
100,000
250,000
Cash was applied to
Cash dividends
80,000
Cash paid for loan
25,000
Cash paid for share repurchase
40,000
145,000
Net cash inflow from financing activities
105,000
Net increase/ decrease in cash held
84,000
Add bank balance at beginning
12,000
Bank Balance at end
96,000
Operating Activities
Inflows:
-
Receipts from customer
Other Income
Outflows:
- Interest Paid
- Suppliers
- Wages
- Other Expenses
- Taxation
Investing Activities
Inflows:
- Sale of PPE
- Sale of Investment (Shares and Term Deposit)
Outflows:
- Purchase of PPE
- Purchase of Investment (Shares and Term Deposit)
Financing Activities
Inflows:
- Issue of Shares
- Loan
Outflows:
- Payment of Dividends
- Repayment of Loan
- Repurchase 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
1
2,500,000
Other Income
2
5,000
2,556,000
Cost of Goods Sold
1,600,000
Depreciation- Property, plant and equipment
71,000
Bad Debts
9,000
Loss on Sale of Delivery Vehicle
6,000
Other Expenses
533,000
Doubtful Debts
1,000
Less Finance Costs
3
45,000
Profit before tax
291,000
Income Tax Expense
75,000
Profit for the period
216,000
Other Comprehensive Income
Gain on Land Revaluation
80,000
Total Comprehensive Income
296,000
Notes to Statement of Comprehensive Income
NZ $
1. Revenue
Sales
2,500,000
2. Other income
Dividends Received
12,000
Increase in Fair Value of Financial Assets
10,000
Rent Received
26,000
Discount Received
8,000
3. Finance Costs
Interest on Mortgage
45,000
Statement of Financial Position
Notes
Current and Non-Current Assets
NZ $ 2013 NZ $ 2014
Bank
21,000
35,000
6,000
10,000
40,000
58,000
Inventory
64,000
85,000
Financial Assets
80,000
90,000
3,000
7,000
20,000
15,000
1,035,000
1,147,000
1,269,000
1,447,000
14,000
20,000
Accrued Expenses- Interest
3,000
8,000
Income in Advance- Rent Received
4,000
2,000
12,000
18,000
Mortgage
451,000
400,000
Total Liabilities
484,000
448,000
Net Assets
785,000
999,000
562,000
662,000
30,000
110,000
Retained Earnings
193,000
227,000
Total Equity
785,000
999,000
Prepayment- Other Expense
Accounts Receivable
4
Accrued Income- Dividends
Term Deposit
Property, Plant and Equipment
5
Total Assets
Current and Non-Current Liabilities
Accounts Payable
Taxation Payable
Equity
Contributed Equity
Land Revaluation Surplus
Notes and Additional Information
Notes
4. Accounts Receivable
Less Allowance for Doubtful Debts
NZ $ 2013 NZ $ 2014
42,000
61,000
2,000
3,000
40,000
58,000
5. Property, Plant and Equipment
Land Equipment
Delivery
Vehicles
Total
NZ $
NZ $
NZ $
NZ $
300,000
650,000
255,000
1,205,000
0
(130,000)
(40,000)
(170,000)
300,000
520,000
215,000
1,035,000
380,000
700,000
280,000
1,360,000
0
(143,000)
(70,000)
(213,000)
380,000
557,000
210,000
1,147,000
For the year ended 31 March 2013
Cost or Valuation
Accumulated Depreciation
Carrying Amount
As at 31 March 2014
Cost or Valuation
Accumulated Depreciation
Carrying Amount
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
1/4/2013
Balance
31/3/2014 Sales




Dr
Cr
Balance
42,000 Dr
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 incomedividends 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)
$7,000
Add opening accrued income (2013)
$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)
$4,000
Add opening income in advance (2013)
$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
1/4/2013
Balance
Dr



1,600,000 1,536,000 Cr
1,621,000
Particulars
1/4/2013
Balance
Dr

Cr
Balance
14,000 Cr
31/3/2014 Inventory

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


Balance
64,000 Dr
31/3/2014 Cost of Goods Sold
Accounts Payable
Cr
1,621,000 1,635,000 Cr
Discount Received
8,000
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 expenseinterest’ 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
Less closing accrued expense (2014)
$45,000
$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
Bank
69,000
87,000 Cr
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
2,472,000
Cash from dividends received
8,000
Cash from rent received
24,000
2,504,000
Cash was applied to
Cash paid to suppliers
1,607,000
Cash paid for other expenses
537,000
Cash paid for interest on mortgage
40,000
Cash paid for taxation
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
20,000
15,000
Assets
Term Deposit
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
-
Loss on sale
= cash from sale
$17,000
$6,000
$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
Total
NZ $
NZ $
NZ $
NZ $
300,000
650,000
255,000
1,205,000
0
(130,000)
(40,000)
(170,000)
300,000
520,000
215,000
1,035,000
380,000
700,000
280,000
1,360,000
0
(143,000)
(70,000)
(213,000)
380,000
557,000
210,000
1,147,000
As at 31 March 2013
Cost or Valuation
Accumulated Depreciation
Carrying Amount
As at 31 March 2014
Cost or Valuation
Accumulated Depreciation
Carrying Amount
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
1/4/2013
Balance
Dr
45,000
Bank

Balance
255,000 Dr
31/3/2014 Disposal (Cost)


Cr
70,000
210,000 Dr
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
5,000
Cash from sale of delivery vehicle
11,000
16,000
Cash was applied to
Cash paid for buildings
50,000
Cash paid for delivery vehicles
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


Balance
255,000 Dr
31/3/2014 Disposal (Cost)

Cr
45,000
210,000 Dr
Trade-in
11,000
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
50,000
Cash paid for delivery vehicles
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
451,000
400,000
Contributed Equity
562,000
662,000
Retained Earnings
193,000
227,000
Land Revaluation Surplus
30,000
110,000
Liabilities
Mortgage
Equity
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
1/4/2013
Balance
Dr
Cr
193,000 Cr
31/3/2014 Income Summary
Dividends



Balance
216,000
182,000
409,000 Cr
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
100,000
Cash was applied to
Cash paid for mortgage
51,000
Cash paid for dividends
182,000
Net cash outflow from financing
activities
233,000
(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
2,472,000
Cash from dividends received
8,000
Cash from rent received
24,000
2,504,000
Cash was applied to
Cash paid to suppliers
1,607,000
Cash paid for other expenses
537,000
Cash paid for interest on mortgage
40,000
Cash paid for taxation
69,000
2,253,000
Net cash inflow from operating
activities
251,000
Cash flows from investing activities
Cash was provided from
Cash from term deposit
5,000
Cash from sale of delivery vehicle
11,000
16,000
Cash was applied to
Cash paid for buildings
50,000
Cash paid for delivery vehicles
70,000
120,000
Net cash outflow from investing
activities
(104,000)
Cash flows from financing activities
Cash was provided from
Cash from share issue
100,000
Cash was applied to
Cash paid for mortgage
51,000
Cash paid for dividends
182,000
Net cash outflow from financing
activities
233,000
(133,000)
Net cash increase
14,000
Add bank balance at beginning
21,000
Bank balance at end
35,000
Share Repurchase
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
Contributed Equity
562,000
662,000
Retained Earnings
193,000
227,000
Land Revaluation Surplus
30,000
110,000
Equity
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
1/4/2013
Balance
31/3/2014 Bank
Dr

Balance
562,000 Cr
20,000
Bank


Cr
542,000 Cr
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
1/4/2013
Balance
Dr
Cr
Balance
193,000 Cr
31/3/2014 Income Summary




216,000
409,000 Cr
Bank
10,000
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
120,000
Cash was applied to
Cash paid for mortgage
51,000
Cash paid for share repurchase
30,000
Cash paid for dividends
172,000
Net cash outflow from financing
activities
253,000
(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.
Download
Related flashcards
Accounting

24 Cards

KPMG people

17 Cards

Create flashcards