Chapter 21
Manufacturing
Accounts
MANUFACTURING ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20X8
$
Raw materials
Opening inventory
Purchases
Less closing inventory
$
X
X
X
(X)
X
Factory wages
Prime cost
X
X
Indirect factory expenses
Salaries
Depreciation on plant and machinery
Power
Heating and lighting
Indirect materials
Insurance
Factory cost of production
Work-in-progress
Opening balance
Closing balance
Factory cost of finished goods produced
Slide 2
notes reference - page 229
X
X
X
X
X
X
X
X
X
(X)
X/(X)
X
TRADING ACCOUNT
£
Sales
X
Opening inventory of finished goods
Factory cost of finished goods transferred
Closing inventory of finished goods
X
X
X
(X)
X
X
Gross profit
Slide 3
£
notes reference - page 229
Costs of production
Direct costs
Indirect costs
Variable
Slide 4
Fixed
Vary with no. of
goods produced
& hours worked
Not related to
production of
a unit
e.g. raw materials
& labour
e.g. rates
notes reference - page 230
Costs of production
Total direct costs
Prime cost
Slide 5
Total direct
+ indirect costs
Factory cost
of production
notes reference - page 230
Factory cost of
production +/change in WIP
Factory cost of
finished goods
produced
Lecture example 1
Manufacturing account for the year ended 31 December 20X1
Raw materials
Opening inventory
7,630
Purchases
18,920
26,550
(7,890)
Less closing inventory
18,660
Factory wages
20,860
39,520
Prime cost
Indirect factory expenses
Electricity (4,620 x ½)
2,310
Rent & rates (5,000 x ½)
2,500
Supervisor’s salary
8,200
Depreciation (plant & machinery)
4,700
17,710
Factory cost of production
57,230
Opening work in progress
4,920
Closing work in progress
(4,540)
380
Factory cost of finished goods produced
57,610
Slide 6
notes reference - page 232
Lecture example 1
Income Statement for the year ended 31 December 20X1
Sales
Less cost of sales
181,820
Opening inventory of finished goods
Factory cost of finished goods produced
Less closing inventory of finished goods
Gross profit
Selling & distribution costs
Electricity (4,620 x ¼)
Rent & rates (5,000 x ¼)
Depreciation (delivery vans)
Sales commissions
Salesmen’s salaries
6,780
57,610
64,390
(5,430)
58,960
122,860
1,155
1,250
1,600
13,680
20,000
(37,685)
Slide 7
notes reference - page 233
Lecture example 1
Administration expenses
Electricity (4,620 x ¼)
Rent & rates (5,000 x ¼)
Salaries (41,630 – 8,200)
Depreciation (fixtures & fittings)
1,155
1,250
33,430
1,420
(37,255)
Net Profit
Slide 8
47,920
notes reference - page 234
Chapter 22
Interpretation of accounts
Categories
Profitability
Liquidity
Investors’
ratios
Gearing
Slide 10
notes reference - page 239
Profitability
ROCE
Profits earned in relation to
capital employed
NPM/GPM
Relationship
between costs and
revenue
Asset turnover
Profitability
Return on equity
Return to ordinary shareholders
Slide 11
notes reference - page 241
Revenue
generated by assets
employed
Lecture example 1 Profitability
20X9
20X8
Return on capital employed
(ROCE)
Profit from operations % 790 = 29% 462 = 25%
3655-965
TALCL
1,801
Possible reason:
New non-current assets may have
improved efficiency
Slide 12
notes reference - page 241
Lecture example 1 Profitability
20X9
Return on equity
(ROE)
PAT – preference div
OSC + reserves
20X8
478 = 21.8% 266 = 19%
2,190
1,401
Possible reason:
Good use of extra capital raised
Slide 13
notes reference - page 241
Lecture example 1 Profitability
20X9
20X8
Asset turnover
Revenue
TALCL
7,180
= 2.7
2,690
5,435 = 3.02
1,801
Possible reason:
New non-current assets bought
in year have not had time to
create the same rate of revenue
Slide 14
notes reference - page 241
Lecture example 1 Profitability
20X9
20X8
Net profit margin
Profit from operations %
Revenue
790
= 11% 462 = 8.5%
7,180
5,435
Possible reasons:
Higher selling prices
Better cost control
Slide 15
notes reference - page 241
Lecture example 1 Profitability
20X9
20X8
Gross profit margin
1,795
= 25%
7,180
Gross profit %
Revenue
1,223 = 22.5%
5,435
Possible reasons:
Higher selling prices
Better cost/production control
Slide 16
notes reference - page 241
Liquidity
Current ratio
Quick ratio
Ability to meet short
term commitments
Stricter test of
liquidity
Average payment
period
Credit period taken
by the business
Inventory days
Liquidity
Average collection period
Credit period taken by customers
Slide 17
notes reference - page 241
Average period that
Inventories are held
Lecture example 1 Liquidity
1
20X9
20X8
2,314
= 2.4
965
1,679 = 2.4
704
Current ratio
CA
CL
Comment
A healthy unchanged ratio.
Depends on the industry so comparisons
are necessary.
Slide 18
notes reference - page 241
Lecture example 1 Liquidity
20X9
2
20X8
Quick ratio
CA - inventories
CL
1,308 = 1.4
965
808 = 1.1
704
Comment
The company’s acid ratio has
improved due to an increase in
receivables and cash, not inventories
Slide 19
notes reference - page 241
Lecture example 1 Liquidity
20X9
20X8
3 Inventory Days
Inventories x 365 days 1,006 = 68 days 871 = 75 days
5,385
4,212
Cost of sales
Comment
The company holds inventories for
less time. May be a reason for the
improved margins.
Note - Inventory turnover
Cost of sales
Inventories
Slide 20
5,385
= 5.35
1,006
notes reference - page 241
4,212 = 4.84
871
Lecture example 1 Liquidity
20X9
20X8
4 Receivables days
Trade receivables x 365 days 948 = 48 days 708 = 47 days
Credit turnover
7,180
5,435
Comment
No significant change.
Slide 21
notes reference - page 241
Lecture example 1 Liquidity
20X9
20X8
5 Payables days
Trade payables x 365 days 653 = 44 days
5,385
Credit purchases
516 = 45 days
4,212
Comment
No significant change.
However, payables days less than
receivables days which could cause
cash flow problems in the future.
Slide 22
notes reference - page 241
Operating cycle
Receivables
Days
Inventory Days
Payables
Days
Operating cycle
Cash out
Slide 23
notes reference - page 241
Cash in
Gearing
Gearing
Debt/Equity
Shows how the company is financed
Shows risk of shareholders not receiving dividend
Slide 24
notes reference - page 242
Lecture example 1 Gearing
20X9
20X8
1 Gearing ratio
Interest bearing debt
Capital, reserves & debt
500
= 18.6% 400 = 22.2%
1,401+400
2,190+500
Comment
Gearing has decreased due to the
issue of shares.
Slide 25
notes reference - page 242
Limitations of ratios
• Lack of comparability of accounting policies.
• Non trading income included in some ratios
• Useless in isolation
• Cannot compare across industries
• Can be manipulated
Slide 26
notes reference - page 242
Chapter 23
IAS 7: Cash Flow Statements
XYZ Co – Cash Flow statement (Indirect method)
$000
Cash flows from operating activities
Net profit before taxation
Adjustment for:
Depreciation
Investment income
Interest expense
Operating profit before working capital changes
Increase in trade and other receivables
Decrease in inventories
Decrease in trade payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
Slide 28
notes reference - page 248
$000
3,570
450
(500)
400
3,920
(500)
1,050
(1,740)
2,730
(270)
(900)
1,560
XYZ Co – Cash Flow statement (Indirect method)
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from sale of equipment
Interest received
Dividends received
(900)
20
200
200
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Dividends paid
(480)
250
250
(1,290)
Net cash used in financing activities
(790)
Net increase in cash and cash equivalents
290
Cash and cash equivalents at beginning of period (Note)
Cash and cash equivalents at end of period (Note)
120
410
Slide 29
notes reference - page 248
Cash flows from operating activities
• Cash flows derived from operating or trading
activities
• Can use:
– Direct method
– Indirect method (more common in exams)
Slide 30
notes reference - page 249
Lecture example 1
Income Tax payable
Tax paid
116
bal b/d
168
bal c/d
156
IS
104
272
Slide 31
notes reference - page 249
272
Lecture example 2
Plant and equipment
b/d
200 Disposal 20
Accumulated depreciation
Disposal 9 b/d
80
Addition 100
Charge
c/d
300
Slide 32
280
300
c/d
notes reference - page 250
111
120
40
120
Lecture example 3 Dividends paid
Dividends payable
b/d
R Earnings
Slide 33
Cash
50
c/d
45
95
notes reference - page 252
35
60
95
Lecture example 4
$000 $000
Cash flows from operating activities
Net profit before taxation
Adjustments for:
Depreciation
Interest expense
Operating profit before working capital changes
Increase in trade receivables (168 – 147)
Increase in inventories (214 – 210)
Increase in trade payables (136 – 21)
Cash generated from operations
Interest paid
Income taxes paid (W1)
Slide 34
notes reference - page 253
87
42
8
137
(21)
(4)
15
127
(8)
Lecture example 4 (cont’d) Working 1
Income tax payable
b/d
Slide 35
Cash
20
c/d
39
59
I/S
notes reference - page 253
28
31
59
Lecture example 4 (cont’d)
$000 $000
Cash flows from operating activities
Net profit before taxation
Adjustments for:
Depreciation
Interest expense
Operating profit before working capital changes
Increase in trade receivables (168 – 147)
Increase in inventories (214 – 210)
Increase in trade payables (136 – 21)
Cash generated from operations
Interest paid
Income taxes paid (W1)
Net cash from operating activities
Slide 36
notes reference - page 254
87
42
8
137
(21)
(4)
15
127
(8)
(20)
99
Lecture example 4 (cont’d) Working 2
Dividends payable
b/d
Slide 37
Cash
22
c/d
18
40
R Earnings
notes reference - page 254
16
24
40
Lecture example 4 (cont’d) Working 3
Property, plant and equipment (NBV)
b/d
514
Revaluation
10
Depreciation
Cash additions 146 c/d
670
Slide 38
notes reference - page 254
42
628
670
Lecture example 4 (cont’d)
$000 $000
Cash flows from investing activities
Purchase of property, plant and equipment (W3)
Net cash used in investing activities
(146)
(146)
Cash flows from financing activities
Proceeds from issuance of share capital (320 – 260) 60
Proceeds from issuance of debentures (80 – 50)
30
Dividends paid (W2)
(22)
Net cash from financing activities
68
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
21
(14)
7
Slide 39
notes reference - page 254
Note to the cash flow statement
Cash and cash equivalents
Cash on hand
Bank overdraft
Cash and cash equivalents
Slide 40
31.12.X8
$’000
7
7
notes reference - page 254
31.12.X7
$’000
(14)
(14)
Lecture example 5
Angus Ltd
Cash flow statement for the year ended 31 December 20X0
$
Operating activities
Cash received from customers (54,000 – 6,700)
47,300
Cash paid to suppliers (31,000 – 2,500)
(28,500)
Cash paid to & on behalf of employees
(15,000)
Interest paid (11/12 x 4,800)
(4,400)
Net cash inflow from operating activities
Cash flow from investing activities
Payments to acquire tangible fixed assets
Cash flow from financing activities
Proceeds from long-term loan
Issue of ordinary shares
Repayment of loan
$
(600)
(40,000)
60,000
50,000
(6,000)
104,000
Increase in cash balances
Slide 41
63,400
notes reference - page 256
Lecture example 5 part (b)
This cash flow statement has been prepared using the
direct method
Slide 42
notes reference - page 256
Chapter 24
Income and Expenditure
Accounts
Sources of income
• Main source of income = subscriptions
• Subscriptions received and receivable must
be recorded in the correct period
• Subscriptions income in I&E account
= Number of members x membership fees
Slide 44
notes reference - page 263
Lecture example 1
Subscriptions account
Opening
(5 x $100)
receivables
(subs in arrears b/d)
I & E a/c (subs income)
500
4,700
Closing
(10 x $200) 2,000
receivables
(subs in advance c/d)
Opening
(2 x $200)
payables
(subs in advance b/d)
Cash
Closing payables (4 x $200)
(subs in arrears c/d)
7,200
Slide 45
notes reference - page 263
400
6,000
800
7,200
Income and expenditure account for the year ended ......
INCOME
$
Subscriptions
Life memberships
*Trading activity profit
Bank interest received
*Surplus on club event
*Profit on sale of fixed asset
$
X
X
X
X
X
X
X
EXPENDITURE
Rent
Rates
Electricity
Depreciation
*Loss on trading activity
*Loss on club event
*Loss on sale of fixed asset
X
X
X
X
X
X
X
(X)
Surplus/(Deficit) of income over expenditure
Slide 46
*=Alternatives
notes reference - page 265
X/(X)
Balance sheet as at
NON-CURRENT ASSETS
Fixtures and fittings
Cost
Accumulated
Net book
depreciation
value
$
$
$
X
X
X
Investments
X
X
CURRENT ASSETS
Inventory
Trade receivables
Subscriptions in arrears
Prepayments
Cash at bank
X
X
X
X
X
X
CURRENT LIABILITIES
Trade payables
Subscriptions in advance
Accruals
X
X
X
X
Net current assets
Slide 47
X
notes reference - page 265
X
Proforma
FUNDS
Accumulated fund:
Opening balance
X
Profit/(loss) on sale of investments
X/(X)
Surplus/(deficit) of income over
expenditure for the year
X/(X)
X
Life membership fund
X
X
Slide 48
notes reference - page 265
Life membership subscription
On receipt of the money
Dr Cash
Cr Life membership fund
Two methods of accounting
for life membership sub
T/f to Acc Fund on death of member
Dr Life membership fund
Cr Accumulated fund
Slide 49
Release to I&E a/c over life of member
Dr Life membership fund
Cr I&E account
notes reference - page 266
Bar profits & social events
$
Income
Contribution
Net income from bar trading
Income from socials: receipts
less expenses
$
X
X
X
(X)
X
X
X
Miscellaneous income
Expenses
Ground rent
Rates
Water etc
X
X
X
(X)
X
Slide 50
notes reference - page 267
Disposal of fixed assets
Non current asset
disposal
Slide 51
Asset had been
depreciated
Asset had not been
depreciated
T/f profit/loss
to I&E a/c
T/f profit/loss
to acc fund
notes reference - page 267
Investments & special funds
Investment income recorded in I&E a/c
Profit/loss on sale of investment goes to acc fund
Special fund e.g. to raise money for new boat house
Dr Special fund cash
Cr Special fund account
Slide 52
notes reference - page 267
End of day 6 - what to do now…
• Reinforce today’s learning
• Develop question skills
Course Companion
1.Course
notes review
Slide 53
2. Question
practice
3. Study text
review