FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

KEY ITEMS:
1. Objectives of financial statements and the assumptions
2. Characteristics of financial statements
3. Elements of financial statements and their measurement
4. Concept of capital maintenance

OBJECTIVES AND ASSUMPTIONS:

The main objective is to provide information on the performance and financial position of the
organization to the users of such information such as Managers, Owners of the business, a
prospective buyer, financial institutions, Inland Revenue, a prospective partner and creditors. To
meet these objectives, the accrual system of accounting is adopted and the assumption that the
business will continue to operate for the foreseeable future (going concern concept)

Users of Accounting Information:

Managers: They are the day-to-day decision makers. They need to know how well things are
progressing financially and about the financial status of the business
Owners of the Business: Owners are anxious to see whether the business is profitable. They are
also keen to know the financial resources available.
A Prospective Buyer: A potential buyer will be interested in the accounting information to make
an informed decision to buy the business or not.
Financial Institutions: If the owner approaches a bank, for example, to borrow funds, the bank
will use the accounting information to make a decision on lending.
Inland Revenue: The tax department will need the information to calculate the tax.
A prospective partner: If the owner decides to admit another person as his/her business partner,
the incoming person will need the accounting information to make a decision on investment
Creditors: They would like to know whether they will be paid on time.

Accrual System of Accounting:

Under the accrual system of accounting, revenues and expenses are recorded when they are
earned, regardless of when the money was actually received or paid. The merit of this method is
that it gives a more realistic picture of income and expenses during a given period of time, thus
provides a long-term picture of the business. However, one should be mindful of the fact that
accrual system will not provide any reflection on the cash flow of the business. It is possible that
the business is making huge profits, while in reality the business bank account is overdrawn. This
calls for careful monitoring of cash flow of the business to avoid any distressing consequences.

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The going concern concept
This assumes that the business will continue in operational existence for the foreseeable future.
This means that all the accounts and statements should be prepared on the assumption that the
enterprise has neither the intention nor necessity to liquidate or curtail significantly the scale of
operation.

CHARACTERISTICS OF FINANCIAL STATEMENTS

1. Effective Presentation: The information is readily understandable to users of financial

statements. This is achieved by presenting the financial statements in a simple and lucid
way. Information should be clearly presented and with supporting notes to provide
clarity.
2. True Financial Position: The information contained in the financial statements should be
complete, true and correct, fully transparent, free from of material error and bias. It
should not be misleading and should faithfully represent events and transactions,
underline substance of events and prudently represent estimates and uncertainties
through proper disclosure.
3. Relevance: The information should be relevant to the objectives of the organization and
to the needs of the users. This becomes possible when the person preparing the financial
statements succeeds in properly using the accounting information in its preparation. The
concept of materiality should be fully observed in the preparation of financial statements.
Also, irrelevant information should be avoided. The financial statements should be
prepared and presented at the earliest possible time so that its relevance is not lost.
4. Comparability: The accounting information should be comparable with information of
previous accounting periods so that the users can appreciate the trend in the financial
performance and financial position of the organization. It can also then compared with
figures of other organization in the same industry. Financial statements must show
corresponding figures for the preceding period.

ELEMENTS OF FINANCIAL STATEMENTS & MEASUREMENT

The elements of financial statements are the general grouping of line items in the financial
statements and they include Assets, Liabilities, Equity, Revenue and expenses. The balance sheet
of the organization deals with assets, liabilities and equity and revenues and expenses are
included in the income statement. Changes in these elements are captured in the cash flow
statement. Measurement of elements is done through a Statement of Comprehensive Income
showing companys revenue and expenses for a particular period; a statement of financial
position indicating the organizations assets, liabilities and owners equity at a given point in time,
a statement of changes in Equity showing changes in equity of the company during a given period
and a statement of cash flow that show changes in these elements during a given period.

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CONCEPT OF CAPITAL MAINTENANCE

The concept of capital maintenance is based on the principle that income of an organization is
recognized only after its capital has been maintained and that there has been full recovery of
costs. This means that capital maintenance is reached if the capital of the business at the end of
the period is unchanged from at the beginning of the period; the excess amount is then treated
as profit. The concept of Capital Maintenance comprises:

Financial Capital Maintenance: This means that profits are earned only if the amount of net
assets at the end of the period exceeds the amount at the beginning of the period, excluding any
inflows from or outflows to owners, such as contributions and distributions.

Physical Capital Maintenance: Physical capital maintenance is not concerned with the cost
related with the actual maintenance required on tangible items, such as furniture and machinery.
Instead, it emphasizes on a business's ability to sustain cash flows into the future by maintaining
access to income-generating assets in use within the business's infrastructure. This, therefore,
implies that a profit is earned only if the organizations productive or operating capacity at the
end of a period exceeds the capacity at the beginning of the period, excluding any owners'
contributions or distributions.

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 INCOME STATEMENT &STATEMENT OF FINANCIAL POSITION OF A LIMITED LIABILTY
COMPANY (FOR INTERNAL USE)
XYZ Ltd
Income statement for the year ended 30 June 2017
Revenue (sales less returns) ****
Less Cost of sales:
Inventory : 1 July 2016 **
Add purchases less returns **
Cost of goods available for sale ***
Less Inventory: 30 June 2017 (**)
Cost of sales (**)
Gross Profit **
Distribution costs:
Salaries and wages **
Rent and rates **
General Distribution expenses **
Motor Expenses **
Depreciation : Motors & Equipment ** **
Administrative Costs:
Salaries and wages **
Rent and rates **
General administrative expenses **
Motor expenses **
Auditors remuneration **
Discounts allowed **
Bad debts **
Depreciation : Motors & Equipment ** **
(***)
***
Other operating income **
Operating Profit ***
Finance Income: Interest on deposits ** **
**
Finance costs : Interest payable on Loans ** (**)
Profit before taxation ***
Taxation (**)
Profit for the year ***
Retained profits brought forward from last year **
***
Transfer to general reserve **
Dividend paid **
(**)
Retained profits carried forward to next year ***

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 Statement of Financial Position as at 30 June 2017
Non-Current Assets (Intangible and Tangible assets) Cost Acc.Dep NBV
Goodwill ** ** **
Buildings ** ** **
Equipment ** ** **
Motor Vehicles ** ** **
Total non-current assets ***
Investments **
Current Assets
Inventory **
Accounts receivable **
Bank ** ***
Total Assets ****
Current Liabilities:
Accounts Payable **
Accruals **
Taxation **
***
Non-Current Liabilities:
5% Debentures **
Total Liabilities (**)
Net Assets ***

Equity: Share Capital Authorized Issued

Preference Shares *** ***
Ordinary Shares *** ***
*** ***
Reserves
Share Premium **
Capital Redemption Reserve **
General Reserve **
Retained profits ** ***
Total Equity ***

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Question 1:
Following Balances were extracted from the books of JJ Ltd as at 30 June 2017.
Purchases 200 000
Revenue 450 000
Returns Inwards 20 000
Returns Outwards 15 000
Carriage Inwards 5 000
Retained Profits as at 30 June 2016 100 000
Inventory as at 1 July 2016 25 000
Wages and salaries (Note 1) 65 000
Rent and rates (Note 2) 40 000
General distribution expenses 14 000
General administrative expenses 20 000
Discount allowed 8 000
Bad debts 5 000
Debenture Interest 6 000
Motor Expenses (Note 3) 18 000
Interest received from bank deposits 14 000
Motor Vehicles at cost: Administrative 50 000
Motor Vehicles at cost: Distribution 90 000
Equipment at cost: Administrative 20 000
Equipment at cost : Distribution 10 000
Divided paid 25 000
Notes:
1. Wages and salaries are to be apportioned as: Distribution costs 25%; Administrate
expenses 75%.
2. Rent and rates are to be apportioned: Distribution costs 55%; Administrative expenses
45%
3. Motor expenses are to be apportioned: Distribution costs and Administrative expenses
2:3
4. Inventory as at 30th June 2017: P 30 000
5. Depreciate motor vehicle 20% and equipment 10% on cost
6. Accrued auditors remuneration P10 000
7. Accrued tax for the year was P15 000
8. A sum of P10 000 to be transferred to general reserve

Prepare Income statement for the year ended 30 June 2017 for internal use