Financial Reporting Unit Revision Guide for Southern's
Accountants
This revision guide encompasses key elements of financial
reporting such as asset management, depreciation, control accounts,
reconciliation, financial statement preparation, financial ratios, and cash
flow analysis.
1. Explain the assets in a business organization.
Assets are essential elements in a firm that have inherent worth and
enhance its financial health. They are usually categorized as tangible or
intangible assets and are essential for the company's operations and
financial reporting. Here is an overview of assets in a company
organization:
1. Physical assets:
Physical assets are tangible assets including buildings, land, machinery,
cars, and inventory. Physical assets are utilized directly in the
manufacturing or delivery of goods and services.
Depreciation refers to the decrease in value of tangible assets such as
machinery and buildings due to wear and tear over time. Depreciation is
the accounting term used to represent the decrease in value of an asset,
and it is recorded as an expense on the income statement.
2. Intangible Assets:
Intellectual property refers to intangible assets like patents, trademarks,
copyrights, and trade secrets. Intellectual property assets frequently
enhance a company's competitive edge and have the potential to provide
consistent income.
Goodwill is the intangible worth derived from characteristics such as a
robust brand reputation, customer relationships, or a devoted consumer
base. It usually happens during mergers and acquisitions when a
business buys another company at a price higher than its net tangible
assets.
Businesses often depend on intangible assets such as software, licenses,
and technology platforms to operate effectively and stay competitive.
3. Assets at present:
These are assets anticipated to be converted into cash or utilized within
one year or one operational cycle, whichever is greater. Typical current
assets consist of cash, accounts receivable, inventories, and short-term
investments.
Current assets are crucial for ensuring liquidity and meeting short-term
financial obligations, such as bill payments, payroll, and supplier
expenses.
4. Non-Current Assets (Long-Term Assets):
Non-current assets are assets that are anticipated to provide value for a
period exceeding one year. Examples consist of enduring investments,
real estate, machinery, equipment, and intangible assets such as patents.
These assets are essential for the sustained functioning of a corporation
and typically involve significant financial expenditure.
5. Management of assets:
Efficient asset management is crucial for a company's financial well-
being. Asset management include the processes of acquiring,
maintaining, and disposing of assets to maximize their value and benefit
to the company.
Asset management strategies focus on optimizing the efficient use,
adequate maintenance, and timely replacement or upgrading of assets.
6. Valuation of assets:
Precise assessment of assets is essential for financial reporting and
decision-making. Businesses utilize different approaches, including cost-
based valuation, market-based valuation, and income-based valuation,
to evaluate the worth of their assets.
7. Statement of financial position:
Assets are essential elements of a company's balance sheet, offering a
snapshot of its financial status at a specific moment. Assets are
presented on the left side of the balance sheet, with liabilities and equity
on the right side. The balance sheet equation asserts that assets are
equivalent to the sum of liabilities and equity.
Example: Southern's Accountants Asset List
Cash in Bank: $50,000 (Current Asset)
Accounts Receivable: $20,000 (Current Asset)
Inventory: $30,000 (Current Asset)
Property, Plant & Equipment (PPE): $300,000 (Non-Current Asset)
Investments: $100,000 (Non-Current Asset)
2. Implement depreciation on the assets of a business
organization.
Depreciation is an accounting technique that spreads out the cost of
physical assets over their expected lifespan. This allocation procedure
acknowledges that assets depreciate over time owing to variables like as
wear and tear, obsolescence, and other reasons. Depreciation is crucial
for financial reporting and tax compliance. Let's calculate depreciation
for a business organization's assets with a hypothetical example.
Situation:
ABC Manufacturing Company has obtained a piece of machinery for its
production line. The machinery is priced at $100,000, with an anticipated
usable life of 5 years, and the company projects a salvage value of $10,000
after the 5-year period.
- Depreciation Calculation:
ABC Manufacturing has the option to utilize various techniques for
computing depreciation. This example will demonstrate the usage of the
straight-line depreciation approach, known for its simplicity.
- Linear depreciation:
The formula for straight-line depreciation is: Depreciation Expense
equals the Cost of Asset divided by the Salvage Value Useful Life.
Asset cost: $100,000
Residual Value: $10,000
Lifespan: 5 years
Now, let's determine the yearly depreciation cost.
The Depreciation Expense is calculated as follows: (100,000 - 10,000)/5 =
90,000/5 = $18,000 per year
Annual Depreciation Schedule:
Year 1: Depreciation Expense is $18,000
Depreciation accumulated in Year 1 amounts to $18,000.
The book value at the conclusion of Year 1 is $82,000, calculated as
$100,000 minus $18,000.
Year 2 Depreciation Expense is $18,000.
The Accumulated Depreciation for Year 2 is $36,000, calculated by adding
$18,000 to the previous year's total of $18,000.
The book value at the end of Year 2 is $64,000.
Year 3 Depreciation Expense is $18,000.
The Accumulated Depreciation for Year 3 is calculated as the sum of
$36,000 and $18,000, resulting in $54,000.
The book value at the conclusion of Year 3 is calculated as $100,000 -
$54,000, which is $46,000.
Year 4 Depreciation Expense is $18,000.
The Accumulated Depreciation for Year 4 is calculated as $54,000 plus
$18,000, which is $72,000.
The book value at the conclusion of Year 4 is $28,000, calculated as
$100,000 minus $72,000.
Year 5: Depreciation Expense is $18,000
The Accumulated Depreciation for Year 5 is $90,000, calculated by adding
$72,000 and $18,000.
The book value at the end of Year 5 is $10,000, calculated as $100,000
minus $90,000.
After Year 5, the machinery's book value had depreciated to its
estimated salvage value of $10,000. It indicates that the asset has been
completely depreciated and its value will no longer decrease in the
financial accounts.
The depreciation expense is documented in the income statement
and accrues in the balance sheet inside an accumulated depreciation
account. Depreciation enables the corporation to allocate the cost of the
asset throughout its useful life, giving a more precise representation of
the asset's actual value on the balance sheet. It aids in calculating the
tax-deductible expenses associated with the asset, hence lowering the
company's tax burden.
3. Create a business organization's asset register.
An asset register is a detailed document that lists all the assets
possessed by a company, providing information such as asset name,
description, acquisition date, cost, and cumulative depreciation.
Example: Glov Couriers’ Asset Register
Current
Deprecia Useful Deprecia Book
Asset Asset License Acquisiti Cost tion Life tion Value
Type Category Plate on Date (USD) Method (Years) (USD) (USD)
Delivery 01/10/20 Double
Vehicles DV001 25,000 5 14,000 11,000
Van 1 20 Declining
Delivery 03/15/20 Double
Vehicles DV002 30,000 5 10,000 20,000
Van 2 21 Declining
Motorcyc 06/05/20 Double
Vehicles MC001 5,000 3 4,000 1,000
le 1 19 Declining
Motorcyc 08/20/20 Double
Vehicles MC002 6,000 3 3,500 2,500
le 2 20 Declining
Handhel
Equipme 12/01/20 Straight-
d HH001 2,500 4 1,000 1,500
nt 21 Line
Devices
Equipme GPS 02/15/20 Straight-
GPS001 1,500 5 900 600
nt Systems 18 Line
Current Inventory N/A Various N/A N/A N/A N/A 8,000
Cash in
Current N/A Various N/A N/A N/A N/A 15,000
Bank
4. Describe the objectives and roles of control accounts.
Control accounts, or general ledger control accounts, are essential
in accounting and financial management. They fulfill distinct roles and
tasks that are essential for preserving precise and structured financial
documentation within a corporation. Here is an elucidation of the
objectives and operations of control accounts:
Control Accounts' Objective:
Control accounts serve as a protective measure to detect and prevent
problems inside the accounting system. By comparing the balances of
subsidiary ledgers with those of control accounts, any discrepancies or
inconsistencies can be swiftly recognized and addressed.
Efficiency and organization facilitate the recording and tracking of
transactions, particularly in firms with a large number of comparable
transactions. Control accounts aid in organizing and reducing clutter in
the general ledger.
Control accounts aid in segregating roles in the accounting department.
Various personnel can handle subsidiary ledgers, while a distinct
individual or team supervises the control accounts to minimize the
potential for fraudulent acts.
Control accounts offer a brief overview of particular account categories,
facilitating management's supervision and examination of financial
information. This streamlines decision-making and financial planning.
Control accounts are important resources for external auditors to ensure
the precision and entirety of financial statements during auditing and
financial reporting. They act as a benchmark for audit procedures and
validate the accuracy of the accounts.
Control Accounts Functions:
Summary: Control accounts consolidate the balances of associated
subsidiary ledgers or individual accounts. The accounts receivable
control account consolidates the balances of all customer accounts in the
accounts receivable subsidiary ledger.
Reconciliation involves using control accounts to align the balances of
subsidiary ledgers with those of the general ledger. Discrepancies
between the control account balance and the total of the subsidiary
ledger accounts can be detected and addressed.
Cross-verification involves confirming that the total of the control
account matches the total of the corresponding subsidiary ledger to
ensure data accuracy. This internal check guarantees the precision of
recorded transactions.
Control accounts streamline financial reporting by consolidating a set of
connected accounts into a single balance. This is particularly beneficial
for conveying financial data to stakeholders, including shareholders or
regulators.
Monitoring Transactions: Control accounts aid in overseeing and
documenting different kinds of transactions. The accounts payable
control account can monitor the outstanding balances owing to different
suppliers and the schedule of payments.
Support for Aging Schedules: Control accounts serve as the foundation
for establishing aging schedules, which categorize outstanding balances
based on age for managing accounts receivable or payable.
Control account balances are commonly utilized in financial analysis to
assist firms in making well-informed decisions on cash flow, credit
policies, and resource allocation.
5. Prepare Control Accounts for Sample Data:
Control accounts, or general ledger control accounts, summarize
and reconcile the balances of associated subsidiary accounts. Prepare
control accounts for a fictitious corporation named XYZ Corporation
using the provided data in this example.
XYZ Corporation Control Accounts
1. Accounts Receivable Control Account:
Account Description Debit (USD) Credit (USD)
Initial Balance 10,000
Aquisitions 25,000
Transactions 12,000
Ending Balance 23,000
2. Accounts Payable Control Account:
Account Description Debit (USD) Credit (USD)
Initial Balance 7,00
Aquisitions 15,000
Transactions 8,000
Ending Balance 7,000
3. Inventory Control Account:
Account Description Debit (USD) Credit (USD)
Initial Balance 10,000
Aquisitions 15,000
Transactions 12,000
Ending Balance 13,000
4. Cash Control Account:
Account Description Debit (USD) Credit (USD)
Initial Balance 5,000
Aquisitions 9,000
Transactions 7,000
Ending Balance 7,000
Control accounts offer a condensed overview of the corresponding
subsidiary ledger accounts and are utilized for reconciliation and
monitoring. The closing balances act as the initial balances for the
following accounting period.
6. Prepare reconciliation statements for control accounts together
with schedules of trade payables and trade receivables:
Reconciliation statements are utilized to verify that the balances in
the general ledger control accounts align with the relevant subsidiary
ledger balances for trade payables and trade receivables.
1. Reconciliation Statement for Accounts Receivable Control
Account:
Opening Balance as per General Ledger: $10,000
Add: Sales on credit during the period: $25,000
Less: Receipts from customers: ($12,000)
Closing Balance as per General Ledger: $23,000
Schedule of Trade Receivables:
Customer A: $8,000
Customer B: $10,000
Customer C: $5,000
Total Trade Receivables: $23,000
Reconciliation:
General Ledger Balance: $23,000
Schedule of Trade Receivables: $23,000
The Accounts Receivable Control Account is compared with the Schedule
of Trade Receivables, and they both indicate a balance of $23,000.
2. Accounts Payable Control Account Reconciliation Statement:
Initial Balance as per General Ledger: $7,000
Add: Purchases on credit during the period: $15,000
Less: Payments to suppliers: ($8,000)
Ending Balance as per General Ledger: $7,000
Schedule of Trade Payables:
Supplier X: $4,000
Supplier Y: $5,000
Supplier Z: $8,000
Total Trade Payables: $17,000
Reconciliation:
General Ledger Balance: $7,000
Schedule of Trade Payables: $17,000
Discrepancy: $10,000 (Overstated)
Explanation:
The General Ledger Control Account balance is $10,000 lower than
the Schedule of Trade Payables. The difference indicates that the control
account is inflated by $10,000. Additional inquiry is necessary to address
this inconsistency.
The initial reconciliation statement for the Accounts Receivable
Control Account shows that the general ledger balance aligns with the
Schedule of Trade Receivables, confirming their agreement.
The second reconciliation statement for the Accounts Payable
Control Account reveals a $10,000 mismatch, indicating that the control
account is overstated. Additional investigation is required to rectify this
problem and confirm that the control account balance matches the
subsidiary ledger balances.
7. Generate Financial Statements for a Single Entity:
Financial statements consist of the income statement, balance
sheet, and cash flow statement. They offer a summary of the company's
financial performance and status.
Example: Southern's Accountants Financial Statements derived from the
Trial Balance
Income Statement for the year ending December 31, 2022
| Revenue | $300,000 |
| Expenses | $150,000 |
| Net Income (Profit) | $150,000 |
Balance Sheet at December 31, 2022
Properties Liabilities & Equity
Cash: $50,000 Accounts Payable: $20,000
Personal Protective
Equity: $280,000
Equipment: $250,000
Total Assets: $300,000 Total Liabilities & Equity: $300,000
8. Compile financial statements using incomplete records:
Financial statements can be generated in the presence of
incomplete records by accounting methods like single-entry
bookkeeping or account reconstruction.
Ex: Southern's Accountants Financial Statements from Incomplete
Records
Southern's Accountants presented the following information:
Cash received: $100,000
Cash expenditures: $40,000
Projected profit margin: 25%
Income Statement
| Revenue (Cash Received) | $100,000 |
| Expenditures (Cash expenditures) | $40,000 |
| Net Income (Profit) | $60,000 |
Statement of financial position
Properties Liabilities & Equity
Cash: $60,000 Capital: $240,000
Total Assets: $60,000 Total Liabilities & Equity: $240,000
References:
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Education.
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5. IASB (International Accounting Standards Board). (2021).
"International Financial Reporting Standards (IFRS) - Official
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