CHAPTER 5 PREPARATION OF FINANCIAL STATEMENTS IFRS Principles

CHAPTER 5 PREPARATION OF FINANCIAL STATEMENTS IFRS Principles of Accounting with Key Words in Korean Soon Suk Yoon • Hyo Jin Kim Power. Point Presentation by: Soon Suk Yoon, Professor, Chonnam National University Hyo Jin Kim, Assistant Professor, Jeonju University 2011

Objective 1 Describe a worksheet for a service-oriented business

WORKSHEET A key means of avoiding errors is the preparation of an informal schedule called a worksheet (정산표) at the end of the reporting period. The worksheet is not a permanent accounting record but rather is used to put the detailed accounting data in one place, and hence to save time and effort in correcting errors.

The columns of a typical worksheet appear 1. 2. 3. 4. in the following order: Trial Balance, Adjustments, Income Statement, and Balance Sheet.

Example 5 -1 Adjusting Entries for a Service Company The trial balance and additional information for adjusting entries for Jiffy Service Corporation are as follows: Jiffy Service Corporation Trial Balance December 31, 20× 4 Cash $6, 000 Accounts Receivable 12, 000 Supplies Prepaid Insurance Machinery 500 2, 000 10, 000 Accumulated Depreciation $3, 000 4, 000 Accounts Payable 2, 000 Notes Payable 1, 000 Unearned Service Fees 10, 000 Capital Stock 3, 000 Retained Earnings 15, 000 Service Fees Salary Expense 5, 000 Telephone Expense 2, 500 $38, 000

Example Jiffy Service Corporation Worksheet Year Ending December 31, 20× 4 Trial Balance Account Cash(현금) Accounts Receivable(외상매출금) Supplies(소모품) Prepaid Insurance(선급비용) Machinery(기계장치) Dr. Adjustments Cr. Dr. Income Statement Cr. Dr. Cr. Balance Sheet Dr. Cr. 6, 000 12, 000 500 ⓐ 300 2, 000 ⓑ 1, 000 10, 000 Accumulated Depreciation 10, 000 3, 000 (감가상각누계액) 4, 000 ⓒ 1, 000 Accounts Payable(외상매입금) 4, 000 Notes Payable(지급어음) 2, 000 Unearned Service Fees(선수수익) 1, 000 Capital Stock(자본금) Retained Earnings(이익잉여금) Service Fees(용역수익) 5, 000 Telephone Expense(전화요금) 2, 500 38, 000 Supplies Expense(소모품비) 10, 000 3, 000 15, 000 Salaries Expense(급여) 500 ⓓ 500 15, 500 ⓓ 500 5, 150 ⓕ 150 2, 500 38, 000 ⓐ 300 Insurance Expense(보험비용) ⓑ 1, 000 Depreciation Expense(감가상각비) ⓒ 1, 000 ⓔ 50 50 Interest Expense(이자비용) Interest Payable(미지급이자) ⓔ 50 50 Salaries Payable(미지급급료) ⓕ 150 3, 000 Net Income 3, 000 5, 500 15, 500 29, 200

Objective 2 Prepare financial statements from adjusted account balances.

Preparing the Financials 1. After adjusting entries (수정분개) and trial balance (시산 표) 2. Statements can copied from the T/B • Formatting Conventions exist • Order matters (because of articulation) ① Income Statement 1 st ② Owner’s Equity Statement 2 nd ③ Balance Sheet 3 rd ④ Cash Flow Statement 4 th

Income Statement Template Revenues Less: Expenses = Net Income Statements come in 2 flavours: (condensed and detailed)

Example 5 -2 Preparation of Financial Statements for a Service Company Jiffy Service Corporation Income Statement For the Year Ending December 31, 20× 4 Service Fees $15, 500 Less：Expense Salaries Expense Telephone Expense Supplies Expense $5, 150 2, 500 300 Insurance Expense 1, 000 Depreciation Expense 1, 000 Interest Expense Total Expenses Net Income 50 10, 000 $ 5, 500

Owner’s Equity Template Opening Balance of Owners Equity + Additional Investment - Drawings + Net Income (or minus net loss) = Ending Balance of Owner’s Equity Note the articulation: - Opening balance from last year B/S - Net Income from Income Statement - Ending balance goes to this year’s B/S

Statement of Retained Earnings Template Opening Balance of Retained Earnings -Dividends + Net Income (or minus net loss) = Ending Balance of Retained Earnings

Example 5 -2 Preparation of Financial Statements for a Service Company Jiffy Service Corporation Statement of Retained Earnings For the Year Ending December 31, 20× 4 Retained Earnings－January 1, 20× 4 Net Income for year Retained Earnings－December 31, 20× 4 $3, 000 5, 500 $8, 500

Balance Sheet Template Assets -Liabilities = Equity

Example 5 -2 Preparation of Financial Statements for a Service Company Jiffy Service Corporation Balance Sheet December 31, 20× 4 ASSETS Current Assets Cash $6, 000 Accounts Receivable 12, 000 Supplies 200 Prepaid Insurance 1, 000 Total Current Assets $19, 200 Non-current Assets Machinery $10, 000 Less: Accumulated Depreciation Total Assets 4, 000 6, 000 $25, 200

Example 5 -2 Preparation of Financial Statements for a Service Company Jiffy Service Corporation Balance Sheet December 31, 20× 4 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts Payable Notes Payable $4, 000 2, 000 Interest Payable 50 Salaries Payable 150 Unearned Service Fees 500 Total Current Liabilities $ 6, 700 Stockholders’ Equity Capital Stock $10, 000 Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 8, 500 18, 500 $25, 200

Shareholders Equity on B/S Shareholders Equity Capital Stock……………$$$ Retained Earnings………$$$ Total…………. . . $$$ Compare with one line for sole proprietor

Template for Cash Flow Statement Cash Provided By: Operations Financing activities Investing activities Total…………………………$$$ Cash Applied To: Financing activities Investing Activities Total…………………………$$$ Net Change in Cash for the period…. ………………. $$$

Proof of Cash (attached to stmt) Opening Balance Cash (+) or (–) Change in cash (from stmt) = Ending Balance Cash If you are astute…. notice all entries to statement come from the Cash T account…the cash flow statement is nothing more than a reformatted cash account

Cash from Operations u. Cash Paradigm: Net Income is cash from operations u. Accrual Paradigm: Net Income not equal to cash so some conversion needed to convert to cash basis income (we revisit at end of course)

Investing Activities Principally: Buying & selling of long term assets

Financing Activities Principally: • Acquiring & retiring long term debt • Making additional equity investment or divestment Warning: We add many complexities to this stmt later

Key Concepts: CHAPTER 5 Adjusting entries Adjusted Trial Balance Income Statement Forms of Business Entity • Statement of Retained Earnings • Statement of Partners’ Equity • Statement of Retained Earnings Balance Sheet Cash Flow Statement Articulation of F/S

Class Exercise 1 SAM’S BBQ We will work this problem together…. obviously twice as valuable if you try it in advance! Sam’s illustrates wonderfully: • Small business accounting & importance of accounting • Analysis of cases (organizing & filtering info) • Basic preparation of F/S

SAM’S BBQ Class Exercise 1 Sam Black has just completed a busy week organizing and supervising the annual April Fool's Day chicken, hot dog, and beer barbecue sponsored by the students' society of his faculty as a combination public relations, fun, and fundraising activity. The barbecue was a success. Sam had just returned from the bank, where he had deposited the proceeds of $2, 810 and proudly announced that the bank balance now stood at $2, 858, which represented "the most successful result of any barbecue. " The following conversation took place between Sam Black and Herbert Mc. Alister, the president of the students' society. "Congratulations on the successful barbecue, Sam, " said Mc. Alister. "Would you please transfer the $2, 858 to the society's bank account tomorrow, so I can pay for the advance booking of the graduating class dance? "

SAM’S BBQ Class Exercise 1 "I can't transfer all of the money, " said Black. "I still have two bills to pay ‑ $347 for the chicken and $630 for the material needed to build the barbecue. The chicken was all sold, but the barbecue should last for another two years. "And further, " Black added, "10 of the 80 cases of beer that were delivered C. O. D. were not sold and are to be returned for a refund of $4. 80 per case. And at the same time, the 65 cases of empties will be picked up, and the deposit of $0. 60 a case will be returned. "I managed to sell the 24 dozen buns left over for $0. 50 a dozen to Jill Rosen for a sorority party, " continued Sam. "This was half the unit cost of the 120 dozen purchased, but at least they will be used. Jill didn't have the money with her and will pay me tomorrow. "

SAM’S BBQ Class Exercise 1 Spurred on by Herbert's interest, Black said he had also purchased barbecue sauce, condiments, and charcoal for $78 cash. Although there was a little barbecue sauce left over, it was given to the student helpers. In addition, $370 had also been spent on promoting the event. Intent on his explanation, Sam was unaware that Bill Hahn, the society's treasurer, had sidled up and heard the story. "From the sounds of it, last year's affair was more successful, " announced Hahn. "Once you have paid your bills and repaid the $1, 000 advance I gave you last week, you will have less than $900 left. This is $400 less than last year's 'Beer and Hot Dog' reported net income. " Sam was deflated by the last comment, as well as a little confused. Help Sam Black out of his confusion by preparing an income statement and a current balance sheet for the barbecue.

Demarco Sports Class Exercise 2 We will work this problem together…. obviously twice as valuable if you try it in advance! Your friend Alex Demarco has asked for your advice. He is considering purchasing a sporting goods store, but knows nothing about accounting and does not know if this represents a good investment opportunity. He has obtained income statements showing net income averaging $40, 000 per year. The most recent balance sheet showed Assets of $180, 000 and Liabilities of $30, 000. The current owner is asking $200, 000 for the business.

Demarco Sports Class Exercise 2 • Alex cannot understand why he should pay more than the net value of the assets ($150, 000), especially since the business is several years old and some of the assets may be worn out. What counsel can you provide? • After examining the income statements, you notice that there is no salary expense shown by the current owner. When questioned about this, he replied that he got enough money from his other investments that he never felt the need to draw a salary. What impact will this have on your advice to Alex (who currently works full time at York University)?

Class Exercise 3 Jesse’s Farm Your uncle, Bob Orsky recently made a killing on the stock market and can realize his lifelong dream of becoming a gentleman farmer. He has been negotiating the purchase of Jesse Jone’s farm and small dairy herd near Collingwood Ontario. Jesse wants to sell the farm and retire. Until his own retirement in ten years, Bob would be required to hire a farm family to run the farm. He has been advised that there are families willing to do this for $18, 000/year and free board. The past year was a typical year for farms in the Collingwood area and Bob believes that the statement of cash receipts and disbursements shown to him is representative of what the farm would do under his ownership.

Jesse’s Farm Class Exercise 3 Jones Farm Statement of Cash Receipts and Disbursements For the year just ended 2007 RECEIPTS: Milk deliveries Apple deliveries Sales of calves (male) Sales of tired old milking cows Proceeds of expropriation of land for road allowance Total $60, 000 14, 000 2, 500 600 3000 $80, 100 DISBURSEMENTS Seed grain Cattle food Veterinary fees Property taxes Insurance on building (3 years from Jan 1, 2007) Gas & oil Spray & chemicals Mortgage interest ($1, 000) and principal ($10, 000) Purchase of tractor Cost of replacing 2 cows hit by lightning Total $900 8, 000 600 1, 700 4, 500 4, 000 900 11, 000 18, 000 2, 000 $51, 600

Class Exercise 3 Jesse’s Farm Jesse’s asking price for the farm is $350, 000 (mortgage free) which actually corresponds to the amount of money Bob has available to invest. Bob considers that he would be able to earn at least 15% per annum before income taxes on other investments he is considering as alternatives. The farm equipment is in good condition and today would cost $50, 000 to replace and have a new life of ten years. The buildings are old but appear to have unlimited life as they are made of stone. Because of a fire in one of the local apple packing plants, Jesse has been forced to defer the delivery of 60% of his apple crop and they are stored in the barn. He anticipates no problem selling these once the apple plant reopens. Would you advise Bob to buy Jesse’s farm?

That’s all for now folks!