PREPARATION OF PUBLISHED FINANCIAL

STATEMENTS
CONTENTS
• International Financial Reporting standards relevant to preparation and presentation of financial
statements of limited companies
• Formats of financial statements

OBJECTIVES
• Know the preparation of financial statements in accordance with the provisions of the
Companies Act, and Legislation relating to other accounting entities
• Source, authority and use of accounting standards
PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS OF LIMITED
COMPANIES
This is a chapter dealing with company financial statements, a topic frequently examined.
Do not be put off by the large volume of detail in the chapter. You will gradually acquire the required
knowledge through persistent repetitions of the build up illustrations provided throughout the chapter
and frequent attempts at the practice questions provided at the end of the chapter.

The preparation of published financial statements involves preparing and preventing financial
statements to external users especially shareholders in a form prescribed by the law (Companies Act)
and the International Reporting Standards (IFRSs).

The Companies Act gives the guidelines on preparation of the financial statements, then registration
with the registrar of companies, auditing and certain disclosures such as directors salaries.

The requirements of the Companies Act as pertaining to accounts can be found in

SI47: Keeping proper books of account;

SI48: Laying final accounts before the members at the AGM;
SI49: Compliance with financial statements presenting a true and fair view:
S150 – SI54: Presentation of group accounts to members at the AGM and related matters
S155: Signing the balance sheet
S156 – 157: Constitution of documents to be presented at AGM.
S158: Sending balance sheets and annexed documents to members and debenture holders
before the AGM
S197: Directors emoluments disclosure requirements
S198: Disclosure requirements for loans to directors

Sixth schedule to the Companies Act: Accounts

IFRSs Gives the guideline on the content and the accounting statements of certain events and
transactions in the financial statements. The following IFRSs are relevant for the purpose of
preparing published financial statements;

IAS 1: - Presentation of Financial Statements

IAS 7: - Cashflow statements
IAS 8: - Accounting policies, changes in accounting estimates and errors
IAS 10: - Events after the balance sheet date (not examined)
IAS 12: - Income Tax
IFRS 5 - Non-current assets held for sale and discontinued operations. (Not examined)

IAS 1: Presentations of Financial Statements

The objective is to give guidance regarding the preparation of published financial statements and
prescribe the content of the published financial statement.
The following information should be prominently displayed and repeated when it is necessary for a
proper understanding of the information presented:
(a) The name of the reporting enterprise and other means of identification.
(b) Whether the financial statements cover an individual enterprise or a group of enterprises.
(c) The balance sheet date or the period covered by the financial statements whichever is appropriate
to that component of the financial statements.
(d) The reporting currency.
(e) The level of precision used in the presentation of figures in the financial statements (e.g. Shs. ‘000’
or millions of Shs.)

IAS 1 requires companies to observe the following rules in preparing published financial statements:
1. The financial statements should reflect a true and fair view of the company ‘s financial position
and performance. Where transactions are reported faithfully and the financial statements comply
in all aspects with IFRSs then the true and fair view objective is achieved.
2. The company should apply its accounting policies consistently form one financial period to the
next and incase there is a change in the accounting policy then, adequate disclosure should be
made.
3. The Financial statement should be prepared on a going concern basis incase the going concern
basis isn’t suitable; adequate disclosure should be made.
4. The financial statements should be made on an annual basis (should related to a period of 12
months) and incase the period covered is more or less than 12months then, this fact should be
disclosed.
5. The financial statement should be presented on a comparable basis i.e. the current years’ and
previous years’ financial results unless it is the first year of trading.
6. [financial statements should disclose the date when they were approved for issue by the directors.

IAS 1 prescribes the contents of published financial statements. The major reports that are
included as part of the published financial statements is:-

i) The income statement.

ii) The balance sheet.
iii) The statement of changes in equity.
iv) The Cashflow statement.
v) The notes to the accounts/financial statements.

The most cases, companies that prepare published financial statements include the following additional
reports (that are not financial statements).

i) Corporate information (Company’s address, lawyers. Location, bankers and others).

ii) Chairman’s report (principle business activities of the firm, directors to be elected or retiring,
summary results for the year and dividends).
iii) Auditors report.
iv) Corporate governance (I.T systems, internal audit, audit committees and other systems in place to
ensure good management).
v) Statistical information (major highlights of the company’s performance, over a period of time e.g.
5 years).

THE INCOME STATEMENT

It shows the financial performance of the company during the given financial period. It discloses
the income and expenses and thus the net profit for the period.

IAS 1 recommends that the income statement can be presented in 2 ways or formats

a) By classifying by function

Under this format, the expenses of the company are classified into 5 major categories i.e.
 i) Cost of sales [(opening stock + purchases – closing stock) and deprecation]
ii) Distribution costs (transport costs, selling expenses, commission, provision for bad debts etc)
iii) Administration expenses (salaries and wages, telephone, rates, postage, rent etc, goodwill
amortization)
iv) Other expenses (all other not falling under the above) groups of expenses)
v) Finance cost (interest on loan and bank overdraft, interest on finance lease, dividends on
redeemable preference shares)

b) Classifying expenses by nature

Under this format, expenses are not classified by their nature i.e. referred to specifically according
to their type and the major categories of expenses are:-

i) Changes in finished goods and work in progress

ii) Raw materials consumed
iii) Depreciation and amortization
iv) Employee benefits (staff costs)
v) Other expenses
vi) Finance costs

NOTE: Classification of expenses by function is the most common format used and classification of
expenses by nature is more appropriate for manufacturing firms.

There are certain types of incomes and expenses that do not face within the trading activities of the
business but are within the ordinary activities of the firm. E.g. disposal of property, plant and equipment
and other non-current assets.

The standard requires that if the above incomes and expenses are material, they can either be classified
as part of the other expenses or shown separtely on the face of the income statement.

The company should give additional information about such items in the notes to the accounts.

Examples:
a) Profit/Loss on disposal of non-current assets
b) Material write down or reversal of write down on assets e.g. PPE inventory and debtors.
c) Restructuring and re-organization cost e.g. redundancy payments
d) Litigation costs – payments made as a result of court decisions

The format of the income statement is given as follows:

a) By function

ABC LTD
INCOME STATEMENT FOR THE YEAR ENDED 31/12/
£ £
Revenue x
Cost of sales (x)
Gross profit x
Other incomes (e.g. investment income) x
x
Expenses
Distribution costs x
Administration costs x
Other expenses x
Finance costs x (x)
Profit before x
Income tax expense (x)
Profit for the period xx

b) By Nature

ABC LTD
INCOME STATEMENT FOR THE YEAR ENDED 31/12/
£ £
Revenue x
Other incomes x
x
Expenses
Raw materials consumed x
Changes in finished goods and work in progress x
Depreciation and armortisation x
Employee benefits x
Other expenses x
Finance costs x (x)
Profit before tax x
Income tax expenses (x)
Profit for the period xx

THE BALANCE SHEET

It shows the financial position of the company as at the end of a given financial period. The
standard requires that assets and liabilities should be classified between current and non-current
portions.

Currently, the standard requires the first part of the balance sheet to show the total assets (i.e.
non-current assets + current assets) and the second part of the balance sheet to show equity and
liabilities. Equity is the shareholders funds while liabilities are the total of non-current and current
liabilities.
The format of the balance sheet is given as follows:

ABC LTD
BALANCE SHEET AS AT 31/12/
£ £
NON-CURRENT ASSETS
Property, plant and equipment x
Goodwill x
Other intangible assets x
Investment Longterm x
x

CURRENT ASSETS
Inventory x
Accounts receivables and prepayments x
Short-term investment x
Cash at bank and in hand x x
TOTAL ASSETS xx

EQUITY AND LIABILTIES

Preference share capital x
Ordinary share capital x
x

RESERVES
Share premium x
Revaluation reserve x
General reserve x x
Retained profits x
Shareholders funds x

NON-CURENT LIABILITIES
Loan stock/debentures x
Redeemable preference shares x
Deferred tax x
Other long-term provisions x x

CURRENT LIABILITIES
Bank overdraft x
Trade and other payables (accruals) x
Current tax (tax payable) x
Current portion of loan stock x
Prepared dividends (and shares or preference shares) x x
TOTAL EQUITY AND LIABILITY xx

NOTE:
Most of the balance sheet items are shown in totals and the breakdown of the figures is given by way of
notes to the accounts. E.g. property, plant and equipment which is made up of land, buildings, plant and
machinery and motor vehicles is given in the balance sheets at the total net book values of all there assets
and part of the notes to the accounts will explain the make-up of the assets and movements during the
year.

No workings should be given/shown in the balance sheet for most of the items and only the total or
the net figures should be presented e.g. accounts receivables should be net of provision for doubtful
debts.

IAS 32 requires that redeemable preference shares should be treated as a non-current liability just like
any other loan. Therefore, the preference dividends are shown as part of finance costs in the income
statement, and other accrued interest and shown as part of current liabilities.

If the company proposes dividends on ordinary and preference share capital before the year end then,
this will be provided for in the statements of changes in equity and shown as part of current liabilities
in the balance sheet. However, even the proposed dividends on disclosed after the financial year end,
then they will be mentioned only by the way of notes to he accounts and not provided for in the
financial statement.

THE STATEMENT OF CHANGES IN EQUITY

This is a very important report because it explains the movements in the shareholder funds during the
year and also acts as a link between the income statement and the balance sheet.

The report also shows the total gains or losses made by the company during the year. Some of these
gains or losses may not be included in the income statement e.g. gains or losses on revaluation or PPE
and investments (long -term)
The format of the statement of changes in equity is given as follows:

Preferen Ordinar Share Revaluati Gener Retaine TOTA

ce share y share premiu on al d L
capital capital m reserve reserv profits
e
£ £ £ £ £ £ £
i) Balance at 1.1 X x x x x x x
ii) Changes in a/c
policy/correction of - - - - - (x) (x)
error
iii) Balance as restated (i X x x x x x x
+ii)
iv) Gain/losses on
revaluation PPE - - - x - - x
v) Transfer to retained
profits on sale of - - - (x) - x -
PPE
vi) Gain losses on
investment - - - x - - x
revaluation
vii) Foreign currency
exchange gain/losses - - - x - - x
viii) Net gains/losses
directly reported in
equity (iv + v +vi + - - - x - x x
vii)
ix) Profit for the period - - - - - x x
x) Total gains/losses
recognized during the
year (viii + ix) - - - x - x x
xi) Issue of shares X x x - - - x
xii) Transfer to general
reserve - - - - x (x) -
xiii) Dividends: interim - - - - - (x) (x)
paid
xiv) Final proposed (If
prop before year - - - - - (x) (x)
end)
xv) Balance as at 31.12 (
x + xi + xii + xiii) x x x x x x x

The final value of the total should be the same as the shareholder funds in the balance sheet.

D. THE NOTES TO THE ACCOUNTS

The notes to the accounts provide additional information on the a/c policies that the company has
adopted the make-up of some of the items appearing on the face of the financial accounts and
additional information on items not provided for in the accounts.

IAS 1 does not give the standard format of the notes to the accounts and that this would vary from
one company to another. However, the standard requires the following approach to be used when
presenting the notes to the accounts.

1. The company should state the basis of financial statement (most cases historical basis of
accounting)
2. The company should present the significant policies adopted
3. The make-up of some of the items appearing on the face of the final accounts e.g. PPE and
inventory.
4. Explanation of items not provided for in the final accounts (e.g. Dividends)

An example of the notes to the accounts examined within the scope.

NOTE 1: Accounting Policies.

These financial statements have been prepared under the historical cost basis of accounting which is
modified to accommodate the revaluation of certain property, plant and equipment.

Property, plant and equipment are stated in the accounts of cost or revalued amount less accumulated
depreciation. Depreciation is based on the estimated useful life of the asset and is provided at the
following rates:

Assets Rate
Land No depreciation
Buildings 2 % on cost
Plant and machinery 20% on cost
Fixtures, furniture and fittings 25% on cost
Motors vehicles 30% on reducing balance

Inventory is stated at the lower of cost and net realizable value. Cost represents the purchase price or
production cost and other expenses incurred to get the inventory ready for sale. Net realizable value
is the selling price of the inventory less other expenses that will be incurred to get he inventory ready
for sale.
NOTE 2: Profit for the period

The profit for the period has been arrived at after charging the following expenses:

£ £
Depreciation x
Amortization (impairment of good will ) x
Directors emoluments:
Salaries x
Fees x
Re-imbursment of expenses x
Pension x
Compensation for loss of office x x
Other employee benefits
Salaries and wages x
Pension costs x
NHIF x x
Auditors remuneration x
Loss on disposal of PPE x
Restructuring /Re-organization costs x

NOTE 3: Property, plant and equipment

Land Building Plant & Fixture, Motor TOTAL

Machinery furniture vehicle
& fittings
£ £ £ £ £ £
Balance as at 1.1 x x x x x x
Additions (purchase) x x x x x x
Revaluation gain x x - - - -
Disposal (x) (x) (x) (x) (x) (x)
Balance as at 31.12 x x x x x x

Depreciation
Balance as at 1.1 - x x x x x
Change in the year - x x x x x
Eliminated in disposal - (x) (x) (x) (x) (x)
Eliminated in revaluation - (x) (x) (x) (x) (x)
- x x x x x

Net book value

As at 31.12 x x x x x x
As at 1.1 x x x x x x
NOTE 4: Inventory

Inventory is made up as follows:

£
Raw materials x
Work in progress x
Finished goods x
xx

NOTE 5: Dividends

During the year, the company paid a dividend of Sh.2 per share on the ordinary share s outstanding
and Sh.1 on the preference shares outstanding. The company is now proposing a final dividend of
Sh.3 per share on ordinary shares and sh.1 on preference shares.

NOTE 6: Capital Commitments

The company has contracted X constructors to construct a warehouse a total cost of £200,000.
Construction is to begin on 1st June.

Example 1
The accountant of Wislon Co has prepared the following list of account balances as at 31 December
2005

£ ‘ 000’
50p ordinary shares (fully paid) 350
7% £1 preference shares (fully paid) 100
10% Loan stock 200
Retained earnings 1.1.2005 242
General reserve 1.1.2005 171
Land and buildings 1.1.2005(cost) 430
Plant and machinery 1.1.2005 (cost) 830
Aggregate depreciation
Buildings 1.1.2005 20
Plant and machinery 1.1.2005 222
Inventory 1.1.2005 190
Sales 2,695
Purchases 2,152
Preference dividend 7
Ordinary dividend (interim) 8
Interest on Loan stock 10
Wages and salaries 254
Light and heat 31
Sundry expenses 113
 Suspense account 135
Trade accounts receivable 179
Trade accounts payable 195
Cash 126

Additional information

a) Sundry expenses include £9,000 paid in respect of insurance for the year ending 1
September 2005. Light and heat does not include an invoice of £3,000 for electricity for
the three months ending 2 January 2006, which was paid in February 2006. Light and
heat also includes £20,000 relating to salesmen’s commission.

b) The suspense account is in respect of the following items.

£ ‘ 000’
Proceeds from the issue of 100,000 ordinary shares 120
Proceeds from the sale of plant 300
420
Less consideration for the acquisition of Mary & Co 285
135

c) The net assets of Mary & Co were purchased on 3 March 2005. Assets were valued as
follows:

£ ‘ 000’
Investments 231
Inventory 34
265

The entire inventory acquired was sold during 2005. The investments were still held by Wislon at
31.12.05. Any goodwill arising from the acquisition is considered to be impaired at the rate of
20%.

d) The property was acquired some years ago. The buildings element of the cost was
estimated at £100,000 and the estimated useful life of the assets was fifty years at the time
of purchase. As at 31 December 2005 the property is to be revalued at £800,000.

e) The plant which was sold had cost £350,000 and had a net book value of £274,000 as on
the date of disposal. £36,000 depreciation is to be charged on plant and machinery for
2005.

f) The 50p ordinary shares all rank for dividends at the end of the year.

g) The management wish to provide for:

i) A final ordinary dividend of 2p per share.

ii) A transfer to general reserve of £16,000.
iii) Audit fees of £4,000
The proposed dividends were declared before the year end
 h) Inventory as at 31 December 2005 was valued at £220,000 (Cost).
i) Taxation is to be provided at £30,000. Assume a corporation tax rate of 30%

Required
Prepare the published financial statement of Wilson Co as at 31 December 2005.
Solution
Kantas Co. Ltd
Income statement for the year ended 31 December 2005.
£ ‘000’ £ ‘000’
Revenue 2,695
Cost of sales (2,194)
Gross profit 501
Other income
Gain on disposal of plant 26
527

Expenses
Distribution expenses 20
Administration expenses 276
Other expenses 107
Finance costs 20 (423)
Profit before tax 104
Less income tax expense (30)
Profit for the period 74
Wilson and Company
Statement of changes in equity for the year ended 31/12/2005

Pref. Share Ord. Share Share Reduction General Retained

Capital Capital Premium Reserve Reserve Profits TOTAL
£ £ £ £ £ £ £ ‘000’
Balance as at 1.1.05 100 350 - - 171 242 863
Correction of error - - - - - - -
Balance of restated 100 350 - - 171 242 863
Gain on revaluation of
PPE - - - 392 - - 392
Transfer to retained profits -
on sales of PPE
Gain on revaluation of -
investment
Foreign exchange
losses/gains ______ _______ _______ ______ ______ ______ -
Net gains directly reported
in equity - - - 392 - - 392
Profit for the period - - - - - 74 74
Total gains for the year - - - 392 - 74 466
Issue of shares - 50 70 - - - 120
Transfer to general reserve - - - (16) (16) -
Dividends Interim paid
- Ordinary. (8) (8)
- Preference (7) (7)
Final proposed - -
Balance as at 31.12.05 100 400 70 392 187 285 1,434
Wilson Company
Balance Sheet as at 31/12/2005
£ ‘000’ £ ‘000’

NON-CURRENT ASSETS
Property, plant and equipment 1,098
Goodwill 16
Investment 231
1,345

CURRENT ASSETS
Inventory 220
Trade receivable 179
Prepayments 6
Cash 126 531
TOTAL ASSETS 1,876

EQUITY AND LIABILITIES

Preference share capital 100
Ordinary share capital 400
500

RESERVES
Share premium 70
Revaluation reserve 392
General reserve 187 649
Retained profits 285
Shareholders funds 1,434

NON-CURRENT ASSETS
10% stock 200

NON-CURRENT LIABILITIES
Trade payables 195
Accrued expense 17
Current tax 30 242
TOTAL EQUITY AND LIABILITY 1,876

Notes to the Accounts

a) NOTE 1: Accounting Policies

These financial statements have been prepared under the historical cost basis of accounting which is
modified to accommodate the revaluation of certain property. The financial statements comply with the
applicable IFRSs.
b) Property, plant and equipment is stated in the accounts at cost or revalued amount less accumulated
depreciation. Depreciation is based on the estimated useful life of the assets.

c) Inventory is stated at the lower of cost and net realizable value Cost includes the purchase price or
production cost and other expenses incurred to get the inventory ready for sale. Net realizable value is
the selling price less expenses increased to complete the sale.

NOTE 2: Profit for the period (Profit before tax)

The profit for the profit has been arrived at changing the following expenses:

£ ‘000’
Depreciation 38
Impairment of goodwill 4
Employee benefits:
Salaries and wages 254
Salesman commission 20 274
Auditors remuneration 4

Profit has been arrived after creating gain on proposal on disposal.

NOTE 3: Property, Plant and Equipment

Cost/Valuation Land & Building Plant & Machinery TOTAL

£ ‘000’ £ ‘000’ £ ‘000’
Balance as at 1.1.2004 1,260
Additions (purchases) 430 830 -
Revaluation gain - - 370
Disposal 370 - (350)
Balance as at 31.12.2004 800 (350) 1,280

Depreciation
Balance as at 1.1.2004 20 222 242
Charge in the year 2 36 38
Eliminated in disposal - (76) (76)
Eliminated in revaluation (22) - (22)
Balance as at 31.12.2004 - 182 182

Net book value

As at 31.12.2004 800 298 1,098
As at 1.1.2004 410 608 1,018

NOTE 4: Dividends

During the year, the company paid an interim dividend of £1.14 per shares on the ordinary shares
outstanding and up on the preference shares. The directors are now proposing a final dividend of 2% per
share on the ordinary shares outstanding at the end of the year.
WORKINGS
£ ‘000’ £ ‘000’
1. Cost of sales
Opening inventory 190
Purchases 2,152
Investment in Mary & co. 34 2,186
2,376
Less: closing inventory (220)
2,156
Add: Depreciation on building (100,000 /50) 2
Plant 36 38
2,194

2. Other income
Gain on disposable of plant

Disposal account
Plant 350 Depreciation 76
Profit and loss 26 Suspense 300
376 376

3. Expenses:

Distribution Administration Finance

Other
Interest on loan stock 20
Wages and salaries 254
Light and heat 20 14
Sundry expenses 107
Goodwill impaired 4
Audit fees 4
TOTAL 20 276 107 20

4. Goodwill impairment

Disposal account
Suspense 285 Interest (balance sheet) 231
Purchases (stock) 34
___ Goodwill 20
285 285

5. PPE
£ ‘000’
Land and buildings 800
Plant and machinery 298
1,098
 Land and building account
Balance b/d 430
Revenue reserve 370 Bal c/d 800
800 800

Revaluation account
Land and building 370
Balance c/d 392 Land and building depr. 22
392 392

Plant and machinery account

Balance b/d 630 Disposal 350
Balance c/d 480
830 830
Land and building depreciation account
Revenue reserve 22 Balance b/d 20
Profit & Loss – 4 yr 2
22 22

Plant & Machinery depreciation account

Disposal depreciation 76 Balance b/d 222
Balance c/d 182 Profit and Loss – 4 yr 36
258 258

Accrued expenses

£ ‘000’
Interest on loan stock (20 – 10) 10
Light and heat 3
Audit fees 4
17
Example 2

Auto Transmissions manufactures electrical equipments. The following trial balance as at 31 March 2005 has
been extracted from the books of the company:

£ £
Ordinary shares of 50 p each 400,000
10% Redeemable Preference shares of £1 each 200,000
Retained profits as at 1 April 2004 42,475
Office block (Land £40,000) 170,000
Plant and machinery 730,000
Office equipment 110,000
Motor vehicles 200,000
Provision for depreciation – Plant and Machinery 224,500
- Office equipment 24,500
- Motor vehicles 80,000
Accounts receivables/Payables 500,000 356,226
Provision for doubtful debts 1,000
Manufacturing wages 501,400
Inventory as at 1 April 2004 – raw materials 70,000
- Work in progress 126,000
- Finished goods 250,000
Transport expenses 85,013
Returns inwards 15,106
Purchases of raw materials 518,600
Sales 2,600,147
Bank balance 60,020
Directors salaries 60,114
Maintenance of plan t 30,102
Rent 40,063
Advertising 190,048
Rates 50,171
Insurance 20,116
Office salaries 166,013
Light and heat 46,027
Factory power 30,014
Bank interest 7,070
Interim dividends on preference shares 10,000
General administration expenses 63,011 _________
3,988,868 3,988,868

Further information is as follows:

(1) Depreciation is to be provided as follows:

Plant and machinery 15% on cost. (Production expense)

Office equipment 10% on cost (administration expense)
Motor vehicles 25% on WDV (distribution cost)
New office blocks 2% on cost (Administration expense).

(2) Prepayment of rates at 31 March 2005 was £3,140.

(3) An insurance premium for public liability cover amounting to £3,360 was paid for the year to 30 June
2005.
(4) The amount owing for light and heat is £1,214 and rent is £2,321 as at 31 March 2005.
(5) Rent, rates, light and heat and insurance are to be apportioned in the ratio of 5:1 in relation to factory
and office expenses.
(6) The provision for doubtful debts is to be maintained at 1% of the accounts receivables.
(7) The production director acts as a factory manager, his salary is £20,000.Office salaries include
amounts paid to salesmen of £64,237.
(8) The corporation tax of £100,000 is to be provided,
(9) During the year 1,500 electrical equipments were transferred from the factory to the warehouse. Only
100 equipments were in hand at the end of the year.
(10) Inventory at cost as at 31 March 2005 was as follows:
 Raw materials £56,200.
Work in progress £47,190.
Finished goods ?

Required:

Prepare the published income statement for the year ended 31 March 2005 and a balance sheet as at the same
date. (20 marks)

Note: Do not prepare the statement of changes in equity and the notes to the accounts.

Solution

a) Classifying expenses by function

Auto transmission
Income Statement for the year ended 31/03/2005
£ £
Revenue 2,585,041
Cost of sales (1,586,692)
Gross profit 998,349

Expenses
Distribution expenses 373,298
Administration expenses 244,489
Finance costs 27,070 (644,857)
Profit before tax 353,492
Income tax expense (100,000)
Profit for the period 253,492

b) Classifying expenses by nature

Auto Transmission

£ £
Revenue 2,585,041

Expenses
Raw materials consumed 532,40
Changes in finished goods and work in progress 233,332
Depreciation 153,100
Employee benefits 727,527
Other expenses 558,120
Finance costs 27,070 2,231,549
Profit before tax 353,492
Income tax expense (100,000)
Profit for the period 253,492
 Auto Transmission
Balance sheet as at 31/03/2005
£ £

NON-CURRENT ASSETS
Property, Plant and Equipment 727,900

CURRENT ASSETS
Inventory 198,868
Accounts receivables 495,000
Prepayments 3,980 697,848
TOTAL ASSETS 1,425,748

EQUITY AND LIABILITIES

Ordinary share capital 400,000

RESERVES
Retained profits 295,967
Shareholders funds 695,967

NON-CURRENT LIABILITIES
10% Redeemable preference shares 200,000

CURRENT LIABILITIES
Bank overdraft 60,020
Trade payables 356,226
Accruals 13,535
Current tax 100,000 529,781
Total Equity and Liabilities 1,425,748

Workings
£
1. Revenue 2,600,147
Less return inwards (15,106)
2,585,041

2. Cost of sales
Opening inventory : Finished goods
Cost of finished goods 250,000
1,682,170
Less: closing inventory of finished goods (95,478)
1,586,692
Factory cost of finished goods
Manufacturing account
£ £
Opening inventory : raw materials 70,000
Purchases of raw materials 518,600
588,600
Less: Closing stock inventory raw materials (56,200)
Raw materials consumed 532,400
Direct labour: Manufacturing wages 501,400
PRIME COSTS 1,033,800

Factory overheads
Directors’ salaries : Factory manager 20,000
Maintenance of plant 30,102
Rent 35,320
Rates 39,192.50
Insurance 16,063
Light and hear 39,376.50
Factory power 30,014
Depreciation on plant 109,500 319,560
Total cost of production 1,353,369
Add: Opening WIP 126,000
1,479,360
Less: Closing W.I.P 47,190
Factory cost of finished goods 1,432,170

Value of closing stock/finished goods: 1,432,170 x 100 = 95,478 =95,478

1500

3. Expenses Distribution Administration Finance costs

i) Transport 85,013
ii) Directors’ salaries 40,114
iii) Rent 7,064
iv) Advertising 190,048
v) Rates 7,838
vi) Insurance 3,213
vii) Office salaries 101,776
viii) Light and heat 7,873
ix) Bank interest 7,070
x) Preference dividends (redeemable) 20,000
xi) Salesmen salaries 64,237
xii) Increase in provision for bad debts 4,000
xiii) Depreciation on - new office block 2,600
- office equipment 11,00
- motor vehicles 30,000
xiv) General administration expense ______ 63,011 _____
373,298 244,489 27,070
Workings for classification by nature
4. Changes in finished goods and W .I. P

Finished goods Work in progress TOTAL

£ £ £
Closing inventory 95,478 47,190 142,668
Opening inventory (250,000) (126,000) (376,000)
Increase (decrease) (154,522) (78,810) (233,332)

An increase is treated as a saving while a decrease is an expense.

5. Depreciation

Plant and machinery 109,500

New office block 2,600
Office equipment 11,000
Motor vehicles 30,000
153,100

6. Employee benefits

Manufacturing wages 501,400

Factory manger salary 20,000
Director salaries 40,114
Office salaries 101,776
Salesman salaries 64,237
727,527

7. Other expenses

Transport 85,013
Rent 42,384
Advertising 190,048
Rates 47,031
Insurance 19,276
Ling and heat 47,241
Plant maintenance 30,102
Factor power 30,014
Provision for bad debts 4,000
Bank interest 7,070
General administration 63,011
558,120
8. Property, Plant and Equipment

Cost Depreciation to date Net Book value

Office block 170,000 2,600 167,400
Plant and machinery 730,000 334,000 396,000
Office equipment 110,000 35,500 74,500
Motor vehicles 200,000 110,000 90,000
727,900

9. Prepayments and Accruals

Prepayments Accruals
Rates 3,140 Light and heat 1,214
Insurance 840 Rent 2,321
____ Dividend on redeemable preference shares 10,000
3,980 13,535

10. Retained profits

Balance c/d 42,475

Profit for the period 253,492
295,967

Example 2

IAS 12: INCOME TAX

IAS 12 deals with two main types of taxes:-

i) Corporation tax
ii) Deferred tax

i) Corporation Tax
This is the tax payable by companies on their trading activities of a given financial period. The standard
doesn’t give the guidelines on how this tax should be computed because the corporation tax is based on
the rules and procedures of a country with regards to tax matters.

However, once this tax has been computed then the standard gives the guidelines on how it should be
treated in the financial statements.

IAS 12 requires that income tax should be shown as a separate item on the face of the income statement
and described as “Income tax expense”. If part of this amount remains unpaid, then it should be shown
as part of current liabilities in balance sheet and described as “Current tax”.

In practice, it may be difficult for a company to know exactly how much tax should be paid in relation to
a given financial period. Therefore, many companies use an estimate for the purpose of completion of
the accounts.
 In the subsequent financial period, the amount actually payable would be confirmed with the tax
authorities and the firm may be required to pay either more than or less than what was actually provided
for.

The ‘the more than’ or ‘less than’ tax is called on under or over provision of previous years tax.

IAS 12 requires that under or provision of previous year’s tax should be adjusted for in the period in
which it arises and thus the company shouldn’t adjust its previous year’s financial statements.

An underprovision of previous years tax will thus be added to the current years income tax expense and
over provision of previous years tax will be deducted from the current years income tax expense and
eventually the net amount shown as the income tax expense in the income statement.

Example:

During the year ended31/12/2003, A Ltd. had estimated the corporation tax for the year to be
£100,000. The amount was still outstanding as at 31/12/03. During the year ended 2004, on 30 th June
the actual amount payable was agreed with the tax authorities and eventually paid. Meanwhile during the
year 2004, the company paid additional investment taxes of £80,000. As at the end of the year the
company the company estimated that he payable for year 2004 will be £120,000.

Required:
Compute the income tax expense and the balance sheet liability for year 2004 assuming that; A

a) The actual tax paid for year 2003 was £90,000

b) The actual tax paid for year 2003 was £110,000.

a) Tax for 2003 (£90,000) – Over provision of previous years tax

Profit and loss change in 2004

Current years tax estimate 120,000
Less overprovision of previous years tax (100 – 90) ‘000’ (10,000)
Income tax expense 110,000

Balance sheet liability

Current years tax estimate 120,000
Less installment taxes paid (80,000)
Current tax 40,000

b) Tax for 2003 (£110,000) – Under provision of previous years tax

Profit and loss change in 2004

Current years tax estimate 120,000
Add: underprovision of previous years tax (100 – 110) 10,000
Income tax expense 130,000

ii) Deferred tax

 A company may enter into transactions in the current financial period that may result in the firm either
paying or saving some tax in the future. The tax that may be paid or saved in the future is called
deferred tax. Tax that may be paid in the future is called deferred tax liability whereas tax that may be
saved in the future is called deferred tax asset.

Previously accountants used to compute deferred tax using the income statement approach. Under this
approach, the difference between profit before tax and taxable profits was simply referred to as a
difference. This difference was classified into permanent and temporary timing differences.

Permanent differences related to those items that are adjusted for tax in the current year and will never
be adjusted for tax in the future E.g. Donations to political parties.

Temporary/timing differences relate to those items that are adjusted in the current period and are
again adjusted in subsequent financial periods for tax purposes. E.g. investment income accrued in
profits before tax will be deducted in the current period for tax purpose but will be added back in
subsequent financial periods when investment income is received.

All temporary differences therefore result to deferred tax

However, currently the computation of deferred tax is based on the balance sheet approach whereby
temporary differences are given as the difference between the carrying amount of an asset or liability
(book value) and its tax base.

The carrying amount is the accounting value or book value of an asset or liability. The tax base is the
value attributable to asset or liability for tax purpose.

Example;
A firm bought an item of plant at a total amount of £50,000. During the first year, the firm provided for
depreciation of 10,000. The item of plant has a capital allowance of`£15,000 for the first year.

Re. Compute the carrying amount of the asset, the tax base and hence the temporary difference.

Carrying amount cost – depreciation

=50,000-10,000 =40,000

Tax base cost – capital allowance

=50,000-15,000 = 35,000

Temporary differences carrying amount – tax base

=40,000-35,000 =£5,000

There are two main types of temporary differences;

i) Taxable temporary difference

If the carrying amount is more than the tax base then it means that this difference is taxable and the firm
will end up paying some tax in the future. Therefore all taxable temporary differences lead to deferred
tax liability.

ii) Deductible temporary differences

If the tax box is more than the carrying amount, then the firm will end up saving some tax in the future
because the amounts due from the tax authorities will be deducted from the future taxes. Therefore, all
deductible temporary differences will lead to deferred tax assets.
Accounting treatment of deferred tax

The objective of accounting for deferred tax is to ensure that the profits for the period do not fluctuate
due to temporary differences. To achieve this objective, an account called deferred tax account is
prepared upon which adjustments are made at the end of every financial period.

The approach is normally to compute the temporary differences. Thereafter we apply the corporation
tax rate on the temporary difference to get the balance carried down in the deferred tax account. The
balance carried down is compared with the balance brought down and the difference being the balancing
figure in the deferred tax account represents a transfer to or from the profit and loss or income
statement.

The transfer to or from the profit and loss is not debited or credited directly in the income statement but
adjustments are made on the income tax expense whose net amount will now appear in the income
statement.

The final figure for income tax expense that will appear in the income statement will be arrived as
follows:-

£
Current year estimated corporation tax x
Add/(less) under cover provision of previous years tax x/(x)
Add/(Less) transfer to (from) deferred tax account x/(x)
Income tax expense xx

In the balance sheet, deferred tax liability will be shown under NON-CURRENT LIABILTIES.
Whereas a deferred tax asset will be shown under NON-CURRENT ASSETS.

Example
A Ltd., bought an item of plant at a cost of £100,000 in year 2000. The estimated useful life of the plant
was 5 years and depreciation is on a straight line basis with no residual value. The company makes
profits before tax of £200,000 and the corporation tax rate is 30%. The item of plant has the following:

Year 1 2 3 4 5
Rate 30% 25% 20% 15% 10%

Required: (for each of the five years)

i) Tax liability (corporation)

ii) Carrying amount, tax base, taxable temporary difference of the plant and the balance carried down
on deferred tax account.
iii) The deferred tax account
iv) Final accounts extracts (Profit and loss + balance sheet)
Assume that the corporation tax liability is unpaid by the year end.

Corporation tax liability

 2000 2001 2002 2003 2004
£ £ £ £ £
Profit before tax 200,000 200,000 200,000 200,000 200,000
Add back depreciation 20,000 20,000 20,000 20,000 20,000
220,000 220,000 220,000 220,000 220,000
Less capital allowances (30,000) (25,000) (20,000) (15,000) (10,000)
Taxable profits 190,000 195,000 200,000 205,000 210,000
Taxable liability (30%) (57,000) (56,500) (60,000) (61,500) (63,000)
133,000 136,500 140,000 143,5000 147,000

Carrying amount, tax base, and taxable temp diff.

2000 2001 2002 2003 2004

£ ‘000’ £ ‘000’ £ ‘000’ £ ‘000’ £ ‘000’
Carrying amount: Cost 100 100 100 100 100
Accumulated depreciation 20 40 60 80 100
80 60 40 20 -
Tax box: Cost 100 100 100 100 100
Accumulated capital all (30) (55) (75) (90) (100)
70 45 25 10 -
Taxable temp. difference 10 15 15 10 -
Bal c/d on deferred tax a/c (30%) 3 45 45 3 -

Deferred Tax Account

£ ‘000’ £ ‘000’
31/12/00 Bal c/d 3 31/12/00 P & L (bal. fig) 3
31/12/01 Bal c/d 4.5 1/1/01 Bal b/d 3
31/12/01 P & L (bal. fig) 1.5
4.5 4.5
31/12/02 Bal c/d 4.5 1/1/02 Bal b/d 4.5
31/12/03 P & L (Bal. fig) 4.5 1/1/03 Bal b/d 4.5
31/12/03 Bal c/d 1.5
3
4.5 4.5
3 1/1/04 Bal b/d 3

Final accounts extracts

Income statement

2000 2001 2002 2003 2004

£ ‘000’ £ ‘000’ £ ‘000’ £ ‘000’ £ ‘000’
Profit before tax 200 200 200 200 200
Income tax 60 60 60 60 60
Profit for the period 140 140 140 140 140

Workings: Income tax expense

Current year estimated corporation tax

liability 57 58.5 60 61.5 63
Add/(less) transfer to/(from) deferred tax
a/c 3 1.5 - (1.5) (3)
60 60.0 60 60 60

Balance Sheet

NON-CURRENT LIABILITIES
Deferred tax 3 4.5 4.5 3 -
CURRENT LIABILITIES
Current tax 57 58.5 60 61.5 63

IAS 8: ACCOUNTING POLICIES CHANGES IN A ACCOUNTING ESTIMATES AND

ERRORS

The objective of IAS 8 is to recommend the accounting statement of accounting policies changes inn
accounting statements and errors.

Accounting policies
Accounting policies are the specific assumptions, bases, principles and practices that are adopted by firms in
preparing financial statements. The standard requires that companies follow the policies consistently from
one financial period to the next.

A company should be guided by accounting standards or the current practices in choosing and applying
accounting policies. The standard allows firms to change their accounting policies when;

i) There is new standard

ii) The change is required by the law
iii) The new change will result in a fair presentation of the financial performance and position.

When a company changes its policies, then the change should be accounted for respectively i.e. the previously
reported financial statements should be adjusted/restated to reflect the new policy for comparison purposes.

Example:

A Ltd., has decided to change its policy of writing off borrowing costs to capitalizing the same. As at 31st
December, 2003, the company had written off borrowing costs amounting to £200,000. During the year
ended 31/12/04. The company reported profit for the period of £450,000 but after charging borrowing
costs of £50,000. As at 31/12/03 the retained profits were £1,500,000. Other transactions were:-

• Transfer from revaluation reserve on sale of PPE - £40,000

• Transfer from retained profits to general reserve - £50,000
• Interim dividends paid - £200,000

Required: Prepare the statement of changes in equity extract for the year-ended 81/12/04

Retained profits
 £
Balance as at 1.1.2004 1,500,000
Change in accounting policy 200,000
Balance as restated 1,700,000
Transfer from revaluation reserve on sale of PPE 40,000
Profit for the period (450,000 + 50,000) 500,00
Transfer to general reserve (50,000)
Interim dividends paid (200,000)
Balance as at 31/12/2004 1,990,000

Changes in accounting estimates

In preparing financial statements, it may be difficult to arrive at exact values for certain items to be presented
in the financial statements and thus estimates are normally used.

Examples of estimates: Depreciation, provision for doubtful debts and other provisions in relation to
contingent liabilities e.g. pending court cases (suits)

These estimates are based on the available information as at the time of preparing financial statements.

However, in subsequent financial periods, changes may be required on these estimates because of new
information becoming available. IAS 8 requires that a change in accounting estimate should be accounted for
in the period in which the change arises and where relevant, in other subsequent financial period. E.g. an
increase or decrease in provision for doubtful debts will be adjusted for in the current years income statement
whereas depreciation will not only be adjusted for in the current year but also in the subsequent financial
periods. i.e. the remaining Net Book Value of the assets will be depreciated over the remaining useful life
starting with the current financial period.

Example:
B Ltd., bought an item of plant at a total cost of £100,000. The estimated useful life commencing from 1st
January 2000 was 10 years. At the start of the 4th year it was discovered that the actual estimated useful life of
the plant was 8 years and not 10 years.

Required: Compute the depreciation charge for each of the eight years on the plant.

Initial depreciation = 100,000

10
=£10,000 each for 3 years

Net Book Value at beginning of year 4

= 10,000 x 3 years = 30,000
= 100,000 – 30,000 = 70,000

depreciation for rest of the 5 years

= 70,000
5
=£ 14,000
Errors

An error is an error discovered in the current financial period but it relates to one or more previous financial
periods. Such errors arise due to mathematical mistakes, misapplication of accounting policies, oversights
and fraud.

The statement requires that if such an error is material i.e. the previously reported financial statements were
materially misstated or misrepresented, then, the opening balances of the current financial period must be
restated and if practical, the previous financial statements should be restated.
Therefore an error requires retrospective application.

Example:
ABC Ltd., reported the following transactions during the year ended 31/12/2004

Retained profits b/d £100,000

Transfer from revaluation reserve £20,000
Transfer to general reserve £15,000
Profit for the period £60,000
Interim dividends paid £20,000

After the above balances were extracted, new information came to light that the opening inventory was
overstated by £10,000 due to double counting of some stock items.

Required: Prepare the statement change in equity extract for the year ended 31st December 2004.

Retained profits £
Balance as at 1.1.04 100,000
Error (10,000)
Balance restated 90,000
Transfer from revolutions reserve 20,000
Profit for the period (60,000 + 10,000) 70,000
Transfer to general reserve (15,000)
Interim dividends paid (20,000)
Balance as at 31.12.04 145,000

Example 3
The authorized share capital of Shirika Jipya Limited consists of 75,000 redeemable preference shares of
Sh.10 each and 1,500,000 ordinary share of Sh.25 each. The former are to be redeemed during 2005.
The trial balance of Shirika Jipya Limited as at 30 June 2000 was as follows:

Sh. ‘000’ Sh. ‘000’

Ordinary Share capital (shares fully paid) 15,375
6% redeemable preference share capital 750
Share premium account 3,150
Profit and loss account (1 July 1999) 21,600
10% convertible loan stock 8,000
Deferred tax 1,080
Inventories (1 July 1999) 25,073
Trade receivable 34,979
Trade payables 25,425
Provision for doubtful debts 90
Wages and salaries payable 473
Value added tax payable 681
Interim dividend paid 430
Freehold land, at cost 848
Building at cost 5,100
Plant at cost 30,750
Provision for depreciation on building 398
Provision for depreciation on plant 12,059
Long-term investment quoted 3,525
Interest paid 450
Purchases 141,450
Preferred dividend paid 32
Profit on sale of plant 173
Bad debts 23
Sales 179,100
Dividend received from investments (gross) 300
Installment tax and withholding tax paid 738
Wages and salaries 24,450
Bank 806
268,654 268,654

Additional information:
1. The 10% convertible loan stock is secured against the plant.
2. (i.) During the year fixed assets were purchased as follows
Buildings Sh.750,000 and plant Sh.4,050,000.
(ii). Plant with an original cost of Sh.1,500,000.
3. Depreciation is to be charged as to buildings Sh.53,000 and plant Sh.690,000.
4. The quoted investments had a market value at 30 June 2000 of Sh.6,750,000.
5. The wages and salaries figure includes the following:
Directors Salaries 122,00
General Manager 33,000
Company Secretary 23,000

6. The firm had signed a contract for Sh.23,243,000 being the lower of cost and net realisable value.
7. Sh.75,000 needs to be transferred from the deferred tax account.
8. The stock as at 30 June 2000 was Sh.23,243,000 being the lower cost and net realisable value.
9. The following provisions need to be made:
(i). Audit fees of Sh. 53,000
(ii). A final dividend on ordinary shares of Sh.35 per share. This had been proposed
before the year end.
(iii) The provision of doubtful debts is to be adjusted to Sh.120,000.
(iv). Corporate tax of the year’s profit is estimated at Sh. 4,290,000. Last year’s tax was
Overestimated by Sh.15, 000: this figure had been netted off against the installment and with-holding
tax paid.
10. After payment of the preference dividend in March 2000, the company decided to redeem these shares
and this was done in June 2000. No entries have been made in the books in respect of the same. The
shares were redeemed at a premium of 5% and this is to be written –off in the share premium account.

Required:
(a) An Income Statement (using the cost of sales method: do not attempt to classify expenses according to
their functions). (8 marks)

(b) A statement of Changes in Equity for the year ended 30 June 2000. (8 marks)

(c) A Balance Sheet as at that date in a form suitable for publication and conforming (as far as the
information permits) with the requirements of the Companies Act and International Accounting
Standards. (9 marks)
(Total: 25 marks)
Solution
Shirika Jipya
Income statement for the yaer ended 30 June 2000
Sh.000 Sh.000
Turnover 179,100
Cost of sales (W1) (143,023)
Gross profit 35,077
Other operating income: Profit on disposal 173
Investment income 300 473
Expenses 35,550
Other expenses (W) 24556
Finance cost 832 (25,388)
Profit before tax 10,162
Income tax expense (4,200)
Profit for the period 5,962
Shirika jipya
Statement of changes in equity for the year ended 30 june 2000

Ordinary Share Capital Investment Retained

share Premium redemption revaluation Profits Total
capital reserve Sh.’000’
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Bal as at 1.7.99 15,375 3,150 - 21,600 40,125
- -__ -__ -__ -__
15,375 3,150 - 21,600 40,125
Gain on inv. - - - - -
revaluation - 3225 - -3225
- - - - -
- - - - -
- - - - -
Purchase of shares - (37.5) - - (37.5)
Transfer to CRR - - 750 (750) -
Profit for year - - - 5,962 5,962
Dividends:
Interim (W4) - - - (430) (430)
-__ -__ -__ -__

15,375 3,112.5 750 3225 26362 48844.5

Shirika Jipya
Balance sheet as at 30 June 2000
Sh.000 Sh.000

NON CURRENT ASSETS

23,498
Plant, property and equipment (Note 4)
6750
Investments
30248

CURRENT ASSETS
23,243
Inventory
34,859
Receivables (W6)
18.5 58,120.5
Bank (W7)
88368.5
FINANCED BY
37,500
Authorised share capital 750
1.5m ordinary shares @ Sh.29 38,250
75,000 preference shares @ Sh.10

ISSUED AND PAID UP

15,375
Ordinary share capital
750
Capital redemption reserve
3,112.5
Share premium
3,225 7,087.5
26,382
Investment revaluation
48,844.5
Retained profits
Shareholders funds 8,000
1,005 9,005
Non Current Liabilities
Loan stock 25,425
Deferred tax 1,557
4,537
Current liabilities 30,519
Creditors 88368.5
Accruals (W8)
Accrued tax (W9)

Notes to the Financial Statements

1. The above financial statements have been prepared under the historical basis of accounting
which is modified to accommodate revaluation of certain assets.They are in compliance with
the applicable IFRSs and the Company’s Act..

2. The profit for the period has been arrived at after charging:
Sh.000
Directors fee 122
 Depreciation 743
Auditors remuneration 53
Staff costs 24328

3. The tax expense for the year is arrived at by applying the corporate rate of tax in Kenya of
30% to the adjusted profit for the year.

4. Property, plant and Equipment

Land Buildings Plant Total

Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Cost/valuation
Bal b/d 848 28,200 4,350 33,398
Additions - 4,050 750 4,800
Disposal - (1,500) - (1,500)
Bal c/d 848 30,750 5,10 46,698
Depreciation
Bal b/d - 13,214 398 13,612
Eliminated and disposed - (1,155) - (1,155)
Charge for year - 690 53 743
Bal c/d = 12,749 451 13,200
NBV c/a 848 18,001 4,649 23,498
NBV b/d 848 14,986 3,952 19,786

5. The 10% loan stock is secured against the plant.

6. The firm has signed a contract of Sh.8.775m for the construction of a warehouse for storage of
goods.
Workings

1.
Cost of sales 25,073
Opening stock 141,450
Purchases 166,523
Closing stock (23,243)
143,280
Add:Depreciation on:
• Buildings
53
• Plant
690
144023

Finance cost
2. Debenture interest (10% x 8,000) 800
Paid 450
Accrued 350
800
Add: Preference share dividend paid 32
832
 3.
Other expenses 30
Increased provision (bad debts) 53
Audit fee 24,450
Wages and salaries 23
Bad debts 24556
4. Interim dividends
Ordinary share capital 430
Preference share capital 32
462
5 Income tax expense
Current years estimate 4,290
Less previous years overprovison (15)
Transfer from deferred tax (75)
4,200
Note: Under IAS 32 redeemable preference shares are treated as a non current liability. Therefore any
dividends paid thereon are finance costs and it will not appear as aprt of shareholders funds.

Sh.000
5.  15,375  21,525
Final dividends  35x 
 25 
Preference share capital (6% x 750 – 32) 13
21,538

6. Receivables = (34,979 – 120) 34,859

7. Bank: As per TB 806

Paid for redemption (787.5)
18.5

8. Accruals
Wages 473
VAT 681
Interest 350
Audit fee 53
1,557
9. Accrued tax
Estimated for year 4,290
Overestimated (15)
Paid (738)
3,537

Deferred Tax A/c

Sh.000
Sh.000
Profit & Loss 75
C/d 1,005 Bal b/d 1,080
1,080 1,080
Example Four
Viatu Ltd, which manufactures footwear, makes up its accounts to 31 March each year. The company has an
authorised share capital of Sh. 600,000,000 divided into 15,000,000 6.5% preference shares of Sh. 20 each and
30,000,000 ordinary shares of Sh. 10 each. The following trial balance was extracted as at 31 March 2002.

Trial balance as at March 2002

Sh000 Sh000
Cost of Sales 699,992
Motor vehicle expenses 59,684
Selling and distribution costs 78,840
Depreciation of motor vehicles – for the year 12,580
Wages and salaries 95,834
Administration expenses 11,492
Audit fees 1,400
Sales 1,191,864
Discounts received 812
Investment income – trade investments 1,072
- others 1,608
Preference dividends paid 13,000
Debenture interest 1,600
Corporation tax paid – instalment 8,615
Compensation to director for loss of office 8,500
Depreciation of fixtures for the year) 1,040
8% debentures 20,000
Cash in hand 3,000
Ordinary share capital issued and paid-up) 200,000
Bank balance 11,745
Preference share capital issued and paid-up) 200,000
Inventory 31 March 2002) 204,132
Debtors/creditors 336,440 102,000
Deferred tax 3,000
Motor vehicles net book value) 24,800
Provision for doubtful debts 14,400
Fixtures and fittings net book value) 11,300
Profit and loss account 1 April 2001) 110,848
General reserves 60,000
Share premium 40,000
Freehold land and building cost) 270,000
Investments – trade market value Sh.35,000,000) 30,000
Others market value Sh.62,000,000) 61,610
_______ _______
1,945,604 1,945,604

Additional information:
1. Wages and salaries include salary paid to Managing Director of Sh. 30,000,000 and salary paid to Sales
Director of Sh. 25,000,000.
2. Provision is due to be made for directors’ fees Sh. 150,000,000.
3. Provision for doubtful debts is to be adjusted to Sh. 16,822,000.
4. Timing differences of Sh. 4,000,000 are expected to reverse in the near future.
5. The directors recommended an ordinary dividend of Sh.1.35 per share.
6. Corporation tax for the year is Sh.11; 820,000.The corporation tax rate is 30%on adjusted profit.
7. Land and buildings were professionally valued at Sh.300,000,000 at the year end. The directors wish to
incorporate the valued amount in the financial statements.
8. Information about other fixed asset is as follows:

Motor Fixtures &

vehicles fittings
Sh
Sh
Cost (including additions during the year) 51,200,000 20,800,000
Additions during the year 2,240,000 1,600,000
Cost of assets disposed of during the year (No entry made yet) 2,800,000 1,455,000
Accumulated depreciation of asset disposed of during the year 2,150,000 905,000
Proceeds of asset disposed of (including in sales in the trial 715,000 500,000
balance)

Required
(a)Income statement for the year ended 31 March 2002 (13 marks)
(b)Balance sheet as at 31 March 2002 (12 marks)

(The above two statement should be presented in the form suitable for publication in accordance with the
requirements of International Accounting Standards .IASs)
Solution
Viatu Ltd
Income statement for the year ended 31 March 2003
Sh.’000’ Sh.’000’
Turnover (W1) 1,190,694
Cost of sales (699,922)
Gross profit 490,657
Other Incomes : Discount received 812
Profit on disposal 15
Investment income 2,680 3,507
494,164
Selling and distribution expenses 176,104
Administrative expenses 245,688
Finance costs 1,600 (423,392)
Profit before tax 70,772
Income tax expense: Current 11,820
Deferred (1,800) (10,020)
Profit for the period 60,752
 Viatu Ltd
STATEMENT OF CHANGES IN EQUITY AS AT 31.03.02
Ordinary Preference Share General F.A Rev. Retained Total
share share premium reserve Reserve earnings
capital capital Sh.’000’
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Bal b/f 200,000 200,000 400,000 600,000 - 110,848 610,848
Prior adjustment - - - - - - -
Restated 200,000 200,000 400,000 600,000 - 110,848 610,848
Rev. gain on - - - - 30,000 - 30,000
NCA
Rev. gain on - - - - 390 - 390-
investment
Rev. gain on - - - - - - -
foreign - - - - - 60,752 60,752
Net profit: year
Dividends: - - - - -
Interim - - - - - (13,000) (13,000)
-
Bal b/d 200,000 200,000 40,000 60,000 30,390 158,600 68,8990

(b) Viatu Ltd

Balance sheet as at 31 March 2002
Sh.’000’ Sh.’000’
Non Current Assets
Plant, property and equipment 334,900
Investments( Other ) 62000
396900
Current Assets
Inventory 204,132
Receivables (336,440 – 16,822) 319,618
Trade investments 30,000
Cash and bank (11,745 + 3,000) 14,745 568,495
965395
FINANCED BY:
Authorised share capital
15m shares 6.5% preference @ Sh.20 300,000
50m share ordinary @ Sh.10 300,000
600,000
Issued and fully paid
10m 6.5% preference shares @ Sh.20 200,000
20m Ordinary shares @ Sh.10 200,000
400,000
Reserves
Share premium 40,000
Revaluation reserve 30,390
General reserve 60,000 130,390
Retained profit 158,600 158,600
Shareholders funds 688,990
Non current liabilities
8% debentures 20,000
Deferred tax 1,200 21,200
710190
Current liabilities
Trade creditors 102,000
Tax payable (11,820 – 8,615) 3,205
Accrued directors’ fee 150,000 255,205

TOTAL EQUITY AND LIABILITIES 965395

Workings

1. Turnover Sh.’000’
As per trial balance 1,191,864
Less proceeds and disposals (1,215)
1,190,649

2. Selling and distribution costs

As per TB 78,840
Motor vehicle expenses 59,864
Wages 25,000
Depreciation: Motor vehicle 12,580
176,104

3. Administrative expenses
Wages and salaries 70,834
As per TB 11,492
Audit fees 1,400
Depreciation: fixtures 1,040
Compensation of director for loss of office 8,500
Provision for doubtful debts (16,822 – 14,400) 2,422
Director’s fee 150,000
245,688

4. Profit on assets disposed

Motor vehicles Fixtures & Fittings Total
Cost 2,800 1,455 4,255
Acc. Dep. 2,150 905 3,055
NBV 650 550 1,200
Proceeds 715 500 1,215
Profit & Loss 6,500

DEFERRED TAX A/C

Sh.’000’ Sh.’000’
Profit U Loss 1,800
Bal c/d (30% x 4,000) 1,200 Bal b/d 3,000
3,000 3,000
Notes to the accounts
Note 1 Accounting policies

These financial statements have been prepared under the historical cost basis of accounting, which is
modified to accommodate the revaluation of certain properties and in accordance with the applicable IFRSs.

Property plant and equipment is shown at cost or revalued amount less the total accumultaed depreciation
which is based on the estimated useful life of the assets.

Inventory has been stated at the lower of cost and net relisable value.

Note 2 Profit before tax

The profit before tax has been arrived at after charging the following expenses

Sh.’000’
Directors fee 205,000
Compensation to director for loss of office 8,500
Depreciation 13,650
Auditors fee 1,400
Staff costs 40,834

Note 3 Taxation
Corporation tax is based on the adjusted profits for tax purpose at a corporation tax rate of 30%

Note 4 Propety plant and equipment

Freehold land & Motor Fixtures &

COST/VALUATION Buildings vehicles Fittings Total
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Bal as at 01.04.01 270,000 48,960 19,200 338,160
Additions - 2,240 1,600 3,840
Disposals - (2,800) (1,455) (4,255)
Revaluations 30,000 - - 30,000
Bal as at 31.03.02 300,000 48,400 19,345 367,745
Accumulated Depreciation
Bal as at 01.04.01 - 13,820 8,460 22,280
Eliminated on disposal - (2,150) (905) (3,055)
Charge for the year - 12,580 1,040 13,650
Bal as at 31.03.02 - 24,250 8,595 32,845
NBV as at 31.03.02 300,000 24,150 10,750 315,880
NBV as at 01.04.01 270,000 35,140 10,740 315,880

Note 5 Dividends
During the year the company paid a dividend of sh.1.30 on the preference shares outstanding. The
directors are now proposing a dividend of sh.1.35 per s share on the number of ordinary shares
outstanding at the end of the year.
 REINFORCEMENT QUESTIONS
QUESTION ONE
Athi River Cement (ARC) Ltd. is a company quoted on the Nairobi Stock Exchange. It makes up its
accounts to 31 March each year. The balance of the company as at 31 March 2003 is as follows:

Sh. Million Sh. Million

Administrative expenses 99
Borrowings 103
Buildings: Valuation at 1 April 1998 180
Accumulated depreciation 30
Capital work in progress 74
Cash and bank balances 5
Cost of sales 601
Compensating tax payable 8
Deferred income taxes 151
Deferred expenditure 15
Distribution costs 109
Finance leases payable 7
Finance costs 27
Finance income 2
Inventories 186
Other operating expenses 3
Other operating income 4
Plant and machinery: Cost 907
Accumulated depreciation 283
Prepaid operating lease rental: Cost 80
Amortisation of prepaid operating lease rental 20
Revaluation reserve 110
Share capital 450
Share premium 188
Taxation 17
Turnover (net of VAT) 884
Trade and other payables 160
Trade and other receivables 194
Revenue reserve 95
Unclaimed dividends _____ 2
2,497 2,497

Additional information

1. Borrowings comprise:
Bank overdraft (interest are payable in the year 20%) Sh.million
Bank loan, repayable 31 March 2005 (interest rate 13% fixed) 53
50
2. Buildings: Historical cost 103
Depreciation charge for the year included in cost of sales 60
6
 ARC’s accounting policy in relation to the difference between depreciation based on the
revalued amount of buildings (Sh.6 million) and depreciation based on the buildings’
historical cost (Sh.2 million) is to treat it as revaluation surplus realized as the buildings are
used. This transfer for the year has not yet been made.

The buildings had been revalued by Roy and Samika, Registered Valuers and Estate
Agents, on an open market basis.

Accumulated depreciation on historical cost of buildings as at 31 March 2003 was Sh.20

million

No impairment losses have occurred in the life of the company

3. Capital work in progress relates to ongoing construction of a new kin.

4. The compensating tax payable was in respect of the previous year’s dividend paid in the
year.
The directors have proposed that a dividend of 10% be paid for the year ended 31 March
2003. No entry has been made in the financial statements to reflect this. Proposed
dividends are accounted for as a separate component of equity until they have been
ratified at a general meeting.

5. Deferred expenditure represents development costs relating to production of new

products that are written off over four years. Expenditure of Sh.20 million was incurred
early in the year to 31 March 2003. The amortisation charge for the year was Sh.5 million.

6. The tax expense for the year is as follows: Sh. Million

Current taxation based on adjusted profit at 30% -
Deferred tax expense 17
17
Ignore deferred tax on the revaluation surplus

7. Finance lease payable comprise: Minimum Present value

lease of minimum
payments lease payments
Sh. Million Sh. Million
Payable within one year 3 5
Payable later than one year but not later than five years 8 5
11 7
8. Finance costs comprise: Sh. Million
Interest on bank loan 9
Interest on bank overdraft 16
Interest on finance leases 2
27
9. Finance income: Sh. Million
Interest received on bank deposits 2
10. Inventories comprise: Sh. Million
Raw materials 48
Work in progress 29
Finished goods 51
Stores and spares 58
186
11. The depreciation charge for the year on the plant and machinery was Sh.52 million and
the amortisation charge of the prepaid operating lease rental was Sh.2 million
All depreciation and amortisation charges are included in cost of sales

12. Other expenses included in the various functional expenses or cost of sales are:
Sh. Million Sh. Million
Directors’ emoluments: Fees 2
Other emoluments 12 14
Other staff costs: Wages and salaries 81
Social security cost (NSSF) 2
Termination benefits 3 86
Auditors’ remuneration 2
Loss on disposal of motor vehicles 3
105
The average number of staff employed by the company during the year was 603.

13. The authorized share capital of the company is made up of 90 million ordinary shares of
Sh.5 each.

Required:

Prepare the Income Statement and the Statement of Changes in Equity for the year ended 31 March 2003 and
the Balance Sheet as at 31 March 2003. ARC Limited prepares its Balance Sheet showing Total Assets and
Total Equity and Liabilities. Any notes necessary to ensure that the Financial Statements are prepared in
accordance with Internation Financial Reporting Standards should be added, but using only the information
included above. Do not compute the Earnings Per Share for the year.
QUESTION TWO
Maina and Ojara have been in partnership for a number of years sharing profits in the ratio 3:2. Because of
the present difficult economic situation in the country, it has been agreed that in the period ended 30 April
2000, no salaries will be paid to the partners and no drawings will be made either. Interest has been credited
to the partners in respect of their capital accounts. They decided to turn the partnership into a company on
30 April 2000, with its accounts being made up to 30 April each year. They decided that they would not open
a separate set of accounts on 30 April 2000, but would continue to record the transactions of the business in
the partnership books.

The trial balance extracted by the accountant, after he had computed the profit for the period ended 30 April
2000 and the year ended 30 April 20001, was as follows

Sh. ‘000’ Sh. ‘000’

Capital accounts at 1 November 1999: Maina 1,350
Ojara 750
Net profit before tax: period to 30 April 2000 495
Operating profit before interest and tax: year to 30 April 2001 1,680
210,000 ordinary shares of Sh. 10 each, fully paid up 2,100
20% debentures 450
Stock and work-in progress 1,140
Trade receivables 1,515
Cash at Bank and in hand 405
Interim dividend paid on 28 February 2001 300
Trade payables 1,530
Purchase consideration for company 2,850
 Land and buildings 900
Plant and machinery 900
Vehicles 540
Depreciation: Land and buildings 30
Depreciation: Plant and machinery 90
Depreciation: Vehicles 135
Loss on revaluation of net assets as at 30 April 60 _____
8,610 8,610

Additional information:

1. The fair values of the identifiable assets and liabilities of the partnership at 30 April 200 were:

Sh. ‘000’
Land and buildings 900
Plant and machinery 900
Vehicles 540
Stock 480
Trade receivables 1,470
Cash at Bank and in hand 750
Trade payables (2,505)
2,535

These fair values recorded in the books on 30 April and were the basis used for computing the purchase
consideration payables to the partners. Depreciation for the year ended 30 April 2001 has been provided for based
on these figures.

2. The purchase consideration of Sh. 2,858,000 was satisfied by the issue of 210,000 ordinary shares of Sh. 10 each, Sh.
450,000 20% debentures and the balance in cash. The ordinary shares and the debentures were divided between the
partners in their profit sharing ratio. Maina paid the dissolution expenses of the partnership out of his personal bank
account in the amount of Sh. 90,000.
3. Interest on the debentures for the year ended 30 April 2001 has not been paid and has not accrued for either.
4. The company, which is called Maoja Limited, will pay a final dividend of Sh. 1 per shares on the profit made in the
year. This had been decided at a meeting of the board of directors held on 30 April 2001.
5. Income tax at the rate of 30% on the adjusted profit for the year needs to be provided for in the amount of SH.
470,000. No installment tax has been paid since the year under consideration is the first year in which the company
operated.
6. Maoja Ltd. has a policy of amortising goodwill over five years on a straight line basis. In the year to 3o April 2001,
turnover was Sh. 10,080,000, cost of sales was Sh. 6,720,000, distribution costs were Sh. 1,092,000 and
administrative expenses were Sh. 588,000. Included in these expenses items were Directors’ Remuneration of Sh.
60,000, staff costs of Sh. 402,000 (including contributions to a defined contribution plan of Sh. 21,000) included in
administrative expenses, and depreciation included in distribution costs. Amortisation of goodwill should be
included in administrative expenses

Required:
(a). Prepare the Realisation and Capital Accounts of Maina and Ojaro to record the dissolution of the partnership.
(7 marks)
(b). Prepare for Maoja Limited the income statement for the year ended 30 April 2001 and the balance sheet at that
date in conformity with Kenya Companies Act and the International Accounting Standards. Do not prepare the
statement of changes in equity – deal with dividends proposed and paid in the income statement. Ignore deferred
tax. (13 marks)