Financial Statements and Annual Reports

Financial Statements
▪ The objective of financial statements is to provide information about the financial
performance, financial position and cash flows of an entity that is useful to a wide range of
users in making economic decisions. Financial statements also show the results of the
management’s stewardship of the resources entrusted to it.
▪ International Accounting Standard 1 (IAS 1) states that financial statements are a structured
representation of the financial position and financial performance of an entity.
▪ Financial statement refers to two statements, which the accountant prepares at the end of
the period for a business enterprise. (Myer, 1959).
▪ Kohler (1983), posits that financial statements are those statements, which show both the
performance and the financial position. They include statement of financial position
(balance sheet), income statement, fund statement or any supporting statement or other
presentation of financial data derived from accounting records.
▪ According to J.J. Hampton, a financial statement is an organized collection of data
according to logical and consistent accounting procedures. Its purpose is to convey an
understanding of some financial aspects of a business firm. It may show a position at a
moment of time as in the case of a statement of financial position, or may reveal a series
of activities over a given period of time, as in the case of an income statement.
▪ American Institute of Certified Accountants (AICPA), states that financial statements
reflect a combination of recorded facts, accounting principles and personal judgements.
▪ The components of financial statements are;
1. The statement of financial position (balance sheet) as at the end of the period: This
statement represents the assets, liabilities, and owner’s equity of a business enterprise at a
specific date. It shows the financial position of the enterprise, that is, as to whether the
business is in a sound financial position and can pay all its debt as they fall due or not.
2. The statement of comprehensive income (trading, profit and loss accounts) for the
period:
This statement presents the revenues of business enterprise against expenses to show the
resulting net profit or loss for a specified period of time.
3. The statement of changes in equity for the period:
It summarizes the changes in owner’s equity for a specific period of time.
4. The statement of cash flow for the period:
It summarizes information concerning the cash inflows (receipts) and outflows (payments)
for a specific period of time.
5. Notes, comprising a summary of significant accounting policies and other explanatory
information.
▪ These financial statements are prepared for presenting a periodical review or report on the
progress by the management and deal with;
(i) The status of investments in the business and
 (ii) The results achieved during the period under review
Corporate or Annual Reports
▪ This is a report issued annually by a company to its shareholders and it’s probably the most
important among the various reports issue to shareholders. It contains basic financial
statements (the income statement, the statement of financial position, the statement of
retained earnings and the statement of cash flow) as well as management’s opinion of the
past year’s operations, and the firm’s future prospects.
▪ Corporate reports contain both the financial statements and non-financial statements of
the company. The non-financial statements that can be found in the annual reports of a
company include:
➢ Auditors’ report
➢ Management report (Board Chairman and CEO reports)
➢ Directors’ report
➢ Corporate social responsibility report
➢ Value added report, etc.

Preparation of Financial Statements for Merchandise Enterprises

1. Statement of Financial Statement (Balance Sheet)

This includes assets, liabilities, equity (capital), income, and expenses. They are precisely defined
and universally understood and applied. The following elements of financial statements are
directly related to the measurement of the financial position.
(a) Assets: They are the resources controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the enterprise (IAS 16).
▪ Controlled by the Enterprise: Control is the ability to obtain the economic benefits and to
restrict the access of others to those resources.
▪ Past Events: The events must be “past” before an asset can arise.
▪ Future Economic Benefits: These are evidenced by the prospective receipt of cash. This
could be cash itself, a debt receivable or any item which may be sold. It could also be the
benefit from the usage of item.
In other words, assets are the resources owned by a business and are expected to benefit future
operations by way of cash inflows to the business. Assets consist of properties of all kinds.
Types of Assets:
(i) Non-Current Assets (Fixed Assets): They are the type of assets that are acquired not primarily
for re-sale or conversion into cash, but to be used in the continuing operations of a business
enterprise. They have long life span and are classified into tangible and intangible (fictitious).
Examples; Land and building, Machinery, Motor vehicle, Equipment, Delivery van, etc.
(ii) Current Assets: These are assets that have a short life span and are primarily meant for re-
sale or conversion into cash. Current assets thus have benefit within one year. Examples are Stock
of goods (inventories), cash in hand, cash at bank, bills receivable, accounts receivables (debtors),
prepayments or advance payments, etc.
(b) Liabilities: They are the present obligations of an enterprise arising from past events or
transactions, the settlement of which is expected to result in an outflow from the enterprise’s
economic benefits. Liabilities can also be described as the debts owed by a business entity as a
result of acquisition of properties, goods or services on credit for the running and sustainability of
the business. They are classified as cash, goods and services introduced into a business from
outside sources. Liabilities are of two kinds, long-term liabilities and current liabilities.
(i) Non-Current Liabilities: They are debts of a business that fall due after more than one year or
beyond the normal operating cycle of a business (usually one accounting year). Examples are
debentures or loans etc.
(ii) Current Liabilities: This is made up of obligations that fall due within the normal accounting
year or the normal operating cycle. Examples are accrued expenses, unearned incomes, bank
overdraft, bills payable, accounts payable (creditors), and loans repayable within one year.
(c) Capital: This is the resources invested by the owner into a business. Capital is thus the internal
resources invested by the owner into a business. It could either be actual money or money worth
(assets). It is sometimes called owner’s equity or shareholders’ funds or the net worth of a
business and it serves as the right of claims against the resources owned by the business. The
capital is the residual amount found after deducting all liabilities of the entity from all the entity’s
assets (Capital =Assets ‒ Liabilities).

2. Income Statement (Profit and Loss Account)

The following elements of financial statements are directly related to the measurement of
performance.
(a) Income: It is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in an increase in equity
(other than increases resulting from contributions by equity participants, i.e. owners)
Revenue is the value of what is received for goods sold, for services rendered, and from other
sources. It consists of monitory value of goods and services that have been delivered to customers.
Revenue increases profit and hence the owner’s equity. It is the out of revenue that income is
generated. Income is what remains after expenses and taxes are deducted from revenue. Sometime
income is also used to mean the amounts earned from such activities which are not main activities
of the business entity. e.g. Rent receivable, discount received, commission received, interest
received.
(b) Expenses: They are the decreases in economic benefits during the accounting period in the
form of outflows or depletion of assets or increase in liabilities that result in decreases in equity
(other than decreases because of distributions to owners). Expenses are the monies spent for
operating the business. Expenses are the cost of the goods and services used up in the process of
obtaining revenue. Expenses involve expenditure of money which has been utilized in the running
of business and for which there is no benefit remaining at the end of the trading period e.g. rent,
utilities, insurance, repairs, discount allowed, salaries, motor expenses, and Bad debts etc.
Expenses decrease profit and hence reducing owner’s equity.

Presentation of Statement of Financial Position (Vertical Style)

ABC Enterprise
Statement of Financial Position as at 31st December, 2023
Cost Depreciation Net Book Value
GH¢ GH¢ GH¢
Non-Current Assets
Land xxx
Building xxx xx xxx
Equipment xxx xx xxx
Motor Vehicle xxx xx xxx
Fixtures & Fittings xxx xx xxx
xxx xxx xxx
Current Assets
Inventories (Stock of goods) xxx
Accounts Receivable (Debtors) xxx
Prepaid xxx
Bank Balance xxx
Cash in Hand xxx xxx
Current Liabilities
Accounts Payable (Creditors) xxx
Accruals (Owings/Outstanding) xxx
Bank Overdraft xxx xxx
Working Capital xxx
Net Assets / Capital Employed xxxx

Financed By
Capital xxx
Add: Net Profit xxx
xxx
Less: Drawings xxx
Owner’s Equity xxx
xxx
Long-Term Liabilities
Loans xxx
Debenture xxx xxx
Net Worth / Assets xxxx
Illustration Question
Prepare a Statement of financial position (Balance Sheet) from the following list of balances
extracted from the books of Pink Sheet Limited as at 30th June, 2021:
GH¢
Capital 60,000
Fixtures and Fittings 15,000
Inventories 9,000
Accounts Receivable 20,400
Accounts Payable 27,300
Cash in hand 600
Bank Balance 45,300
Drawings 21,000
Net Profit 24,000

Illustration Question
The following balances were extracted from the books of Global Burger Trading Company as on
31st December, 2020.
GH¢
Capital 75,000
Cash in hand 100
Rent Owing 2,000
Freehold Premises 50,000
Trade Debtors 500
Trade Creditors 5,300
Motor Vehicles 7,200
Stock of Goods 16,000
Cash at Bank 300
Fixtures and Fittings 8,000
Profit for the year 1,600
Drawings 1,800

Required: Draw up a statement of financial position.

Assignment Question
The statement of financial position below was prepared by Obeng Mensah, a non-accounting
student. As a student studying financial accounting, re-draft the statement of financial position
making all the necessary corrections.
Enkoyie Enterprise
Statement of Financial Statement for the year ended 30th June, 2021
GH¢ GH¢ GH¢
Non-current Assets:
Buildings 40,000
Equipment & Furniture 35,000
Inventories (closing) 11,000 86,000
Current Assets:
Inventories (opening) 4,800
Cash in Hand 800
Accounts Receivable 24,000
Bank Balance 2,400 32,000
Less Current Liabilities:
Loan from Nana Broni 20,000
Accounts Payable 18,000 38,000 (6,000)
80,000
Financed By:
Capital 62,000
Drawings 18,000
Salaries and wages 31,200
111,200
Less Net Profit 31,200 80,000

Preparation of Income Statement

Name of Business
Income Statement for the Year Ended 31st December 2013.
GH¢ GH¢ GH¢
Sales xx
Less: Returns Inwards xx
Net Sales xx
Less Cost of Sales
Opening Stock xx
Add: Purchases xx
Carriage Inwards xx
xx
Less Returns Outwards xx xx
Cost of goods Available for sales xx
 Less Closing Stock xx xx
Gross Profit/Loss xx
Discount Received xx
Commission Received xx
Interest Received xx
Rent Receivable xx
Decrease in Provision for bad debt xx xx
xx
Less: Selling & Distribution Expenses:
Carriage Outwards xx
Advertising xx
Bad debt xx
Discount Allowed xx
Increase in Provision for bad debt xx
General / Administrative Expenses:
Office Expenses xx
Rent and Rate xx
Insurance xx
Add: Owings xx xx
Postage & Stationery xx
Salaries xx
Electricity Charges xx
Less: Prepaid xx xx
Depreciation: Equipment xx xx
Net Profit/Loss xx

Illustration Question I
From the following trial balance of Madam Abena Boatemaa, draw up the income statement for
the year ended 30th September 2019, and a statement of financial position as at that date.
Dr. Cr.
GH¢ GH¢
Inventories at 1st October 2018 41,600
Carriage outwards 2,100
Carriage inwards 3,700
Returns inwards 1,540
Returns outwards 3,410
Purchases 188,430
Sales 380,400
Discount received 150
Salaries and wages 61,400
Warehouse rent 3,700
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating expenses 894
General expenses 245
Premises 92,000
Motor vehicles 13,400
Fixtures and fittings 1,900
Accounts Receivable 42,560
Accounts Payable 31,600
Cash at bank 5,106
Drawings 22,000
Capital 68,693
484,253 484,253

Stock at 30th September, 2019 was GH¢44,780

Suggested Solution
Madam Abena Boatemaa
Income Statement for the year ending 30th September 2019
GH¢ GH¢
Sales 380,400
Less Returns inwards 1,540 378,860
Less: Cost of goods sold:
Opening stock 41,600
purchases 188,430
Add: Carriage Inwards 3,700
192,130
Less: Returns Outwards 3,410 188,720
230,320
Less Closing stock 44,780 185,540
Gross profit 193,320
Discount received 150
193,470
Less Expenses:
Salaries and wages 61,400
Warehouse rent 3,700
Carriage out 2,100
Insurance 1,356
 Motor expenses 1,910
Office expenses 412
Lighting and heating 894
General expenses 245 72,017
Net profit 121,453

Madam Abena Boatemaa

Statement of Financial Position as at 30th September 2019
Non-current assets: GH¢ GH¢
Premises 92,000
Fixtures and fittings 1,900
Motor vehicles 13,400 107,300
Current assets:
Stock 44,780
Debtors 42,560
Bank 5,106
92,446
Less Current liabilities:
Creditors 31,600 60,846
168,146
Financed By:
Capital 68,693
Add net profit 121,453
190,146
Less Drawings 22,000
168,146

Illustration Question II
The trial balance of a small business, Break-Even Enterprise at 31st August, 2019 is as follows:
GH¢ GH¢
Stock: 1 September 2018 8,200
Purchases and sales 26,500 40,900
Discount received 500
Rent 4,400
Business rates 1,600
Sundry expenses 340
Motor vehicle at cost 9,000
Debtors and creditors 1,960 2,100
 Provision for doubtful debt 800
Bank 1,500
Provision for depreciation on motor vehicle 1,200
Capital at 1st September 2018 19,700
Drawings 11,700
65,200 65,200
st
At 31 August 2019 there was:
a) Stock valued at cost prices GH¢9,100.
b) Accrued rent of GH¢400.
c) Prepaid business rates of GH¢300.
d) Provision for doubtful debt should be GH¢960.
e) The motor vehicle is to be depreciated at 20% of cost.

You are required to prepare the income statement for the year ended 31 August 2019, together
with a Statement of Financial Position as at that date.

Suggested Solution
Break-Even Enterprise
Income Statement for the year ending 31st August 2019
GH¢ GH¢
Sales 40,900
Less Cost of goods sold:
Opening stock 8,200
Add purchases 26,500
34,700
Less Closing stock 9,100 25,600
Gross profit 15,300
Discount received 500
15,800
Less expenses:
Rent 4,800
Business rates 1,300
Sundry expenses 340
Provision for doubtful debt 160
Depreciation on Motor Vehicle 1,800 8,400
Net profit 7,400
 Break-Even Enterprise
Statement of Financial Position as at 31st August 2019
Fixed assets: Cost Dep NBV
Motor vehicles 9,000 3,000 6,000
Current assets:
Debtors 1,960
Less: Provision for doubtful debt 960 1,000
Stock 9,100
Bank 1,500
Rates Prepayment 300
11,900
Current liabilities:
Creditors 2,100
Rent accrual 400 2,500 9,400
15,400
Financed By:
Capital 19,700
Add net profit 7,400
27,100
Less: Drawings 11,700
15,400
Assignment 1
The following trial balance was extracted from the books of Calvary Enterprise on 30 April
2018. From it, and the note about stock, prepare the income statement for the year ended
30 April 2018, and a statement of financial position as at that date.
Trial Balance as at 30th April, 2018
Dr. Cr.
GH¢ GH¢
Sales 210,420
Purchases 108,680
Stock 1 May 2017 9,410
Carriage outwards 1,115
Carriage inwards 840
Returns inwards 4,900
Returns outwards 3,720
Salaries and wages 41,800
Motor expenses 912
Rent 6,800
Sundry expenses 318
Investment income 507
Motor vehicles 14,400
Fixtures and fittings 912
Debtors 23,200
Creditors 14,100
Cash at bank 4,100
Cash in hand 240
Drawings 29,440
Capital 18,320
247,067 247,067

Stock at 30th April 2018 was GH¢11,290.

Assignment 2
The following trial balance was extracted from the books of AB Mechanical Enterprise.
Dr Cr
GH¢ GH¢
Capital 315,200
Purchases 259,800
Sales 484,700
Carriage inwards 17,410
Machinery at cost 215,000
Equipment at cost 198,000
Trade debtors 76,800
Bank overdraft 63,509
Trade creditors 77,820
Cash in hand 13,400
Inventory (January I, 2020) 27,680
Salaries and wages 56,700
Discount allowed 11,450
Drawings 70,000
Discount received 22,800
Electricity 29,229
General expenses 37,060
Rent 43,000
9% Bond 100,000
Returns inwards 24,500
Returns outwards 16,000
1,080,029 1,080,029
Additional information:
▪ Inventory in trade at December 31, 2020 was GH¢29,400;
▪ Rent prepaid GH¢19,500;
▪ Depreciation is to be provided as follows:
- Machinery 12½% on cost;
 - Equipment 10% on cost.
You are required to prepare:
(a) Income Statement for the year ended 31st December, 2020.
(b) Statement of Financial Position as at that date.

Assignment 3
The following balances were extracted from the books of Mastire Enterprise, a retailer as
at 31st March 2021.
Dr Cr
GH¢ GH¢
Capital 100,000
Drawings 50,000
Cash in hand 1,000
Cash at bank 18,500
Debtors 70,000
Creditors 4,000
Purchases 535,000
Sales 700,000
st
Inventories: 1 April, 2020 50,000
Discount allowed 13,000
Advertisement 2,500
Electricity 2,000
Wages and salaries 30,000
Rent 20,000
Equipment at cost 15,000
st
Provision for depreciation of Equipment 1 3,000
April, 2020
807,000 807,000
Additional information:
▪ Inventory on 31 March, 2021 was valued at GH¢60,000;
▪ At 31st March, 2021; GH¢1,500 was outstanding on advertisement, electricity was
prepaid by GH¢500 and there was a doubtful debt of GH¢1,000;
▪ Depreciation is to be provided on equipment at 10% on cost.

You are required to prepare:

(a) Income Statement for the year ended 31st March, 2021.
(b) Statement