LECTURE 4 PART 1

Preparation of Financial
Statements
(No Adjustments)

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Learning
Learning Objectives
Objectives // Outcomes
Outcomes

After studying this chapter, you should be able to:

1. Prepare the Statement of profit or loss (SPL) for Sole
proprietorship and company.
2. Prepare the Statement of financial position (SOFP) for
Sole proprietorship and company.
3. Prepare the Retained earnings statement (RES) for
company.

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Statement of Profit or Loss (SPL) /
Income Statement
Format A = Merchandise
Format B = Services

 Reports the profitability of the company’s operations

over a specific period of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).
 Does not include investment and dividend
transactions between the shareholders and the
business.
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 STATEMENT OF PROFIT OR LOSS

SERVICE MERCHANDISING

Net Sales
Revenues
Less(-)
Cost of goods Sold
Less(-)
Equals(=)

Gross profit
Expenses
Add (+)

Equals(=) Other revenue

Less(-)
Expenses
Net Profit/Loss
Equals(=)

Net profit/Loss 4
Calculate Net Sales - Example
Example RM RM RM
Sales Revenues 1000
Less : Return inwards (50)
Net sales 950

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Calculate Cost of Goods Sold (COGS) - Example
Example RM RM RM
Opening inventory 200
Purchase 400
Less : Return outwards (100)
Net purchase 300
Add: Carriage inwards 50
Add: Duty on purchase 100
Add: Insurance on purchase 100
Cost of purchases 550
Cost of goods available for 750
sale
Less : Closing Inventory (120)
Cost of goods sold 630

Please refer to the IS & BS format

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Cash Discounts
1) Discount Allowed
-Cash discount given to the customer
-It is treated as an EXPENSE
2) Discount received
-Cash discount received from the supplier
-It is treated as a REVENUE

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 Carriage Inwards and Carriage Outwards
• Cost of transport known as carriage or freight
1) Carriage inwards – cost of transport paid to
bring the goods to the business premises
2) Carriage outwards – cost of transport paid to
deliver the goods sold to the buyer’s premises

BOTH are EXPENSES to the business

Carriage inwards – cost of goods sold in SPL
Carriage outwards - operating expense in SPL
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Statement of Financial Position (SOFP)
Format C = Small Business
Format D = Company

 Reports the assets, liabilities, and equity at a

specific date.
 Lists assets at the top, followed by liabilities and
equity.
 Total assets must equal total liabilities and equity.
 Is a snapshot of the company’s financial condition
at a specific moment in time (usually the month-end
or year-end).
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Account Classifications (SOFP)

 To improve understanding, companies group similar

assets and similar liabilities together.

Standard Classifications

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Asset ( Current Asset & Non-current Asset)

1) Current Assets
 Assets that a company expects to convert to cash
or use up within one year or the operating cycle,
whichever is longer.

 Operating cycle is the average time it takes from

the purchase of inventory to the collection of cash
from customers.

 Examples :

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Current Assets

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Non-Current Asset

1) Long-Term Investments
 Investments in ordinary shares and bonds of other
companies.
 Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.

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Non-Current Asset

2)Property, Plant, and Equipment

 Long useful lives.

 Currently used in operations.

 Depreciation - allocating the cost of assets to a number

of years.

 Accumulated depreciation - total amount of

depreciation expensed thus far in the asset’s life.

 Examples :

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Property, Plant, and Equipment

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 Non-Current Asset

3)Intangible Assets
 Assets that do not have physical substance.

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Liabilities
(Current liabilities & Non-current liabilities)

Current Liabilities
 Obligations company is to pay within the coming year or
its operating cycle, whichever is longer.

 Usually list notes payable first, followed by accounts

payable. Other items follow in order of magnitude.

 Liquidity - ability to pay obligations expected to be due

within the next year.

 Examples :
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Current Liabilities

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Non-Current Liabilities
 Obligations a company expects to pay after one year.

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Equity
 Proprietorship - one capital account.
 Partnership - capital account for each partner.
 Company – Share Capital and Retained Earnings.

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Retained Earnings Statement (Format E)

 Reports the changes in retained earnings for a

specific period of time.
 The time period is the same as that covered by the
income statement.
 Information provided indicates the reasons why
retained earnings increased or decreased during
the period.

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Exercise (1)
• The following is the trial balance of Jakie Chong
Trading, a service provider as at 28 February 2019.

Required:
a) Prepare the statement of profit or loss (SPL) for the
year ended 28 February 2019.
b) Prepare the statement of financial position (SOFP)
as at 28 February 2019.

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Exercise (2)
• The following is the trial balance from the book of
Nikki Trading for the year ended 30 June 2017

Required
a) Prepare the SPL for the year ended 30 June 2017.
b) Prepare the SOFP as at 30 June 2017.

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Exercise (3)
• Cempaka Bhd. is a merchandising company which has
business operations in Cyberjaya. The following balances
have been extracted from the books as at 31 December
2016.

Required:
• Prepare the SPL for the year ended 31 December 2016.

• Prepare the RES for the year ended 31 December 2016

• Prepare the SOFP as at 31 December 2016.
 

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THE END

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