The following is an extract from the trial balance of World Star Co for the year ended 31 December 2005: $000 $000 Revenue 50,000 Cost of Sales 15,000 Administrative expenses 10000 Distribution Cost 7,000 Income Tax (note 3) 120 Deferred tax liability 1 January 2005 (note 3) 7,000 Provision at 1 January 2005 (note 2) 5000 Retained earnings at 1 January 2005 64,000 Equity share capital ($1) at 1 January 2005 50,000 Intangible assets (note 6) 2,650 Investment property (note 5) 29,000 Finance Cost 3,500 Investment Income 850 Suspense account 60,000 The following information is relevant: The store manager made a mistake in the inventory count at 31 December 2004, hence the closing inventory balance in the financial statements was overstated by $950,000. No entries have been made to correct this error. The provision relates to a court case in existence since December 2004. World Star Company settles the case on 31 December 2005 for $8,500,000. The full amount was credited correctly to cash, with a corresponding debit entry being made in the suspense account. The income tax figure in the trial balance relates to the under/over provision from the previous year. The current year tax is estimated to be a tax refund of $2,000,000. In addition, the deferred tax liability at 31 December 2005 is estimated to be 9,000,000. On 30 September 2005, World Star Company made a 1 for 4 rights issue. The exercise price was $1.50 per share. The proceeds were correctly accounted for in cash, with a corresponding credit entry being made in the suspense account. World Star acquired an investment property for 30,000,000 cash on January 2005 and decided to use the fair value model to account for investment properties. As the property is expected to have a 30-year useful life, depreciation was recorded in this basis. The fair value of the property at 31 December 2005 has been assessed at 32,000,000 but no accounting has taken place in relation to this. All depreciation and amortization is charged on a pro-rate basis to administrative expenses. There were no other acquisitions or disposals of non-current assets. World Star Co incurred a number of expenses in relation to branding during the year and has capitalized the following costs as intangible assets. $1,700,000 cash was paid on 1 April 2005 to promote one of its major brands which is deemed to have an indefinite life. $950,000 cash was paid on 1 October 2005 to acquire a brand from one of its competitors. World Star intends to sell it after five years. At the point of sale, it is estimated that the value of the brand will have increased and so no amortization has been accounted for in the current year.950000/5=190,000 World Star Co paid dividend of $0.05 per share on all existing shares 31 December 2005 recording the dividend paid in administrative expenses. Required: Prepare the statement of profit or loss for the year ended 31 December 2005. (Show the necessary adjustments for each line item based on the notes) Prepare the statement of changes in equity for the year ended 31 December 2005. Prepare the following extracts form the statement of cash flows Co for the year ended 31 December 2005: Cash flows from investing activities Cash flows from financing activities
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
The following is an extract from the
|
|
$000 |
$000 |
|
Revenue |
|
50,000 |
|
Cost of Sales |
15,000 |
|
|
Administrative expenses |
10000 |
|
|
Distribution Cost |
7,000 |
|
|
Income Tax (note 3) |
120 |
|
|
|
|
7,000 |
|
Provision at 1 January 2005 (note 2) |
|
5000 |
|
|
|
64,000 |
|
Equity share capital ($1) at 1 January 2005 |
|
50,000 |
|
Intangible assets (note 6) |
2,650 |
|
|
Investment property (note 5) |
29,000 |
|
|
Finance Cost |
3,500 |
|
|
Investment Income |
|
850 |
|
Suspense account |
|
60,000 |
|
|
|
|
The following information is relevant:
- The store manager made a mistake in the inventory count at 31 December 2004, hence the closing inventory balance in the financial statements was overstated by $950,000. No entries have been made to correct this error.
- The provision relates to a court case in existence since December 2004. World Star Company settles the case on 31 December 2005 for $8,500,000. The full amount was credited correctly to cash, with a corresponding debit entry being made in the suspense account.
- The income tax figure in the trial balance relates to the under/over provision from the previous year. The current year tax is estimated to be a tax refund of $2,000,000. In addition, the deferred tax liability at 31 December 2005 is estimated to be 9,000,000.
- On 30 September 2005, World Star Company made a 1 for 4 rights issue. The exercise price was $1.50 per share. The proceeds were correctly accounted for in cash, with a corresponding credit entry being made in the suspense account.
- World Star acquired an investment property for 30,000,000 cash on January 2005 and decided to use the fair value model to account for investment properties. As the property is expected to have a 30-year useful life,
depreciation was recorded in this basis. The fair value of the property at 31 December 2005 has been assessed at 32,000,000 but no accounting has taken place in relation to this. All depreciation and amortization is charged on a pro-rate basis to administrative expenses. There were no other acquisitions or disposals of non-current assets. - World Star Co incurred a number of expenses in relation to branding during the year and has capitalized the following costs as intangible assets.
- $1,700,000 cash was paid on 1 April 2005 to promote one of its major brands which is deemed to have an indefinite life.
- $950,000 cash was paid on 1 October 2005 to acquire a brand from one of its competitors. World Star intends to sell it after five years. At the point of sale, it is estimated that the value of the brand will have increased and so no amortization has been accounted for in the current year.950000/5=190,000
- World Star Co paid dividend of $0.05 per share on all existing shares 31 December 2005 recording the dividend paid in administrative expenses.
Required:
- Prepare the statement of profit or loss for the year ended 31 December 2005. (Show the necessary adjustments for each line item based on the notes)
- Prepare the statement of changes in equity for the year ended 31 December 2005.
- Prepare the following extracts form the statement of
cash flows Co for the year ended 31 December 2005:
- Cash flows from investing activities
- Cash flows from financing activities
Step by step
Solved in 3 steps with 1 images
