Preparation of financial statements (A Level)

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Cambridge International AS & A Level Accounting 9706

Preparation of Financial Statements (A Level)

The big idea: At A Level the same double entry is pushed into harder settings: partnerships that change their members, clubs that do not aim for profit, factories that make what they sell, and companies that must report under international accounting standards, including a statement of cash flows.

Summary — What This Chapter Covers

Each type of organisation needs statements that answer its own users’ questions: profit and capital for partners, the surplus and accumulated fund for a club, the cost of production for a manufacturer, and the full IAS set for a limited company.
Goodwill is the amount by which a business is worth more than its identifiable net assets. Purchased goodwill is recorded; inherent goodwill is not.
On a change in partnership (new ratio, admission, retirement), goodwill is credited to the old partners in the old ratio and written off in the new ratio; revaluation gains and losses go to the old partners in the old ratio.
A change part-way through the year splits the appropriation account into two periods.
On dissolution a realisation account collects every asset sold or taken over, and the partners are paid out so that the bank account closes at nil.
A club prepares a receipts and payments account, a subscriptions account, an income and expenditure account and a statement of financial position headed by the accumulated fund.
A manufacturing account builds prime cost, factory overheads and the cost of production; factory profit is added and the provision for unrealised profit removes it from unsold finished goods.
A limited company prepares the statement of profit or loss, the statement of changes in equity, the schedule of non-current assets, the statement of financial position and the statement of cash flows (IAS 7, indirect method).

1. The Need for and Purpose of Financial Statements

Syllabus 3.1.1 · A Level · Paper 3

Different organisations, different users

Every set of financial statements exists to tell someone what they need to know about the organisation. The format follows from who owns the organisation, who lends to it, and what it is trying to achieve.

Organisation	Statements prepared	Why these statements
Partnership	Statement of profit or loss, appropriation account, capital and current accounts, statement of financial position	Partners need to see how the profit has been shared under the partnership agreement and what each partner has invested and withdrawn.
Club or society	Receipts and payments account, trading account for any revenue-generating activity, income and expenditure account, statement of financial position	Members want to know whether subscriptions cover running costs (surplus or deficit) and whether the club is stable. Profit is not its aim.
Manufacturing business	Manufacturing account, statement of profit or loss, statement of financial position	Managers need the cost of production to set prices and control factory costs, and to judge the factory and the selling side separately.
Limited company	Statement of profit or loss, statement of changes in equity, statement of financial position, statement of cash flows, notes including the schedule of non-current assets

Practice Question 1

Practice Question 2

5. Clubs and Societies

Memorise

Partnership changes

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Also in the full note

Old ratio in, new ratio out
Two periods, two ratios
Sell up, pay the creditors, pay the partners
Accumulated fund, subscriptions, surplus
Prime cost → cost of production → transfer price
Profit or loss, changes in equity, schedule, financial position
Indirect method: from profit to cash

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Preparation of financial statements (A Level)