Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and

Income Statement

Financial Management

Financial Management
Topic 2:
Preparation of Published Financial
Statements: Statement of Financial Position
and Income Statement

NCC Education Limited

V1.0

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.2

Scope and Coverage

This topic will cover:
Statement of financial position (SoFP)
Comparison between SoFP and balance sheet
Income statement

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.3

Learning Outcomes for Topic 2

By the end of this topic students will be able to:
Discuss the preparation of the statement of financial
position and income statement.
Prepare the statement of financial position.
Explain the differences between the balance sheet
and statement of financial position.
Prepare the income statement.

V1.0

V1.0

NCC Education Limited

Visuals Handout Page 1

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and
Income Statement

Financial Management

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.4

Context for the Topic

This topic is concerned with published accounts for
companies listed on the UK stock exchange
Must comply with International Financial Reporting
Standards (IFRS)
(IFRS).
Remember from Topic 1 not all organisations have
to comply with IFRS (e.g. sole traders).

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.5

Statement of Financial Position

Required to be published under IAS 1 Presentation
of financial statements.
Equivalent to the balance sheet but may have
differences.
Reports companys net worth as at last day of
accounting period.
Flexible format for companies to choose how to
present the required information.

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.6

SoFP: Vertical Format

Commonly used in the UK
ASSETS
minus
LIABILITIES
equals
EQUITY

V1.0

V1.0

NCC Education Limited

Visuals Handout Page 2

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and
Income Statement

Financial Management

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.7

SoFP: Horizontal Format

Commonly used in continental European countries.

EQUITY
plus

ASSETS

equals
LIABILITIES

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.8

SoFP: Alternative Format

ASSETS
Equals
EQUITY
Plus
LIABILITIES

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.9

SoFP Example
Head Noise Ltd Statement of financial position as at 31 March 2010
ASSETS

000 EQUITY

Non-current assets
Property, plant & equipment
Goodwill

Share capital
18,720 Retained earnings
700

000
8,000
8,580
16,580

19420 LIABILITIES
Current assets

Non-current liabilities

Inventories

1,270 Long-term borrowings

Trade receivables

1,350

Cash

3,600

260 Current Liabilities

2,880 Trade & other payables
Current tax payable

1,240
880
2,120

Total Assets

V1.0

V1.0

22,300 Total Equity & Liabilities

22,300

NCC Education Limited

Visuals Handout Page 3

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and
Income Statement

Financial Management

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.10

SoFP Example Discussed - 1

This example uses the horizontal format but the
vertical or alternative format would also be
acceptable.
Key is that total assets equals total equity and
liabilities
liabilities.
Title states:
Financial statement being produced (i.e. SoFP)
Company the statement relates to (i.e. Head Noise Ltd)
Date financial statement relates to (i.e. 31 March 2010)

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.11

SoFP Example Discussed - 2

Assets and liabilities are both divided into noncurrent and current.
Each sub-section shows a sub-total (e.g. total noncurrent assets, total current assets etc.).
Other items may be included under each subsection this is just an example.

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.12

Comparison of Balance Sheet and

SoFP
International Accounting Standards refer to the new
title of SoFP but still permit companies to use the
term balance sheet in their financial statements.
Format
F
may be
b the
h same choice
h i lilies with
ih
individual companies.
Terms adopted must comply with IAS (e.g.
receivables, payables and inventory).
So... may be no difference at all!

V1.0

V1.0

NCC Education Limited

Visuals Handout Page 4

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and
Income Statement

Financial Management

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.13

Income Statement (IS)

Required to be published under IAS 1 Presentation
of financial statements.
Equivalent to the profit and loss account.
Reports
p
on the p
profit or loss in the p
period.
Part of larger comprehensive income statement.
Minimum information specified by IAS 1 to be
reported but no mandatory format.

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.14

Income Statement Example

Head Noise Ltd Income Statement for year ended 31 March 2010
000
Revenue

98,763

Cost of sales

(24,764)

Gross Profit

73,999

Other income

2,000

Distribution costs

(26,984)

Administration expenses

(38,762)

Other expenses

(1,026)

Profit from operations

Finance costs

9,227
(2,387)

Profit before tax

6,840

Tax expense

(2,736)

Profit for the year from continuing activities

V1.0

4,104

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.15

IS Example Discussed - 1
This example shows the income statement which
may be shown as a separate statement or part of a
larger comprehensive income statement.
Title states:
Financial statement being produced (i
(i.e.
e IS)
Company the statement relates to (i.e. Head Noise Ltd)
Period financial statement relates to (i.e. Year ended 31
March 2010)

Income and expenses must be clearly distinguished

(e.g. expenses shown in brackets).

V1.0

V1.0

NCC Education Limited

Visuals Handout Page 5

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and
Income Statement

Financial Management

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.16

IS Example Discussed - 2
Cost of sales is calculated as:

Opening inventory
Plus purchases
Less closing inventory
Equals cost of sales

000
2,037
24,392
(1,665)
24,764

Distribution costs includes costs of delivering goods

to customers.
Administration expenses are costs incurred to keep
business going.

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.17

IS Example Discussed - 3
Finance costs include interest paid on loans or
interest received from investments.
All companies must pay a percentage of the profit
before tax as corporation tax
tax.
Companies would also show any profit or loss from
discontinued operations as a continuation of the
income statement.

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.18

Preparation of the SoFP and IS

This lecture has introduced the concepts and
suggested formats for preparing both the statement
of financial position and income statement
Th
The Private
Pi
S
Study
d exercises
i
and
dT
Tutorial
i l session
i
will build on this introduction to equip you to prepare
these financial statements.

V1.0

V1.0

NCC Education Limited

Visuals Handout Page 6

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position and
Income Statement

Financial Management

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.19

Summary
In this lecture we have looked at:
Statement of financial position
Similarities or potential differences between SoFP
and balance sheet
Income statement

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.20

References
Weetman, P. (2011) Financial & Management
Accounting: An Introduction. 5th Edition. FT Prentice
Hall.
McLaney, E. and Atrill, P. (2010) Accounting: An
Introduction. 5th Edition. FT Prentice Hall.

V1.0

NCC Education Limited

Preparation of Published Financial Statements: Statement of Financial Position and Income Statement Topic 2 - 2.21

Topic 2 - Preparation of Published Financial

Statements: Statement of Financial Position
and Income Statement
Any Questions?

V1.0

V1.0

NCC Education Limited

Visuals Handout Page 7