Chapter 21 Manufacturing Accounts. Slide 2 notes reference - page 229.

Chapter 21

Manufacturing Accounts

Slide 2 notes reference - page 229

MANUFACTURING ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20X8

$ $ Raw materials Opening inventory X Purchases X X Less closing inventory (X) X

Factory wages X Prime cost X

Indirect factory expenses Salaries X Depreciation on plant and machinery X Power X Heating and lighting X Indirect materials X Insurance X X Factory cost of production X Work-in-progress Opening balance X Closing balance (X) X/(X) Factory cost of finished goods produced X


TRADING ACCOUNT £ £

Sales X

Opening inventory of finished goods X Factory cost of finished goods transferred X X Closing inventory of finished goods (X) X Gross profit X


Direct costs

Costs of production

Indirect costs

Variable

Vary with no. ofgoods produced& hours worked

e.g. raw materials& labour

Fixed

Not related toproduction ofa unit

e.g. rates


Total direct costs

Costs of production

Total direct + indirect costs

Factory cost of production +/-

change in WIP

Prime costFactory costof production

Factory cost of finished goodsproduced


Lecture example 1Manufacturing account for the year ended 31 December 20X1Raw materialsOpening inventory 7,630

Indirect factory expensesElectricity (4,620 x ½) 2,310Rent & rates (5,000 x ½) 2,500Supervisor’s salary 8,200Depreciation (plant & machinery) 4,700

Opening work in progress 4,920

Purchases 18,92026,550

Less closing inventory (7,890)18,660

17,71057,230Factory cost of production

57,610Factory cost of finished goods produced

Closing work in progress (4,540)380

Factory wages 20,86039,520Prime cost


Lecture example 1Income Statement for the year ended 31 December 20X1

Selling & distribution costsElectricity (4,620 x ¼) 1,155Rent & rates (5,000 x ¼) 1,250Depreciation (delivery vans) 1,600Sales commissions 13,680

64,390

Factory cost of finished goods produced 57,610

Less closing inventory of finished goods (5,430)58,960

(37,685)

Opening inventory of finished goods 6,780Less cost of salesSales 181,820

122,860Gross profit

Salesmen’s salaries 20,000


Lecture example 1

Administration expensesElectricity (4,620 x ¼) 1,155Rent & rates (5,000 x ¼) 1,250Salaries (41,630 – 8,200) 33,430Depreciation (fixtures & fittings) 1,420

(37,255)

47,920Net Profit

Chapter 22

Interpretation of accounts


Categories

Profitability Liquidity

Investors’ ratios

Gearing


Profitability

ROCE

Profits earned in relation tocapital employed

Return on equity

Return to ordinary shareholders

Asset turnover

Revenuegenerated by assets

employed

NPM/GPM

Relationship between costs and

revenue

Profitability


Lecture example 1 Profitability

790 3655-965

= 29% 462 1,801

= 25%

20X9 20X8

Possible reason:

New non-current assets may have improved efficiency

Return on capital employed(ROCE)

Profit from operations % TALCL



478 2,190

= 21.8% 266 1,401

= 19%

20X9 20X8

Possible reason:

Good use of extra capital raised

Return on equity (ROE)PAT – preference div OSC + reserves



7,1802,690

= 2.7 5,4351,801

= 3.02

20X9 20X8

Possible reason:

New non-current assets bought in year have not had time to create the same rate of revenue

Asset turnover

Revenue TALCL



Profit from operations % Revenue

Net profit margin

790 7,180

= 11% 462 5,435

= 8.5%

20X9 20X8

Possible reasons:

Higher selling pricesBetter cost control



Gross profit % Revenue

Gross profit margin

1,7957,180

= 25% 1,2235,435

= 22.5%

20X9 20X8

Possible reasons:

Higher selling pricesBetter cost/production control


Liquidity

Current ratio

Ability to meet short term commitments

Average collection period

Credit period taken by customers

Inventory days

Average period thatInventories are held

Average paymentperiod

Credit period takenby the business

Quick ratio

Stricter test of liquidity

Liquidity


Lecture example 1 Liquidity

2,314 965

= 2.4 1,679 704

= 2.4

20X9 20X8

Comment

A healthy unchanged ratio. Depends on the industry so comparisons are necessary.

1 Current ratio

CA CL



1,308 965

= 1.4 808704

= 1.1

20X9 20X8

CommentThe company’s acid ratio has improved due to an increase in receivables and cash, not inventories

2 Quick ratio

CA - inventories CL


Inventories x 365 days Cost of sales


1,0065,385

= 68 days 871 4,212

= 75 days

20X9 20X8

Comment The company holds inventories for less time. May be a reason for the improved margins.

3 Inventory Days

Cost of sales Inventories

5,3851,006

= 5.35 4,212 871

= 4.84

Note - Inventory turnover


Trade receivables x 365 days Credit turnover


948 7,180

= 48 days 708 5,435

= 47 days

20X9 20X8

Comment

No significant change.

4 Receivables days


Trade payables x 365 days Credit purchases


653 5,385

= 44 days 516 4,212

= 45 days

20X9 20X8

Comment

No significant change. However, payables days less than receivables days which could cause cash flow problems in the future.

5 Payables days


Operating cycle

Inventory DaysReceivables Days

Payables Days

Cash inCash out

Operating cycle


Gearing

Debt/Equity

Shows how the company is financed

Shows risk of shareholders not receiving dividend

Debt/Equity

Shows how the company is financed

Shows risk of shareholders not receiving dividend

Gearing


Interest bearing debt Capital, reserves & debt

Lecture example 1 Gearing

500 2,190+500

= 18.6% 400 1,401+400

= 22.2%

20X9 20X8

Comment

Gearing has decreased due to theissue of shares.

1 Gearing ratio


Limitations of ratios

• Lack of comparability of accounting policies.

• Non trading income included in some ratios

• Useless in isolation

• Cannot compare across industries

• Can be manipulated

Chapter 23

IAS 7: Cash Flow Statements


$000 $000Cash flows from operating activitiesNet profit before taxation 3,570Adjustment for: Depreciation 450 Investment income (500) Interest expense 400Operating profit before working capital changes 3,920 Increase in trade and other receivables (500) Decrease in inventories 1,050 Decrease in trade payables (1,740)Cash generated from operations 2,730Interest paid (270)Income taxes paid (900)

Net cash from operating activities 1,560

XYZ Co – Cash Flow statement (Indirect method)


Cash flows from investing activitiesPurchase of property, plant and equipment (900)Proceeds from sale of equipment 20Interest received 200Dividends received 200

Net cash used in investing activities (480)

Cash flows from financing activitiesProceeds from issuance of share capital 250Proceeds from long-term borrowings 250Dividends paid (1,290)

Net cash used in financing activities (790)

Net increase in cash and cash equivalents 290

Cash and cash equivalents at beginning of period (Note) 120Cash and cash equivalents at end of period (Note) 410

XYZ Co – Cash Flow statement (Indirect method)


Cash flows from operating activities

• Cash flows derived from operating or trading activities

• Can use:

– Direct method – Indirect method (more common in exams)


Lecture example 1Income Tax payable

Tax paid 116 bal b/d 168

bal c/d 156 IS 104

272 272


Lecture example 2

b/d 200

c/d 280

Plant and equipmentb/d 80

c/d 111

Accumulated depreciationDisposal 20

300300

Addition 100

Disposal 9

120 120

Charge 40


Lecture example 3 Dividends paid

b/d

c/d

35

45

R Earnings 60

9595

Cash 50

Dividends payable


$000 $000Cash flows from operating activitiesNet profit before taxation 87Adjustments for: Depreciation 42 Interest expense 8Operating profit before working capital changes 137 Increase in trade receivables (168 – 147) (21) Increase in inventories (214 – 210) (4) Increase in trade payables (136 – 21) 15Cash generated from operations 127Interest paid (8)Income taxes paid (W1)

Lecture example 4


Lecture example 4 (cont’d) Working 1

b/d

c/d

28

39

I/S 31

5959

20

Income tax payable

Cash


(20)Net cash from operating activities 99

$000 $000Cash flows from operating activitiesNet profit before taxation 87Adjustments for: Depreciation 42 Interest expense 8Operating profit before working capital changes 137 Increase in trade receivables (168 – 147) (21) Increase in inventories (214 – 210) (4) Increase in trade payables (136 – 21) 15Cash generated from operations 127Interest paid (8)Income taxes paid (W1)

Lecture example 4 (cont’d)



b/d

c/d

16

18

R Earnings 24

4040

22

Dividends payable

Cash



Cash additions 146

Depreciation 42

670670

10

Property, plant and equipment (NBV)

Revaluation

b/d 514

c/d 628


$000 $000Cash flows from investing activitiesPurchase of property, plant and equipment (W3) (146)

Net cash used in investing activities (146)

Cash flows from financing activitiesProceeds from issuance of share capital (320 – 260) 60Proceeds from issuance of debentures (80 – 50) 30Dividends paid (W2) (22)

Net cash from financing activities 68

Net increase in cash and cash equivalents 21Cash and cash equivalents at beginning of year (14)Cash and cash equivalents at end of year 7

Lecture example 4 (cont’d)


Note to the cash flow statement

Cash and cash equivalents31.12.X8 31.12.X7

$’000 $’000Cash on hand 7 -Bank overdraft - (14)Cash and cash equivalents 7 (14)


Lecture example 5Angus Ltd

Cash flow statement for the year ended 31 December 20X0

Net cash inflow from operating activities

Cash flow from financing activities

Interest paid

Payments to acquire tangible fixed assetsCash flow from investing activities

Proceeds from long-term loanIssue of ordinary sharesRepayment of loan

Increase in cash balances

(600)(4,400)

(40,000)

60,00050,000(6,000)

63,400

$Operating activitiesCash received from customersCash paid to suppliersCash paid to & on behalf of employees

104,000

(54,000 – 6,700) 47,300(31,000 – 2,500) (28,500)

(15,000)(11/12 x 4,800)

$


Lecture example 5 part (b)

This cash flow statement has been prepared using the direct method

Chapter 24

Income and Expenditure Accounts


Sources of income

• Main source of income = subscriptions

• Subscriptions received and receivable must

be recorded in the correct period

• Subscriptions income in I&E account

= Number of members x membership fees


Lecture example 1

Subscriptions account

Opening receivables

(5 x $100) 500

(subs in arrears b/d)

Opening payables

(2 x $200) 400

(subs in advance b/d)

Closing receivables

(10 x $200) 2,000

(subs in advance c/d)

Closing payables (4 x $200) 800

(subs in arrears c/d)

Cash 6,000I & E a/c (subs income) 4,700

7,2007,200


Income and expenditure account for the year ended ......

INCOME $ $

Subscriptions X Life memberships X *Trading activity profit X Bank interest received X *Surplus on club event X *Profit on sale of fixed asset X

X

EXPENDITURE

Rent X Rates X Electricity X Depreciation X *Loss on trading activity X *Loss on club event X *Loss on sale of fixed asset X

(X)

Surplus/(Deficit) of income over expenditure X/(X)

*=Alternatives


Balance sheet as at

NON-CURRENT ASSETS Cost Accumulated Net book

depreciation value

$ $ $

Fixtures and fittings X X X

Investments X

X

CURRENT ASSETS

Inventory X Trade receivables X Subscriptions in arrears X Prepayments X Cash at bank X

X

CURRENT LIABILITIES

Trade payables X Subscriptions in advance X Accruals X

X

Net current assets X

X


Proforma

FUNDS

Accumulated fund:

Opening balance X

Profit/(loss) on sale of investments X/(X)

Surplus/(deficit) of income over

expenditure for the year X/(X)

X

Life membership fund X

X


Life membership subscription

On receipt of the money

Dr Cash

Cr Life membership fund

Two methods of accountingfor life membership sub

T/f to Acc Fund on death of member

Dr Life membership fund

Cr Accumulated fund

Release to I&E a/c over life of member

Dr Life membership fund

Cr I&E account


Bar profits & social events

$ $ Income Contribution X Net income from bar trading X Income from socials: receipts X less expenses (X) X Miscellaneous income X X

Expenses Ground rent X Rates X Water etc X (X) X


Disposal of fixed assetsNon current asset disposal

Asset had been

depreciated

Asset had not been

depreciated

T/f profit/loss

to I&E a/c

T/f profit/loss

to acc fund


Investments & special funds

Investment income recorded in I&E a/c

Profit/loss on sale of investment goes to acc fund

Special fund e.g. to raise money for new boat house

Dr Special fund cashCr Special fund account

Slide 53

End of day 6 - what to do now…

1.Course notes review

Course CompanionCourse Companion

2. Question practice

3. Study text review

• Reinforce today’s learning • Develop question skills

Chapter 21 Manufacturing Accounts. Slide 2 notes reference - page 229.

Documents

production230lecture

20x1233lecture example

days cost of sales1

days credit turnover

x920x8possible reasons

note inventory turnover

new noncurrent assets

0220x920x8possible reason