Preparing the Financial Statements - Assignment Example

1. When are financial statements produced for you organization and the process of preparing the financial statements Financial statements in my organization are prepared through the following process; i) Balances in the individual accounts are posted into the trial balance and the accountants ensure that the trial balance balances. ii) The entries in the trial balance are used to produce a work sheet which should balance iii) Entries that might not have been captured in the worksheet (adjusting entries ) are entered into the worksheet iv) After adjusting entries have been made in the worksheet, the financial statements are made from the worksheet using information contained in the ledger accounts. v) The financial statements are prepared in the following order; -income statement -Statement of retained earnings -Balance Sheet -Cash flow statement In my organization, the above financial statements are prepared at the year-end which is at 3th June of every year. My company is BHP Billiton. 2. The following are the users of accounting information in my organization ; a) Internal users include i) Management – used for analyzing performance and hence take appropriate measures to improve company results ii) Employees –for assessing company’s profitability and its effect on remuneration and job security iii) Owners –for analyzing viability and profitability of investment and decide future course of action b) External users include i) Creditors-determine organization creditworthiness ii) Tax authorities – determine credibility of tax returns iii) Investors –Analyze feasibility of investing in the company iv) Customers- assess firm’s financial position v) Regulatory authorities – ensuring compliance with regulations on reporting by the company. 3. Profit center – this is because a profit center incorporates both a cost center and a revenue center. A work team may be a cost center in that they may be offering services to the firm which do not necessarily lead to revenue but are necessary. It can also be a revenue center if it generated profit for the firm. 4. Examples of assets and liabilities Assets i) Cash ii) Debtors iii) Motor vehicle iv) Equipment Liabilities i) Creditors ii) Bank loan iii) Accrued expenses iv) Bank overdraft 5. Examples of revenue and expenses Revenue i) Sales revenue ii) Rental income iii) Interest revenue iv) Service revenue Expenses i) Rent expense ii) Salary and wages iii) Insurance expense iv) Advertising expense 6. Rolling Pebbles Balance Sheet As at 31st December 2013 Fixed assets Land and Buildings $85,000 Furniture and fittings $30,000 Shares in Beetle $30,000 Total fixed assets $145,000 Current assets Cash at bank $40,000 Accounts receivables $6,000 Merchandise $47,000 Total current assets $93,000 Total assets $238,000 Current Liabilities Accounts payable $20,000 Total current Liabilities $20,000 Long-term liabilities Mortgage $30,000 Total long-term liabilities $30,000 Total liabilities $50,000 Owner’s equity Capital $95,000 Profit $93,000 Total owners’ equity $188,000 Owner’s equity and Liabilities $238,000 7. Rolling Pebbles Income statement For the period ended 31st December 2013 Sales $200,000 Appearance income $60,000 Total income $260,000 Cost of goods sold $50,000 ($50,000) Gross profit $210,000 Expenses Advertising $10,000 Interest on loans $70,000 Petrol and oil $1,500 Rent $2,000 Electricity $1,500 Wages $30,000 Total expenses ($115,000) Net profit $95,000 8. Types of budgets prepared in our organization include capital budget, cashflows, balance sheet and income budget. The budget process is triggered by the accounting department which prepares worksheets aimed at helping department heads in preparing departmental budget estimates. The finance manager then calls all departmental managers to a meeting where they present and discuss their estimates for the following year’s projected activity levels. After this, the departmental managers together with finance manager prepare their departmental estimates for the coming year. The completed departmental budgets are then presented to the managing director for review and approval. 9. Delegated authority Financial transactions Who has delegated authority To what amount Purchase of stationery items Administrative assistant $1,000 Purchase of new equipment Production manager $50,000 Purchase of new plant or motor vehicle Managing director $250,000 Salaries for a new employee Human resources manager $15,000 Entertainment allowance Human resources manager $2,500 10. The accountant has the responsibility of auditing petty cash receipts. The following are the procedures that he uses in auditing petty cash i) He meets the administrative assistant who is the petty cash custodian and obtains an audit log which is a running tally of petty cash totals over time. ii) He counts the cash and coins iii) He sums all the receipts and vouchers that have been used to justify payments made from petty cash and add the total to the cash. This he does ensuring that all the documentation is legitimate while conforming to the applicable reimbursement policies iv) He adds the cash total to the voucher total v) He adds a record to the petty cash log and notes any discrepancies between the amount issued and what is counted or what has been established by the policy. vi) He and the administrative assistant sign the audit log to indicate agreement that cash is equivalent to amount logged. He removes and archives existing receipts and vouchers in accordance to the policy vii) He inspects where petty cash is stored while ensuring access is restricted to the custodian while the petty cash box is stored in a place where theft is deterred. 11. Budgets a) Budgeted Income statement Month 1 Month 2 Month 3 Total Revenue $230,000 $255,000 $289,000 $774,000 Less expenses Salaries $75,000 $75,000 $75,000 $225,000 Casual wages $2,250 $3,750 $6,000 Rent $69,000 $76,500 $86,700 $232,200 Other expenses $25,000 $25,000 $25,000 $75,000 Total expenses $169,000 $178,750 $190,450 $538,200 Profit $61,000 $76,250 $98,550 $235,800 b) Budgeted cashflows statement Month 1 Month 2 Month 3 Total Cash Revenue $138,000 $153,000 $173,400 $464,400 Credit sales 30 days $45,000 $69,000 $76,500 $190,500 Credit sales 60 days $15,000 $20,000 $23,000 $58,000 Total cash receipts $198,000 $242,000 $272,900 712,900 Cash payments Salaries $75,000 $75,000 $75,000 $225,000 Casual wages $2,250 $3,750 $6,000 Rent $69,000 $76,500 $86,700 $232,200 Other expenses $25,000 $25,000 $25,000 $75,000 Total cash payments $169,000 $178,750 $190,450 $538,200 Receipts less payments $29,000 $63,250 $82,450 $174,700 Add opening balance $29,500 $58,500 $121,750 $29,500 Closing bank balance $58,500 $121,750 $204,200 $204,200 2 1. Non-financial information include customer satisfaction, changes in beliefs and attitude, sustainability reporting, environmental reports, cases before the court, employee satisfaction etc. 2. Variance reports are produced once per year at the year end when comparing actual performance with budgeted performance. The rule of the thumb regarding variance is that – investigate all variances that are adverse to a certain value so that corrective action may be taken. The chief accountant is responsible for monitoring and correcting budget variances in my work team. 3. Variance 1: Sales revenue had a variance of -$50,000. The variance occurred since the company had budgeted to achieve sales of $650,000 but we only achieved actual sales of $600,000. The variance was not caused by accounting error. Investigation revealed that the variance had been caused by a bad weather which affected production. The company recommended that we start another line of products in a bid to address the variance. Variance 2: Salaries and wages had a variance of $15,000. The variance had been caused by lying off some staff due to the bad weather. The company intends to start a new line of production in a bid to address the variance. Variance 3: Budgeted cost of production had a variance of -$20,000. The variance was caused by increased cost of electricity. It was decided that the company look into ways of producing its own power in a bid to reduce power cost. Variance 4 Rental income-this had a variance of $4,000. The variance was an accounting error since there was a prepayment that had been recorded as current tax income. The accountant corrected the error through the necessary adjusting entry. 4. Downturn in sales – in this case, the company comes up with ways of reducing related costs such as lying off some staff or pegging pay on commissions so as to keep costs low. The company then undertakes aggressive advertisement in a bid to increase sales and also looks at new markets in a bid to increase sales. 5. Calculation of variances = Budgeted-Actual Feb budgeted Feb Actual Feb Variance Year Budgeted Year actual Year variance Nursing $59,500 $63,750 -$4,250 $476,000 $493,000 -$17,000 Radiology $15,300 $15,850 -$550 $122,400 $122,400 0 Housekeeping $8,500 $9,860 -$1,360 $68,000 $73,100 -$5,100 Maintenance $11,050 $5,100 $5,950 $88,400 $65,450 $22,950 Client food service $28,220 $29,790 -$1,570 $225,760 $231,710 -$5,950 Cafeteria $13,770 $14,070 -$300 $110,160 $115,260 -$5,100 General medicine $178,500 $173,400 $5,100 $1,428,000 $1,420,265 $7,735 Surgical $119,000 $119,850 -$850 $952,000 $948,430 $3,570 Administration $42,500 $45,475 -$2,975 $340,000 $345,100 -$5,100 The table above as well as the graphs above shows variances for various functions. There was variance in every function’s spending both for the month of February and the year ending February apart from radiology that had no variance at the year end. It is also worth noting that maintenance and general medicine recorded positive variances in that they spent less than that which had been budgeted while the rest had negative variances in that they had more expenses than had been budgeted. Surgical had a positive variance at the year end. The maintenance department had the largest variance while radiology department had the lowest variance. I think that the variance for the maintenance department needs to be investigated. Although it is a positive variance, there is a great discrepancy between what had been budgeted and what was actually spent. We need to know what had been budgeted for but was not implemented in the maintenance department hence leading to the lower figure used both in the month of February and at the year end. The variance for the maintenance department may have a cost saving effect for the hospital. However, we need to investigate the variance so that we establish that everything that had been budgeted for has been implemented. It could be that although money was not spent, the facilities at the hospital are in deplorable conditions since those who would have been paid to do maintenance work were not paid. Another possibility could be that the workers in maintenance department were more than was required and hence some were laid off. The non-financial information that need to be used in analyzing whether or not this requires further attention include the state of the facilities at the hospital, whether budgeted maintenance activities have been implemented and the number of workers working in the department vis avis those who had been budgeted for. References: Jared, N2010,Financial accounting, London, Rutledge. Read More