The Balance Sheet and Profit and Loss Statement of JT Engineering Limited - Assignment Example

?FINANCIAL MENTS OF JT ENGINEERING FOR THE FINANCIAL YEAR Dear Directors, Please find attached the balance sheet and profit and loss ment of JT Engineering Limited for the financial year 2012. JT Engineering     Income Statement   Amount in $ For the year ended December 31, 2012           Sales   440,000 Return inwards   (1,200) Net sales   438,800 Cost of goods sold     Opening inventory 6,500   Purchases 150,000   Discount received (2,200)   Return outwards (800)   Closing inventory (7,500)   Cost of goods sold 146,000 (146,000)       Gross profit   292,800       Depreciation Machinery   (5,200) Depreciation Vehicles   (1,863) Business Rates   (2,300) Wages & Salaries   (73,780) Motor Expenses   (900) Loan Interest   (310) Insurance   (1,600) Electricity   (1,350) Commission received   37,800       Net Profit   243,297 JT Engineering   Amount in $ Balance sheet     As at ended December 31, 2012           Assets           Non-Current Assets     Land & Buildings   660,000 Machinery   52,000 Provision for Depreciation for Machinery   (15,600) Motor Vehicles   23,000 Provision for Depreciation for Motor Vehicles   (6,233)       Net Non-Current Assets   713,167       Current Assets     Accounts Receivables   9,200 Bank   36,400 Cash   1,200 Closing inventory   7,500 prepayments   550 Total assets   768,017       Non-current liabilities     Long-term bank loan   35,000       current liabilities     Accounts Payables   8,100 Accruals   980 Total liabilities   44,080       Equity     Capital   507,640 Drawings   (27,000) Retained earnings   243,297       Total capital   723,937       Total Equity and liability   768,017 In addition to the above financial information, it is also important to understand various accounting concepts and principles based on which these financial statements are prepared. Gross profit margin is an analyzing tool which assists in identifying how effectively and efficiently the company is utilizing its raw materials, variable cost related to labor and fixed costs such as rent and depreciation of property plant and equipment. Net profit margin, on the other hand analyzes the profitability of the company before deducting the taxation and finance charges from the earnings The statement of financial position tells the shareholder above the financial outlook of a company and the status of the assets and liabilities. Statement of financial position is usually divided into three parts, Assets, Liabilities and Shareholder equity. Assets are further divided into non-current assets and current assets whereas liabilities are divided in to non-current and current as well. Usually a company which has higher assets base and positive equity portrays stronger and better financial outlook. From shareholder’s perspective, the statement of financial position is very important as it guides them to take important decision pertaining to the investment in the shares of the company. Non-current assets are those which are held by entity for a longer period of time and maturity or the useful life of these assets are usually more than one year. Example of non-current assets would be Property, Plant and Equipment, Deferred acquisition cost and loans and advances given. On the other hand, current assets are those in which the maturity is short term and the company is likely to avail the economic benefit embodies in the assets within a period of 12 months. Examples of current assets would be cash and cash equivalent, accounts receivables and stocks GAAP or the generally accepted accounting principles are the set of accounting rules and regulations based on which the companies prepare their financial statements. The primary purpose of GAAP is that the financial statements prepared under it homogenous so that the shareholders are able to compare the financial information of various companies easily and can make informed decisions. GAAP cover all of the areas of the financial statements such as revenue, expense, assets and liabilities. The financial statements should be prepared in accordance with the prudence concept. Income should only be included to the extent that it can be realized with reasonable certainty, and proper allowance should be made for all known and foreseeable losses and liabilities. The prudence concept forms the backbone of all of the accounting principles that are applicable on several companies. Going concern concepts means that the owners of the business are sure that the business will able to be conducted in the foreseeable future and the financial statements have been prepared on the similar basis. Going concern can further be defined that entity is of the view that they have the potential and have the financial strength to discharge the liability of their creditors in the normal course of business and for that they do not need to liquidate their business. GAAP recommends that if the financial statements are prepared on the basis of going concern then the assets in the statement of financial position should be recorded at their historical cost, or revalued amount as the case may be. But on the other hand, if the financial statements are not prepared on the basis of going concern, then the assets and liabilities should be recorded at their forced sale value i.e. the amount that the assets would fetch and the liabilities settled in the open market in the current state. Income and expenditure should be matched to the services provided in the same accounting period. This requires compliance with the concept of accruals for revenue and capital. An example for this would be insurance policies. In most circumstances, insurance companies record revenue on their insurance policies through premium over the period of the term of the insurance. On the other hand, based on the matching concept, the insurance companies also recognize the cost of policy acquisition over the period of the insurance policies and not entirely in the period in which it was incurred. As per the objectivity concept in accounting, all of the decision taken by the owner of the business should be made objectively and free form any bias. The decisions that are taken should be able to be measured realizably and the management should have proper rationale for taking the decision. As per the concept of materiality, any amount is material in the statement of financial position if it can influence the decision taken by the user of the financial statement. Materiality is quite a subjective concept and differs from entity to entity. For example an amount might be material for one company but not for the other which usually depends upon economic scales and the financial outlook of the company. Consistency concepts demand that the financial statements are prepared from year to year on a consistent basis and not in a haphazard manner. As per the consistency concept, the companies are also required to present the comparative figures in the statement of financial position particularly in the statement of financial position, income statement, cash flow statement and statement of changes of equity. The main reason behind the comparative concept is that the shareholders and the user of the financial statements are able to analyze the trend between the current and the prior financial position. For example if the current year profit has decreased significantly as compared to the prior year and the financial statements have been prepared on consistent basis, then the this is a sign that the company’s operation are not going smoothly and it is better to divest from such company as the shareholder might suffer a loss based on the declining share price of the company. As per this particular concept, each component of assets and liabilities should be accounted for separately in the statement of financial position. For example when valuing stocks and spares, each item of stock and spares needs to valued separately and then included in the statement of financial position as a total. Read More