Income Statement & Statement of Financial Position (Cambridge (CIE) IGCSE Accounting)

Worked Example

Pablo owns a small carpet and rug factory, making bespoke carpets for local furniture businesses. The following balances are provided at 31 December 2023.

Additional Information

• Inventory at 31 December 2023

  • Raw materials $6 860

  • Work in progress $10 885

  • Finished goods $14 650

• Insurance and rates are to be apportioned ⅓ to the office and ⅔ to the factory

• Factory equipment is to be depreciated at 15% using the reducing balance method

(a) Prepare the manufacturing account for the year ended 31 December 2023.

(b) Prepare the trading section of the income statement for the year ended 31 December 2023.

(c) Prepare an extract of the statement of financial position at 31 December 2023 showing the inventories.

Answer

Deal with the additional information.

• Inventory at 31 December 2023

  • These appear as current assets on the statement of financial position

  • The raw materials and work in progress appears on the manufacturing account

  • The finished goods appear on the income statement

• Insurance and rates are to be apportioned ⅓ to the office and ⅔ to the factory

  • Find the amount for the office

    • ⅓ × $15 000 = $5 000

    • This appears in the profit and loss section of the income statement

  • Find the amount for the factory

    • ⅔ × $15 000 = $10 000

    • This appears on the manufacturing account as a factory overhead

• Factory equipment is to be depreciated at 15% using the reducing balance method

  • Find the net book value of the factory equipment

    • $120 000 - $40 000 = $80 000

  • Calculate the year's depreciation charge

    • 15% × $80 000 = $12 000

    • This appears on the manufacturing account as a factory overhead

(a) Prepare the manufacturing account.

(b) Prepare the trading section of the income statement.

(c) Prepare an extract of the statement of financial position to show the inventories.