Financial statements of manufacturers, clubs and incomplete records

• One sentence for the whole chapter: the statements do not change — what feeds them does. A manufacturer feeds in a cost of production, a club feeds in subscriptions due and a surplus, and an incomplete-records trader feeds in figures you have worked out rather than figures you have read off a ledger.
• Trace it, or place it. If you can trace the cost to the goods made, it is direct and it belongs in prime cost. If you cannot trace it but it happens inside the factory, it is an overhead. If it happens outside the factory, it never enters the manufacturing account at all.
• Three, then everything, then the two ends. Three direct costs make prime cost. Every factory overhead is added next. Then the two work-in-progress figures close the account: opening in, closing out.
• Two statements, one substitution, three inventories. Replace purchases with the cost of production, keep everything below gross profit unchanged, and remember that the manufacturer counts its inventory three times.
• Cash in, cash out — then adjust. Prepare the receipts and payments account from the cash book, then turn each line into income earned or expenditure incurred. Two of the lines will disappear, one new line will arrive that never touched the bank, and the club’s real result appears.
• Due, not received. Net, not gross. Subscriptions enter the income and expenditure account at the amount due for the year; an activity enters it at its profit, never at its sales.
• Assets less liabilities at the start; add the surplus; that is where you must finish. The closing statement of financial position is not a separate calculation — it is a proof of the one you have already done.
• Cheap now, expensive later. Incomplete records save the owner time and money this year and cost them certainty, control and credibility in every year after that.

• I can distinguish a direct cost from an indirect cost and give three examples of each in a factory.
• I can calculate the cost of materials consumed, including carriage inwards on raw materials and purchases returns.
• I can calculate prime cost and explain exactly which three items it contains.
• I can apportion a cost shared between factory and office on the basis a question gives me.
• I can adjust for opening and closing work in progress and say why one is added and the other deducted.
• I can prepare a complete manufacturing account ending at the cost of production.
• I can prepare a manufacturer’s statement of profit or loss, using the cost of production in place of purchases.
• I can show the three inventories under current assets in a manufacturer’s statement of financial position.
• I can place each depreciation charge in the correct account: factory machinery in the manufacturing account, office and delivery assets in the statement of profit or loss.
• I can adjust for drawings in a manufacturer’s books: raw materials taken out of purchases, finished goods out of the cost of production, private expenses out of the expense — each at cost.
• I can state three differences between a receipts and payments account and an income and expenditure account.
• I can prepare a receipts and payments account that balances to the closing cash and bank figure.
• I can prepare a subscriptions account with arrears and prepayments at both ends of the year and read the income figure out of it.
• I can prepare a small trading account for a revenue-generating activity and transfer one profit figure to the income and expenditure account.
• I can prepare an income and expenditure account ending in a surplus or a deficit.
• I can define the accumulated fund and calculate it from an opening statement of affairs.
• I can prepare a club’s statement of financial position and prove that the closing fund equals the opening fund plus the surplus.
• I can explain why a small trader keeps less than a full double entry system, and weigh the advantages against the disadvantages.
• I can prepare an opening and a closing statement of affairs and read the capital out of each.
• I can put back the drawings the records never captured — goods taken by the owner and private expenses paid by the business — before I deduce anything from purchases.
• I can calculate profit from the change in capital, adjusting correctly for drawings and capital introduced.
• I can reconstruct credit sales from a total trade receivables account and credit purchases from a total trade payables account.
• I can use a cash or bank summary to find one missing receipt or payment.
• I can calculate an expense for the year from cash paid plus the accrual and prepayment at each end.
• I can convert a mark-up to a margin and back, and use either to find a missing inventory or sales figure.
• I can use the rate of inventory turnover to recover a closing inventory figure.
• I can prepare both statements from incomplete records and reconcile the closing capital to opening capital, profit and drawings.
• I can state that incomplete records in this syllabus are for sole traders only.

Why this chapter is worth the effort. Every figure here is produced by the same double entry you already know; nothing new is being invented. What is being tested is whether you can decide which account a cost belongs in, and whether you can work backwards when the ledger is not in front of you. Both are habits, and both are built by preparing complete statements rather than by reading about them.

• “Wages are wages — they all go in prime cost.” Fix Only the wages of the people who make the product are direct labour. Supervisors, maintenance staff, cleaners and storekeepers are indirect wages, and indirect wages are a factory overhead. Putting them in prime cost overstates prime cost and understates overheads, and the cost of production is unchanged — which is why the error survives the total and still loses the answer.
• “Work in progress is inventory, so add it like opening inventory.” Fix Opening work in progress is added and closing work in progress is deducted. The test is whether the cost has produced a finished good this year. Last year’s half-made goods were finished this year, so their cost belongs here; this year’s half-made goods will be finished next year, so their cost is carried forward.
• “The receipts and payments account shows whether the club did well.” Fix It shows cash, nothing else. It contains capital payments such as new equipment, it contains subscriptions belonging to other years, and it contains no depreciation, no accruals and no prepayments. A club can bank a large surplus of cash in a year in which its income and expenditure account reports a deficit.
• “Subscriptions income is the subscriptions money received.” Fix Income is the amount due for the year. Work it through the subscriptions account with arrears and prepayments at both ends: what was owing at the start, what was prepaid at the start, what was received, what is owing at the end, what is prepaid at the end. Adjusting only one end of the year is enough to make the figure wrong.
• “Profit is closing capital minus opening capital.” Fix Not until the two things that moved capital without being profit are removed. Add back drawings, because they reduced capital and were not a loss; deduct capital introduced, because it increased capital and was not a profit. A trader whose capital fell can still have made a profit.
• “A 25% mark-up means a 25% margin.” Fix Mark-up is a percentage of cost; margin is a percentage of selling price. Since selling price is larger than cost, the margin is always the smaller number. A 25% mark-up is a 20% margin. Decide which base the question has given you before you multiply anything.
• Indirect wages are part of prime cost. Correction Prime cost is direct materials consumed, direct labour and direct expenses — nothing else. Indirect wages are a factory overhead. Cost The cost of production is unchanged, so the error survives the total and is only visible in the two named subtotals. That is exactly why it is worth checking.
• Carriage inwards on raw materials is a factory overhead. Correction It is added to purchases of raw materials inside the cost of materials consumed, so it is part of prime cost. Cost Prime cost understated, overheads overstated. Carriage outwards, by contrast, never enters the manufacturing account at all.
• Closing work in progress is added in arriving at the cost of production. Correction Opening work in progress is added; closing work in progress is deducted. Cost With Ravi’s figures, adding the $2 700 instead of deducting it gives a cost of production of $100 400 rather than $95 000 — an error of twice the closing figure, carried into gross profit and into profit for the year.
• A manufacturer has one inventory figure. Correction Three — raw materials, work in progress and finished goods — all current assets, all at the lower of cost and net realisable value. Cost Two of the three go missing from the statement of financial position, which then does not balance.
• The receipts and payments account shows the club’s surplus. Correction It shows cash movements only. The surplus comes from the income and expenditure account. Cost Riverside’s cash rose by $2 300 while its surplus was $3 720. Neither figure is the other, and quoting the wrong one answers a different question.
• Subscriptions income equals subscriptions received. Correction Income is the amount due for the year: adjust for arrears and prepayments at both ends, or prepare the subscriptions account and take the balancing figure. Cost The income figure is wrong and two balances go missing from the statement of financial position — arrears as a current asset, advances as a current liability.
• Buying equipment is expenditure in the income and expenditure account. Correction It is a capital payment: an asset. Only the year’s depreciation is expenditure. Cost For Riverside, charging the $2 500 cuts the surplus by $2 500 and removes the same $2 500 from assets. Two statements wrong from one decision — and because both sides move together the statement of financial position still balances, so nothing warns you. Only the depreciation, $850, belongs in the income and expenditure account.
• Profit equals closing capital less opening capital. Correction Add drawings and deduct capital introduced. Both moved capital without being a trading result. Cost For Nadia, $35 800 − $22 900 gives $12 900 rather than $16 500 — and in the reverse model in section H, it turns a $9 000 profit into a $2 500 loss.
• Mark-up and margin are the same percentage. Correction Mark-up is on cost; margin is on selling price. A 25% mark-up is a 20% margin; a 50% mark-up is a 33⅓% margin. Cost Treating Nadia’s 33⅓% as a mark-up on cost instead of a margin on revenue gives a cost of sales of $72 000 and a gross profit of $24 000, and the closing inventory then comes out at nil instead of $8 000.
• Incomplete-records questions can involve any kind of business. Correction The syllabus restricts them to sole traders. Service and manufacturing businesses are excluded. Cost Time spent preparing for a question that is not set — and, in an answer, features imported from the wrong kind of business.

• Layout is part of the answer. The command word prepare means the heading, the business name, the date or period and the named subtotals are assessed alongside the arithmetic. A manufacturing account with correct figures and no Prime cost or Cost of production label is an incomplete answer, and so is an income and expenditure account that does not end with the words Surplus of income over expenditure.
• The asking question for every adjustment: what does the asset or the cost do? A machine that cuts timber is a factory cost; a computer that raises invoices is an office cost; a van that delivers finished goods is a selling cost. The name of the asset never decides; its job always does.
• Two adjustments, quietly worth a lot. The accrued factory wages of $1 400 raise prime cost and appear as an other payable; the prepaid factory rent of $900 lowers overheads and appears as an other receivable. Each one touches two statements. Answering only one half of an adjustment is a reliable way to make a set like this stop balancing.
• Do not memorise the signs — memorise the question. For every figure in front of you ask: which year did the club earn this? If the answer is “this year”, it is in; if the answer is another year, it is out. The formula above is just that question answered four times.
• If it does not balance, look in four places, in this order. (1) Has a subscription balance gone in on the wrong side — arrears are an asset, advances a liability? (2) Has the depreciation been charged in the income and expenditure account and deducted from the asset, or only one of the two? (3) Has the accrual been added to the expense and shown as a payable, or only one of the two? (4) Have the refreshment sales and purchases been counted both in the trading account and again in the income and expenditure account?
• One unknown per account. If two figures are missing from the same summary, you cannot solve it — find one of them somewhere else first. That is why the six-step order in the next studio matters: each step hands the following step the figure it needs.
• Before any multiplication, answer one question: is the 100% the cost or the selling price? Mark-up means cost is 100%. Margin means revenue is 100%. Applying a margin percentage to cost, or a mark-up percentage to revenue, produces a wrong gross profit and then a wrong inventory figure, and the error carries through every later line.
• Use the second route as a check, not as the answer. When a question says prepare a statement of profit or loss, the statement is the answer and the capital comparison is your proof of it. When a question gives you nothing but two statements of affairs, the capital comparison is the only route available — and then it is the answer.
• How to use this list in the last week. Cover the corrections and read only the bold statements. Any one you cannot immediately refute is the section to reread — and it will be one of the four sections these errors come from, not the whole chapter.
• Before you compare with the model, mark yourself on presentation. Does every statement carry the club’s name, the title and the period or date? Are the subtotals named — profit on refreshments, surplus of income over expenditure, accumulated fund? Does the subscriptions account total on both sides? Layout is assessed under the command word prepare, and it is the part most easily gained on a second attempt.
• The most valuable two minutes in the whole plan is writing out the five formulas cold. Everything else in this chapter is a layout you can reason your way back to; a formula recalled wrongly produces a confident wrong answer with no warning attached to it.

• All candidates take both papers, and all candidates are eligible for grades A* to G. Cambridge IGCSE Accounting 0452 has one route and one entry: both components below are sat by everyone, both examine the whole of the subject content, and the full range of grades is open to every candidate. Examinations are available in the June and November series, and also in the March series in India.
• Across the whole qualification the assessment objectives weigh AO1 knowledge and understanding 66%, AO2 analysis 24% and AO3 evaluation 10%. Both papers cover all seven topics and every question is compulsory. Calculators are allowed in both. Every Paper 2 question is built on stimulus material, and the published list of tasks includes calculations, completing a cash book, completing incomplete statements, preparing accounts, and preparing suspense accounts and journal entries.
• One classification or one calculation, decided in under two minutes: is this cost direct or indirect; what is prime cost; what is the subscriptions income when the receipts are given; what is profit when capital, drawings and capital introduced are given.
• A stimulus of balances and notes, then prepare one or two statements in full, then explain, advise or evaluate something the figures have just revealed.
• Only on Paper 2, and only on judgement: whether a club should raise its subscription, whether a trader should start keeping full records, whether a manufacturer should buy rather than make.
• Layout is part of the answer. The command word prepare means the heading, the business name, the date or period and the named subtotals are assessed alongside the arithmetic. A manufacturing account with correct figures and no Prime cost or Cost of production label is an incomplete answer, and so is an income and expenditure account that does not end with the words Surplus of income over expenditure.