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

Income statements for manufacturing businesses

What is the layout of the income statement of a manufacturing business?

• The income statement of a manufacturing business is prepared in a similar way to the other types of retail businesses

• The income statement will be prepared after the manufacturing account

• For the trading section:

  • Use the inventory for finished goods

  • Use the cost of production in place of purchases

    • The business might have also purchased extra finished goods
    • Add this to the cost of production

• For the profit and loss section:

  • Only include expenses that relate to the non-production aspects of the business

    • Such as advertising, carriage outwards, etc

  • The expenses related to manufacturing are included in the cost of production

  • A business might use a factory and an office

    • The factory expenses are included in the cost of production
    • The office expenses are included in the profit and loss section

Layout of the trading section of an income statement for a manufacturing business

Statements of financial position for manufacturing businesses

What is the layout of the statement of financial position of a manufacturing business?

• The statement of financial position of a manufacturing business is prepared in a similar way to the other types of retail businesses
• The only difference is how the inventory is displayed in the current assets section
• All three inventories are shown separately and the total is calculated

Layout of the inventory entry on the statement of financial position for a manufacturing business

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.

	$
Revenue	280 050
Inventory at 1 January 2023
Raw materials	7 100
Work in progress	10 420
Finished goods	12 450
Purchases of raw materials	96 200
Wages of factory workers	38 000
Wages of factory supervisors	28 500
Wages of office and sales staff	48 000
Insurance and rates	15 000
General factory expenses	13 180
Factory equipment at cost	120 000
Provision for depreciation of factory equipment	40 000

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 appear 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

Final answer: Pablo Final answer: Manufacturing Account for the year ended 31 December 2023
	Final answer: $**	Final answer: $
Final answer: Cost of material consumed
Final answer: Opening inventory of raw materials		Final answer: 7 100
Final answer: Purchases of raw materials		Final answer: 96 200
		Final answer: 103 300
Final answer:** Less: Closing inventory of raw materials **		Final answer: 6 860
		Final answer: 96 440
Final answer: Direct wages - factory workers		Final answer: 38 000
Final answer:** Prime cost **		Final answer: 134 440
Final answer: Factory overheads
Final answer: Wages - Supervisors	Final answer: 28 500
Final answer: Insurance and rates	Final answer: 10 000
Final answer: General expenses	Final answer: 13 180
Final answer: Depreciation of factory equipment	Final answer: 12 000	Final answer: 63 680
		Final answer: 198 120
Final answer:** Add: Opening work in progress **		Final answer: 10 420
		Final answer: 208 540
Final answer: Less: Closing work in progress		Final answer: 10 885
Final answer: Cost of production		Final answer: 197 655

**(b) **

Prepare the trading section of the income statement

Final answer: Pablo Final answer: Income statement (trading section) for the year ended 31 December 2023
	Final answer:****$	Final answer: $
Final answer: Revenue		Final answer: 280 050
Final answer: Less: Cost of sales
Final answer: Opening inventory of finished goods	Final answer: 12 450
Final answer: Cost of production	Final answer: 197 655
	Final answer: 210 105
Final answer: Less: Closing inventory of finished goods	Final answer: 14 650	Final answer: 195 455
Final answer: Gross Profit		Final answer: 84 595

**(c) **

Prepare an extract of the statement of financial position to show the inventories

Final answer: Pablo Final answer: Statement of Financial Position (Extract) at 31 December 2023
	Final answer:****$	Final answer: $
Final answer: Current Assets
Final answer: Closing Inventory:
Final answer:** Raw materials **	Final answer: 6 860
Final answer:** Work in progress **	Final answer: 10 885
Final answer:** Finished goods	Final answer: 14 650	Final answer: 32 395