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Free Example of Hammersmith Tools Limited Essay

A Statement of Accounting Policies accompanies the notes to any released financial statements, and usually appears as the first or second note in the notes section. The main aim of an executive summary is to aid any accountant who happens to read the financial statements to understand fully their mode of preparation and presentation. The following is the Statement of Accounting Policies for Hammersmith Tools Limited. The statement highlights the basis of accounting for sales, purchases, stock, bad debts, doubtful debts, expenses and fixed assets. In addition, it gives the methods of item recognition employed, details of the reporting entity, and the basis of measurement of the reported items, including the basis of preparation of the statement of cash flows..

The underlying accounting policies have been applied in the preparation of the financial statements of Hammersmith Tools Ltd.

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Statement of Accounting Policies

For the Year ending 31 December 2011

  1. Purpose

The purpose of the following statement of Accounting policies is to act as a guide to non-accounting employees on basic accounting procedures that are employed in the company while determining the overall profits of the company.

  1. Basis of Preparation

The financial statements are prepared in accordance with the applicable law and under the convention of Historical cost. The preparation is governed by the Generally Accepted Accounting Principles (GAAP) rules and the regulations from the Association of Chartered Certified Accountants and Chartered Institute of Management Accountants (CIMA)

  1. Basis of Consolidation

The following financial statements are those of the company and its subsidiaries up to the end of the 2011 financial year. Results of subsidiaries disposed or acquired in the course of the year are included in the income statement up to the disposal date or from the acquisition date.

Joint ventures are the undertakings that the company has a long term interest and shares its control jointly with another entity (Kones 2009, 45).

Business associates are the undertakings that Hammersmith Tools has the ability to exercise a significant influence because the company has a controlling interest in the capital structure of the other company.

Figures of the joint ventures and associates are those taken from the last audited financial statements at the balance sheet date (Barry 2004. 67). The investment in these companies is taken as a fixed asset in the company’s financial statements.

  1. The reporting Entity

Hammersmith Tools Limited is incorporated as a wholesale distributor of hardware equipment to high quality, independent hardware stores across London and in the South East. Hammersmith Tools serves as a niche provider in the overall hardware industry in the United Kingdom, which is dominated by national chains like Tools R Us and Home Basis. The company is preparing this statement of accounting policies to serve as a guide to the selling staff as to how the company recognizes profits.

  1. Basis of measurement

The financial statements have been prepared on the basis of historical cost

  1. Budgetary Estimates

The budget estimates are those that are provided by the Board of Directors at the beginning of every year.

  1. Sales

Sales are recognized on a sales basis. The accrual basis of accounting is applied in the recognition of sales items. All sales are recognized when the sale is actually made or when the sale is invoiced, and not when an order is received (Lee 1978). On invoicing, the debtors account is debited. When the receipt is received, the debtors account is credited while the bank or cash account is debited. The company recognizes both credit and cash sales. The sales recorded in the income statement are the sales that have actually been paid for. Sales that remain unpaid at the balance sheet date are taken as an asset and recorded as an account receivable.

  1. Purchases

Purchases are also recognized on the sales basis (Allan 2004). The accrual basis of accounting is never employed in recognition of sales. This means that sales items are recognized in the income statement when an invoice is prepared, and not when the company actually sends its invoice or when it sends out purchase orders. Hammersmith Tools makes both credit and sales purchases. Purchases that remain unpaid at the end of the year are recorded in the balance sheet as a current liability. Unpaid credit purchases add to the figure of money owed to creditors (David 2008).

  1. Stock
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Stock values are never available directly from the books of accounts and have to be calculated at the end of every year (Lewis 2001). Hammersmith Tools records stocks by first doing a physical verification of their presence. Stock that is available for resale is recorded at market value (net realizable value) or cost, whichever is lower.

The value of opening stock is added to the value of purchases during the year, while the value of closing stock is deducted from the purchases (Francis 1999). The verified closing stock is carried as a current asset in the balance sheet.

  1. Expenses

The accrual basis of accounting is used to recognize expenses in the organization. The expenses that are recorded in the income statement are those that are incurred in the financial year. The matching principle is also employed. This means that an expense is recognized when the accompanying sale is recognized.

Pre-paid expenses at the beginning of the year are taken as an asset and not shown in the income statement. Prepaid expenses at the end of the year are added to the total expense figure. Accrued expenses at the end of the year are also added to the year’s expenses. Accrued expenses at the end of the year are deducted from the expense figure in the income statement.

  1. Statement of Cash flows

Cash refers to cash balances in the business premises, demand deposits, available in the company’s bank accounts, and any other highly liquid financial investments that the company has invested as part of its daily activities.

Investing activities are those activities that are related to the disposal and acquisition of non-current assets such as motor vehicles and furniture.

Operating activities incorporates cash received from the company’s income sources and mostly include cash records for sales and purchases. Financing activities are those activities that lead to a change in the debt and equity capital structure of Hammersmith Tools Limited. 

  1. Bad and Doubtful debts

These are taken as an expense in the income statement. A provision for bad debts, if it exists, is taken as an expense in the income statement. If a previously written off bad debt is recovered, it is recorded as an income item in the income statement.

  1. Financial Instruments

Financial Instruments of Hammersmith Tools Limited includes creditors, debtors, loans and Investments. All expenses and revenues are disclosed in the income statement while all financial instruments are disclosed in the Statement of Financial Position.

  1. Fixed Assets

Land and Buildings owned by Hammersmith are recorded at the market value. The company follows IFRS 3 where the depreciated replacement cost is the basis for valuing buildings. This is because it is impossible to value buildings based on market evidence.

Depreciation is on a straight line basis on all buildings, plant and equipment.  

Hammersmith Tools Limited

Income Statement

For the Year ending 31 December 2011

Sales                                                                                  4,800,000

Cost of sales: purchases               3,000,000

Add opening stock                        300,000

Less closing stock                        (400,000)

Cost of Sales                                                                        (2,900,000)

Gross Profit                                                                           1,900,000 

Gross Profit b/d                                                                     1,900,000

Less Expenses: General Expenses           1,610,000

                        Depreciation                  214,500

                        Bad Debts                     32,000                       (1,847,500)

Net Profit                                               52,500 

Notes to the Income Statement

  1. Calculation of Depreciation

Buildings              = 600,000/50  = 12,000

Furniture              =50,000/20     =2,500

Delivery Van         =200,000        =200,000

Total                                         =214,500

  1. Bad Debts

5% * 640,000       =32,000

The amount of bad debts is five percent of the vale owed to the company at the end of the year.

  1. Expenses

Cash                                                      1,600,000

Accrued expenses at 31/12/2011               160,000       

Accrued expenses at 31/12/2010               (120,000)

Prepaid expenses at 31/12/2011               (30,000)

                  Expenses                               1,610,000

  1. Closing and Opening Stocks are Valued at their net Realizable Values.
  2. Purchases and Sales are recorded at their invoiced amounts.
Code: writers15

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