Financial Accounting Lecture Revision Lecture 1: Presentation and Preparation of Financial Statements • IAS 1 – Presentation of Financial Standards o Specifies structure and content so statements are comparable with: § Other periods § Other entities o “To provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions” o General features § Fair presentation and compliance • With international standards – Compliance statement in notes § Going concern basis • Must be used unless intended to cease trading or doubts arise § Accruals basis • Must be used (except for cash flow statement) § Materiality and aggregation • Each material class of similar items shown § Offsetting • Show assets/liabilities and income/expenses separately § Frequency of reporting • Annual • If longer or shorter the period of entity should disclose: o Why the period is longer or shorter o The fact that comparative accounts are no longer comparable § Consistency of presentation • Components of Financial Statements o Statement of Financial Position o Statement of profit or loss & other comprehensive income o Statement of changes in equity o Statement of cash flows (IAS 7) o Notes o Comparative figures for the previous period • Statement of Financial Position o Assets = Equity + Liabilities OR Assets – Liabilities = Equity o Current and Non-Current Assets § An asset is a current asset if: • It is held for the purpose of being traded • It is expected to be realised within 12 months • It is cash or a cash equivalent defined by IAS 7 • All others are Non-Current Assets o Liabilities § A liability is a current liability if: • It is expected to be settled within 12 months after the reporting period or the entity’s normal operating cycle • All other liabilities are non-current liabilities 1
Financial Accounting Lecture Revision Statement of Financial Position as at … Working New Year Old Year ASSETS All Non-Current Assets Nice Property, Plant & Equipment People XXX XXX Intangible Assets Inhabit XXX XXX Investments Igloos XXX XXX Total Non-Current Assets To = = Current Assets Carry Inventories Items XXX XXX Trade Receivables They XXX XXX Cash & Cash Equivalents Can XXX XXX Total Current Assets Teach = = Total Assets Themselves = = EQUITY AND LIABILTIES Enough Equity Ergonomic XXX XXX Share Capital Skills XXX XXX Retained Earnings Rarely XXX XXX Other Reserves On XXX XXX Total Equity The = = Non-Current Liabilities Nice Long-term Borrowings Lake XXX XXX Deferred Tax Do XXX XXX Long-term Provisions Liars XXX XXX Total Non-Current Liabilities Talk = = Current Liabilities Can Trade and Other Payables They XXX XXX Short-term Borrowings Survive XXX XXX Current Tax Payable Cos XXX XXX Short-term Provisions Sometimes XXX XXX Total Current Liabilities The = = Total Liabilities Towers = = Total Equity and Liabilities Tumble = = 2
Financial Accounting Lecture Revision o Equity § The residual interest in the assets of a company after taking the liabilities • Share capital o Ordinary Shares § Voting rights § Entitled to dividends if declared by directors § Entitled to assets on winding-up § High risk o Preference Shares – paid before ordinary shares § Fixed dividend - % of nominal value § On winding-up, repaid before ordinary shareholders § No general voting rights § Dividends are • Non-cumulative – lost if too little profit • Cumulative – arrears of dividends carried forward until there are profits § Irredeemable – Equity section of SoFP § Redeemable – A Non-current liability • Share premium o Used when shares are issued for more than their value o E.g. 500 £2 ordinary shares are issued for £2.50 each § Debit ‘Bank’ £2.50 x 500 shares = £1,250 § Credit ‘Ordinary Share Capital’ = £1,000 § Credit ‘Share Premium’ = £250 • Bonus Shares o Company may use its reserves to give existing shareholders fully paid up bonus shares o Not paid for (they own the reserves anyway) o Over time reserves may increase (e.g. by retaining profits) o Reserves may become so high that the share capital doesn’t represent the asset base of the company, so bonus shares are issued • Capital reserves o Created on capital restructure of the company or from capital transactions not from trading and so cannot be dividends § Share premium account § Revaluation reserve § Capital redemption reserve • Revenue reserves o From trading profits o More flexible and can be paid out as dividends Retained earnings § Asset replacement reserve (for a specific purpose) § § General reserve (less common) 3
Financial Accounting Lecture Revision Lecture 2: Presentation and Preparation of Financial Statements • Statement of Profit or Loss and Other Comprehensive Income o Shows an entity’s income and expenses for the reporting period o Presented in either: § A single statement of comprehensive income OR § Two separate statements • Statement of profit or loss • A second statement beginning with the profit or loss for the period and showing the entity’s other comprehensive income Statement of Comprehensive Income for … Working New Year Old Year Revenue Really XXX XXX Cost of Sales Careful (XXX) (XXX) Gross Profit Gay = = Other Income Officers XXX XXX Distribution Costs Die (XXX) (XXX) Administrative Expenses Ahead (XXX) (XXX) Other Expenses Of (XXX) (XXX) Finance Costs Fagot (XXX) (XXX) Profit Before Tax Patrol = = Tax Expense The (XXX) (XXX) Profit For The Year Police = = Other Comprehensive Income: Often Items that will not be reclassified to profit or loss: Interrogate Gains on property revaluation Gays XXX XXX Investments in equity instruments Incase XXX XXX Tax relating to items that will need to be reclassified They (XXX) (XXX) Other comprehensive income for the year net of tax Outwit = = TOTAL COMPREHENSIVE INCOME FOR THE YEAR Them = = 4
Financial Accounting Lecture Revision • Statement of Changes in Equity o Shows how each bit of equity has changed during an accounting period o Provides a reconciliation of the opening and closing balance on each component of equity Statement of Changes in Equity for the year … Share Retained Revaluation Total Capital Earnings Reserve Equity Balance at (start of year before) Before XXX XXX XXX XXX Changes in Equity for (start of year before) Cranes Total Comprehensive Income They XXX XXX Dividends Divided (XXX) (XXX) Balance at (end of year before) Bricks = = = = Balance at (start of new year) Before XXX XXX XXX XXX Changes in equity for 2017 Climbing Changes in Accounting Policy Careful XXX XXX Restated Balance Retailers = = = = Issue of Share Capital Insisted XXX XXX Total comprehensive income They XXX XXX XXX Dividends divide (XXX) (XXX) Balance at (end of new year) Bricks = = = = • Notes o IAS 1 States that the notes should: § Present information on the measurement bases and accounting policies used § Disclose further information required by IAS § Provide any additional information relevant to an understanding of the financial statements § Should be cross-referenced to the four primary financial statements • Dividends Proposed o These have not yet been authorised by the ordinary shareholders § Not shown as a liability in the SoFP § Must be disclosed in a note to the accounts o Dividends paid during the year are subtracted from retained earnings • Depreciation o Could be included in cost of sales, admin expenses or depreciation costs o Assigned to what is logical: § Depreciation of warehouse/delivery van = distribution cost § Depreciation of office computers = admin cost § Depreciation of machine which makes the product = cost of sales § Value in value of inventory = add to cost of sales • Tax Provision o At the end of the year the tax liability is estimated. Rarely the same as the actual amount o Example: § A company estimates the tax liability for 2016 is £12,000 5
Financial Accounting Lecture Revision • Dr tax expense £12,000 = Expense in Profit and Loss Account • Cr tax liability £12,000 = Current Liability in SoFP o Summary: § Expense each year is: • Estimated tax liability for the year – over provision for last year + under provision for last year § Liability in SoFP: • Estimated liability for the year 6
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