6. How to Use the Materials
These Kaplan Publishing learning materials have been carefully designed to
make your learning experience as easy as possible and to give you the best
chances of success in your examinations.
The product range contains a number of features to help you in the study
process. They include:
The sections on the study guide, the syllabus objectives, the examination
and study skills should all be read before you commence your studies. They
are designed to familiarise you with the nature and content of the
examination and give you tips on how to best to approach your learning.
The complete text or essential text comprises the main learning
materials and gives guidance as to the importance of topics and where
other related resources can be found. Each chapter includes:
(1) Detailed study guide and syllabus objectives
(2) Description of the examination
(3) Study skills and revision guidance
(4) Complete text or essential text
(5) Question practice
• The learning objectives contained in each chapter, which have been
carefully mapped to the examining body's own syllabus learning
objectives or outcomes. You should use these to check you have a clear
understanding of all the topics on which you might be assessed in the
examination.
• The chapter diagram provides a visual reference for the content in the
chapter, giving an overview of the topics and how they link together.
• The content for each topic area commences with a brief explanation or
definition to put the topic into context before covering the topic in detail.
You should follow your studying of the content with a review of the
illustration/s. These are worked examples which will help you to
understand better how to apply the content for the topic.
• Test your understanding sections provide an opportunity to assess
your understanding of the key topics by applying what you have learned
to short questions. Answers can be found at the back of each chapter.
vi KAPLAN PUBLISHINGvi KAPLAN PUBLISHING
8. Test Your Understanding – following key points and definitions are
exercises which give the opportunity to assess the understanding of these
core areas. Within the work book the answers to these sections are left
blank, explanations to the questions can be found within the online version
which can be hidden or shown on screen to enable repetition of activities.
Illustration – to help develop an understanding of topics and the test your
understanding exercises the illustrative examples can be used.
Exclamation Mark – this symbol signifies a topic which can be more
difficult to understand, when reviewing these areas care should be taken.
Tutorial note – included to explain some of the technical points in more
detail.
Footsteps – helpful tutor tips.
Syllabus
Paper introduction
Paper background
The aim of ACCA Paper F7, Financial reporting, is to develop knowledge
and skills in understanding and applying accounting standards and the
theoretical framework in the preparation of financial statements of entities,
including groups and how to analyse and interpret those financial
statements.
Objectives of the syllabus
• Discuss and apply a conceptual and regulatory framework for financial
reporting.
• Account for transactions in accordance with International accounting
standards.
• Analyse and interpret financial statements.
• Prepare and present financial statements for single entities and
business combinations which conform with International Financial
Reporting Standards.
viii KAPLAN PUBLISHING
9. Core areas of the syllabus
Syllabus objectives and chapter references
We have reproduced the ACCA’s syllabus from September 15 to June 16.
Below shows where the objectives are explored within this book. Within the
chapters, we have broken down the extensive information found in the
syllabus into easily digestible and relevant sections, called Content
Objectives. These correspond to the objectives at the beginning of each
chapter.
A A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
1 The need for a conceptual framework
• A conceptual framework for financial reporting.
• A regulatory framework for financial reporting.
• Financial statements.
• Business combinations.
• Analysing and interpreting financial statements.
(a) Describe what is meant by a conceptual framework of accounting.
[2] Ch. 6
(b) Discuss whether a conceptual framework is necessary and what an
alternative system might be.[2] Ch. 6
(c) Discuss what is meant by relevance and faithful representation and
describe the qualities that enhance these characteristics.[2] Ch. 6
(d) Discuss whether faithful representation constitutes more than
compliance with accounting standards.[1] Ch. 6
(e) Discuss what is meant by understandability and verifiability in relation to
the provision of financial information.[2] Ch. 6
(f) Discuss the importance of comparability and timeliness to users of
financial statements.[2] Ch. 6
(g) Discuss the principle of comparability in accounting for changes in
accounting policies.[2] Ch. 8
KAPLAN PUBLISHING ix
10. 2 Recognition and measurement
3 Specialised, notforprofit and public sector entities
4 Regulatory framework
(a) Define what is meant by ‘recognition’ in financial statements and
discuss the recognition criteria.[2] Ch. 6
(b) Apply the recognition criteria to.[2] Ch. 6
(i) assets and liabilities
(ii) income and expenses.
(c) Explain the following measures and compute amounts using.[2] Ch. 7
(i) historical cost
(ii) fair value/current cost
(iii) net realisable value
(iv) present value of future cash flows.
(d) Describe the advantages and disadvantages of the use of historical
cost accounting.[2] Ch. 7
(e) Discuss whether the use of current value accounting overcomes the
problems of historical cost accounting.[2] Ch. 7
(f) Describe the concept of financial and physical capital maintenance and
how this affects the determination of profits.[1] Ch. 7
(a) Distinguish between the primary aims of notfor profit and public sector
entities and those of profit oriented entities.[1] Ch. 1
(b) Discuss the extent to which International Financial Reporting Standards
(IFRSs) are relevant to specialised, notforprofit and public sector
entities.[1] Ch. 1
(a) Explain why a regulatory framework is needed also included the
advantages and disadvantages of IFRS over a national regulatory
framework.[2] Ch. 6
(b) Explain why accounting standards on their own are not a complete
regulatory framework.[2] Ch. 6
(c) Distinguish between a principles based and a rules based framework
and discuss whether they can be complementary.[1] Ch. 6
(d) Describe the IASB’s standard setting process including revisions to
and interpretations of standards.[2] Ch. 6
(e) Explain the relationship of national standard setters to the IASB in
respect of the standard setting process.[2] Ch. 6
x KAPLAN PUBLISHING
11. 5 The concepts and principles of groups and consolidated financial
statements
B ACCOUNTING FOR TRANSACTIONS IN FINANCIAL
STATEMENTS
1 Tangible noncurrent assets
(a) Describe the concept of a group as a single economic unit.[2] Ch.16
(b) Explain and apply the definition of a subsidiary within relevant
accounting standards.[2] Ch.16
(c) Identify and outline using accounting standards the circumstances in
which a group is required to prepare consolidated financial statements
as required by applicable accounting standards and other regulation.[2]
Ch.16
(d) Describe the circumstances when a group may claim exemption from
the preparation of consolidated financial statements.[2] Ch.16
(e) Explain why directors may not wish to consolidate a subsidiary and
when this is permitted by accounting standards and other applicable
regulation.[2] Ch.16
(f) Explain the need for using coterminous year ends and uniform
accounting policies when preparing consolidated financial statements.
[2] Ch.16
(g) Explain why it is necessary to eliminate intra group transactions.[2]
Ch.16
(h) Explain the objective of consolidated financial statements.[2] Ch.16
(i) Explain why it is necessary to use fair values for the consideration for an
investment in a subsidiary together with the fair values of a subsidiary's
identifiable assets and liabilities when preparing consolidated financial
statements.[2] Ch.17
(j) Define an associate and explain the principles and reasoning for the
use of equity accounting.[2] Ch.19
(a) Define and compute the initial measurement of a noncurrent (including
a selfconstructed and borrowing costs) asset.[2] Ch. 2
(b) Identify subsequent expenditure that may be capitalised, distinguishing
between capital and revenue items.[2] Ch. 2
(c) Discuss the requirements of relevant accounting standards in relation to
the revaluation of noncurrent assets.[2] Ch. 2
(d) Account for revaluation and disposal gains and losses for noncurrent
assets.[2] Ch. 2
KAPLAN PUBLISHING xi
12. 2 Intangible assets
3 Impairment of assets
4 Inventory and biological assets
(e) Compute depreciation based on the cost and revaluation models and
on assets that have two or more significant parts (complex assets).[2]
Ch. 2
(f) Discuss why the treatment of investment properties should differ from
other properties.[2] Ch. 2
(g) Apply the requirements of relevant accounting standards for investment
property.[2] Ch. 2
(a) Discuss the nature and accounting treatment of internally generated and
purchased intangibles.[2] Ch. 3
(b) Distinguish between goodwill and other intangible assets.[2] Ch. 3
(c) Describe the criteria for the initial recognition and measurement of
intangible assets.[2] Ch. 3
(d) Describe the subsequent accounting treatment, including the principle
of impairment tests in relation to goodwill.[2] Ch. 3, Ch. 17
(e) Indicate why the value of purchase consideration for an investment may
be less than the value of the acquired identifiable net assets and how
the difference should be accounted for.[2] Ch. 17
(f) Describe and apply the requirements of relevant accounting standards
to research and development expenditure.[2] Ch. 3
(a) Define an impairment loss.[2] Ch. 4
(b) Identify the circumstances that may indicate impairments to assets.
[2] Ch. 4
(c) Describe what is meant by a cash generating unit.[2] Ch. 4
(d) State the basis on which impairment losses should be allocated, and
allocate an impairment loss to the assets of a cash generating unit.[2]
Ch. 4
(a) Describe and apply the principles of inventory valuation.[2] Ch. 8
(b) Apply the requirements of relevant accounting standards for biological
assets.[2] Ch. 8
xii KAPLAN PUBLISHING
13. 5 Financial instruments
6 Leasing
(a) Explain the need for an accounting standard on financial instruments.
[1] Ch. 10
(b) Define financial instruments in terms of financial assets and financial
liabilities.[1] Ch. 10
(c) Explain and account for the factoring of receivables.[1] Ch. 10
(d) Indicate for the following categories of financial instruments how they
should be measured and how any gains and losses from subsequent
measurement should be treated in the financial statements.[1] Ch. 10
(i) amortised cost
(ii) fair value through other comprehensive income (including where an
irrevocable election has been made for equity investments that are
not held for trading).
(iii) fair value through profit or loss
(e) Distinguish between debt and equity capital.[2] Ch. 10
(f) Apply the requirements of relevant accounting standards to the issue
and finance costs of.[2] Ch. 10
(i) equity
(ii) redeemable preference shares and debt instruments with no
conversion rights (principle of amortised cost).
(iii) convertible debt
(a) Explain why recording the legal form of a finance lease can be
misleading to users (referring to the commercial substance of such
leases).[2] Ch. 9
(b) Describe and apply the method of determining a lease type (i.e. an
operating or finance lease).[2] Ch. 9
(c) Discuss the effect on the financial statements of a finance lease being
incorrectly treated as an operating lease.[2] Ch. 9, Ch. 20
(d) Account for assets financed by finance leases in the records of the
lessee.[2] Ch. 9
(e) Account for operating leases in the records of the lessee.[2] Ch. 9
(f) Account for sale and leaseback agreements. Ch. 9
KAPLAN PUBLISHING xiii
14. 7 Provisions and events after the reporting period
8 Taxation
9 Reporting financial performance
(a) Explain why an accounting standard on provisions is necessary.[2] Ch.
12
(b) Distinguish between legal and constructive obligations.[2] Ch. 12
(c) State when provisions may and may not be made and demonstrate how
they should be accounted for.[2] Ch. 12
(d) Explain how provisions should be measured.[1] Ch. 12
(e) Define contingent assets and liabilities and describe their accounting
treatment.[2] Ch. 12
(f) Identify and account for: [2] Ch. 12
(i) warranties/guarantees
(ii) onerous contracts
(iii) environmental and similar provisions
(iv) provisions for future repairs or refurbishments
(g) distinguish between and account for:
(i) adjusting and nonadjusting events after the reporting date.[2] Ch. 12
(ii) identify items requiring separate disclosure, including their accounting
treatment and required disclosures.[2] Ch. 12
(a) Account for current taxation in accordance with relevant accounting
standards.[2] Ch. 13
(b) Explain the effect of taxable temporary differences on accounting and
taxable profits.[2] Ch. 13
(c) Compute and record deferred tax amounts in the financial statements.
[2] Ch. 13
(a) Discuss the importance of identifying and reporting the results of
discontinued operations.[2] Ch. 5
(b) Define and account for noncurrent assets held for sale and
discontinued operations.[2] Ch. 5
(c) Indicate the circumstances where separate disclosure of material items
of income and expense is required.[2] Ch. 5
(d) Account for changes in accounting estimates, changes in accounting
policy and correction of prior period errors.[2] Ch. 8
xiv KAPLAN PUBLISHING
15. 10 Revenue
11 Government grants
(e) Earnings per share (EPS)
(i) calculate the EPS in accordance with relevant accounting
standards (dealing with bonus issues, full market value issues and
rights issues).[2] Ch. 14
(ii) explain the relevance of the diluted EPS and calculate the diluted
EPS involving convertible debt and share options (warrants).[2] Ch.
14
(a) Explain and apply the principles of recognition of revenue:
(i) identification of contracts Ch. 11
(ii) identification of performance obligations Ch. 11
(iii) determination of transaction price Ch. 11
(iv) allocation of the price to performance obligations Ch. 11
(v) recognition of revenue when/as performance obligations are
satisfied Ch. 11
(b) Explain and apply the criteria for recognising revenue generated from
contracts where performance obligations are satisfied over time or at a
point in time.[2] Ch. 11
(c) Describe the acceptable methods for measuring progress towards
complete satisfaction of a performance obligation.[2] Ch. 11
(d) Explain and apply the criteria for the recognition of contract costs.[2]
Ch. 11
(e) Prepare financial statement extracts for contracts where performance
obligations are satisfied over time.[2] Ch. 11
(f) Apply the principles of recognition of revenue, and specifically account
for the following types of transaction: [2] Ch. 11
(i) principle versus agent
(ii) bill and hold arrangements
(iii) consignments
(g) Prepare financial statement extracts for contracts where performance
obligations are satisfied over time.[2] Ch. 11
(a) Apply the provisions of relevant accounting standards in relation to
accounting for government grants.[2] Ch. 2
KAPLAN PUBLISHING xv
16. C ANALYSING AND INTERPRETING FINANCIAL STATEMENTS
1 Limitations of financial statements
2 Calculation and interpretation of accounting ratios and trends to
address users’ and stakeholders’ needs
3 Limitations of interpretation techniques
(a) Indicate the problems of using historic information to predict future
performance and trends.[2] Ch. 20
(b) Discuss how financial statements may be manipulated to produce a
desired effect (creative accounting, window dressing).[2] Ch. 20
(c) Explain why figures in a statement of financial position may not be
representative of average values throughout the period for example,
due to:
(i) seasonal trading
(ii) major asset acquisitions near the end of the accounting period.[2]
Ch. 20
(a) Define and compute relevant financial ratios.[2] Ch. 20
(b) Explain what aspects of performance specific ratios are intended to
assess.[2] Ch. 20
(c) Analyse and interpret ratios to give an assessment of an entity’s
performance and financial position in comparison with.[2] Ch. 20
(i) an entity’s previous period’s financial statements
(ii) another similar entity for the same reporting period
(iii) industry average ratios.
(d) Interpret an entity’s financial statements to give advice from the
perspectives of different stakeholders.[2] Ch. 20
(e) Discuss how the interpretation of current value based financial
statements would differ from those using historical cost based
accounts.[1] Ch. 20
(a) Discuss the limitations in the use of ratio analysis for assessing
corporate performance.[2] Ch. 20
(b) Discuss the effect that changes in accounting policies or the use of
different accounting policies between entities can have on the ability to
interpret performance.[2] Ch. 20
(c) Indicate other information, including nonfinancial information, that may
be of relevance to the assessment of an entity’s performance.[2] Ch. 20
xvi KAPLAN PUBLISHING
17. 4 Specialised, notforprofit and public sector entities
D PREPARATION OF FINANCIAL STATEMENTS
1 Preparation of single entity financial statements
2 Preparation of consolidated financial statements including an
associate
(d) Compare the usefulness of cash flow information with that of a
statement of profit or loss or a statement of profit or loss and other
comprehensive income.[2] Ch. 15
(e) Interpret a statement of cash flows (together with other financial
information) to assess the performance and financial position of an
entity.[2] Ch. 15
(f) (i) explain why the trend of eps may be a more accurate indicator of
performance than a company's profit trend and the importance of
eps as a stock market indicator.[2] Ch. 14
(ii) discuss the limitations of using eps as a performance measure.[2]
Ch. 14
(a) Discuss the different approaches that may be required when assessing
the performance of specialised, notforprofit and public sector
organisations.[1] Ch. 6 & 20
(a) Prepare an entity's statement of financial position and statement of
profit or loss and other comprehensive income in accordance with the
structure prescribed within IFRS and content drawing on accounting
treatments as identified within A, B and C. Ch. 1
(b) Prepare and explain the contents and purpose of the statement of
changes in equity. Ch. 1
(c) Prepare a statement of cash flows for a single entity (not a group) in
accordance with relevant accounting standards using the direct and the
indirect method.[2] Ch. 15
(a) Prepare a consolidated statement of financial position for a simple
group (parent and one subsidiary) dealing with pre and post acquisition
profits, noncontrolling interests (at fair value or proportionate share of
subsidiaries net assets) and consolidated goodwill.[2] Ch. 17
(b) Prepare a consolidated statement of profit or loss and consolidated
statement of profit or loss and other comprehensive income for a
simple group dealing with an acquisition in the period and non
controlling interest.[2] Ch. 18
(c) Explain and account for other reserves (e.g. share premium and
revaluation reserves).[1] Ch. 17
KAPLAN PUBLISHING xvii
19. Questions on topic areas that are also included in Paper F3 will be
examined at an appropriately greater depth in this paper.
Candidates will be expected to have an appreciation of the need for
specific accounting standards and why they have been issued. For detailed
or complex standards, candidates need to be aware of their principles and
key elements.
Paperbased examination tips
Divide the time you spend on questions in proportion to the marks on offer.
One suggestion for this examination is to allocate 1.8 minutes to each
mark available, so a 15mark question should be completed in
approximately 27 minutes.
Unless you know exactly how to answer the question, spend some time
planning your answer. Stick to the question and tailor your answer to what
you are asked. Pay particular attention to the verbs in the question.
If you get completely stuck with a question, leave space in your answer
book and return to it later.
If you do not understand what a question is asking, state your assumptions.
Even if you do not answer in precisely the way the examiner hoped, you
should be given some credit, if your assumptions are reasonable.
You should do everything you can to make things easy for the marker. The
marker will find it easier to identify the points you have made if your answers
are legible.
Short narrative response: Your answer should be concise but specific,
explaining terms where required. Short narrative responses will often
require comment on the correct accounting treatment of items, so an ability
to discuss this is essential, rather than simply providing calculations.
Computations: It is essential to include all your workings in your answers.
Many computational questions require the use of a standard format. Be sure
you know these formats thoroughly before the exam and use the layouts that
you see in the answers given in this book and in model answers.
Number of marks
Section A – Twenty 2mark multiple choice questions 40
Section B – Two 15mark questions 30
Section B – One 30mark question 30
–––
Total time allowed: 3 hours 100
KAPLAN PUBLISHING xix
20. Interpretation style response: Longer form responses are likely to
contain some form of interpreting information. A good interpretation answer
takes account of the information contained within the question and is
structured well, with good use of headings and sections.
Study skills and revision guidance
This section aims to give guidance on how to study for your ACCA exams
and to give ideas on how to improve your existing study techniques.
Preparing to study
Set your objectives
Before starting to study decide what you want to achieve – the type of pass
you wish to obtain. This will decide the level of commitment and time you
need to dedicate to your studies.
Devise a study plan
Determine which times of the week you will study.
Split these times into sessions of at least one hour for study of new material.
Any shorter periods could be used for revision or practice.
Put the times you plan to study onto a study plan for the weeks from now until
the exam and set yourself targets for each period of study – in your sessions
make sure you cover the course, course assignments and revision.
If you are studying for more than one paper at a time, try to vary your
subjects as this can help you to keep interested and see subjects as part of
wider knowledge.
When working through your course, compare your progress with your plan
and, if necessary, replan your work (perhaps including extra sessions) or, if
you are ahead, do some extra revision/practice questions.
Effective studying
Active reading
You are not expected to learn the text by rote, rather, you must understand
what you are reading and be able to use it to pass the exam and develop
good practice. A good technique to use is SQ3Rs – Survey, Question,
Read, Recall, Review:
(1) Survey the chapter – look at the headings and read the introduction,
summary and objectives, so as to get an overview of what the chapter
deals with.
xx KAPLAN PUBLISHING
21. You may also find it helpful to reread the chapter to try to see the topic(s) it
deals with as a whole.
Notetaking
Taking notes is a useful way of learning, but do not simply copy out the text.
The notes must:
Trying to summarise a chapter without referring to the text can be a useful
way of determining which areas you know and which you don't.
Three ways of taking notes:
Summarise the key points of a chapter.
Make linear notes – a list of headings, divided up with subheadings listing
the key points. If you use linear notes, you can use different colours to
highlight key points and keep topic areas together. Use plenty of space to
make your notes easy to use.
Try a diagrammatic form – the most common of which is a mindmap. To
make a mindmap, put the main heading in the centre of the paper and put a
circle around it. Then draw short lines radiating from this to the main sub
headings, which again have circles around them. Then continue the process
from the subheadings to subsubheadings, advantages, disadvantages,
etc.
(2) Question – whilst undertaking the survey, ask yourself the questions
that you hope the chapter will answer for you.
(3) Read through the chapter thoroughly, answering the questions and
making sure you can meet the objectives. Attempt the exercises and
activities in the text, and work through all the examples.
(4) Recall – at the end of each section and at the end of the chapter, try to
recall the main ideas of the section/chapter without referring to the text.
This is best done after a short break of a couple of minutes after the
reading stage.
(5) Review – check that your recall notes are correct.
• be in your own words
• be concise
• cover the key points
• be wellorganised
• be modified as you study further chapters in this text or in related ones.
KAPLAN PUBLISHING xxi
23. International Examinable Documents
FINANCIAL REPORTING
Knowledge of new examinable regulations will not be required until at least
six calendar months after the last day of the month in which the document
was issued, or the legislation passed.
The relevant last day of issue for the June examinations is 30 November of
the previous year, and for the December examinations, it is 31 May.
The study guide offers more detailed guidance on the depth and level at
which the examinable documents will be examined. The study guide should
be read in conjunction with the examinable documents list.
For the most uptodate list of examinable documents please visit the
student section of the ACCA website: http://www.accaglobal.com/students/.
KAPLAN PUBLISHING xxiii
26.
1 Preparation of financial statements for companies
IAS 1 Presentation of financial statements
A complete set of financial statements comprises:
IAS 1 (revised) does not require the above titles to be used by companies. It
is likely in practice that many companies will continue to use the previous
terms of balance sheet rather than statement of financial position, income
statement instead of statement of profit or loss, and cash flow statement
rather than statement of cash flows.
Exceptional items
Exceptional items is the name often given to material items of income and
expense of such size, nature or incidence that disclosure is necessary in
order to explain the performance of the entity.
• a statement of financial position
• either
– a statement of profit or loss and other comprehensive income, or
– a statement of profit or loss plus a statement showing other
comprehensive income
• a statement of changes in equity
• a statement of cash flows
• accounting policies and explanatory notes.
Introduction to published accounts
2 KAPLAN PUBLISHING2 KAPLAN PUBLISHING
28.
Note that IAS 1 requires an asset or liability to be classified as current if:
Current assets:
Inventories X
Trade receivables X
Cash and cash equivalents X
––
X
––
Total assets X
––
Equity and liabilities
Capital and reserves:
Share capital X
Retained earnings X
Other components of equity X
––
X
––
Total equity X
––
Noncurrent liabilities:
Longterm borrowings X
Deferred tax X
–– X
Current liabilities:
Trade and other payables X
Shortterm borrowings X
Current tax payable X
Shortterm provisions X
––
X
––
Total equity and liabilities X
––
• it will be settled within 12 months of the reporting date, or
• it is part of the entity's normal operating cycle.
Introduction to published accounts
4 KAPLAN PUBLISHING
29. Within the equity section of the statement of financial position, other
components of equity include:
• revaluation surplus
• investment reserve (seen in financial instruments, chapter 10).
Statement of changes in equity (SOCIE)
The statement of changes in equity provides a summary of all changes in
equity arising from transactions with owners in their capacity as owners.
This includes the effect of share issues and dividends.
Other nonowner changes in equity are disclosed in aggregate only.
XYZ Group
Statement of changes in equity for the year ended 31 December
20X2
Share
capital
Share
premium
Revaluation
surplus
Retained
earnings
Total
equity
$ $ $ $ $
Balance at 31
December 20X1
X X X X X
Change in
accounting
policy/prior year
error (IAS 8)
(X) (X)
–– –– –– –– ––
Restated balance X X X X X
Dividends (X) (X)
Issue of share
capital
X X X
Total
comprehensive
income
X X X
Transfer to retained
earnings
(X) X –
–– –– –– –– ––
Balance at 31
December 20X2
X X X X X
chapter 1
KAPLAN PUBLISHING 5
30. Statement of profit or loss and other comprehensive income
Total comprehensive income is the realised profit or loss for the period,
plus other comprehensive income.
Other comprehensive income is income and expenses that are not
recognised in profit or loss (i.e. they are recorded in reserves rather than as
an element of the realised profit for the period). For the purposes of F7,
other comprehensive income includes any change in the revaluation of non
current assets (IAS 16, covered in chapter 2) and fair value through other
comprehensive income financial assets (IFRS 9, covered in chapter 10).
The amendments to IAS 1 revised change how items of OCI are
presented in the financial statements – they do not change which items
should be presented in OCI. In principle, items of OCI must be classified
into two groups as follows:
• Items that might be reclassified (or recycled) to profit or loss in
subsequent accounting periods.
– Foreign exchange gains and losses arising on translation of a
foreign operation (IAS 21) (not on F7 syllabus).
– Effective parts of cash flow hedging arrangements (IAS 39) (not
on F7 syllabus).
• Items that will not be reclassified (or recycled) to profit or loss in
subsequent accounting periods.
– Changes in revaluation surplus (IAS 16 & IAS 38).
– Remeasurement of equity instruments designated to be
classified as fair value through OCI (IFRS 9).
IAS 1 Presentation of financial statements requires that you prepare either:
(1) A statement of profit or loss and other comprehensive income showing
total comprehensive income; or
(2) A statement of profit or loss showing the realised profit or loss for the
period PLUS a statement showing other comprehensive income.
Introduction to published accounts
6 KAPLAN PUBLISHING
Presentation of other comprehensive income
31. Statement of profit or loss
A recommended format is as follows:
XYZ: Statement of profit or loss and other comprehensive income
for the year ended 31 December 20X2
$
Revenue X
Cost of sales (X)
––
Gross profit X
Distribution costs (X)
Administrative expenses (X)
––
Profit from operations X
Finance costs (X)
Investment income X
––
Profit before tax X
Income tax expense (X)
––
Profit for the year X
Other comprehensive income
Gain/loss on revaluation (IAS 16) X
Gain/loss on fair value through other comprehensive
income financial assets (IFRS 9)
X
––
Total comprehensive income for the year X
––
chapter 1
KAPLAN PUBLISHING 7
32. Statement of profit or loss plus statement of comprehensive
income
A recommended format for the statement of profit or loss is as follows:
A recommended format for the presentation of other comprehensive
income is:
XYZ
Statement of profit or loss for the year ended 31 December 20X2
$
Revenue X
Cost of sales (X)
––
Gross profit X
Distribution costs (X)
Administrative expenses (X)
––
Profit from operations X
Finance costs (X)
Investment income X
––
Profit before tax X
Income tax expense (X)
––
Profit for the year X
XYZ
Statement of other comprehensive income for the year ended
31 December 20X2
$
Profit for the year X
Other comprehensive income
Gain/loss on property revaluation X
Gain/loss on fair value through other comprehensive income financial
assets
X
–
Total comprehensive income for the year X
–
Introduction to published accounts
8 KAPLAN PUBLISHING
Alternative presentation
33. 2 Introduction to published accounts
The following questions enable preparation of published accounts utilising
knowledge gained at F3 Financial Accounting. In order to be able to
complete an F7 published accounts question these basic preparation
techniques must be followed and the accounting standards in chapters 2 –
14 must first be learned.
The following information has been extracted from the books of Picklette
for the year to 31 March 20X9.
Dr Cr
$000 $000
Administrative expenses 170
Interest paid 5
Called up share capital (ordinary shares of
$1 each)
200
Dividend 6
Cash at bank and in hand 9
Income tax (remaining balance from
previous year)
10
Warranty provision 90
Distribution costs 240
Land and buildings:
at cost (Land $110,000, Buildings
$100,000)
210
accumulated depreciation (at 1 April 20X8) 48
Plant and machinery:
at cost 125
accumulated depreciation (at 1 April 20X8) 75
Retained earnings (at 1 April 20X8) 270
10% Loan (issued in 20X7) 80
Purchases 470
Sales 1,300
Inventory (at 1 April 20X8) 150
Trade payables 60
Trade receivables 728
––––– –––––
2,123 2,123
––––– –––––
chapter 1
KAPLAN PUBLISHING 9
Example 1 – Published accounts
34. Additional information
Required:
Prepare Picklette plc’s statement of profit or loss for the year to 31
March 20X9 and a statement of financial position as at that date.
Solution
Picklette statement of profit or loss
(1) Inventory at 31 March 20X9 was valued at $250,000.
(2) Buildings and plant and machinery are depreciated on a straight
line basis (assuming no residual value) at the following rates:
On cost: Buildings 5%
Plant and machinery 20%
(3) There were no purchases or sales of noncurrent assets during the
year to 31 March 20X9.
(4) The depreciation charges for the year to 31 March 20X9 are to be
apportioned as follows:
Cost of sales 60%
Distribution costs 20%
Administrative expenses 20%
(6) Income taxes for the year to 31 March 20X9 (at a rate of 30%) are
estimated to be $135,000.
(7) The loan is repayable in five years.
(8) The year end provision for warranty claims has been estimated at
£75,000. Warranty costs are charged to administrative expenses.
$000
Revenue 1,300
Cost of sales (470 + 150 – 250 + (60% × 30)) (388)
–––––
Gross profit 912
Distribution ((20% × 30) + 240) (246)
Administration ((20% × 30) + 170 – 15) (161)
–––––
Introduction to published accounts
10 KAPLAN PUBLISHING
35. Statement of financial position
Profit from operations 505
Finance costs
(80 × 10%)
(8)
–––––
Profit before tax 497
Income Tax (135 + 10) (145)
–––––
Profit for the year 352
–––––
$000 $000
Noncurrent assets
Tangible (W1) 182
Current assets
Inventory 250
Receivables 728
Bank 9
–––––
987
–––––
1,169
–––––
Share capital 200
Retained earnings (W2) 616
–––––
816
Noncurrent liabilities
Loan 80
Provision for warranties 75
–––––
155
Current liabilities
(60 + 135 + (3 accrued interest))
198
–––––
1,169
–––––
chapter 1
KAPLAN PUBLISHING 11
36. Working 1
Working 2
Land and
buildings
Plant and
machinery
Total
$000 $000 $000
Cost
b/f 210
––––
125
––––
335
––––
Depreciation
b/f 48 75 123
Charge 5
––––
25
––––
30
––––
c/f 53
––––
100
––––
153
––––
Carrying amount
c/f 157
––––
25
––––
182
––––
$000
Profit for the year 352
Dividends (6)
––––
346
Retained earnings b/f 270
––––
Retained earnings c/f 616
––––
Introduction to published accounts
12 KAPLAN PUBLISHING
37. The following trial balance has been extracted from the books of Arran
as at 31 March 20X7:
$000 $000
Administration expenses 250
Distribution costs 295
Share capital (all ordinary shares of $1 each) 270
Share premium 80
Revaluation surplus 20
Dividend paid 27
Cash at bank and in hand 3
Receivables 233
Interest paid 25
Dividends received 15
Interest received 1
Land and buildings at cost (land 380, buildings 100) 480
Land and buildings: accumulated depreciation 30
Plant and machinery at cost 400
Plant and machinery: accumulated depreciation 170
Retained earnings account (at 1 April 20X6) 235
Purchases 1,260
Sales 2,165
Inventory at 1 April 20X6 140
Trade payables 27
Bank loan 100
––––– –––––
3,113 3,113
––––– –––––
chapter 1
KAPLAN PUBLISHING 13
Test your understanding 1
38. Additional information
Buildings 5% on cost (straight line)
Plant and machinery 30% on carrying amount (reducing balance)
Prepare the statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial
position for year ended 31 March 20X7.
Note: Show all workings but notes are not required.
(1) Inventory at 31 March 20X7 was valued at a cost of $95,000.
Included in this balance were goods that had cost $15,000. These
goods had become damaged during the year and it is considered
that following remedial work the goods could be sold for $5,000.
(2) Depreciation for the year to 31 March 20X7 is to be charged
against cost of sales as follows:
(3) Income tax of $165,000 is to be provided for the year to 31 March
20X7.
(4) Land is to be revalued upwards by $100,000.
3 Notforprofit and public sector entities
Comparison of aims
The main aims of notforprofit and public sector entities are very
different to those of profitorientated entities:
Profitorientated sector Notforprofit/public sector
Financial aim is to make profit
and increase shareholder
wealth.
Directors are accountable to
shareholders.
External finance freely available
in the form of loans and share
capital.
Financial aim is to achieve value for
money/provide service.
Managers are accountable to
trustees/government/public.
Finance limited to donations/
government subsidies.
Introduction to published accounts
14 KAPLAN PUBLISHING
Notforprofit and public sector entities
39. Accounting standards and notforprofit and public sector entities
Accounting standards are designed to:
Notforprofit and public sector organisations:
Some measurement accounting standards will be relevant such as those
relating to inventory, noncurrent assets, leasing, etc. Others relating
purely to reporting such as earnings per share (EPS) will not be so
relevant.
• measure financial performance accurately and consistently
• report the financial position accurately and consistently
• account for the directors' stewardship of the resources and assets.
• do not aim to achieve a profit but will have to account for their
income and costs
• will have to account for their effectiveness, economy and efficiency
• do not have to produce financial statements for the public (but in
many cases may do so).
chapter 1
KAPLAN PUBLISHING 15
42. Test your understanding answers
Statement of profit or loss and other comprehensive income for
the year ended 31 March 20X7
$000
Revenue 2,165
Cost of sales (W1) (1,389)
––––––
Gross profit 776
Administration (250)
Distribution (295)
––––––
Operating profit 231
Finance cost (25)
Interest receivable 1
Investment income 15
––––––
Profit before tax 222
Income tax expense (165)
––––––
Profit for the year 57
––––––
Other comprehensive income
Gain on land revaluation 100
––––––
Total comprehensive income for the year 157
––––––
Introduction to published accounts
18 KAPLAN PUBLISHING
Test your understanding 1
43. Statement of changes in equity
Statement of financial position as at 31 March 20X7
Share
capital
Share
premium
Revaluation
surplus
Retained
earnings
Total
equity
$000 $000 $000 $000 $000
B/f 270 80 20 235 605
Total
comprehensive
income for the
year
100 57 157
Dividends (27) (27)
––– ––– ––– ––– –––
C/f 270 80 120 265 735
$000
Noncurrent assets:
Property, plant and equipment (W2) 706
Current assets:
Inventory 85
Receivables 233
Bank 3
––––
321
––––
1,027
––––
Share capital (from SOCIE) 270
Share premium (from SOCIE) 80
Revaluation surplus (from SOCIE) 120
Retained earnings (from SOCIE) 265
––––
735
Noncurrent liabilities 100
Current liabilities 27
Tax liability 165
––––
1,027
––––
chapter 1
KAPLAN PUBLISHING 19
44. Workings
(W1) Cost of sales
(W2) Property, plant and equipment
$
Opening inventory 140
Purchases 1,260
Closing inventory (95 – 10) (85)
Depreciation (5% × 100) + (400 – 170) × 30% 74
–––––
Total 1,389
–––––
Land and
buildings
Plant and
machinery
Total
$000 $000 $000
Carrying amount b/f 450 230 680
Revaluation 100 100
Depreciation charge (5) (69) (74)
––––– ––––– ––––
Carrying amount c/f 545 161 706
Introduction to published accounts
20 KAPLAN PUBLISHING
45. P Ltd Statement of profit or loss and other comprehensive
income for the year ended 31 March 20X1
P Ltd Statement of changes in equity for the year ended 31 March
20X1
Note: Dividends declared after the year end will not be adjusted for.
$000
Revenue 5,300
Cost of Sales (1,350)
–––––
Gross profit 3,950
Distribution costs (370)
Administration expenses (490)
–––––
Profit from operations 3,090
Income from investments 210
Finance cost (190)
–––––
Profit before tax 3,110
Income tax expense (470)
–––––
Profit for period 2,640
Other comprehensive income –
–––––
Total comprehensive income for the period 2,640
–––––
Share
capital
Share
premium
Retained
earnings
Total
$ $ $ $
Balance at 1 April 20X0 1,500 800 1,163 3,463
Total comprehensive income 2,640 2,640
Dividends (390) (390)
––––––– ––––––– ––––––– –––––––
Balance at 31 March 20X1 1,500 800 3,413 5,713
––––––– ––––––– ––––––– –––––––
chapter 1
KAPLAN PUBLISHING 21
Test your understanding 2
46. P Ltd Statement of financial position as at 31 March 20X1
$000 $000
Noncurrent assets
Property, plant and equipment 4,250
Current assets
Inventories 114
Trade receivables 418
Prepayments 25
Investments 2,700
Cash and cash equivalents 12
–––––– 3,269
–––––––
Total assets 7,519
–––––––
Equity and liabilities
Capital and reserves
Issued ordinary share capital 1,500
Share premium 800
Retained earnings 3,413
–––––– 5,713
Noncurrent liabilities
Longterm loans 1,200
Current liabilities
Trade payables 136
Income tax 470
–––––– 606
–––––––
Total equity and liabilities 7,519
–––––––
Introduction to published accounts
22 KAPLAN PUBLISHING
