Lý thuyết Eng Ver (đã mở khoá).pdf

Some notes for learning F3
EFFECTIVE LEARNING
Active reading
Take notes
Revision
Further reading
Scan Ask Read Recall Review
Technical
articles
IFRS box
Practice exam standard
questions
Mind map/diagrams
Your own word
key points, headings
Learning outcomes

F3 Detailed Syllabus
A. The context and purpose of
financial reporting
B. The qualitative characteristics of
financial information
C. The use of double-entry and
accounting systems
D. Recording transactions and events
E. Preparing a trial balance
F. Preparing basic financial
statements
G. Preparing simple consolidated
financial statements
H. Interpretation of financial
statements

OVERVIEW
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
LEDGER
ACCOUNTS
TRIAL BALANCE
FINANCIAL
STATEMENTS
BUSINESS
TRANSACTIONS
Chapter 4 Chapter 5
Chapter 6 &
14-16
Chapter 17-22
Chapter 7-13
CONSOLIDATED
FINANCIAL
STATEMENTS
Chapter 23-25
FINANCIAL INFORMATION
Chapter 3
THE REGULATORY FRAMEWORK
Chapter 2

LEARNING OBJECTIVES
► Explain the context and purpose of
financial reporting.
► Define the qualitative characteristics of
financial information.
► Demonstrate the use of double entry and
accounting systems.
► Record transactions and events.
► Prepare a trial balance (including
identifying and correcting errors).
► Prepare basic financial statements for
incorporated and unincorporated
entities.
► Prepare simple consolidated financial
statements
► Interpretation of financial statements

Overview and learning outcomes
1. The purpose of financial reporting
2. Types of business entity
3. Stakeholders
4. Introduction to financial statements
5. Those charged with governance
OVERVIEW LEARNING OUTCOMES

Introduction to financial statements
ASSETS
 Non-current assets
 Properties, plant and
equipment (PPE)
 Long-term investment
 Other NCA
 Current assets
 Cash and cash equivalents
 Inventories
 Trade receivables
 Short-term investment
 Other CA
LIABILITIES
 Non-current liabilities
 Long-term borrowings
 Long-term provisions
 Current liabilities
 Trade and other payables
 Short-term borrowings
 Bank overdraft
 Taxation
 Other CL
EQUITY
 Share capital/premium
 Retained Earnings (RE)
 Reserves
STATEMENT OF FINALCIAL POSITION (SOFP)
 Revenue
 Cost of sales
 Gross profit
 Other income
 Expenses
 Selling expenses
 Operations and administrative exp
 Other expenses
 Finance cost
 Profit before tax (PBT)
 Income tax expenses
 Profit for the year (net profit after
tax)
Income statement (IS)

Format of Income Statement
An income statement summarizes the income
and expenditure of the company over a period
of time. If income exceeds expenditure, the
business gets a profit, if vice versa, a loss occurs
Income: Increases in economic benefits during
the accounting period In the form of
- inflows or enhancements of assets; or
- decreases of liabilities
that result in increase in equity, other than
those relating to contributions to equity
participants
Expenses: Decrease in economic benefits
during the accounting period in the form of
- outflows or depletions of assets;
- incurrences of liabilities
that result in decreases in equity, other than
those relating to distributions to equity
participants

Format of Statement of Financial Position
The Statement of Financial
Position is a statement of assets
owned, liabilities owed and equity
of a business at a particular date.
An asset is a resource controlled by
an entity as a result of past events
and from which future economic
benefits are expected to flow to the
entity.
A liability is a present obligation of
the entity arising from past events,
the settlement of which is
expected to result in an outflow
from the entity of resources
embodying economic benefits

The Statement of Financial Position is a statement of assets owned,
liabilities owed and equity of a business at a particular date.
An asset is a resource controlled by an entity as a result of past
events and from which future economic benefits are expected to flow
to the entity.
A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits

Format for the Statement of Cash Flow
A cash flow statement summarizes the cash inflows
(receipts) and cash outflows (payments) for a given period.
The cash flow statement provides historical information
about cash and cash Equivalents.

SOURCES, RECORDS AND BOOKS
OF PRIME ENTRY

Learning outcomes and overview
1. Business transactions
2. Sources of documents
3. Books of prime entry
► Sales/Sales returns day book
► Purchase/Purchase returns
day book
► Cash/Petty cash book
► Journal
LEARNING OUTCOMES
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
BUSINESS
TRANSACTIONS
Chapter 4
LEDGER
ACCOUNTS
Chapter 5
FINANCIAL
STATEMENTS
FINANCIAL
INFORMATION
Chapter 3

Business transactions
Cash
transactions Discounts
Credit
transactions

Sources of documents
Documents Content Purpose
Quotation Quantity/description/details of goods required. To establish price from various suppliers and cross refer to
purchase requisition
Purchase order Details of supplier, e.g. name, address.
Quantity/description/details of goods
required and price. Terms and conditions of
delivery, payment, etc.
Sent to supplier as request for supply. To check to the
quotation and delivery note.
Sales order Quantity/description/details
of goods required and price.
Cross checked with the order placed by customer.
Sent to the stores/warehouse department for
processing of the order.
Receipt Details of payment received. Issued by the selling company indicating the
payment received.
Goods
despatched
note – GDN
Details of supplier, e.g. name and address.
Quantity and description of goods
Provided by supplier. Checked with goods
received and purchase order.
Goods received
note (GRN)
Quantity and description of
goods.
Produced by company receiving the goods as proof of
receipt. Matched with delivery note and purchase order.
Invoice Name and address of supplier and customer;
details of goods, e.g. quantity, price, value, sales
tax, terms of credit, etc.
Issued by supplier of goods as a request for payment. For
the supplier selling the
goods/services this will be treated as a sales invoice. For
the customer this will be treated as a purchase invoice.

Sources of documents
Documents Content Purpose
Statement Details of supplier, name and address.
Date, invoice numbers and values,
payments made, refunds, amount owing.
Issued by the supplier. Checked with other
documents to ensure that the amount owing is
correct.
Credit note Details of supplier, name and address.
Contains details of goods returned, quantity,
price, value, sales tax, terms of
Credit.
Issued by the supplier. Checked with documents
regarding goods returned.
Debit note Details of the supplier. Contains details of
goods returned, e.g. quantity, price, value,
sales tax, terms of credit, etc.
Issued by the company receiving the goods. Cross
referred to the credit note issued by the supplier.
Remittance
advice
Method of payment, invoice number,
account number, date, etc.
Sent to supplier with, or as notification of, payment.

Books of prime entry
Books of prime entry Transaction type
Sales day book Credit sales
Purchases day book Credit purchases
Sales returns day book Returns of goods sold on credit
Purchases returns day
book
Returns of goods bought on credit
Cash book All bank transactions
Petty cash book All small cash transactions
The journal All transactions not recorded elsewhere
All transactions are initially recorded in a book of prime entry. This is a simple note of the transaction, the
relevant customer/supplier and the amount of the transaction. It is, in essence, a long list of daily transactions.

Sales day book
 The sales day book is the book of prime entry for
credit sales. The sales day book is used to keep a list
of all invoices sent out to customers each day.
Purchase day book
 A business also keeps a record in the purchase day
book of all the invoices it receives. The purchase day
book is the book of prime entry for credit purchases.
Sales returns day book
 When customers return goods for some reason, a
credit note is raised. All credit notes are recorded in
the sales returns day book.
 The sales returns day book is the book of prime
entry for credit notes raised.
 Where a business has very few sales returns, it may
record a credit note as a negative entry in the sales
day book.
Purchase returns day book
 The purchase returns day book records credit notes
received in respect of goods which the business sends
back to its suppliers.
 The purchase returns day book is the book of prime
entry for credit notes received from suppliers.
 A business with very few purchase returns may record
a credit note received as a negative entry in the
purchase day book

Cash book
 The cash book may be a manual record or a
computer file. It records all transactions that go
through the bank account.
 The cash book deals with money paid into and out of
the business bank account.
 The cash book is the book of prime entry for cash
receipts and payments.
Bank statements
 Weekly or monthly, a business will receive a bank
statement. Bank statements should be used to check
that the amount shown as a balance in the cash book
agrees with the amount on the bank statement, and
that no cash has 'gone missing'.
Petty cash book
 Most businesses keep petty cash on the premises,
which is topped up from the main bank account. Under
the imprest system, the petty cash is kept at an
agreed sum, so that each topping up is equal to the
amount paid out in the period.
 A small amount of cash on the premises to make
occasional small payments in cash, eg staff
refreshments, postage stamps, to pay the office
cleaner, taxi fares, etc. This is often called the cash
float or petty cash account.
 A petty cash book is a cash book for small payments.

LEDGER ACCOUNTS AND DOUBLE
ENTRIES

1. Financial accounting process
2. Ledger accounts
3. The accounting/business equation
4. Double entry bookkeeping
5. The receivables and payables ledger
LEARNING OUTCOMES
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
BUSINESS
TRANSACTIONS
Chapter 4
LEDGER
ACCOUNTS
Chapter 5
FINANCIAL
STATEMENTS
FINANCIAL INFORMATION
Chapter 3

The Accounting Equation
Concepts Description
Stocks/Inventories Unsold goods
Account receivables (AR) Amounts owed to the business by its customers
Account payables (AP) Amount owed by the business to its suppliers
Retained earnings (RE) Profit generated from operation by a business but not yet
distributed to its owners
Drawings Amounts of money or assets taken out of a business by its
owners
Return inwards Goods returned to the business
Return outwards Goods returned by the business
Gross profit Gross profit = Sales – Cost of goods sold (COGS)
Net profit Net profit = Gross profit – Expenses

Ledger Account
► Nominal ledger (General ledger/GL) is an accounting record which contains the principle accounts and
which summarizes the financial affairs of a business
► The method used to summarise these records: ledger accounting and double entry.
► Format of a nominal ledger
Account Name
Dr Cr

 An account shows the effect of transactions on a given
asset, liability, equity, revenue, or expense account.
 Double-entry accounting system (two-sided effect).
 Recording done by debiting at least one account and
crediting another.
 DEBITS must equal CREDITS.
Debits and Credits
LO 1
Ledger Account

Account Name
Debit / Dr. Credit / Cr.
Debits and Credits
 An arrangement that shows the
effect of transactions on an
account.
 Debit = “Left”
 Credit = “Right”
Account
An Account can be
illustrated in a T-
Account form.
LO 1

Account Name
$10,000 Transaction #2
$3,000
8,000
Transaction #1
Transaction #3
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Debits and Credits
LO 1

Account Name
$10,000 Transaction #2
$3,000
8,000
Balance
Transaction #1
Transaction #3
If the sum of Debit entries are less than the sum of
Credit entries, the account will have a credit balance.
Debits and Credits
LO 1

Chapter
3-23
Assets
Normal Balance
Chapter
3-27
Normal Balance
Expense
Chapter
3-24
Liabilities
Normal Balance
Chapter
3-25
Normal Balance
Equity
Chapter
3-26
Normal Balance
Revenue
Normal
Balance
Credit
Normal
Balance
Debit
Debits and Credits Summary
LO 1

Statement of Financial
Position
= + -
Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits Summary
Income Statement
LO 1

Relationship among the assets, liabilities and equity of a
business:
The equation must be in balance after every transaction. For
every Debit there must be a Credit.
The Accounting Equation

Financial
Statements
and Ownership
Structure
Investments by shareholders
Net income retained in the
business

FROM TRIAL BALANCE TO
FINANCIAL STATEMENTS

1. The Trial balance (TB)
2. The Statement of Profit or Loss (PL)
3. The Statement of Financial position (SFP)
4. Balancing off/Closing off ledger accounts and preparing the FSs.
LEARNING OUTCOMES
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
Chapter 4
LEDGER
ACCOUNTS
Chapter 5
TRIAL BALANCE
Chapter 6 &
14-16

The Trial Balance (TB)
At suitable intervals, the entries in each ledger account are totaled and a balance is struck. Balances are usually collected
in a trial balance which is then used as a basis for preparing a statement of profit or loss and a statement of financial
position.
A trial balance is a list of ledger balances shown in debit and credit columns.
Steps to prepare the Trial Balance (TB):
► Step 1: Collect of ledger accounts
► Step 2: Balance ledger accounts
► Step 3: Collect the balances
► Step 4: Check and reconcile

Financial Statements
A profit or loss ledger account is opened up to gather all items relating to income and expenses. When rearranged,
these items make up the statement of profit or loss.
STATEMENT OF PROFIT AND LOSS
STATEMENT OF FINANCIAL POSITION
The balances on all remaining ledger accounts (including the profit or loss account) can be listed and rearranged to
form the statement of financial position.
These remaining accounts must also be balanced and ruled off, but since they represent assets and liabilities of the
business (not income and expenses) their balances are not transferred to the P/L account. Instead they are carried
down in the books of the business. This means that they become opening balances for the next accounting period
and indicate the value of the assets and liabilities at the end of one period and the beginning of the next.

Balancing off/Closing off ledger accounts
Step 1 Step 2 Step 3
Total both sides
of the T-account
and find the
larger total
Put the larger
total in the total
box on the debit
and credit side.
Insert a balancing
figure to the side
which does not
currently add up to
the amount in the
total box. Call this
balancing figure
‘balance c/f’ (carried
forward) or ‘balance
c/d’ (carried down).
Step 4
Carry the
balance down
diagonally and
call it ‘balance
b/f’ (brought
forward) or
‘balance b/d’
(brought down).
BALANCING OFF A LEDGER ACCOUNT

Balancing off/Closing off ledger accounts
BALANCING OFF A LEDGER ACCOUNT
Balance sheet ledger accounts
Assets/liabilities at the end of a period = Assets/liabilities
at start of the next period.
Balancing the account will result in:
► A balance c/f (being the asset/liability at the end of
the accounting period)
► A balance b/f (being the asset/liability at the start of
the next accounting period).
Profit or Loss ledger accounts
► At the end of a period any amounts that relate to that
period are transferred out of the income and
expenditure accounts into another ledger account
called profit or loss.
► Do not show a balance c/f or balance b/f but instead
put the balancing figure on the smallest side and label
it ‘profit or loss'.

Shows the
balance of all
accounts, after
adjusting entries,
at the end of the
accounting period.
Proves the
equality of the
total debit and
credit balances
Adjusted
Trial
Balance

Closing Entries
Service Revenue 106,000
Profit or Loss 106,000
Salaries & Wages Expense 46,000
Supplies Expense 15,000
Rent Expense 9,000
Insurance Expense 500
Interest Expense 500
Depreciation Expense 400
Bad Debt Expense 1,600
Retained Earnings 33,000
Retained Earnings 5,000
Dividends 5,000
Closing Journal Entries

CORRECTION OF ERRORS
ERRORS OF
TRANPOSITION
ERRORS OF
OMISSIONS
ERRORS OF
PRINCIPLE
ERRORS OF
COMMISSION
COMPENSATING
ERRORS

ERRORS OF TRANSPOSITION
An error of transposition is when two digits in a figure are accidentally recorded the wrong way round.
For example, suppose that a sale is recorded in the sales account as $6,843, but it has been incorrectly
recorded in the total receivables account as $6,483. The error is the transposition of the 4 and the 8. The
consequence is that total debits will not be equal to total credits. You can often detect a transposition error by
checking whether the difference between debits and credits can be divided exactly by 9. For example, $6,843 –
$6,483 = $360; $360/9 = 40.

ERRORS OF OMISSIONS
An error of omission means failing to record a transaction at all, or making a debit or credit entry, but not the
corresponding double entry.
(a) If a business receives an invoice from a supplier for $250, the transaction might be omitted from the books
entirely. As a result, both the total debits and the total credits of the business will be incorrect by $250.
(b) If a business receives an invoice from a supplier for $300, the payables control account might be credited, but
the debit entry in the purchases account might be omitted. In this case, the total credits would not equal total
debits (because total debits are $300 less than they ought to be).

ERRORS OF PRINCIPLE
An error of principle involves making a double entry in the belief that the transaction is being entered in the
correct accounts, but subsequently finding out that the accounting entry breaks the 'rules' of an accounting
principle or concept.
(a) For example, repairs to a machine costing $150 should be treated as revenue expenditure, and debited to a
repairs account. If, instead, the repair costs are added to the cost of the non-current asset (capital
expenditure) an error of principle would have occurred. As a result, although total debits still equal total
credits, the repairs account is $150 less than it should be and the cost of the non-current asset is $150
greater than it should be.
(b) Similarly, suppose that the proprietor of the business sometimes takes cash out of the till for their personal
use and during a certain year these withdrawals on account of profit amount to $280. The bookkeeper states that
they have reduced cash sales by $280 so that the cash book could be made to balance. This would be an error
of principle, and the result of it would be that the withdrawal account is understated by $280, and so is the total
value of sales in the sales account.

ERRORS OF COMMISSION
Errors of commission are where the bookkeeper makes a mistake in carrying out their task of recording
transactions in the accounts.
(a) Putting a debit entry or a credit entry in the wrong account. For example, if telephone expenses of $540
are debited to the electricity expenses account, an error of commission would have occurred. The result is
that although total debits and total credits balance, telephone expenses are understated by $540 and
electricity expenses are overstated by the same amount.
(b) Errors of casting (adding up). The total daily credit sales in the sales day book should be $28,425, but are
incorrectly added up as $28,825. The total sales in the sales day book are then used to credit total sales and
debit total receivables in the ledger accounts. Although total debits and total credits are still equal, they are
incorrect by $400.

COMPENSATING ERRORS
Compensating errors are errors which are, coincidentally, equal and opposite to one another.
For example, although unlikely, in theory two transposition errors of $540 might occur in extracting ledger
balances, one on each side of the double entry. In the administration expenses account, $2,282 might be written
instead of $2,822 while, in the sundry income account, $8,391 might be written instead of $8,931. Both the debits
and the credits would be $540 too low, and the mistake would not be apparent when the trial balance is cast.
Consequently, compensating errors hide the fact that there are errors in the trial balance.

SUSPENSE ACCOUNT
A suspense account is a temporary account which can be opened for a number of reasons. The most common
reasons are as follows.
(a) A trial balance is drawn up which does not balance (ie total debits do not equal total credits).
(b) The bookkeeper of a business knows where to post the credit side of a transaction, but does not know where
to post the debit (or vice versa). For example, a cash payment might be made and must obviously be credited to
cash. But the bookkeeper may not know what the payment is for, and so will not know which account to debit.

Definition
Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by the local tax
authorities.
Some sales tax is irrecoverable. Where sales tax is irrecoverable it must be regarded as part of the cost of the
items purchased and included in the statement of profit or loss charge or in the statement of financial position
as appropriate.
Sales tax paid on purchases
(input tax)
Dr Purchases – (net cost)
Dr Sales tax (sales tax)
Cr Payables/cash – (gross cost)
Sales tax charged on sales
(output tax)
Dr Receivables/cash (gross selling price)
Cr Sales – (net selling price)
Cr Sales tax (sales tax)

Learning outcomes
1. Definition of Inventory, cost of
sales
2. Methods of valuing inventory
3. IAS 02 – INVENTORY
LEARNING OUTCOMES
Inventory
Valuation Adjustment
Cost NRV Opening Closing

Cost of goods sold
Cost of good sold (COGS) = Opening inventory + purchases – closing inventory
Format:
Opening inventory value X
+ Add cost of purchases (or, in the case of a manufacturing company, the cost of
production)
X
X
- Less closing inventory value (X)
Cost of goods sold X
The value of closing inventories is accounted for in the nominal ledger by debiting an inventory account and
crediting the profit or loss account at the end of an accounting period. Inventory will therefore have a debit
balance at the end of a period, and this balance will be shown in the statement of financial position as a current
asset.

CARRIAGE INWARDS & OUTWARDS
Cost of carriage inwards
Cost of carriage
outwards
Usually added to COST of PURCHASE
Selling & distribution expense in SOPL

VALUING INVENTORY
Inventory
measurement
Cost
Net realisable value
(Fair value – cost to sell)
Purchase
cost
Cost of
conversion
Other cost bringing the
inventories to their present
location and condition
Purchase
price
Import
duties
Other directly
attributable cost
Trade
discounts
Costs directly related to
the units of production
Fixed and variable
production overheads
Purchase
cost
Cost of
conversion
Purchase
price
Import
duties
Other directly
attributable cost
Trade
discounts
Costs directly related to
the units of production

Methods of valuing inventory
The standard lists types of cost which would not be included in cost of inventories. Instead, they should be
recognised as an expense in the period they are incurred.
► Abnormal amounts of wasted materials, labour or other production costs
► Storage costs (except costs which are necessary in the production process before a further production stage)
► Administrative overheads not incurred to bring inventories to their present location and conditions
► Selling costs
Method Key points Conditions
Unit cost This is the actual cost of purchasing
identifiable units of inventory.
Only used when items of inventory are
individually distinguishable and of high value
FIFO – first
in first out
For costing purposes, the first items of
inventory received are assumed to be the
first ones sold.
The cost of closing inventory is the cost of the
most recent purchases of inventory.
AVCO –
Average
cost
The cost of an item of inventory is calculated
by
taking the average of all inventory held.
The average cost can be calculated periodically
or continuously.
CALCULATION COST OF INVENTORY

1. Capital expenditure and
revenue expenditure
2. Capital income and revenue
income
3. Depreciation accounting
4. NCA – Revaluation
5. NCA – Disposal
LEARNING OUTCOMES OVERVIEW

CAPEX AND OPEX
Capital expenditure
► Acquisition of non-current assets
► Improvements to existing non-current assets
► Recognition of a non-current asset in the statement of
financial position
Revenue expenditure
► Trade of the business
► Maintain the existing earning capacity of non-current
assets
► Expense in the Income statement
Capital Income
The proceeds from the sale of non-trading assets
(including long-term investments).
Revenue Income
Income derived from the following sources.
► (a) The sale of trading assets, such as goods held in
inventory
► (b) The provision of services
► (c) Interest and dividends received from investments
held by the business

IAS 16 - Properties, plant and equipment
No. Concepts Definition
1 Property, plant and
equipment
Tangible assets that:
► Are held by an entity for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
► Are expected to be used during more than one period
2 Cost the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or
construction
3 Fair value the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date
4 Carrying amount the amount at which an asset is recognised after deducting any accumulated
depreciation and impairment losses

Measurement & Recognition
Recognition
► Probable that future economic benefits associated with the asset
► Cost of the asset to the entity can be measured reliably
► Period over 12 months
Initial
measurement
COST
Purchase price excluding any trade discount
and sales tax
costs of dismantling and removing,
restoring the site
Directly attributable costs of bringing the
asset to working condition
cost of site preparation
Initial delivery and handling costs
Installation and assembly costs
Professional fees (lawyers,
architects, engineers)
Costs of testing after deducting the
net proceeds from selling samples

Measurement & Recognition
Subsequent
measurement
COST model
REVALUATION
model
Revaluation – Acc depreciation –
Impairment loss
Cost – accumulated depreciation
Subsequent
expenditure
IMPROVEMENT Upgrade
Modification
New production process

Depreciation Accounting
The cost of a non-current asset, less its estimated residual value, is allocated fairly between accounting periods
by means of depreciation. Depreciation is both of the following:
► Charged against profit (PL);
► Deducted from the value of the non-current asset in the statement of financial position.
Two methods of depreciation are specified in your syllabus.
► The straight line method
► The reducing balance method
Depreciation charge = (Cost – Residual value)/Useful life
Straight-line method
Reducing balance
method
Depreciation charge = X % × carrying amount
Dr Depreciation expense
Cr Accumulated depreciation
Double entry

Depreciation Accounting
The period over which a depreciable asset is expected to be used by the enterprise; or the number of production
or similar units expected to be obtained from the asset by the enterprise.
The following factors should be considered when estimating the useful life of a depreciable asset.
► Expected physical wear and tear
► Obsolescence
► Legal or other limits on the use of the assets
USEFUL LIFE
The net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the
expected costs of disposal
RESIDUAL VALUE
► Expected useful life
► method of depreciation
► residual value
CHANGE PROSPECTIVELY

Revaluation of Non-current Assets
When a non-current asset is revalued, depreciation is charged on the revalued amount.
The gain on revaluation is recognised in the statement of profit or loss and other comprehensive income, as
other comprehensive income. From here, the 'gain' is transferred to a revaluation surplus (sometimes called a
revaluation reserve), part of capital in the statement of financial position.
If Non-current assets were to be subsequently sold for the revalued amount, the profit would be realized and
could be taken to the statement of profit or loss.
The accounting entries to record the depreciation charge each year would therefore be as follows:
► To record the new annual depreciation charge
DEBIT Depreciation expense (statement of profit or loss)
CREDIT Accumulated depreciation account (statement of financial position)
► To record the transfer of the excess depreciation
DEBIT Revaluation surplus (statement of financial position)
CREDIT Retained earnings (statement of financial position)
► To record revaluation downwards
DEBIT Revaluation surplus
DEBIT NCA - Accumulated depreciation account
CREDIT NCA - Cost

Non-current assets disposal
When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference
between the net sale price of the asset and its carrying amount at the time of disposal.
Profit/loss on disposal is charged directly to PL in that period.
The ledger accounting entries are as follows:
► with the cost of the asset disposed of.
DEBIT Disposal of non-current asset account
CREDIT Non-current asset account
► with the accumulated depreciation on the asset as at the date of sale.
DEBIT Accumulated depreciation account
CREDIT Disposal of non-current asset account
► with the income from disposal
DEBIT Receivable account or cash book
CREDIT Disposal of non-current asset account

Non-current assets disposal
A business purchased a non-current asset on 1 January 20X1 for $25,000. It had an estimated life of 6 years and an
estimated residual value of $7,000. The asset was eventually sold after 3 years on 1 January 20X4 to another trader
who paid $17,500 for it.
What was the profit or loss on disposal, assuming that the business uses the straight line method for depreciation?

1. Definition
2. Research and development
costs
3. Accounting treatment

Definition
Tangible Non-current Assets
► Normally have physical substance, e.g land and
buildings
► Normally involve expenditure being incurred
► Cost of the tangible non-current asset is
capitalized
► Depreciation is a reflection of the wearing out of
the asset
Intangible Non-current Assets
► Do not normally have physical substance, e.g
copyright
► Can be purchased or may be created within a
business without any expenditure being incurred,
i.e internally generated, e.g brands.
► Purchased intangible non-current assets are
capitalized. Generally, internally generated assets
may not be capitalized.
► Amortization is a reflection of a wearing out of the
(capitalized) assets
Intangible assets are non-current assets with no physical substance.

Research and Development costs
original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge
and understanding
Research Development
the application of research findings or other knowledge to
a plan or design for the production of new or substantially
improved materials, devices, products, processes,
systems or services prior to the commencement of
commercial production or use
R&D Costs
All costs that are directly attributable to R&D activities, or that
can be allocated on a reasonable basis ( Salaries, wages,
costs of materials and services, depreciation, overhead costs
and other costs)
be recognised as an
expense in the period in
which they are incurred
be recognised as an
intangible asset (deferred
development expenditure)
IAS
38

Accounting treatment
Recognition
criteria
(Capitalized as IA)
Probable future
economic
benefits
Intention to
complete the
intangible asset
adequate
technical,
financial and
other
Resources to
complete the
development
Ability to use
or sell the
intangible asset
Technical
feasibility
measure
reliably the
Expenditure
PIRATE ► Once capitalised as an asset, development costs must be
amortised and recognised as an expense to match the costs
with the related revenue or cost savings. The amortisation
will begin when the asset is available for use.
► Amortisation must be done on a systematic basis to reflect
the pattern in which the related economic benefits are
recognised.
► Impairment (fall in value of an asset) is a possibility, but is
perhaps more likely with development costs, when the asset
is linked with success of the development. The development
costs should be written down.
► If the useful life of an intangible asset is finite, the
capitalized development costs must be amortised once
commercial exploitation begins.
► An intangible asset with an indefinite useful life should not be
amortised. Instead, it should be subject to an annual
impairment review.
Disclosure in financial statements
► IAS 38 requires both numerical and narrative disclosures for
intangible assets.
► The financial statements should show a reconciliation of the
carrying amount of intangible assets at the beginning and at
the end of the period. The reconciliation should show the
movement on intangible assets, including: Additions,
disposal, reductions in carrying amount, amortization, any
other movements).

1. Definition
2. Accounting treatment
Accruals concept
Expenditure Income
Prepaid
Accrued

Definition
Accruals
► Accrued expenses (accruals) are expenses
relate to an accounting period but have not been
paid for. They are shown in the statement of
financial position as a liability.
► Accruals are included in payables in current
liabilities, as they represent liabilities which have
been incurred but for which no invoice has yet
been received
► Enter any accruals
DR Expenses
CR Accruals
Prepayments
► Prepaid expenses (prepayments) are expenses
which have already been paid but relate to a
future accounting period. They are shown in the
statement of financial position as an asset.
► Prepayments are included in receivables in
current assets in the statement of financial
position. They are assets, as they represent
money that has been paid out in advance of the
expense being incurred.
► Enter any prepayments
DR Assets
CR Expenses

1. Irrecoverable debts
2. Allowances for AR
► Doubtful debts
► Accounting treatment
3. Presentation
Trade receivables
Irrecoverable debts Allowances

Irrecoverable debts
► Irrecoverable debts are specific debts owed to a business which it decides are never going to be paid. They
are written off as an expense in the statement of profit or loss.
► An irrecoverable (or 'bad') debt is a debt which is definitely not expected to be paid. An irrecoverable debt
could occur when, for example, a customer has gone bankrupt.
► According to the Conceptual Framework an asset is a resource controlled by an entity from which future
economic benefits are expected to flow. If the customer can't pay, then no economic benefits are expected to
flow from the trade receivable. So the trade receivable no longer meets the definition of an asset and it must
be removed from the statement of financial position and is charged as an expense in the statement of profit or
loss.
Writing off irrecoverable debts
DEBIT Irrecoverable debts expense (statement of profit or loss)
CREDIT Trade receivables (statement of financial position)
Subsequently paid
DEBIT Cash account (statement of financial position)
CREDIT Irrecoverable debts expense (statement of profit or loss)

Allowances for receivables
Irrecoverable debts
Irrecoverable debts are specific debts which are
definitely not expected to be paid.
Doubtful debts
► A doubtful debt is a debt which is possibly
irrecoverable.
► Doubtful debts may occur, for example, when an
invoice is in dispute, or when a customer is in
financial difficulty.
► There is doubt over whether the debt will be paid, an allowance for receivables is made against the doubtful debt. Allowance
for receivables. An impairment amount in relation to receivables that reduces the receivables asset to its recoverable
amount in the statement of financial position. It is offset against trade receivables, which are shown at the net amount.
► The allowance against the trade receivables balance is made after writing off any irrecoverable debts.
Accounting treatment
► When an allowance is first made
DEBIT Irrecoverable debts expenses (SPL)
CREDIT Allowances for receivables (SFP)
► When an allowance already exists, the increase in allowance is charged as an expense, decrease in allowance is credited
back to the statement of profit or loss for the period in which the reduction in allowance is made.

1. Provisions
2. Contingencies

Provisions
Liability
Uncertain
timing
Uncertain
amount
incurred a
present
obligation
probable that
a transfer of
economic
benefits
a reliable
estimate
DEFINITION RECOGNITION
DEBIT Expenses (PL)
CREDIT Provisions (BS)
In subsequent years, adjustments may
be needed to the amount of the
provision. The procedure to be
followed then is as follows.
(a) Calculate the new provision
required.
(b) Compare it with the existing
balance on the provision account (ie
the balance b/f from the previous
accounting period).
(c) Calculate increase or decrease
required.
ACCOUNTING TREATMENT
SUBSEQUENT MEASUREMENT

Contingencies
Contingent assets
A possible asset that arises from past
events and whose existence will be
confirmed by the occurrence of one or
or more uncertain future events not
wholly within the enterprise's control.
Contingent liabilities
A possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the entity's control; or
A present obligation that arises from past events but is not recognised because:
► It is not probable that a transfer of economic benefits will be required to settle the
obligation; or
► The amount of the obligation cannot be measured with sufficient reliability.
must not be recognized, but
should be disclosed
Virtually certain > 95%
Probable 51% – 95%
Possible 5% – 50%
Remote < 5%
Probability of
occurence
Outflow Inflow
Virtually certain Provide Recognise
Probable Provide Disclosure note
Possible Disclosure note Ignore
Remote Ignore Ignore

Contingencies - Disclosure
Contingent assets
Where an inflow of economic benefits is probable, an
an entity should disclose:
A brief description of its nature, and where
practicable;
An estimate of the financial effect
Contingent liabilities
Unless remote, disclose for each contingent liability:
A brief description of its nature, and where practicable;
An estimate of the financial effect;
An indication of the uncertainties relating to the amount or
timing of any outflow;
The possibility of any reimbursement

1. Control accounts
2. Contra entry
3. Refund
4. Reconciliation of AR and AP
Control accounts
Memorandum accounts/
lists of balance
Control account
reconciliations

Control Accounts
A control account keeps a total record of a number of individual items. It is an impersonal account which is part of the double
entry system.
A control account is an account in the nominal ledger in which a record is kept of the total value of a number of similar but
individual items. Control accounts are used chiefly for trade receivables and payables.
► (a) A receivables control account is an account in which records are kept of transactions involving all receivables in total.
The balance on the receivables control account at any time will be the total amount due to the business at that time from
its receivables.
► (b) A payables control account is an account in which records are kept of transactions involving all payables in total. The
balance on this account at any time will be the total amount owed by the business at that time to its payables.
A control account is an (impersonal) ledger account which will appear in the nominal ledger
Total credit sales from
sales day book
Total cash received from
debtors and discounts
Receivables control
accounts
Total credit purchases
from purchase day book
Total cash paid to debtors
and discounts received
Payables control accounts

Control Accounts & Personal Accounts
The personal accounts of individual customers of the business are kept in the receivables ledger, and the amount owed by
each receivable will be a balance on the receivable's personal account. The amount owed by all the receivables together (ie all
the trade receivables) will be a balance on the receivables control account.
At any time the balance on the receivables control account should be equal to the sum of the individual balances on the
personal accounts in the receivables ledger.

DISCOUNTS
Trade discount
is a reduction in the list price of an
article, given by a wholesaler or
manufacturer to a retailer. It is often
given in return for bulk purchase
orders.
Cash (Settlement) discount
is a reduction in the amount payable
in return for payment in cash, or
within an agreed period.
Trade discount
1. A customer is quoted a price of $1 per unit for a particular item, but a lower
price of 95 cents per unit if the item is bought in quantities of 100 units or
more at a time.
2. An important customer or a regular customer is offered a discount on all
the goods the customer buys, regardless of the size of each individual order,
because the total volume of the customer's purchases over time is so large.
Cash (Settlement) discount
A supplier charges $1,000 for goods, but offers a discount of 5% if the goods
are paid for immediately in cash. Alternatively, a supplier charges $2,000 to a
credit customer for goods purchased, but offers a discount of 10% for
payment within so many days of the invoice date

ACCOUNTING FOR DISCOUNTS
TRADE DISCOUNTS
RECEIVED ALLOWED
deducted
from the cost
of purchases
deducted
from sales
CASH DISCOUNTS
RECEIVED ALLOWED
included
as 'other
income' of
the period
expenses in
the period
Trade discount received:
Company A purchases inventory on credit from Supplier B at a gross cost of $100, and receives a
trade discount of 5% from the supplier. The double entry for the purchase is as follows:
Dr Inventory / Cr Payables: $ 95
Trade discount allowed:
Company B sells inventory on credit to Customer A at a gross sale price of $100 and offers a trade
discount of 10% to the customer. The double entry for the sale is as follows:
Dr Income / Cr Trade receivables: $90

Contra/debts off-setting
The situation may arise where a customer is also a supplier. Instead of both owing each other money, it may be
agreed that the balances are contra’d, i.e. cancelled.
The double entry for this type of contra is:
Dr Payables ledger control account
Cr Receivables ledger control account
The individual receivable and payable memorandum accounts must also be updated to reflect this.

Reconciliation process
Tick off the items
which appear in both
the statement and the
payables ledger
Agree the opening
balance on the
supplier's statement
Allocate payments to
invoices after allowing
for any credit notes
Identify differences

1. Definition
2. Differences analysis
3. Bank reconciliation process
4. Presentation
Cash book Bank statement
Reconciliation

Definition and Process
In theory, the entries appearing on a
business's bank statement should be
exactly the same as those in the
business cash book. The balance
shown by the bank statement should
be the same as the cash book balance
on the same date.
A bank reconciliation is a
comparison of a bank statement (sent
monthly, weekly or even daily by the
bank) with the cash book. Differences
between the balance on the bank
statement and the balance in the cash
book will be errors or timing
differences, and they should be
identified and satisfactorily explained.
Common explanations
Timing
differen
ces
Errors
Bank
charges
or Bank
interest
Cash
book
Bank
statement
Differences
► Errors – usually in the cash book
► Omissions – such as bank charges not
posted in the cash book
► Timing differences – such as
unpresented cheques
A bank
reconciliation
Corrections and
adjustments to the cash
book
Items reconciling the
corrected cash book balance
to the bank statement

BANK RECONCILIATION
Corrections and adjustments to the cash book:
(i) Payments made into the bank account or from the bank account by way of standing order or
direct debit, which have not yet been entered in the cash book
(ii) Dividends received (on investments held by the business), paid direct into the bank account
but not yet entered in the cash book
(iii) Bank interest and bank charges, not yet entered in the cash book
(iv) Errors in the cash book that need to be corrected
The corrected cash book balance is the balance that is shown in the statement of financial
position.

BANK RECONCILIATION
Items reconciling the corrected cash book balance to the bank statement
(i) Cheques drawn (ie paid) by the business and credited in the cash book, which have not yet
been presented to the bank, or 'cleared', and so do not yet appear on the bank statement. These
are commonly known as unpresented cheques or outstanding cheques.
(ii) Cheques received by the business, paid into the bank and debited in the cash book, but which
have not yet been cleared and entered in the account by the bank, and so do not yet appear on
the bank statement. These are commonly known as outstanding lodgements or deposits
credited after date.
(iii) Electronic payments that have not yet been cleared.

At 30 September 20X6, the balance in the cash book of Wordsworth Co was $805.15 debit. A
bank statement on 30 September 20X6 showed Wordsworth Co to be in credit by $1,112.30.
On investigation of the difference between the two sums, it was established that:
(a) The cash book had been undercast by $90.00 on the debit side*
(b) Cheques paid in not yet credited by the bank amounted to $208.20, called outstanding
lodgements
(c) Cheques drawn not yet presented to the bank amounted to $425.35 called unpresented
cheques
* Note. 'Casting' is an accountant's term for adding up.
Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement to the balance per cash
book.

On 31 January 20X8 a company's cash book showed a credit balance of $150 on its current account which did
not agree with the bank statement balance. In performing the reconciliation the following points came to light.
$
Not recorded in the cash book:
Bank charges 36
Transfer from deposit account to current account 500
Not recorded on the bank statement:
Unpresented cheques 116
Outstanding lodgements 630
It was also discovered that the bank had debited the company's account with a cheque for $400 in error.
What was the original balance on the bank statement?

Incomplete records questions may test your ability to prepare accounts in the following situations.
• A trader does not maintain a ledger and therefore has no continuous double entry record of
transactions.
• Accounting records are destroyed by accident, such as fire.
• Some essential figure is unknown and must be calculated as a balancing figure. This may occur as a
result of inventory being damaged or destroyed, or because of misappropriation of assets.
The task of preparing the final accounts involves the following.
(a) Establishing the cost of purchases and other expenses
(b) Establishing the total amount of sales
(c) Establishing the amount of accounts payable, accruals, accounts receivable and
prepayments at the end of the year

The accounting equation: assets = capital + liabilities
The business equation:
closing net assets = opening
net assets + capital introduced
+ profit – drawings

Credit sales and trade receivables

Stolen goods
or goods
destroyed
The cost of the goods lost is the
difference between (a) and (b).
(a) The cost of goods sold
(b) Opening inventory of the goods
(at cost) plus purchases less closing
inventory of the goods (at cost)

Example: cost of goods destroyed
Orlean Flames is a shop which sells fashion clothes. On 1 January 20X5, it had trade inventory which
cost $7,345. During the nine months to 30 September 20X5, the business purchased goods from
suppliers costing $106,420. Sales during the same period were $154,000. The shop makes a gross
profit of 40% on cost for everything it sells. On 30 September 20X5, there was a fire in the shop which
destroyed most of the inventory in it. Only a small amount of inventory, known to have cost $350, was
undamaged and still fit for sale.
How much of the inventory was lost in the fire?

Accounting for inventory destroyed, stolen or otherwise
lost
If the lost goods were not
insured, the business must
bear the loss, and the loss is
shown PL
DR EXPENSE (Eg: Admin
expense)
CR COGS
Lost goods were insured, the
business will not suffer a loss,
because the insurance will pay
back the cost of the lost goods
DR INSURANCE CLAIM
(RECEIVABLE)
CR COGS

PREPARATION OF
FINANCIAL STATEMENTS FOR SOLE TRADERS

1. Preparation of financial
accounts

Preparation of final accounts
You should now be able to prepare a set of final accounts for a sole trader from a trial balance after
incorporating period-end adjustments for depreciation, inventory, prepayments, accruals, irrecoverable
debts, and allowances for receivables
Adjustments to accounts
Draft Trial balance Final Trial balance
Financial statements

IFRS 15- Revenue from contracts with customer
IFRS 15 governs the recognition of revenue arising from contracts with customers.
Revenue is income arising in the ordinary course of an entity's activities, such as sales and fees.
(1) Identify the contract(s) with a customer
(2) Identify the performance obligations in the contract
(3) Determine the transaction price
(4) Allocate the transaction price to the performance obligations in the contract
(5) Recognise revenue when (or as) the entity satisfies a performance obligation

Revenue is income arising in the course of an entity’s ordinary activities.
Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than
those relating to contributions from equity participants.
A contract is an agreement between two or more parties that creates enforceable rights and
obligations.
A customer is a party that has contracted with an entity to obtain goods or services that are an
output of the entity’s ordinary activities in exchange for consideration.
A performance obligation is a promise in a contract with a customer to transfer to the
customer either: a good or service (or a bundle of goods or services) that is distinct; or a series
of distinct goods or services that are substantially the same and that have the same pattern of
transfer to the customer.
Transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties.

Cash/settlement discounts allowed
If a customer is expected to take up a cash/settlement discount allowed, the discount is deducted
from the invoiced amount when recording the revenue. If the customer subsequently does not take
up the discount, the discount is then recorded as revenue.
If the customer is not expected to take up the discount, the full invoiced amount is recognised as
revenue when recording the sale. If the customer subsequently does take up the discount, revenue
is then reduced by the discount.

TDF is a company that manufactures office furniture. A customer placed an order on 22 December
20X4 for an office desk at a price of $300 plus sales tax at 20% of $60. The desk was delivered to the
customer on 25 January 20X5, who accepted the goods as satisfactory by signing a delivery note. TDF
then invoiced the customer for the goods on 1 February 20X5. The customer paid $360 to TDF on 1
March 20X5.
Required
How should TDF account for revenue?

Applying the five step model:
(1) Identify the contract(s) with a customer:
A customer placed an order for a desk. This represents a contract to supply the desk.
(2) Identify the performance obligations in the contract:
There is one performance obligation, the delivery of a satisfactory desk.
(3) Determine the transaction price:
This is the price agreed as per the order, ie $300. Note that sales tax is not included since transaction price as
defined by IFRS 15 does not include amounts collected on behalf of third parties.
(4) Allocate the transaction price to the performance obligations in the contract:
There is one performance obligation, therefore the full transaction price is allocated to the performance of the
obligation of the delivery of the desk.
(5) Recognise revenue when (or as) the entity satisfies a performance obligation:
Since the customer has signed a delivery note to confirm acceptance of the goods as satisfactory, this is
evidence that TDF has fulfilled its performance obligation and can therefore recognise $300 in January 20X5.

INTRODUCTION TO
COMPANY ACCOUNTING

Preference shares
Preference shares carry the right to a final dividend which is expressed as a percentage of their par value.
Eg: 6% $1 preference share carries a right to an annual dividend of 6c. Preference dividends have priority over ordinary
dividend
Rights of Preference shares:
1. Preference shareholders have a priority right to a return of their capital over ordinary shareholders if the company goes
into liquidation.
2. Preference shares do not carry a right to vote.
3. If the preference shares are cumulative, it means that before a company can pay an ordinary dividend it must not only pay
the current year's preference dividend but must also make good any arrears of preference dividends unpaid in previous
years

Preference shares
Classification Definition Examples Treatment
Redeemable
preference
shares
the company will
redeem (repay) the
nominal value of
those shares at a
later date.
Redeemable 5% $1 preference shares
20X9' means that the company will pay
these shareholders $1 for every share
they hold on a certain date in 20X9. The
shares will then be cancelled and no
further dividends paid.
• Treated like loans and are included
as non-current liabilities in the
statement of financial position;
• Reclassify them as current
liabilities if the redemption is due
within 12 months;
• Dividends paid on redeemable
preference shares are treated like
interest paid on loans and are
included in financial costs in the
statement of profit or loss.
Irredeemable
preference
shares
treated just like other shares. They form part of equity and their dividends are treated as appropriations
of profit.

Ordinary shares
Ordinary shares are shares which are not preferred with regard to dividend payments. Thus a holder only receives a
dividend after fixed dividends have been paid to preference shareholders.
Example:
Garden Gloves Co has issued 50,000 ordinary shares of 50 cents each and 20,000 7% preference shares of $1 each. Its
profits after taxation for the year to 30 September 20X5 were $8,400. The management board has decided to pay an
ordinary dividend (ie a dividend on ordinary shares) which is 50% of profits after tax and preference dividend.
Required
Show the amount in total of dividends and of retained profits, and calculate the dividend per share on ordinary
shares

Loan stock or bonds
• Limited liability companies may issue loan stock or bonds.
• These are long-term liabilities. In some countries they are described as loan capital because they are a means of raising
finance, in the same way as issuing share capital raises finance
SHARE CAPITAL LOAN STOCK
Shareholders are members of a company Providers of loan capital are creditor
Shareholders receive dividends (appropriations of profit)
Holders of loan capital are entitled to a fixed rate of
interest (an expense charged against revenue)
Shareholders cannot enforce the payment of dividends.
Loan capital holders can take legal action against a
company if their interest is not paid when due
Not secured on company assets Loan stock is often secured on company assets

Reserves
Shareholder’s equity
Ordinary share capital
(Irredeemable
preference share)
Other equity (reserves)
Share premium
Revaluation
surplus
Retained earnings Others
Statutory reserves
Non statutory reserves/
Revenue reserves
reserves which a company is required to set
up by law, and which are not available for
the distribution of dividends.
reserves consisting of profits which are
distributable as dividends, if the company so
wishes.

Reserves
Shareholder’s
equity
Par value of issued
capital (minus any
amount not yet called
up on issued shares)
Other equity:
• Capital paid-up in excess
of par value (share
premium)
• Revaluation surplus
• Reserves
• Retained earnings

Share premium account
'premium' means the difference between the issue price of the share and its par value. The account is sometimes called
'capital paid-up in excess of par value.
The difference between cash received by the company and the par value of the new shares issued is transferred to the share
premium account.
Share premium account cannot be distributed as a dividend under any circumstances.
Eg: if X Co issues 1,000 $1 ordinary shares at $2.60 each. What would be the accounting entries?
Debit Cash $ 2,600
Credit Ordinary shares $ 1,000
Credit
Share premium
account
$ 1,600

Bonus and Right Issues
Bonus issues Right issues
Advantages Disadvantages
Objectives
Advantages Disadvantages
Objectives
Increase the share capital
Increase marketability
Raise additional financing
► Increases capital without
diluting current
shareholders' holdings
► Capitalise reserves, so
they cannot be paid as
dividends
► Does not raise any cash
► Could jeopardise
payment of future
dividends if profits fall
► Raises cash for the
company
► Keeps reserves available
for future dividends
► Dilutes shareholders'
holdings if they do not
take up rights issue

Statement of Changes in Equity

EVENTS AFTER THE REPORTING
PERIOD

1. Definition
2. Types of events
3. Disclosures
Events after the reporting period
Adjusting Non-adjusting

Definition
► Events after the reporting period which provide additional evidence of conditions existing at the reporting date will
cause adjustments to be made to the assets and liabilities in the financial statements.
► IAS 10 Events after the reporting period requires the provision of additional information in order to facilitate such an
understanding. IAS 10 deals with events after the reporting date which may affect the position at the reporting date.
► Events after the reporting period: An event which could be favourable or unfavourable, that occurs between the
reporting period and the date that the financial statements are authorised for issue. (IAS 10)
► Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the
reporting period.
Adjusting events
Events that provide further evidence
of conditions that existed at the
reporting date should be adjusted for
in the financial statements.
Non-adjusting events
Events which do not affect the situation
at the reporting date should not be
adjusted for, but should be disclosed in
the financial statements.

Adjusting Events and Non Adjusting Events
IAS 10 An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.
► Evidence of a permanent diminution in property value prior to the year end
► Sale of inventory after the end of the reporting period for less than its carrying value at the year end
► Insolvency of a customer with a balance owing at the year end
► Amounts received or paid in respect of legal or insurance claims which were in negotiation at the year end
► Determination after the year end of the sale or purchase price of assets sold or purchased before the year end
► Evidence of a permanent diminution in the value of a long-term investment prior to the year end
► Discovery of fraud or errors that show that the financial statements are incorrect
IAS 10 An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting
period.
► Acquisition, or disposal, of a subsidiary after the year end
► Announcement of a plan to discontinue an operation
► Major purchases and disposals of assets
► Destruction of a production plant by fire after the end of the reporting period
► Announcement or commencing implementation of a major restructuring
► Share transactions after the end of the reporting period
► Litigation commenced after the end of the reporting period.
► Dividends proposed or declared after the end of the reporting period are not recognised as a liability in the accounts at the reporting date,
but are disclosed in the notes to the accounts
ADJUSTING EVENTS
NON ADJUSTING EVENTS

Adjusting Events and Non Adjusting Events
Dividends proposed or declared after the end of the reporting period are not recognised as a liability in the
accounts at the reporting date, but are disclosed in the notes to the accounts.
The following disclosure requirements are given for material events which occur after the reporting period which do
not require adjustment. If disclosure of events occurring after the reporting period is required by this standard, the
following information should be provided.
(a) The nature of the event
(b) An estimate of the financial effect, or a statement that such an estimate cannot be made
DIVIDENDS
DISCLOSURES

1. Preparing Statement of cash
flows
2. Classification of activities in
cash flows
3. Cash flows accounting
The need for a cash flow statement
Format of a cash flow statement
Preparation of cash flow statement
Interpretation using a cash flow
statement

Preparing Statement of Cash flows
Statements of cash flows are a useful addition to the financial statements of a company because accounting
profit is not the only indicator of performance. They concentrate on the sources and uses of cash and are a
useful indicator of a company's liquidity and solvency.
IAS 7
Objectives Scope
Provide information for users of financial statements
about an entity's ability to generate cash and cash
equivalents, as well as indicating the cash needs of
the entity. The statement of cash flows provides
historical information about cash and cash
equivalents, classifying cash flows between
operating, investing and financing activities.
A statement of cash flows should be presented as an
integral part of an entity's financial statements. All
types of entity can provide useful information about
cash flows, as the need for cash is universal,
whatever the nature of their revenue-producing
activities. Therefore all entities are required by the
standard to produce a statement of cash flows.

Classification of activities in cash flows
The standard gives the following definitions, the most important of which
are cash and cash equivalents.
► Cash comprises cash on hand and demand deposits.
► Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value.
► Cash flows are inflows and outflows of cash and cash equivalents.
► Operating activities are the principal revenue-producing activities of
the enterprise and other activities that are not investing or financing
activities.
► Investing activities are the acquisition and disposal of non-current
assets and other investments not included in cash equivalents.
► Financing activities are activities that result in changes in the size
and composition of the equity capital and borrowings of the entity.
Operating
activities
Investing
activities
Financing
activities

Operating activities
Most of the components of cash flows from operating activities will be those items which determine the net profit or loss of
the enterprise, ie they relate to the main revenue-producing activities of the enterprise.
The standard gives the following as examples of cash flows from operating activities:
(a) Cash receipts from the sale of goods and the rendering of services
(b) Cash receipts from royalties, fees, commissions and other revenue
(c) Cash payments to suppliers for goods and services
(d) Cash payments to and on behalf of employees
Certain items may be included in the net profit or loss for the period which do not relate to operational cash flows; for
example, the profit or loss on the sale of a piece of plant will be included in net profit or loss, but the cash flows will be
classed as investing.

Investing activities
The cash flows classified under this heading show the extent of new investment in assets which will generate future profit
and cash flows. The standard gives the following examples of cash flows arising from investing activities.
(a) Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those
relating to capitalised development costs and self-constructed property, plant and equipment
(b) Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets
(c) Cash payments to acquire shares or debentures of other enterprises
(d) Cash receipts from sales of shares or debentures of other enterprises
(e) Cash advances and loans made to other parties
(f) Cash receipts from the repayment of advances and loans made to other parties

Financing activities
The standard gives the following examples of cash flows which might arise under these headings.
(a) Cash proceeds from issuing shares
(b) Cash payments to owners to acquire or redeem the enterprise's shares
(c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short- or long term borrowings
(d) Cash repayments of amounts borrowed

Methods
2 ways of
creating a cash
flow statement
Direct method Indirect method
disclose major classes of gross cash
receipts and gross cash payments
net profit or loss is adjusted for the
effects of transactions of a non-
cash nature, any deferrals or
accruals of past or future operating
cash receipts or payments, and
items of income or expense
associated with investing or
financing cash flows

Direct method example
Boggis Co had the following transactions during the year.
(a) Purchases from suppliers were $19,500, of which $2,550 was unpaid at the year end. Brought forward payables were $1,000.
(b) Wages and salaries amounted to $10,500, of which $750 was unpaid at the year end. The accounts for the previous year showed an accrual for
wages and salaries of $1,500.
(c) Interest of $2,100 on a long-term loan was paid in the year.
(d) Sales revenue was $33,400, including $900 receivables at the year end. Brought forward receivables were $400.
(e) Interest on cash deposits at the bank amounted to $75.

Indirect method
The net profit or loss for the period is adjusted for the following:
(a) Changes during the period in inventories, operating receivables and payables
(b) Non-cash items, eg depreciation, provisions, profits/losses on the sales of assets
(c) Other items, the cash flows from which should be classified under investing or financing activities

Indirect method
(a) Depreciation is not a cash expense, but is deducted in arriving at the profit figure in the statement of profit or
loss. It makes sense, therefore, to eliminate it by adding it back.
(b) By the same logic, a loss on a disposal of a non-current asset (arising through underprovision of depreciation)
needs to be added back and a profit deducted.
(c) An increase in inventories means less cash – you have spent cash on buying inventory.
(d) An increase in receivables means the company's receivables have not paid as much, and therefore there is less
cash.
(e) If we pay off payables, causing the figure to decrease, again we have less cash

Interest & Dividends
Cash flows from interest and dividends received and paid should each be disclosed separately. Each should be classified in a
consistent manner from period to period.
(a) Interest paid should be classified as an operating cash flow or a financing cash flow.
(b) Interest received and dividends received should be classified as operating cash flows or, more usually, as investing cash
flows.
(c) Dividends paid by the enterprise should be classified as an operating cash flow, so that users can assess the enterprise's
ability to pay dividends out of operating cash flows or, more usually, as a financing cash flow, showing the cost of obtaining
financial resources.

Indirect method
Principles
The treatment is logical if you think in terms of cash:
(a) Increase in inventory is treated as negative (in brackets). This is because it represents a cash
outflow; cash is being spent on inventory.
(b) An increase in receivables would be treated as negative for the same reasons; more receivables
means less cash.
(c) By contrast, an increase in payables is positive because cash is being retained and not used to settle
accounts payable. There is therefore more of it.
Step 1
Set out the
proforma
statement of
cash flows
Step 2
Begin with the
reconciliation of
profit before tax
to net cash from
operating
activities as far
as possible
Step 3
Calculate the
cash flow figures
for dividends
paid, purchase
or sale of NCA,
issue of shares
and repayment
of loans if these
are not already
Step 4
Open up a
working for the
trading, income
and expense
account
Step 5
Be able to
complete the
statement by
slotting in the
figures given or
calculated

Cash Flows Accounting
Advantages
ability to
generate cash
more
comprehensive
easier to
prepare
Creditors are
more interested
a better means
of comparing the
results
satisfies the
needs of all
users

INTRODUCTION TO GROUP AND
CONSOLIDATED ACOUNTS

1. Group and consolidation
2. Subsidiaries
3. Associates and trade investments
4. Consolidated Financial statements
LEARNING OUTCOMES
OVERVIEW
Group
account/consolidation
IAS 27
Separate financial
statements
IAS 28
Investment in
associates
IFRS 3
Business
combinations
IFRS 10
Consolidated
IFRS 11
Joint
arrangements
IFRS 12
Disclosure of interest
in other entities
Business
combinations
Recognition
Measurement
(GW, NCI)
Accounting for
associates
Equity method
present its
investments in the
separate financial
statements
Controls
Consolidated
Procedures
Investment entities
Joint venture
Joint operations
Disclosures

Introduction to Group Account
162
Types of Investment
Subsidiaries Associates Joint arrangements Other investments
Acquisition
method and
apply full
consolidation
procedures
Equity method
Joint ventures using
equity method
Joint operations
accounted for as
a financial
instrument in line
with IAS
39 or IFRS 9
Criteria Control
Significant
influence
Joint Control Other
Accounting
method
Share ≥50% 20% to <50% Equal Other

Introduction to Group Account
No Concepts Definition
1 Control An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through power over the investee
2 Power Existing rights that give the current ability to direct the relevant activities of the
investee
3 Subsidiary An entity that is controlled by another entity
4 Parent An entity that controls one or more subsidiaries
5 Group A parent and all its subsidiaries
6 Associate An entity over which an investor has significant influence and which is neither a
subsidiary nor an interest in a joint venture
7 Significant
influence
The power to participate in the financial and operating policy decisions of an
investee but it is not control or joint control over those policies

Basic Principles of Consolidation
► Consolidation means adding together (uncancelled items).
► Consolidation means cancellation of like items internal to the group.
► Consolidate as if you owned everything then show the extent to which you do not.
Keep these basic principles in mind as you work through the detailed techniques of consolidated financial statements.

Control
owns more than half (ie over 50%) of the voting power of an
entity unless it can be clearly shown that such ownership does
not constitute control (these situations will be very rare)
over more than 50% of the voting rights by virtue of agreement
with other investors
govern the financial and operating policies of the entity by
statute or under an agreement.
power to appoint or remove a majority of members of the board of
directors (or equivalent governing body)
power to cast a majority of votes at meetings of the board of
directors
IFRS 10
Business entity concepts
Ignore the legal boundaries

Significant
influence
Representation on the board of directors (or equivalent)
of the investee
Participation in the policy making process
Material transactions between investor and investee
Interchange of management personnel
Provision of essential technical information
Associates
Equity
method

Consolidated Financial Statements
Objectives of IFRS 10
Consolidated FS Control
Accounting
requirements
Investment
entities
Exemption from
preparing group
accounts
a wholly-owned
subsidiary or it is
a partially owned
subsidiary
not publicly
traded
not in the
process of
issuing
securities
ultimate or
intermediate
parent

Consolidated Financial Statements
Non-controlling interest
NCI
The equity in a subsidiary not attributable,
directly or indirectly, to a parent
be presented in the consolidated statement
of financial position within equity, separately
from the parent shareholders’ equity
Group structure
Direct interest Indirect holdings
P
S2
S1 S3
P
S
SS
60%
70%
60%
55%
80%

Consolidated statement of financial position

171
Basic procedures
The financial statements of a parent and its subsidiaries are combined on a line-by-line basis by
adding together like items of assets, liabilities, equity, income and expenses.
Parent Subsidiary Group Action
Investment in subsidiary Portion of equity Eliminated
Intra-group trading Intra-group trading Eliminated
Internal balances Internal balances Eliminated
Dividend received from
subsidiary
Dividend paid to parent Eliminated
NCI of net income Adjusted to net income attributed to
owners of parent
NCI of net asset Presented separately in the
consolidated SOFP
Goodwill (GW) IFRS 3

Calculated NCI
Proportionate share Full (fair) value
NCI value = NCI % × S’s net assets at acquisition
NCI value = fair value of NCI's holding at acquisition
(number of shares NCI own × subsidiary share price)
Fair value of NCI in subsidiary just before acquisition
Goodwill attributable to NCI

Goodwill
Consideration transferred
NCI value at acquisition
Subsidiary’s net assets
Ordinary shares
Reserves on acquisition
Retained earnings (RE)
Fair value adjustment
Fair value of net assets
GOODWILL
INVESTMENT
VALUE
FAIR VALUE OF
NET ASSETS
CARRYING VALUE
OF NET ASSETS
GOODWILL

Goodwill
Consideration
transferred
Cash paid
Deferred consideration
Share exchange
Expense and issue cost
Contingent consideration
discounted
Fair value
@ published prices at acquisition date
Lawyers, audit fees, accounting fees are
written off as incurred
Issue costs are deducted from the proceeds
Unwinding discount (PV x cost of capital) is
charged to finance cost
Goodwill impairment Goodwill arising on consolidation is subjected to an annual impairment review and impairment may be
expressed as an amount or as a percentage.
DEBIT Impairment expenses (PL) (Group retained earnings-BS)/ CREDIT Goodwill (BS)
When NCI is valued at fair value the goodwill in the statement of financial position includes goodwill
attributable to the NCI.
DEBIT Impairment expenses (PL) (Group retained earnings-BS)/ DEBIT NCI/ CREDIT Goodwill (BS)

Intra Group Transactions
Parent (P) Subsidiary (S) Group Adjustments
P sells at mark-up S buys at mark-up but not
sells out to customers
Unrealised profit (URP) at P
Closing inventory at S
DR Group RE
CR Group Inventory (URP)
P buys at mark-up but not
sells out to customers
S sells at mark-up Unrealised profit at S
Closing inventory at P
DR Group RE
DR NCI
CR Group Inventory (URP)
P sells Non-current assets at
mark-up
S buys Non-current assets
from P at mark-up
Unrealised profit (URP) at P
NCA at S and unreal
additional depreciation at S
DR Group RE (URP)
CR NCA
CR Depreciation
P buys Non-current assets
from S at mark-up
S sells Non-current assets at
mark-up
Unrealised profit (URP) at S
NCA at P and unreal
additional depreciation at P
DR Group RE (URP)
DR NCI
CR NCA
CR Depreciation

Consolidated Procedures
Working Procedures
Working 1 Group structure
P  S
Working 2 Net assets of subsidiary At the date of
acquisition
At the reporting
date
Post-acquisition
Share capital (SC) XXX XXX -
Share premium (SP) XXX XXX -
Reserves (RS) XXX XXX XXX
Retained Earnings (RE) XXX XXX XXX
XXX XXX XXX
Fair value adjustment XXX XXX
Fair value of net assets XXX XXX

Working Procedures
Working 3 Goodwill
Investment value (IV) XXX
Fair value of net assets (FV) – (W2) (XXX)
Goodwill XXX
Impairment of GW (LOS 3) (XXX)
XXX
Working 4 Non-controlling interest
NCI value at acquisition (LOS 3) XXX
NCI share of post-acquisition reserves (W2) XXX
NCI share of impairment (fair value method only) (XXX)
XXX

Working Procedures
Working 5 Group Retained Earnings (RE)
P's retained earnings (100%) XXX
P's % of sub's post-acquisition retained earnings (W2) XXX
Less: Parent share of impairment (W3) (XXX)
XXX
Working 6 Eliminate Intra-group transactions
Working 7 Aggregate assets and liabilities
Working 8 Share capital
Only P’s accounts

Cancellation entries
No. Contents Notes
W1 Recording fair value of consideration given
DR Investment in S
CR Payable to S Record contingent or deferred consideration
DR RE – P (interest expense)
CR Payable to S Record interest expense on unwinding the discount
W2 Cancellation of carrying value of S’s net assets
DR OS/SP/Reserve – S
DR RE – S @ acq
CR Investment in S
CR NCI

No. Contents Notes
W3 Recording Goodwill and fair value adjustment
DR Goodwill
DR Assets
CR Investment in S
CR NCI
CR Liabilities
DR RE – P Adjusted accumulated depreciation expenses for
depreciable assets
DR NCI
CR Assets

Inter-co sales of Non-current assets
Downstream transaction (P sells to S)
1 DR RE – P (gain) Eliminate gain on sales of assets
CR Assets
2 DR Assets Adjust accumulated depreciation expenses
CR RE - P
Upstream transaction (S sells to P)
1 DR RE – P (gain) Eliminate gain on sales of assets
DR NCI
CR Assets
2 DR Assets Adjust accumulated depreciation expenses
CR RE - P
CR NCI

No. Contents Notes
Inter-co dividend Not affect the SFP
Inter-co payable/receivables
DR Payables
CR Receivables
Payment in transit
1 DR Cash Eliminate payment in transit
CR Receivables
2 DR Payables Eliminate AR/AP
CR Receivables

CONSOLIDATED STATEMENT OF PROFIT
AND LOSS AND OTHER COMPREHENSIVE
INCOME

1. The consolidated statement of
profit or loss (and other
comprehensive income)
2. Disposals

Consolidated SOCI
No. Contents Notes
Step 1 Aggregate revenue and expenses (100% P + 100% S)
Step 2 Eliminate intra-group items from both revenue and costs of sales
Goods sold by P. Increase cost of sales by unrealised profit
Goods sold by S. Increase cost of sales by full amount of unrealised profit
and decrease non-controlling interest by their share of unrealised profit
Step 3 Fair value adjustment
If the value of S’s NCA have been subjected to FV uplift then any additional
depreciation must be charged to PL. NCI will need to be adjusted for their
share.
Impairment of Goodwill
Eliminate dividend paid by subsidiary DR Dividend income (PL)
DR NCI
CR Retained Earnings (RE)

Consolidated SOCI
No. Contents Notes
Step 4 Calculate NCI
S’s profit after tax as per statement of P/L XXX
LESS Unrealized profit (*) (XXX)
Profit on disposal of NCA (*) (XXX)
Additional depreciation due to FV adjustments (XXX)
ADD Additional depreciation due to disposal of NCA (*) XXX
XXX
NCI (%) XXX
Step 5 Present profit attributable to owners of P and NCI separately
Notes (*) ALL sales of goods and non-current assets made by subsidiary
Only the post-acquisition profits of the subsidiary are brought into the
Consolidated PL

INTERPRETATION OF
FINANCIAL STATEMENTS FOR COMPANIES

1. Financial analysis
2. Limitations of ratios analysis
3. Ratios
Interpretation of financial statements
Ratio analysis
Review the raw data
Profitability Liquidity Efficiency Position

Financial Analysis
Financial
analysis
Trend
analysis
Comparison
s across
companies

Trend Analysis
Trend
analysis
Changes in
the nature of
the business
Unrealistic
depreciation
rates under
historical cost
accounting
The
changing
value of the
currency
unit being
reported
Changes in
accounting
policies
Different
degrees of
diversification
Different
production and
purchasing
policies
Different
financing
policies
Different
accounting
policies
Different effects
of government
incentives Comparability
between
companies

The Broad Categories of Ratios
► Return on
capital
employed
► Net profit as a
percentage of
sales
► Asset turnover
ratio
► Gross profit as a
percentage of
sales
► Debt ratios
► Gearing
ratio/leverage
► Interest cover
► Current ratio
► Quick ratio
► Receivables
collection period
► Payables
payment period
► Inventory
turnover period
► Gearing
ratio/leverage
► EPS
► Dividend cover
► Dividend per
share
► Price earning
ratios
Profitability and return
Long-term solvency
and stability
Short-term solvency
and liquidity
Efficiency (turnover
ratios)
Shareholders'
investment ratios
RATIO
ANALYSIS

ROCE
Profit
margin
Asset
turnover
PBIT/ SALES SALES / CAPITAL EMPLOYED
A warning about comments on profit margin and asset turnover
(a) A high profit margin means a high profit per $1 of sales but, if this also means that sales prices are
high, there is a strong possibility that sales turnover will be depressed, and so asset turnover lower.
(b) A high asset turnover means that the company is generating a lot of sales, but to do this it might
have to keep its prices down and so accept a low profit margin per $1 of sales.

Debt ratio
(a) Assets consist of non-current assets at their statement of financial position value, plus current assets.
(b) Debts consist of all payables, whether they are due within one year or after more than one year.
There is no absolute guide to the maximum safe debt ratio but, as a very general guide, you might regard 50% as
a safe limit to debt. In practice, many companies operate successfully with a higher debt ratio than this, but 50% is
nonetheless a helpful benchmark

Gearing/leverage
Gearing or leverage is concerned with a company's long-term capital structure. We can think of a
company as consisting of non-current assets and net current assets (ie working capital, which is current
assets minus current liabilities). These assets must be financed by long-term capital of the company, which is
either:
(a) Shareholders' equity
(b) Long-term debt
There is no absolute limit to what a gearing ratio
ought to be. A company with a gearing ratio of
more than 50% is said to be highly geared,
whereas low gearing means a gearing ratio of less
than 50%

Leverage is the term used to describe the converse of gearing, ie the proportion of total assets financed by
equity, and which may be called the equity to assets ratio. It is calculated as follows

Interest cover
The interest cover ratio shows whether a company is earning enough PBIT to pay its interest costs comfortably,
or whether its interest costs are high in relation to the size of its profits, so that a fall in PBIT would then have a
significant effect on profits available for ordinary shareholders

Short-term solvency and liquidity
Liquidity is the amount of cash a company can put its hands on quickly to settle its debts (and possibly to
meet other unforeseen demands for cash payments too).
Liquid funds consist of:
(a) Cash
(b) Short-term investments for which there is a ready market
(c) Fixed-term deposits with a bank or other financial institution, for example, a six month high-interest deposit with
a bank
(d) Trade receivables (because they will pay what they owe within a reasonably short period of time)

The Cash Cycle
Cash goes out to pay for supplies, wages and salaries and other expenses, although payments can be
delayed by taking some credit. A business might hold inventory for a while and then sell it. Cash will come
back into the business from the sales, although customers might delay payment by themselves taking some
credit.
The main points about the cash cycle are as follows:
► Cash flows out can be postponed by taking credit. Cash flows in can be delayed by having receivables
► The time between making a purchase and making a sale also affects cash flows
► Holding inventories and having payables can therefore be seen as two reasons why cash receipts are
delayed.
► Similarly, taking credit from creditors can be seen as a reason why cash payments are delayed.
The liquidity ratios and working capital turnover ratios are used to test a company's liquidity, length of
cash cycle and investment in working capital.

Liquidity ratios: current ratio and quick ratio
A current ratio in excess of 1 should be expected.
The quick ratio should ideally be at least 1 for companies with a slow inventory
turnover. For companies with a fast inventory turnover, a quick ratio can be
comfortably less than 1 without suggesting that the company should be in cash
flow trouble

Efficiency ratios: control of receivables and inventories and payables

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