4. The Main Financial Statements

Question 1

What do financial statements prepared under IFRS Accounting Standards comprise?

What sets out the form and content of the financial statements?

Answer 1

Financial statements prepared under IFRS Accounting Standards collectively comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, notes and in certain circumstances, a revised statement of financial position from an earlier period.

IAS 1, Presentation of Financial Statements sets out the form and content of the financial statements.

Question 2

According to IAS 1 what does a complete set of financial statements for a reporting period (typically a year) comprise? (6)

Answer 2

1. A statement of financial position as at the end of the reporting period.
2. A statement of profit or loss and other comprehensive income for the reporting period, which can be in a two-part format including a separate statement of profit or loss.
3. A statement of changes in equity for the reporting period.
4. A statement of cash flows for the reporting period.
5. Notes comprising a summary of significant accounting policies and other explanatory information.
6. A statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively, makes a restatement of items in its financial statements or reclassifies items.

Question 3

What is the statement of financial position?

Answer 3

The statement of financial position is a list of all the assets controlled and all the liabilities owed by a business as at a particular date: it is a snapshot of the financial position of the business at a particular moment.

Monetary amounts are attributed to assets and liabilities. It also quantifies the amount of the owners’ interest in the company, which is known as equity.

Question 4

What is equity?

Answer 4

Equity is the amount invested in a business by the owners (IAS 1 refers to ‘owners’ rather than ‘equity holders’ or ‘shareholders’). The conceptual framework defines equity as ‘the residual interest in the assets of the entity after deducting all its liabilities’ (Conceptual Framework: para. 4.63).

Question 5

What factors may affect a company’s financial position at any one time? (4)

Answer 5

1. The economic resources it controls (cash, labour, materials, machinery, skills)
2. Its financial structure (whether it is funded by owners, lenders, suppliers, or by all three)
3. Its liquidity (short-term availability of cash) and solvency (long-term access to funds)
4. It adaptability to changes in its operating environment

Question 6

How does the Conceptual Framework suggest that information about an entity’s economic resources and claims can help users to identify the reporting entity’s strength and weaknesses? (3)

Answer 6

It points out that information about the nature and amounts of an entity’s economic resources and claims can help users to assess:
1. The entity’s liquidity and solvency
2. The entity’s need for additional financing
3. How success the entity is likely to be in obtaining financing.

Question 7

How is gaining knowledge of the economic resources of a business useful to users?

Answer 7

By gaining knowledge of economic resources a business controls, users will be in a better position to predict the entity’s ability to generate cash in the future.

Question 8

How is information about an entity’s financial structure useful to users? (3)

Answer 8

1. To predict future borrowing needs
2. To predict how future profits and cash flows will be distributed among owners and lenders
3. To predict how successfully it will be able to raise future finance

Question 9

How is information about an entity’s liquidity/solvency useful to users?

Answer 9

To predict its ability to meet financial commitments as they fall due

Question 10

What is the statement of profit or loss?

Answer 10

The statement of profit or loss is a statement displaying items of income and expense in a reporting period as components of profit or loss for the period. The statement shows whether the business has had more income than expense (a profit for the period) or vice versa (a loss for the period).

Question 11

How is information about a business’ financial performance needed by users according to the conceptual framework? (3)

Answer 11

1. To understand the return that the entity has produced on its economic resources.
2. To assess management’s stewardship of the entity’s economic resources.
3. To help predict the business’ future returns on its economic resources (Conceptual Framework: para. 1.16)

Question 12

What provides the link between the statement of financial position and the statement of profit or loss?

Answer 12

The link between the statement of financial position and the statement of profit or loss and other comprehensive income is provided by the statement of cash flows and the statement of changes in equity.

Question 13

What is the statement of cash flows?

What is the statement of changes in equity?

Answer 13

The statement of cash flows shows the actual cash flowing into and paid out of the business.

The statement of changes in equity reconciles the opening and closing equity of the company.

Question 14

How will companies reporting under UK GAAP present their financial statements? (2)

Answer 14

Companies reporting under the UK GAAP will present their financial statements in accordance with:
1. Companies Act 2006
2. FRS 102

Question 15

Who is responsible for ensuring that all transactions are captured and that accurate accounting records are maintained? Why is this important?

Answer 15

The directors of the company.

To allow true and fair financial statements to be prepared.