Chapter 2: Format of Financial Statements Flashcards
What is the layout for the statement of profit or loss when using classification of expenses by function?
(add) Revenue
(less) Cost of Sales
————-
(add) Gross Profit
(add) Other Income
(less) Distribution Costs
(less) Administrative Expenses
——–
(add) Operating profit
(less) Finance Costs
(add) Investment income
———-
(add) Profit before tax
(less) Income tax expense
———
= Profit for the year/period
What is total comprehensive income?
The realised profit or loss for the period, plus other comprehensive income
What is ‘other comprehensive income’?
Income and expenses that are not recognised in profit or loss
How do you calculate total comprehensive income? (Statement of comprehensive income)
(add) Profit for the year (SPL)
(add) Other comprehensive income e.g. Gain on property revaluation (the only type you’ll see)
———-
= Total comprehensive income for the year
What does IAS 16 Property Plant and Equipment say?
That companies have a choice to either hold their PPE at historic cost (cost model) or at fair value (the revaluation model)
What are the steps to perform a revaluation?
1) Increase cost to market value: DR Cost
2) Remove all accumulated depreciation recognised to date: CR Accumulated Depreciation
3) Create a revaluation surplus which sits in equity in the SFP: CR Revaluation Surplus
The amount credited to the revaluation surplus is the difference between the carrying amount and the fair value.
As this is an unrealised gain, we see this in other comprehensive income
What constitutes the headings of the columns of the SOCE?
- Share capital
- (Shares to be issued)
- Share premium
- Revaluation Surplus
- Retained earnings
- Total
What constitutes the rows of the SOCE?
- Balance b/f
- Total comprehensive income
- Dividends
- ## Issue of share capitalBalance c/f
What goes in the NCA section of the SOFP?
PPE
Investments
Intangible Assets
Financial Assets
What goes in the current asset section of the SOFP?
Inventories Trade and other receivables Cash and cash equivalents Non-current assets held for sale ------------ Total assets
What goes in the equity and liabilities section of the SOFP? (Equity and Non-current liabilities)
Ordinary share capital Share premium account Irredeemable preference share capital Retained earnings Revaluation surplus
Total equity
Non-current liabilities:
Redeemable preference share capital
Long-term borrowings
What goes in the current liabilities section of the SOFP?
Trade and other payables
Short-term borrowings
Current tax payable
Provisions
When do you classify an asset as current?
Current if:
- will be settled within 12 months of the reporting date
- is part of the entity’s normal operating cycle
All other assets should be classified as NCA
When do you classify a liability as current?
Current if:
- expected to be settled in the normal course of the enterprise’s operating cycle, or
- held primarily for trading purposes, or
- due to be settled within 12 months of the reporting date
All other liabilities should be classified as non-current liabilities
What are ordinary shares?
- Ordinary shareholders own a % of the share capital plus the reserves of the company
- Voting rights are attached to the shares
What are interim ordinary dividends?
If approved but NOT declared at the year end, no liability will be recognised in the SFP, as directors may still revoke the dividend before it’s paid. Once declared, an obligation/liability is required. Interim ordinary dividends are often declared and also paid during the year
How do you usually account for ordinary dividends in the exam?
When paid:
Dr Retained earnings
Cr Cash
What are final ordinary dividends?
A contractual obligation to pay the dividend arises once it has been approved by the shareholders at a general meeting, which usually happens post-year-end. This means there will not be a liability at the year end
What are preference shares?
- Preference shareholders only own a % of the preference share capital
- They have no voting rights
What about dividends on redeemable preference shares?
Obligation: Dividends on redeemable preference shares and irredeemable preference shares with mandatory/cumulative dividends are accounted for on an accruals basis and recognised as interest in the SPL:
Dr Finance Cost (SPL)
Cr Dividend payable/Cash
What about dividends on irredeemable preference shares?
No obligation: Dividends on irredeemable preference shares without mandatory/cumulative dividends are treated like ordinary dividends, accounted for on a cash basis and recognised in retained earnings
Dr Retained Earnings
Cr Cash
Statements of cash flows are…
- Factual - they are not influenced by accounting policies
- Easily understood by users who can see how cash is raised and spent
What are the additional benefits of cash flows?
- Provide extra information on business activities
- Allow the users of the financial statements to assess the future prospects of a business (for example, heavy investment in non-current assets should result in increased profits)
- Show how adaptable a company is to its circumstances
- Show whether a company is in a position to pay amounts as they fall due
- Facilitate comparison between companies by requiring the use of standard headings
What goes in cash flows from operating activities?
(add) Cash generated from operations
(less) Interest paid
(less) Income taxes paid
———–
Net cash from operating activities
What goes under cash flows from investing activities?
(add) Proceeds of sale of PPE
(add) Interest received
(add) Dividends received
(less) Purchase of PPE
————
Net cash used in investing activities
What goes under cash flows from financing activities?
(add) Proceeds of issue of shares (subtract or add) Repayment of loans/Issue of loans (less) Dividends paid ------------- Net cash used in financing activities
What are the three numbers at the bottom of the cash flow?
(add) Net increase in cash and cash equivalents
(add) Cash and cash equivalents at the beginning of the period
————
Cash and cash equivalents at the end of the period
What are cash equivalents?
Investments with a maturity date of three months or less
What should you be aware of in regards to a bank overdraft on a cash flow?
A bank overdraft is repayable on demand and is treated as a negative cash balance in the statement of cash flows
What is the indirect method for cash flows?
(add) Profit before tax
(add) Finance Cost
(less) Investment income
(add) Depreciation charge
Loss/(profit) on disposal of NCA
(Increase)/decrease in inventories
(Increase)/decrease in trade receivables
Increase/(decrease) in trade payables
—————
Cash generated from operations
Why do you adjust finance cost in the indirect method?
Added back to profit because it is not part of cash from operations (interest paid is dealt with later in the statement of cash flows)
Why do you adjust investment income in profit before tax?
Deducted as it is not part of cash from operations (interest received and dividends received are dealt with later in the statement of cash flows)
Why do you adjust depreciation charge and loss/profit on disposal in the indirect method?
Depreciation charge: added back because it is a non-cash item
Loss/profit on disposal: added back/deducted because they are non-cash items
Why do you add a decrease in inventories to profit before tax?
Added on because the decrease of inventories liberates extra cash (and increase in inventories are deducted as purchases of inventories represent cash expenditure)
Why do you deduct an increase in trade receivables from profit before tax?
Deducted because this is part of the profit not yet realised into cash but tied up in receivables (and decrease in receivables are added on since these represent cash receipts from customers)
Why do you deduct a decrease in trade payables from profit before tax?
Deducted because the reduction in payables must reduce cash (increase in payables are added on as these are a delay in paying cash to suppliers)
What should you do with non-trade receivables and payables?
You should remove non-trade receivables and from your calculations, e.g. interest receivables or payables arising from purchase of PPE. These will be dealt with elsewhere in the statement of cash flows.
How do you calculate interest/income taxes paid?
T-account:
DR
Cash paid (balancing figure)
Payable c/f
CR
Payable b/f
SPL expense
If there is not an opening or closing statement of financial position payable amount, it follows that the SPL expense is the cash outflow
How can interest paid be shown?
Interest paid can be shown as either an operating or financing cash flow. The presentation should be applied consistently each year/period. In FAR, assume this is an operating cash flow unless you are told otherwise
What cash outflows go in ‘other cash from operating activities’?
- interest paid
- income taxes paid
What cash inflows/outflows go under ‘cash from investing activities’?
Cash inflows may include:
- interest received
- dividends received
- proceeds of property, plant and equipment
Outflows:
- Purchase of property, plant and equipment
How do you calculate interest receivable or dividends receivable?
T-account:
DR
Receivable b/f
SPL income
CR
Cash received (balancing figure)
Receivable c/f
What is the T-account for PPE carrying amount?
This should be used when insufficient detail is provided to produce a separate cost and accumulated depreciation accounts.
DR
CA b/f
Additions
Revaluation (movement on revaluation surplus)
CR
Disposals at CA
Depreciation charge for year
CA c/f
What is the T-account for disposals of PPE?
DR
Cost
Profit
CR
Acc. Dep/n
Cash received (balancing figure)
Loss
What T-accounts should you use for the purchase and proceeds of PPE?
- Cost account
- Accumulated depreciation account
- Disposals account (where relevant)
What are cash inflows and outflows from financing activities?
Inflows:
- Proceeds from issue of shares
- Proceeds from issue of loans/debentures
Outflows:
- Repayment of loans/debentures
- Dividends paid
How do you calculate proceeds from issue of shares?
- Generally derived by comparison of the brought forward and carried forward balances on the share capital and share premium accounts together
- You may need to consider any non-cash share issue such as bonus issue taken from retained earnings
How do you calculate proceeds from issue of loans/repayments?
This cash flow is derived by comparison of the brought forward and carried forward balances
