Chapter 2 - Format of Financial Statements

Question 1

The objective of IAS1 Presentation of Financial Statements is to?

Answer 1

Ensure comparability with the entity’s previous period’s financial statements, and with other entitys

Question 2

Financial statements are prepared on what basis?

Answer 2

The going concern basis, meaning that the company is expected to continue operation for the foreseeable future. Hence management should consider the future (at least 12 months from reporting date)

Question 3

Uncertainty with regards to going concern of a company must be?

Answer 3

Disclosed

Question 4

What is the difference between a break up (alternative) basis and going concern basis

Answer 4

If a entity is not of going concern, the FS are prepared on a break up basis.

This means that assets are recorded their recoverable amount on sale & all assets and liabilities are classified as current. This is compared to going concern, where PPE would be recorded at cost and written off over their useful life.

Question 5

When can we aggregate items?

Answer 5

Each material class of an item must be shown separately in the FS. Immaterial items can be aggregated

Question 6

The general rule of FS is consistency of presentation, which means?

Answer 6

Accounting policies are to be kept the same from year to year for comparability

Question 7

IAS1 states that for format of expenses can be classified by either?

Answer 7

Function or nature. Function is the common practise within the UK. E.g function would be COS, but nature would be open inv for raw m, work in progress goods, and then closing

Question 8

IAS 1 requires a statement of other comprehensive income, which means?

Answer 8

Income and expenses that are not recognised in the SPL. Comprehensive income is the realised P/L in the SPL.

Question 9

In FAR the only type of other comprehensive income we will see is?

Answer 9

Gain from property revaluation

Question 10

What is the format for a statement of comprehensive income

Answer 10

Profit for the year (SPL) x
Other comprehensive income:
Gain on property revaluation x

Total comp x

Question 11

According to IAS 16 PPE, companies have the choice to recognise PPE as either?

Answer 11

Historic cost (cost model)
or Fair value (revaluation model)

Question 12

*** If we value our inventory using the revaluation method, and we get a gain in value, what are the double entries

Answer 12

We would need to increase cost to the market (fair) value (Dr cost)

Remove all accumulated depreciation to date (Dr Acc dep) (Cost - CA)

Create a reval surplus which sits in equity (Cr Reval surplus) - this just fair value - acc dep

Question 13

Why do we recognise a revaluation surplus in other comprehensive income?

Answer 13

Because it is a unrealised gain.

Question 13

In our SOCIE, include the total comprehensive income figure. What part of the SOCIE does this affect?

Answer 13

The revaluation surplus and the retained earnings. We use the other comprehensive income amount within the reval surplus section, and the remaining (profit at year end) to go to retained earnings.

Question 14

What would we expect to see in the LHS columns of the SOCIE?

Answer 14

b/f figures, any additional issues in shares, dividends, total comprehensive income.

Remember - we must write the total comprehensive income format out before we do the SOCIE.

Question 15

Non current assets are defined to be

Answer 15

Settled within 12 months of reporting date or part of the entity’s normal operating cycle

Question 16

*** We only account for ordinary dividends if they have actually been paid. The DE is?

Answer 16

Dr Retained Earnings
Cr Cash

Question 17

What do ordinary shareholders own?

Answer 17

A % of share capital and the reserves of a company. Also have voting rights

Question 18

What do preference share holders own?

Answer 18

A % of the preference share capital. They have no voting rights.

Question 19

** Redeemable preference shares means that dividends are mandatory. Irredeemable preference shares can be mandatory, but not always. What are the different accounting treatments?

Answer 19

Redeemable / mandatory irredeemable pref dividends;

Dr Finance Cost (SPL)
Cr Dividend payable / Cash

Irredeemable (not mandatory);

Dr Retained Earnings
Cr Cash

Question 20

Retained earnings calculation?

Answer 20

B/f RE
Profit for the year
(Dividends)

C/f RE

Question 21

Benefits of cash flow statements?

Answer 21

Factual - not influenced by accounting policies
Shows if a company is in a position to pay amounts as they fall due

Question 22

What are operating activities?

Answer 22

The principle revenue earning activities, including day to day activities

Question 23

What are investing activities

Answer 23

Cash flow from purchase or sale of PPE, and any investments

Question 24

What are financing activities

Answer 24

LT finance of the company e.g share capital

Question 25

What are cash equivalents?

Answer 25

Investments with a maturity date of less than 3 months. Note this is an overdraft, given this is repayable upon demand.

Question 26

Two methods of calculating cash generated from operations are?

Answer 26

Indirect method - Most popular method. Starts with profit before tax figure as reported in the SPL, and reverses figures.

Looks at;
Profit before tax
Finance cost x
Investment income (x)
Depreciation x

Loss/profit of disposal of NCA x/(x)
Increase/decrease in inventories (x)/x
Increase/decrease in trade payables x/(x)
Increase/decrease in trade receivables (x)/x

Direct method - Taken directly from ledger accounts of client.

Question 27

How would you work out the cash for interest/dividend receivable?

Answer 27

Receivable = asset, thus bring b/f figure from SFP on RHS, and c/f on LHS. Take income from SPL into the rhs, with the balancing figure being the cash received. (Note,the opposite is for payable)

Question 28

How would you figure out the cash paid for PPE addition?

Answer 28

Create a PPE CA T account. PPE is a asset, thus bring b/f on RHS, c/f on LHS. A disposal of asset will be Cr by its CA. Depreciation charge for the year is also credited. Any revaluation is the LHS. Balancing figure is cash paid.

Question 29

How do we work out cash proceeds from issue of shares/loans?

Answer 29

Comparison of the b/f and c/f figures

Question 30

How does the RE T account look?

Answer 30

Dr; Bonus issue, Irredeemable preference dividends payable, B dividends paid

Cr; b/f RE, profit, reval surp

Question 31

IAS 7 requires what cash flow disclosures?

Answer 31

Disclosure on;
- The accounting policy stating what balances cash and cash equiv include
- Other relevant info such as unused overdraft facility
- Significant non cash transactions such as issue of bond