3. Presentation of single entity published financial statements

Question 1

Main movements in Shareholders equity

Answer 1

Movements in shareholders’ equity typically include the following:
Capital injections, or withdrawals by the shareholders e.g., the issue or redemption of shares (including rights issues and share buybacks) (1);

Dividends paid, these representing a distribution of wealth attributable to the shareholders (1);
Profit or loss attributable to shareholders, as reported in the statement of profit and loss and other comprehensive income (OCI) (1);

Revaluation gains and losses, to the extent that they are recognised outside the statement of profit and loss and OCI (1).

Transfers between components of equity, for example a bonus issue of shares where share capital is increased as other components of equity are reduced (1).

Prior year adjustments if prior year errors or accounting policy changes are material (1).

Any other gains or losses not recognised in the statement of profit and loss and OCI, such as actuarial gains and losses (1).

Question 2

What does International Accounting Standard 1 govern?

Answer 2

It governs the preparation and presentation of single entity financial statements.

Question 3

What are the key objectives of financial statements?

Answer 3

To provide and fairly represent the financial position, performance, and cash flows of an entity in a way that is useful to a wide range of users in making financial decisions.

Question 4

What comprises a complete set of financial statements?

Answer 4

A complete set includes: a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, and a statement of cash flows.

Question 5

What additional information do financial statements include?

Answer 5

They include narratives or notes that help to further explain numbers on the financial statements.

Question 6

What overriding concepts are applied in the preparation of financial statements?

Answer 6

Presentation, fair presentation and compliance with IFRS, going concern, accruals basis, materiality and aggregation, reporting period, and offsetting.

Question 7

What is the statement of financial position?

Answer 7

It presents the financial position of an entity at a given date and includes assets, liabilities, and equity.

Question 8

What are the main components of the statement of financial position?

Answer 8

The main components are assets, liabilities, and equity.

Question 9

How must assets and liabilities be classified in the statement of financial position?

Answer 9

They must be presented as current and non-current unless liquidity provides more reliable and relevant information.

Question 10

What does the statement of profit or loss and OCI review?

Answer 10

It reviews overall performance as a result of financial transactions during the accounting period.

Question 11

What is total comprehensive income?

Answer 11

It is defined as the change in equity during a period resulting from transactions and other events, excluding those from transactions with owners.

Question 12

What does IAS 1 require regarding material items of income and expense?

Answer 12

Material items must be disclosed separately in the statement of profit or loss and other comprehensive income or in the notes.

Question 13

What does IFRS 5 require regarding discontinued operations?

Answer 13

It requires the results of discontinued operations to be disclosed separately from continuing operations.

Question 14

What does the statement of changes in equity analyze?

Answer 14

It provides an analysis of the changes in shareholders’ equity over an accounting period.

Question 15

What are the key components of equity?

Answer 15

Key components include share capital, retained earnings, and other components such as the revaluation surplus.

Question 16

What does International Accounting Standard 7 govern?

Answer 16

It governs the preparation and presentation of statements of cash flows.

Question 17

What does the statement of cash flows show?

Answer 17

It shows changes in cash and cash equivalents over the accounting period.

Question 18

What classifications are used for cash flows under IAS 7?

Answer 18

Cash flows are classified under operating, investing, and financing activities.

Question 19

How can cash flows from operating activities be presented?

Answer 19

They can be shown on a direct or indirect basis.

Question 20

Whats the accruals basis of accounting?

Answer 20

Basically, to account in the FS when income is earned or expenses are incurred even if wont be paying or receiving the cash for some time.

The accruals basis of accounting is one of the overriding concepts for financial statements.

International Accounting Standard 1 (IAS 1) requires financial statements, except for cash flow information, to be prepared using the accruals basis of accounting (1).

The accruals concept requires transactions to be accounted for in the period when income is earned or expenses are incurred (1), not when they are received or paid in cash (1).

For example, a company delivers goods to one of its clients in November and raises an invoice to the client. The client settles the invoice in the following January. Under the accruals accounting concept, the company must record the revenue in November, as that
is when the income is earned (1).
However, the cash payment from the client is not received until the following January, at which point the cash would be recognised in the cash flow statement (1).

Question 21

Explain overriding concepts for the preparation of published financial statements

Answer 21

Going concern – financial statements are normally prepared assuming
the entity will continue in operation for the foreseeable future. (1)

• Accruals basis of accounting – requires transactions to be accounted for
  in the period when income is earned or expenses incurred, not when they
  are received or paid in cash. (1)
• Materiality – each material class of similar items should be presented
  separately. (1)
• Reporting period – should produce financial statements at least annually,
  and make disclosures if the reporting period is changed. (1)
• Offsetting – assets and liabilities, and income and expenses, shall not be
  offset unless required or permitted by a standard. (1)

Question 22

Using IAS 7 ‘Statement of Cash Flows’, explain how statements of cash flows are structured from the perspective of a lender.

Answer 22

Operating
Investing
Lending/Financing

Cash flows are classified under three main headings – operating, investing
and financing activities. All published statements of cash flows should be
under these same headings, for ease of comparison by a lender looking at
multiple sets of financial statements. (1)

Cash flow from operating activities shows a lender the net cash flows
generated from operations in a period, and as such is a/the best indicator of
whether the company is generating cash, and if they are, at a level to meet
their investing and financing needs. (1)

Separating out the cash flows from investing activities allows the lender to
readily identify the extent of new investment in assets, which will be intended to generate future cash flows. These include the acquisition and disposal of long-term assets. The lender will be able to see how much the company has been investing and in what types of activities. (1)

Separating out the financing activities gives the reader an indication of likely
future interest and dividend payments. Financing activities includes raising
capital, repaying investors, adding or changing loans. So, a lender will be
able to see what the company is already paying out by way of interest
payments on other investments. (1)

IAS 1 has a requirement to provide the previous year comparative figures for
all disclosures, so that trends might be looked for. From this the lender will be
able to assess whether the generation of net cash flow from operating
activities, or the interest payments for existing borrowings, are increasing or
decreasing (1)