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
