CHAPTER 1: FINANCIAL STATEMENTS

Financial Statements

Financial Statements are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.

General Purpose Financial Statements

General purpose financial statements are those statements intended to meet the needs of users who
are not in a position to require an entity to prepare reports tailored to their particular information
needs.

Components of Financial Statements

A complete set of financial statements comprises the following components:

1. Statement of financial position

2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other explanatory
information

Objective of Financial Statements

The objective of general purpose financial statements is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.

Financial Position

The financial position comprises the assets, liabilities and equity of an entity at a particular moment in
time.

Financial Performance

The financial performance comprises the revenue, expenses and net income or loss of an entity for a
period of time.

Cash Flows

Cash flows are the cash receipts and cash payments arising from the operating, investing and financing
activities of the entity.

Financial Reporting
Objectives of Financial Reporting

Under the Conceptual Framework for Financial Reporting, the objective of financial reporting is to
provide financial information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity.

Responsibility for Financial Statements

The management of an entity has the primary responsibility for the preparation and presentation of
financial statements.

General Features of Financial Statements

1. Fair presentation and compliance with PFRS

2. Going concern
3. Accrual basis
4. Materiality and aggregation
5. Offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency of presentation

Fair Presentation

Fair presentation is defined as faithful representation of the effects of transactions and other events in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses laid
down in the Conceptual Framework.

Going Concern

Going concern means that the accounting entity is viewed as continuing in operation indefinitely in the
absence of evidence to the contrary.

Accrual Basis

Accrual accounting means that income is recognized when earned regardless of when received and
expenses is recognized when incurred regardless of when paid.

Materiality and Aggregation

An entity shall present separately each material class of similar items.

An entity shall present separately items of dissimilar nature or function unless they are immaterial.

When is an item immaterial?

This is dependent on good judgement, professional expertise and common sense.

A general guide may be given, to wit:

An item is immaterial if knowledge of it would affect the decision of the informed users of the financial
statements.
Factors of Materiality

In the exercise of judgement in determining materiality, the following factors may be considered:

a. Relative size of the item in relation to the total of the group wo which the items belong.
b. Nature of the item – An item may be inherently material because by its very nature it affects
economic condition.

Offsetting

Assets and liabilities, and income and expenses, when material, shall not be offset against each other.

Offsetting may be done when it is required or permitted by another PFRS.

Frequency of Reporting

An entity shall present a complete set of financial statements at least annually.

Comparable Information

Except when permitted or required otherwise by PFRS, an entity shall disclose comparative information
in respect of the previous period for all amounts reported in the current period’s financial statements.

Consistency of presentation

The principle of consistency requires that the accounting methods and practices shall be applied on a
uniform basis from period to period.