(Sapp) Slide f3 Acca

FINANCIAL
ACCOUNTING
Prepared by Trinh Cong Son
Some notes for learning F3
F3 Detailed Syllabus
A. The context and purpose of

financial reporting
B. The qualitative characteristics of
financial information
C. The use of double-entry and
accounting systems
D. Recording transactions and events
E. Preparing a trial balance
F. Preparing basic financial
statements
G. Preparing simple consolidated
financial statements
H. Interpretation of financial
statements
Some notes for learning F3
LEARNING
OBJECTIVES
► Explain the context and purpose of

financial reporting.
► Define the qualitative characteristics of
financial information.
► Demonstrate the use of double entry and
accounting systems.
► Record transactions and events.
► Prepare a trial balance (including
identifying and correcting errors).
► Prepare basic financial statements for
incorporated and unincorporated entities.
► Prepare simple consolidated financial
statements
► Interpretation of financial statements
CHARTER 1: INTRODUCTION
TO ACCOUNTING
CASE STUDY
DISCUSSION PANNEL
Overview and learning outcomes
OVERVIEW LEARNING OUTCOMES
1. The purpose of financial reporting

2. Types of business entity
3. Stakeholders
4. Introduction to financial statements
5. Those charged with governance
The purpose of financial reporting
PURPOSE FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING
1. Financial reporting is a way of recording, Management

analysing and summarising financial Financial accounting
accounting
data.
2. Financial data/information is the name
given to the actual transactions carried Financial Financial Planning and Decision
out by a business eg sales of goods, performance position controlling activities making
purchases of goods, payment of
expenses. These transactions are
recorded in books of prime entry.
3. The transactions are analysed in the External users Internal users
books of prime entry and the totals are
posted to the ledger accounts.
4. Finally, the transactions are summarised
in the financial statements. Historical information Budgets/Forecasts
Management
Financial statements
reports
Types of business and stakeholders
OVERVIEW BUSINESS STAKEHOLDERS
1. Businesses of whatever size or nature

exist to make a profit. Profit is the excess
of income over expenditure. When
expenditure exceeds revenue, the
business is running at a loss.
2. There are three main types of business
entity:
► Sole trader
► Limited liability company
► Partnerships
Introduction to financial statements
STATEMENT OF FINALCIAL POSITION (SOFP) Income statement (IS)
LIABILITIES
q Non-current liabilities
ASSETS
§ Long-term borrowings q Revenue
q Non-current assets
§ Long-term provisions q Cost of sales
§ Properties, plant and
q Gross profit
equipment (PPE)
q Current liabilities q Other income
§ Long-term investment
§ Trade and other payables q Expenses
§ Other NCA
§ Short-term borrowings § Selling expenses
§ Bank overdraft § Operations and administrative exp
q Current assets
§ Taxation q Other expenses
§ Cash and cash equivalents
§ Other CL q Finance cost
§ Inventories
q Profit before tax (PBT)
§ Trade receivables EQUITY q Income tax expenses
§ Short-term investment q Share capital/premium q Profit for the year (net profit after
§ Other CA q Retained Earnings (RE) tax)
q Reserves
Format of Income
Statement An income statement summarizes the
income and expenditure of the company
over a period of time. If income exceeds
expenditure, the business gets a profit, if
vice versa, a loss occurs
Income: Increases in economic benefits

during the accounting period In the form of
- inflows or enhancements of assets; or
- decreases of liabilities
that result in increase in equity, other
than those relating to contributions to
equity participants
Expenses: Decrease in economic benefits

during the accounting period in the form of
- outflows or depletions of assets;
- incurrences of liabilities
that result in decreases in equity, other than
those relating to distributions to equity
participants
Format of Statement of Financial
Position
The Statement of Financial
Position is a statement of assets
owned, liabilities owed and equity
of a business at a particular date.
An asset is a resource controlled by

an entity as a result of past events
and from which future economic
benefits are expected to flow to the
entity.
A liability is a present obligation of

the entity arising from past events,
the settlement of which is
expected to result in an outflow
from the entity of resources
embodying economic benefits
Format for the Statement of Cash
Flow
A cash flow statement summarizes the cash inflows
(receipts) and cash outflows (payments) for a given period.
The cash flow statement provides historical information
about cash and cash Equivalents.
Revision and Chapter Summary
► ………… is a way of recording, analysing and
summarising financial data.
► ………… is the excess of income over expenditure.
When expenditure exceeds revenue, the business is
running at a …………
► ………… of a company are responsible for the
preparation of the financial statements.
► Financial accounting is mainly a method of reporting
the ……….. and ……….. of a business. Financial
accounts provide ……….. information.
► An ……….. is a resource controlled by an entity as a
result of past events and from which future economic
benefits are expected to flow to the entity.
► A liability is a ………… of the entity arising from past
events, the settlement of which is expected to result
in an outflow from the entity of resources embodying
economic benefits.
► Accounting standards were developed to try to
address …………
Revision - Answer
► Financial reporting is a way of recording, analysing and summarising financial data.
► Profit is the excess of income over expenditure. When expenditure exceeds revenue, the business is running at a
loss.
► Those charged with governance of a company are responsible for the preparation of the financial statements.
► Financial accounting is mainly a method of reporting the financial performance and financial position of a business.
Financial accounts provide historical information.
► An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are
expected to flow to the entity.
► A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in
an outflow from the entity of resources embodying economic benefits.
► Accounting standards were developed to try to address subjectivity.
CHARTER 2: REGULATORY
FRAMEWORK
CASE STUDY
DISCUSSION PANNEL
Learning outcomes
LEARNING OUTCOMES
1. The role of the regulatory system.

2. The role of the International Financial
Reporting Standards (IFRSs).
BUSINESS FINANCIAL INFORMATION FINANCIAL

TRANSACTIONS Chapter 3 STATEMENTS
THE REGULATORY FRAMEWORK

20 Chapter 2
The roles of the regulatory system
THE ROLES IFRS FOUNDATION STRUCTURE
1. A number of factors have shaped the development of financial

accounting.
2. Many figures in financial statements are derived from the
application of judgement in applying fundamental accounting
assumptions and conventions. This can lead to subjectivity.
Accounting standards were developed to try to address this
subjectivity.
3. Financial statements are prepared on the basis of a numberof
fundamental accounting assumptions and conventions.
4. In an attempt to deal with some of the subjectivity, and to
achieve comparability between different organisations,
accounting standards were developed. The F3/FFA syllabusis
concerned with International Financial Reporting Standards
(IFRSs).
5. IFRSs are produced by the International AccountingStandards
Board (IASB).
The roles of the IFRSs
THE ROLES
1. IFRSs are created in accordance with due process.

2. The standards are used in the following ways as
national requirements, an international benchmark for
those countries which develop their own
requirements, by regulatory authorities for domestic
and foreign companies and by companies
themselves.
THE ROLES
IAS 1 - Presentation IAS 24 – Related party IAS 33 - Earnings per

of financial statements disclosures share
IFRS 1 - First-time adoption
of IFFRS
IAS 7 – Statement of
Cash flows
Financial IFRS 3 – Business
Combinations
Statements
IAS 8 – Accounting
policies, changes in
accounting estimates IFRS 10 - Consolidated
and errors financial statements
IAS 28 - Investments in
IAS 10 – Events after IAS 27 – Separate
associates and joint
the reporting period financial statements
ventures
THE ROLES
IAS 2 - Inventories IAS 20 - Accounting for IFRS 16 - Leases

IAS 21 - The effects of
government grants and
changes in foreign exchange
disclosure of government IFRS 5 - Non-current assets
IAS 16 - Property, plant rates
assistance held for sale and
and equipment
discontinued operations
IAS 23 - Borrowing cost IAS 12 – Income tax
IAS 38 – Intangible IFRS 9 - Financial
assets instruments
Items on BS/PL IFRS 7 - Financial

IAS 36 - Impairment of
assets instruments: disclosures
IFRS 8 - Operating segments

IAS 37 - Provisions,
contingent liabilities
and contingent assets IFRS 13 - Fair value
IFRS 2 - Share-based measurement
IAS 19 – Employee benefits
payment
IAS 40 – Investment IFRS 15 - Revenue from
properties contracts with customers
Revision and Chapter summary
Which groups of people are most likely
to be interested in the financial
statements of a sole trader?
1 Shareholders of the company
2 The business’s bank manager
3 The tax authorities
4 Financial analysts
A. 1 and 2 only
B. 2 and 3 only
C. 2, 3 and 4 only
D. 1, 2 and 3 only
Answer: B
A sole trader does not have any shareholders. The accounts are unlikely to be of interest to a financial
analyst, they are more usually interested in the accounts of public companies.
CHARTER 3: THE QUALITATIVE
CHARACTERISTICS OF FINANCIAL
INFORMATION
CASE STUDY
DISCUSSION PANNEL
Learning outcomes
LEARNING OUTCOMES
1. The qualitative characteristics of

financial information.
2. The accounting concepts.

THE REGULATORY FRAMEWORK

28 Chapter 2
The qualitative characteristics of FI
Qualitative
characteristics
Fundamental qualitative Enhancing qualitative

characteristics characteristics
Faithful
Comparability
representation
Fair Verifiability
presentation
Relevance Timeliness
Materiality Understandability
Fundamental quality Definition
characteristics
Relevance ► Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
► The relevance of information is affected by its nature and materiality.
Faithful representation ► To be a faithful representation information must be complete, neutral and free from
error.
► Faithful representation of a transaction is only possible if it is accounted for
according to its substance and economic reality. (Substance over form)
Enhancing quality Definition
characteristics
Comparability ► Enables users to identify and understand similarities in, and differences among item.
► Be compared with similar information about other entities and with similar information about the
same entity for another period or date
► Consistency refers to the use of the same methods for the same items (ie consistency of
treatment) either from period to period within a reporting entity or in a single period across
entities
Verifiability ► Assure users that information faithfully represents the economic phenomena it purports to
represent
► Different knowledgeable and independent observers could reach consensus that a particular
depiction is a faithful representation
Timeliness ► having information available to decision-makers in time to be capable of influencing their
decisions. Generally, the older information is the less useful it is.
► Information may become less useful if there is a delay in reporting it. There is a balance
between timeliness and the provision of reliable information.
Understandability ► Classifying, characterising and presenting information clearly and concisely makes it
understandable.
► Financial reports are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently.
QUESTION 1: QUESTION 2:
Sales revenue should be recognised when goods and Which accounting concept requires that foreseen losses
services have been supplied; costs are incurred when should be anticipated and taken into account
goods and services have been received. immediately
Which accounting concept governs the above? A. The consistency concept
A. The prudence concept B. The accruals concept
B. The materiality concept C. The prudence concept
C. The accruals concept D. The going concern concept
D. The duality concept
ANSWER: C ANSWER: C
CHARTER 4: SOURCES, RECORDS
AND BOOKS OF PRIME ENTRY
CASE STUDY
DISCUSSION PANNEL
Learning outcomes and overview
LEARNING OUTCOMES
1. Business transactions Chapter 4 Chapter 5

2. Sources of documents
3. Books of prime entry
► Sales/Sales returns day book SOURCE
BOOKS OF LEDGER
► Purchase/Purchase returns DOCUMENTS PRIME ENTRY ACCOUNTS
day book
► Cash/Petty cash book
BUSINESS FINANCIAL
FINANCIAL
► Journal TRANSACTIONS INFORMATION
STATEMENTS
Chapter 3
Business transactions
Cash Credit
transactions transactions Discounts
Sources of documents
Documents Content Purpose
Quotation Quantity/description/details of goods required. To establish price from various suppliers and cross refer to
purchase requisition
Purchase order Details of supplier, e.g. name, address. Sent to supplier as request for supply. To check to the
Quantity/description/details of goods quotation and delivery note.
required and price. Terms and conditions of
delivery, payment, etc.
Sales order Quantity/description/details Cross checked with the order placed by customer.
of goods required and price. Sent to the stores/warehouse department for
processing of the order.
Receipt Details of payment received. Issued by the selling company indicatingthe
payment received.
Goods Details of supplier, e.g. name and address. Provided by supplier. Checked with goods
despatched Quantity and description of goods received and purchase order.
note – GDN
Goods received Quantity and description of Produced by company receiving the goods as proof of
note (GRN) goods. receipt. Matched with delivery note and purchase order.
Invoice Name and address of supplier and customer; Issued by supplier of goods as a request for payment.For
details of goods, e.g. quantity, price, value, sales the supplier selling the
tax, terms of credit, etc. goods/services this will be treated as a sales invoice. For
the customer this will be treated as a purchase invoice.
Sources of documents
Documents Content Purpose
Statement Details of supplier, name and address. Issued by the supplier. Checked with other
Date, invoice numbers and values, documents to ensure that the amount owing is
payments made, refunds, amount owing. correct.
Credit note Details of supplier, name and address. Issued by the supplier. Checked with documents
Contains details of goods returned, quantity, regarding goods returned.
price, value, sales tax, terms of
Credit.
Debit note Details of the supplier. Contains details of Issued by the company receiving the goods. Cross
goods returned, e.g. quantity, price, value, referred to the credit note issued by the supplier.
sales tax, terms of credit, etc.
Remittance Method of payment, invoice number, Sent to supplier with, or as notification of, payment.
advice account number, date, etc.
Books of prime entry
Books of prime entry Transaction type
Sales day book Credit sales
Purchases day book Credit purchases
Sales returns day book Returns of goods sold on credit
Purchases returns day Returns of goods bought on credit
book
Cash book All bank transactions
Petty cash book All small cash transactions
The journal All transactions not recorded elsewhere
All transactions are initially recorded in a book of prime entry. This is a simple note of the transaction, the
relevant customer/supplier and the amount of the transaction. It is, in essence, a long list of daily transactions.
Sales day book Purchase day book
q The sales day book is the book of prime entry for q A business also keeps a record in the purchase day
credit sales. The sales day book is used to keep a list book of all the invoices it receives. The purchase day
of all invoices sent out to customers each day. book is the book of prime entry for credit purchases.
Sales returns day book Purchase returns day book
q When customers return goods for some reason, a q The purchase returns day book records credit notes
credit note is raised. All credit notes are recorded in received in respect of goods which the business sends
the sales returns day book. back to its suppliers.
q The sales returns day book is the book of prime q The purchase returns day book is the book of prime
entry for credit notes raised. entry for credit notes received from suppliers.
q Where a business has very few sales returns, it may q A business with very few purchase returns may record
record a credit note as a negative entry in the sales a credit note received as a negative entry in the
day book. purchase day book
Cash book
q The cash book may be a manual record or a Petty cash book

computer file. It records all transactions that go
through the bank account. q Most businesses keep petty cash on the premises,
q The cash book deals with money paid into and out of which is topped up from the main bank account. Under
the business bank account. the imprest system, the petty cash is kept at an
q The cash book is the book of prime entry for cash agreed sum, so that each topping up is equal to the
receipts and payments. amount paid out in the period.
q A small amount of cash on the premises to make
Bank statements occasional small payments in cash, eg staff
refreshments, postage stamps, to pay the office
q Weekly or monthly, a business will receive a bank cleaner, taxi fares, etc. This is often called the cash
statement. Bank statements should be used to check float or petty cash account.
that the amount shown as a balance in the cash book q A petty cash book is a cash book for small payments.
agrees with the amount on the bank statement, and
that no cash has 'gone missing'.
QUESTION: State which books of prime entry the following transactions would be entered into.
Transactions Book of prime entry
Your business pays A Brown (a supplier)$450.00
You send D Smith (a customer) an invoice for $650
Your accounts manager asks you for $12 urgently in orderto

buy some envelopes
You receive an invoice from A Brown for $300
You pay D Smith $500
F Jones (a customer) returns goods to the value of $250
You return goods to J Green to the value of $504
F Jones pays you $500

Revision - Answer
ANSWER
Transactions Book of prime entry
Your business pays A Brown (a supplier)$450.00 Cash book
You send D Smith (a customer) an invoice for $650 Sales day book
Your accounts manager asks you for $12 urgently in orderto Petty cash book
buy some envelopes
You receive an invoice from A Brown for $300 Purchases day book
You pay D Smith $500 Cash book
F Jones (a customer) returns goods to the value of $250 Sales returns day book
You return goods to J Green to the value of $504 Purchase returns day book
F Jones pays you $500 Cash book

CHARTER 5: LEDGER ACCOUNTS
AND DOUBLE ENTRIES
CASE STUDY
DISCUSSION PANNEL
Learning outcomes and overview
LEARNING OUTCOMES
1. Financial accounting process

2. Ledger accounts
3. The accounting/business equation
4. Double entry bookkeeping
5. The receivables and payables ledger
6. Control account
Chapter 4 Chapter 5
SOURCE BOOKS OF LEDGER

DOCUMENTS PRIME ENTRY ACCOUNTS

Financial Accounting
Process
DATA BOOKS OF LEDGER FINANCIAL
TRIAL
SOURC PRIME ENTRY ACCOUN STATEMEN
BALANCE
ES TS TS
DOCUMENTI RECORDING SUMMARISING or PRESENTI

NG POSTING NG
Ledger
Account
► Nominal ledger (General ledger/GL) is an accounting record which contains the principle accounts and
which summarizes the financial affairs of a business
► The method used to summarise these records: ledger accounting and double entry.
► Format of a nominal ledger
Account Name
Dr Cr
Ledger
Account Account type
Double entry FSs
Debit (DR) Credit (CR)
ASSETS
Except from (adversely recorded)
q Accumulated depreciation/Provision for depreciation
Statement
q Provision for slow moving stocks
of
q Provision for doubtful debts/irrecoverable debts
Financial
LIABILITIES Position
CAPITAL (Balance
Except from (adversely recorded) Sheet)
q Drawings
SALES/INCOME
COS/COGS
Except from (adversely recorded) Income
q Return outwards statement
EXPENSES
The Accounting
Equation STATEMENT OF
LIABILITI FINANCIAL POSITION (SOFP)
ES
ASSETS q Non-current
q Non-current assets liabilities ASSETS = EQUITY + LIABILITIES
§ Properties, plant and § Long-term
equipment (PPE) q Current
borrowingsliabilities
§ Long-term investment § Trade and other
Long-term
§ Other NCA payables
provisions
§ Short-term borrowings
q Current assets § Bank overdraft
§ Cash and cash § Taxation Introduced
equivalents § Other CL capital
§ Inventories
§ Trade receivables EQUITY Retained
q Share NET ASSETS
§ Short-term investment Earnings
§ Other CA capital/premium
q Retained Earnings
(RE) Reserves
q Reserves
The Accounting
Equation
Concepts Description
Stocks/Inventories Unsold goods
Account receivables (AR) Amounts owed to the business by its customers
Account payables (AP) Amount owed by the business to its suppliers
Retained earnings (RE) Profit generated from operation by a business but not yet
distributed to its owners
Drawings Amounts of money or assets taken out of a business by its
owners
Return inwards Goods returned to the business
Return outwards Goods returned by the business
Gross profit Gross profit = Sales – Cost of goods sold (COGS)
Net profit Net profit = Gross profit – Expenses
The Business
Equation
CLOSING NET ASSETS PROFIT ASSETS = CAPITAL + LIABILITIES
OPENING NET ASSETS CLOSING NET ASSETS

MOVEMENT IN NET ASSETS
INTRODUCED CAPITAL OPENING NET ASSETS

Introduced
capital
PROFIT INTRODUCED CAPITAL Retained

NET ASSETS
Earnings
DRAWINGS DRAWINGS Reserves

The Business
Equation
QUESTION Business equation
Net assets at the beginning of 20X7 were $101,700. The proprietor
injected new capital of $8,000 during the year and took drawings of
$2,200. Net assets at the end of 20X7 were $180,000.
What was the profit earned by the business in 20X7?
A $72,500 profit
B $88,300 profit
C $84,300 profit
D $(84,100) loss
ANSWER
Profit = movement in net assets – capital introduced + drawings
Profit = (180,000 – 101,700) – 8,000 + 2,200
Profit = $72,500 (A)
Double Entry
Bookkeeping
Dual effect (duality concept)
► Double entry bookkeeping is the method used to transfer the weekly/monthly totals from the books of prime entry
into the nominal ledger.
► Double entry bookkeeping is the method by which a business records financial transactions. An account is
maintained for every asset, liability, income and expense. Every accounting event must be entered in ledger accounts
both as a debit and as an equal but opposite credit.
► The duality concept means that each transaction will affect at least two ledger accounts.
Summary of steps to record a transaction

(1) Identify the items that are affected.
(2) Consider whether they are being increased or decreased.
(3) Decide whether each account should be debited or credited.
(4) Check that a debit entry and a credit entry have been made and they are both for the same amount
Total DR side = Total CR side (balance)
Double Entry
Bookkeeping Double entry for typical transactions
Double entry
Debit (DR) $ Credit (CR) $
Sales transactions
q Cash sales
Sold goods for cash at $ 1,000
Cash at bank 1,000
Sales 1,000
q Credit sales
Sold goods on credit for $ 1,175 including 17.5% sales tax
Trade receivables 1,175
Sales 1,000
Sales tax-output 175
q Sales return
A customer returned goods value $ 117.5 including 17.5% sales tax
Sales return 100
Sales tax - output 17.5
Trade receivable 117.5
Double Entry
Double entry
Purchase transactions
q Cash purchases
Payment of a purchase billed totaling $ 1,175 including sales tax of 17.5%
Purchase (Inventory) 1,000
Sales tax – Input 175
Cash at bank 1,175
q Purchase return
A business returned goods valued $ 100 excluding sales tax of 17.5%
Trade payables 117.5
Purchase return 100
Cash at bank 17.5
q Credit purchase
Bought goods on credit $ 1,175 including sales tax of 17.5%
Purchases 1,000
Sales tax – Input 175
Trade payables 1,175
Double Entry
Double entry
Cash receipts
q Capital contribution
Owner paid $ 900 into the business’s bank account
Cash at bank 900
Capital contribution 900
q Receipt from credit customers
A customer paid $ 1,100 to totally clear his debt
Cash at bank 1,100
Trade receivables 1,100
q Discount allowed
Due to the immediate payment, the business accept customer to deduce the
paying amount of $ 1,000 to $ 900
Cash at bank 900
Discount allowed 100
Sales 1,000
Double Entry
Double entry
Cash payments
q Drawings
Owner withdraw $ 900 from the business’s bank account
Drawings 900
Cash at bank 900
q Payment to suppliers
A payment of $ 1,100 for the company’s AP
Trade payables 1,100
Cash at bank 1,100
Books of prime
entry
The receivables and payables ledgers contain the personal accounts of individual customers and suppliers.
They do not normally form part of the double entry system.
Receivables (Sales) ledger

Payables (Purchases) ledger
q The receivables ledger is a ledger for customers'
personal accounts. q The payables ledger is a ledger for suppliers'
q Receivables ledger accounts are written up as personal accounts.
follows: q After entries are made in the purchase day book, cash
► When entries are made in the sales day book
book, or purchase returns day book – ie after entries
(invoices sent out), they are subsequently also made
are made in the books of prime entry – they are also
in the debit side of the relevant customer account in
the receivables ledger. made in the relevant supplier account in the payables
ledger. Again we say that the entries in the purchase
► Similarly, when entries are made in the cash book
day book are posted to the suppliers’ personal
(payments received), or in the sales returns day book,
they are also made in the credit side of the relevant accounts in the payables ledger.
customer account.
Revision and Chapter
Summary Dual effect recorded
QUESTION 1: What is the double entry to record a in ledger
credit sale of $50? accounts
A DEBIT cash $50, CREDIT sales $50
B DEBIT receivables $50, CREDIT sales $50
C DEBIT sales $50, CREDIT receivables $50 Account name
D DEBIT sales $50, CREDIT cash $50
QUESTION 2 : The double entry to record a purchase of DR = increase CR = increase

office chairs for $1,000 is: § Purchas
in § Revenu
in
DEBIT non-current assets $1,000, CREDIT cash $1,000. es es
True or false? § Expense § Liabilitie
s s
QUESTION 3 : Individual customer accounts are kept in
§ Assets § Equity
the …………?
DR = CR
summary 1
QUESTION 1 : What is the double entry to record a credit sale of $50?
A DEBIT cash $50, CREDIT sales $50
B DEBIT receivables $50, CREDIT sales $50
C DEBIT sales $50, CREDIT receivables $50
D DEBIT sales $50, CREDIT cash $50
QUESTION 2: The double entry to record a purchase of office chairs for $1,000 is:
DEBIT non-current assets $1,000, CREDIT cash $1,000. True or false?
TRUE
QUESTION 3 : Individual customer accounts are kept in the …………?

Receivables ledger
Control
Accounts
A control account keeps a total record of a number of individual items. It is an impersonal account which is part of the double entry
system.
A control account is an account in the nominal ledger in which a record is kept of the total value of a number of similar but individual
items. Control accounts are used chiefly for trade receivables andpayables.
► (a) A receivables control account is an account in which records are kept of transactionsinvolving all receivables in total.
The balance on the receivables control account at any time will be the total amount due to the business at that time from its
receivables.
► (b) A payables control account is an account in which records are kept of transactions involving all payables in total. The balance on
this account at any time will be the total amount owed by the business at that time to its payables.
A control account is an (impersonal) ledger account which will appear in the nominal ledger
Total credit sales Total cash received Total credit Total cash paid to
from from purchases from debtors and
sales day book debtors and purchase day book discounts received
discounts
Receivables
Payables control
control
accounts
accounts
Contra/debts off-
setting
The situation may arise where a customer is also a supplier.
Instead of both owing each other money, it may be agreed
that the balances are contra’d, i.e. cancelled.
The double entry for this type of contra is:

Dr Payables ledger control account
Cr Receivables ledger control account
The individual receivable and payable memorandum

accounts must also be updated to reflect this.
Reconciliation
process Tick off the items
which appear in both
the statement and the
payables ledger
Agree the opening

Identify differences balance on the
supplier's statement
Allocate payments to
invoices after allowing
for any credit notes
QUESTION
summary 2 During a period, A Co has the following transactions on receivables

control account: sales $125,000, cash received $50,000, discounts
allowed $2,000. The balance carried forward is $95,000. What was the
opening balance at the beginning of the period?
A. $22,000 debit
B. $22,000 credit
C. $18,000 debit
D. $20,000 debit
ANSWER: A RECEIVABLES CONTROL
$ $
Bal b/d (bal. figure) 22,000 Cash 50,000

Sales 125,000 Discounts allowed 2,000
Bal c/d 95,000
147,000 147,000
CHAPTER 6: FROM TRIAL
BALANCE TO FINANCIAL
CASE
STUDY
DISCUSSION
PANNEL
Learning outcomes and
overview
LEARNING OUTCOMES
1. The Trial balance (TB)

2. The Statement of Profit or Loss (PL)
3. The Statement of Financial position (SFP)
4. Balancing off/Closing off ledger accounts and preparing the FSs.
Chapter 6 &
Chapter 4 Chapter 5
14-16
SOURCE
BOOKS OF LEDGER
TRIAL BALANCE
DOCUMENTS PRIME ENTRY ACCOUNTS
The Trial Balance
(TB)
At suitable intervals, the entries in each ledger account are totaled and a balance is struck. Balances are usually
collected in a trial balance which is then used as a basis for preparing a statement of profit or loss and a statement of
financial position.
A trial balance is a list of ledger balances shown in debit and credit columns.
Steps to prepare the Trial Balance (TB):
► Step 1: Collect of ledger accounts
► Step 2: Balance ledger accounts
► Step 3: Collect the balances
► Step 4: Check and reconcile
Financial
Statements
STATEMENT OF PROFIT AND LOSS
A profit or loss ledger account is opened up to gather all items relating to income and expenses. When rearranged,
these items make up the statement of profit or loss.
STATEMENT OF FINANCIAL POSITION
The balances on all remaining ledger accounts (including the profit or loss account) can be listed and rearranged to
form the statement of financial position.
These remaining accounts must also be balanced and ruled off, but since they represent assets and liabilities of the
business (not income and expenses) their balances are not transferred to the P/L account. Instead they are carried
down in the books of the business. This means that they become opening balances for the next accounting period
and indicate the value of the assets and liabilities at the end of one period and the beginning of the next.
Balancing off/Closing off ledger
accounts
BALANCING OFF A LEDGERACCOUNT
Step 1 Step 2 Step 3 Step 4

Total both sides Put the larger Insert a balancing
Carry the
of the T-account total in the total figure to the side
balance down
and find the box on the debit which does not
diagonally and
larger total and credit side. currently add up to
call it ‘balance
the amount in the
b/f’ (brought
total box. Call this
forward) or
balancing figure
‘balance b/d’
‘balance c/f’ (carried
(brought down).
forward) or ‘balance
c/d’ (carried down).
Balancing off/Closing off ledger
accounts
BALANCING OFF A LEDGERACCOUNT
Balance sheet ledger accounts Profit or Loss ledger accounts
Assets/liabilities at the end of a period = Assets/liabilities ► At the end of a period any amounts that relate to that
at start of the next period. period are transferred out of the income and
Balancing the account will result in: expenditure accounts into another ledger account
► A balance c/f (being the asset/liability at the end of the called profit or loss.
accounting period) ► Do not show a balance c/f or balance b/f but instead
► A balance b/f (being the asset/liability at the start of put the balancing figure on the smallest side and label
the next accounting period). it ‘profit or loss'.
summary
QUESTION:
A trial balance is made up of a list of debit balances and credit balances.
Which of the following statements is correct?
A. Every debit balance represents an expense
B. Assets are represented by debit balances
C. Liabilities are represented by debit balances
D. Income is included in the list of debit balance
ANSWER: B
CHARTER 7: TANGIBLE NON-
CURRENT ASSETS
CASE
STUDY
DISCUSSION
PANNEL
overview
LEARNING OUTCOMES OVERVIEW
1. Capital expenditure and

revenue expenditure
2. Capital income and revenue
income
3. Depreciation accounting
4. NCA – Revaluation
5. NCA – Disposal
CAPEX AND
OPEX
Capital expenditure Revenue expenditure
► Acquisition of non-current assets ► Trade of the business

► Improvements to existing non-current assets ► Maintain the existing earning capacity of non-current
► Recognition of a non-current asset in the statement of assets
financial position ► Expense in the Income statement
Revenue Income
Capital Income Income derived from the following sources.

► (a) The sale of trading assets, such as goods held in
The proceeds from the sale of non-trading assets inventory
(including long-term investments). ► (b) The provision of services
► (c) Interest and dividends received from investments
held by the business
IAS 16 - Properties, plant and
equipment
No. Concepts Definition
1 Property, plant and Tangible assets that:
equipment ► Are held by an entity for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
► Are expected to be used during more than one period
2 Cost the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or
construction
3 Fair value the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date
4 Carrying amount the amount at which an asset is recognised after deducting any accumulated
depreciation and impairment losses
Measurement &
Recognition
Recognition
► Probable that future economic benefits associated with the asset
► Cost of the asset to the entity can be measured reliably
► Period over 12 months
Initial
measurement
Purchase price excluding any trade discount
cost of site preparation
and sales tax
costs of dismantling and removing, Costs of testing after deducting the

COST
restoring the site net proceeds from selling samples
Directly attributable costs of bringing the Professional fees (lawyers,

asset to working condition architects, engineers)
Installation and assembly costs
Initial delivery and handling costs

Measurement &
Recognition COST model Cost – accumulated depreciation
Subsequent
measurement
REVALUATION Revaluation – Acc depreciation –

model Impairment loss
Modification
Subsequent
IMPROVEMENT Upgrade
expenditure
New production process

Depreciation
Accounting
The cost of a non-current asset, less its estimated residual value, is allocated fairly between accounting periods
by means of
depreciation. Depreciation is both of the following:
► Charged against profit (PL);
► Deducted from the value of the non-current asset in the statement of financial position.
Two methods of depreciation are specified in your syllabus.
► The straight line method
► The reducing balance method
Straight-line method Depreciation charge = (Cost – Residual value)/Useful life
Reducing balance
Depreciation charge = X % × carrying amount
method
Dr Depreciation expense
Double entry
Cr Accumulated depreciation
Depreciation
Accounting
USEFUL LIFE
The period over which a depreciable asset is expected to be used by the enterprise; or the number of production
or similar units expected to be obtained from the asset by the enterprise.
The following factors should be considered when estimating the useful life of a depreciable asset.
► Expected physical wear and tear
► Obsolescence
► Legal or other limits on the use of the assets
RESIDUAL VALUE
The net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the
expected costs of disposal
CHANGE PROSPECTIVELY
► Expected useful life

► method of depreciation
► residual value
Revaluation of Non-current
Assets
When a non-current asset is revalued, depreciation is charged on the revalued amount.
The gain on revaluation is recognised in the statement of profit or loss and other comprehensive income, as
other comprehensive income. From here, the 'gain' is transferred to a revaluation surplus (sometimes called a
revaluation reserve), part of capital in the statement of financial position.
If Non-current assets were to be subsequently sold for the revalued amount, the profit would be realized and
could be taken to the statement of profit or loss.
The accounting entries to record the depreciation charge each year would therefore be as follows.
► To record the new annual depreciation charge
DEBIT Depreciation expense (statement of profit or loss)
CREDIT Accumulated depreciation account (statement of financial position)
►To record the transfer of the excess depreciation DEBIT
Revaluation surplus (statement of financial position)
CREDIT Retained earnings (statement of financial position)
Non-current assets
disposal
When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference
between the net sale price of the asset and its carrying amount at the time of disposal.
Profit/loss on disposal is charged directly to PL in that period.
The ledger accounting entries are as follows.
► with the cost of the asset disposed of.
DEBIT Disposal of non-current asset account
CREDIT Non-current asset account
► with the accumulated depreciation on the asset as at the date of sale.
DEBIT Accumulated depreciation account
CREDIT Disposal of non-current asset account
► with the income from disposal
DEBIT Receivable account or cash book
CREDIT Disposal of non-current asset account
summary
QUESTION:
summary
XY Co has development expenditure of $500,000. Its policy is to amortise development expenditure at 2% per annum. Accumulated
amortisation brought forward is $20,000
1. What is the charge in the statement of profit or loss for theyear's amortisation?
A. $10,000
B. $400
C. $20,000
D. $9,600
ANSWER: A. 2% x $500,000 = $10,000.
2. What is the amount shown in the statement of financial position for developmentexpenditure?
A. $500,000
B. $480,000
C. $470,000
D. $490,000
ANSWER: C. Deferred development expenditure b/f is $480,000 (cost $500,000 – accumulated depreciation $20,000), then deduct
annual depreciation of $10,000 to give figure c/f of $470,000.
CHARTER 8: INTANGIBLE
NON
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Definition
2. Research and development
costs
3. Accounting treatment
Definitio
n
Intangible assets are non-current assets with no physical substance.
Intangible Non-current Assets

Tangible Non-current Assets
► Do not normally have physical substance, e.g
copyright
► Normally have physical substance, e.g land and
buildings ► Can be purchased or may be created within a
business without any expenditure being incurred,
► Normally involve expenditure being incurred i.e internally generated, e.g brands.
► Cost of the tangible non-current asset is
► Purchased intangible non-current assets are
capitalized capitalized. Generally, internally generated assets
► Depreciation is a reflection of the wearing out of may not be capitalized.
the asset ► Amortization is a reflection of a wearing out of the
(capitalized) assets
Research and Development
costs Research Development
the application of research findings or other knowledge to

original and planned investigation undertaken with the a plan or design for the production of new or substantially
prospect of gaining new scientific or technical knowledge improved materials, devices, products, processes,
and understanding systems or services prior to the commencement of
commercial production or use
R&D Costs
IAS
All costs that are directly attributable to R&D activities, or that 38
can be allocated on a reasonable basis ( Salaries, wages,
costs of materials and services, depreciation, overhead costs
and other costs)
be recognised as an be recognised as an
expense in the period in intangible asset (deferred
which they are incurred development expenditure)
Accounting
treatment
PIRATE
Probable future
► Once capitalised as an asset, development costs must be
amortised and recognised as an expense to match the costs
with the related revenue or cost savings. The amortisation
will begin when the asset is available for use.
economic
benefits ► Amortisation must be done on a systematic basis to reflect
the pattern in which the related economic benefits are
recognised.
measure Intention to ► Impairment (fall in value of an asset) is a possibility, but is
reliably the complete the perhaps more likely with development costs, when the asset
Expenditure intangible asset is linked with success of the development. The development
costs should be written down.
► If the useful life of an intangible asset is finite, the capitalized
Recognition development costs must be amortised once commercial
criteria exploitation begins.
(Capitalized as IA)
► An intangible asset with an indefinite useful life should not be
adequate amortised. Instead, it should be subject to an annual
technical, impairment review.
financial and
Technical other Disclosure in financial statements
feasibility Resources to
► IAS 38 requires both numerical and narrative disclosures for
complete the
intangible assets.
development
► The financial statements should show a reconciliation of the
Ability to use carrying amount of intangible assets at the beginning and at
or sell the the end of the period. The reconciliation should show the
intangible asset movement on intangible assets, including: Additions,
disposal, reductions in carrying amount, amortization, any
other movements).
summary QUESTION:
Which of the following items is an intangible asset?
A. Land
B. Patents
C. Buildings
D. Van
ANSWER: B
All the others are tangible assets.
CHAPTER 9:
CASE
STUDY
DISCUSSION
PANNEL
Learning
outcomes
LEARNING OUTCOMES
1. Definition of Inventory, cost of

Inventory
sales
2. Methods of valuing inventory
3. Recognition and presentation
Valuation Adjustment
Cost NRV Opening Closing

Definition of Inventory, cost of
sales
Inventories are assets:
► Held for sale in the ordinary course of business
► In the process of production for such sale
► In the form of materials or supplies to be consumed in the
production process or in the rendering of services
Examples:
► Goods purchased and held for resale
► Finished goods produced
► Work in progress (WIP) being produced
► Materials and supplies awaiting use in the production process
(raw materials)
Definition of Inventory, cost of
sales
Cost of sales are:
► H
Examples:
► G
Methods of valuing
inventory Purchase Purchase Import OOthheerddiirreeccttlyy Trade
cost price dduutieess aattrribbuutaabbleeccoosst discounts
Cost of Costs directly related to Fixed and variable

Cost
conversion thheeuunnitssooffpproodduucctioonn production overheads
Inventory Other cost bringing the

measurement inventories to their present
location and condition
Net realisable value

(Fair value – cost to sell)
Methods of valuing
The standard lists types of cost which would not be included in cost of inventories. Instead, they should be
inventory
recognised as an expense in the period they are incurred.
► Abnormal amounts of wasted materials, labour or other production costs
► Storage costs (except costs which are necessary in the production process before a further production stage)
► Administrative overheads not incurred to bring inventories to their present location and conditions
► Selling costs
CALCULATION COST OF INVENTORY
Method Key points Conditions

Unit cost This is the actual cost of purchasing Only used when items of inventory are
identifiable units of inventory. individually distinguishable and of high value
FIFO – first For costing purposes, the first items of The cost of closing inventory is the cost of the
in first out inventory received are assumed to be the most recent purchases of inventory.
first ones sold.
AVCO – The cost of an item of inventory is calculated The average cost can be calculated periodically
Average by or continuously.
cost taking the average of all inventory held.
Recognition and
presentation
The value of closing inventories is accounted for in the nominal ledger by debiting an inventory account and
crediting the profit or loss account at the end of an accounting period. Inventory will therefore have a debit balance
at the end of a period, and this balance will be shown in the statement of financial position as a current asset.
Format:
Opening inventory value X
+ Add cost of purchases (or, in the case of a manufacturing company, the cost of X
production)
X
- Less closing inventory value (X)
Cost of goods sold X
Recognition and
presentation
Continuous inventory records Period-end inventory records
► There is better information for inventory control. ► They are cheaper in most situations than the costs of
maintaining continuous inventory records.
► Excessive build-up of certain lines of inventory whilst
having insufficient inventory of other lines is avoided. ► Even if there is a continuous inventory record, there
will still be a need to check the accuracy of the
► Less work is needed to calculate inventory at the end information recorded by having a physical check of
of the accounting period. some of the inventory lines.
QUESTION:
summary
The closing inventory at cost of a company at 31
January 20X3 amounted to $284,700. The following
items were included at cost in the total:
1.400 coats, which had cost $80 each and normally
sold for $150 each. Owing to a defect in
manufacture, they were all sold after the reporting
date at 50% of their normal price. Selling expenses
amounted to 5% of the proceeds.
2.800 skirts, which had cost $20 each. These too
were found to be defective. Remedial work in
February 20X3 cost $5 per skirt, and selling
expenses for the batch totalled $800. They were
sold for $28 each.
What should the inventory value be according to IAS
2 Inventories after considering the above items?
A. $281,200
B. $282,800
C. $329,200
D. None of these
ANSWER: A
CHAPTER 10: SALES
CASE
STUDY
DISCUSSION
PANNEL
Definitio
n
Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by the local tax
authorities.
Some sales tax is irrecoverable. Where sales tax is irrecoverable it must be regarded as part of the cost of the
items purchased and included in the statement of profit or loss charge or in the statement of financial position
as appropriate.
Sales tax paid on purchases Sales tax charged on sales

(input tax) (output tax)
Dr Purchases – (net cost) Dr Receivables/cash (gross selling price)

Dr Sales tax (sales tax) Cr Sales – (net selling price)
Cr Payables/cash – (gross cost) Cr Sales tax (sales tax)
summary QUESTION:
The following information relates to Eva Co's sales tax
for the month of March 20X3:
Sales (including sales tax) $109,250
Purchases (net of sales tax) $64,000
Sales tax is charged at a flat rate of 15%. Eva Co's sales
tax account showed an opening credit balance of $4,540
at the beginning of the month and a closing debit
balance of $2,720 at the end of the month.
What was the total sales tax paid to regulatory
authorities during the month of March 20X3?
A. $6,470.00
B. $11,910.00
C. $14,047.50
D. $13,162.17
ANSWER: B
CHARTER 11:
ACCRUALS
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Definition
2. Accounting treatment
Accruals
concept
Expenditur Incom
e e
Accrue Prepai
d d
Definitio
n
Prepayments
Accruals
► Prepaid expenses (prepayments) are expenses
► Accrued expenses (accruals) are expenses which have already been paid but relate to a
which relate to an accounting period but have not future accounting period. They are shown in the
been paid for. They are shown in the statement of statement of financial position as an asset.
financial position as a liability.
► Prepayments are included in receivables in
► Accruals are included in payables in current
current assets in the statement of financial
liabilities, as they represent liabilities which have position. They are assets, as they represent
been incurred but for which no invoice has yet money that has been paid out in advance of the
been received expense being incurred.
► Enter any accruals
► Enter any prepayments
DR Expenses DR Assets
CR Accruals CR Expenses
summary QUESTION:
Electricity paid during the year is $14,000. There
was an opening accrual b/f of $500. A bill for the
quarter ended 31 January 20X7 was $900. What is
the electricity charge in the statement of profit or
loss for the year ended 31 December 20X6?
A. $14,000
B. $14,100
C. $13,900
D. $14,400
ANSWER: B
ELECTRICITY
$ $
Cash 14,000 Accrual b/f 500
Accrual c/f (2/3 x 600 Statement of 14,100
900) profit or loss
14,600 14,600
CHARTER 12:
PROVISIONS AND
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Provisions
2. Contingencies
Provisio
ns
DEFINITION RECOGNITION ACCOUNTING TREATMENT
DEBIT Expenses
Uncertain (PL)
timing incurred a CREDIT Provisions
present (BS)
obligation
SUBSEQUENT MEASUREMENT
Liability In subsequent years, adjustments may

probable that be needed to the amount of the
a transfer of provision. The procedure to be
economic followed then is as follows.
benefits
(a) Calculate the new provision
Uncertain required.
amount (b)Compare it with the existing balance
on the provision account (ie the
a reliable balance b/f from the previous
estimate accounting period).
(c) Calculate increase or decrease
required.
Contingenci
es Contingent assets
Contingent liabilities
A possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
A possible asset that arises from past
wholly within the entity's control; or
events and whose existence will be
confirmed by the occurrence of one or A present obligation that arises from past events but is not recognised because:
more uncertain future events not ► It is not probable that a transfer of economic benefits will be required to settle the
wholly within the enterprise's control. obligation; or
► The amount of the obligation cannot be measured with sufficientreliability.
must not be recognized, but

should be disclosed Probability of Contingent liabilities Contingent assets
occurence
Virtually certain > 95% Virtually certain Provide Recognise
Probable 51% – 95%
Possible 5% – 50% Probable Provide Disclosure note
Remote < 5%
Possible Disclosure note Ignore
Remote Ignore Ignore
summary
summary
QUESTION:
A company has a provision for warranty claims b/f of $50,000. It does a review and decides that the provision needed in future
should be $45,000.What is the effect on the financialstatements?
Statement of profit or loss Statement of financial position
A Increase expenses by $5,000 Provision $50,000
B Increase expenses by $5,000 Provision $45,000
C Decrease expenses by $5,000 Provision $50,000
D Decrease expenses by $5,000 Provision $45,000
ANSWER: D
PROVISION ACCOUNT
$ $
P/L account 5,000 Bal b/f 50,00
0
Bal c/f 45,000
50,000 50,00
0
CHARTER 13:
IRRECOVERABLE DEBTS AND
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Irrecoverable debts
2. Allowances for AR Trade
► Doubtful debts receivables
► Accounting treatment
3. Presentation
Irrecoverable Allowance
debts s
Irrecoverable
debts
► Irrecoverable debts are specific debts owed to a business which it decides are never going to be paid. They
are written off as an expense in the statement of profit or loss.
► An irrecoverable (or 'bad') debt is a debt which is definitely not expected to be paid. An irrecoverable debt
could occur when, for example, a customer has gone bankrupt.
Writing off irrecoverable debts
DEBIT Irrecoverable debts expense (statement of profit or loss)
CREDIT Trade receivables (statement of financial position)
Subsequently paid
DEBIT Cash account (statement of financial position)
CREDIT Irrecoverable debts expense (statement of profit or loss)
Allowances for
receivables Doubtful debts
Irrecoverable debts
► A doubtful debt is a debt which is possibly
irrecoverable.
Irrecoverable debts are specific debts which are
definitely not expected to be paid. ► Doubtful debts may occur, for example, when an
invoice is in dispute, or when a customer is in
financial difficulty.
► There is doubt over whether the debt will be paid, an allowance for receivables is made against the doubtful debt. Allowance
for receivables. An impairment amount in relation to receivables that reduces the receivables asset to its recoverable
amount in the statement of financial position. It is offset against trade receivables, which are shown at the net amount.
►The allowance against the trade receivables balance is made after writing off any irrecoverable debts.
Accounting treatment
► When an allowance is first made
DEBIT Irrecoverable debts expenses (SPL)
CREDIT Allowances for receivables (SFP)
► When an allowance already exists, the increase in allowance is charged as an expense, decrease in allowance is credited back
to the statement of profit or loss for the period in which the reduction in allowance is made.
QUESTION:
summary Irrecoverable debts are $5,000. Trade receivables at the year end
are $120,000. If an allowance for receivables equivalent to 5% of
trade receivables is required, what is the entry for irrecoverable
debts and allowance for receivables in the statement of profit or
loss?
A. $5,000
B. $11,000
C. $6,000
D. $10,750
ANSWER: B $5,000 + (5% x 120,000) = $11,000

CHARTER 14: BANK
RECONCILIATI
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Definition
2. Differences analysis
Cash Bank
3. Bank reconciliation process
book statement
4. Presentation
Reconciliati
on
Definition and
Process
In theory, the entries appearing Cash Bank
on a business's bank statement book statement
should be exactly the same as
those in the business cash
Bank
book. The balance shown by charges
the bank statement should be or Bank Differences
the same as the cash book Errors interest ► Errors – usually in the cash book
balance on the same date. ► Omissions – such as bank charges not
A bank reconciliation is a Timing posted in the cash book
comparison of a bank differen ► Timing differences – such as
statement (sent monthly, unpresented cheques
weekly or even daily by the
ces
bank) with the cash book.
Differences between the
A bank
balance on the bank statement
and the balance in the cash reconciliation
book will be errors or timing
differences, and they should be
Corrections and Items reconciling the
identified and satisfactorily Common explanations
explained. adjustments to the cash corrected cash book balance
book to the bank statement
QUESTION
summary A bank statement shows a balance of $1,200 in credit. An examination

of the statement shows a $500 cheque paid in per the cash book but
not yet on the bank statement and a $1,250 cheque paid out but not yet
on the statement. In addition, the cash book shows deposit interest
received of $50 but this is not yet on the statement. What is the
balance per the cash book?$22,000 debit
A. $1,900 overdrawn
B. $500 overdrawn
C. $1,900 in hand
D. $500 in hand
ANSWER: D $ $
Balance per bank statement 1,200
Add: outstanding lodgements 500
deposit interest not yet credited 50
550
1,750
Less unpresented cheques (1,250)
Balance per cash book 500
CHARTER 17: PREPARATION OF
FINANCIAL STATEMENTS FOR
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Preparation of financial
accounts
Preparation of final
accounts
You should now be able to prepare a set of final accounts for a sole trader from a trial balance after
incorporating period-end adjustments for depreciation, inventory, prepayments, accruals, irrecoverable
debts, and allowances for receivables
Adjustments to
accounts
Draft Trial balance Final Trial balance
Financial statements
summary QUESTION
If an owner takes goods out of inventory for their own use, how is
this dealt with?
A. Credited to drawings at cost
B. Credited to drawings at selling price
C. Debited to drawings at cost
D. Debited to drawings at selling price
ANSWER: C Although we have not specifically covered this

point, you should have realised that goods for own use must be
treated as drawings (and so debited to drawings). If the goods
were transferred at selling price, the business would show a profit
on the sale of the goods that it has not made. So the transaction
must be shown at cost. (Now think about where the credit entry
goes before trying the question from the EQB.)
CHARTER 18: CAPITAL EMPLOYED OF
LIMITED LIABILITY COMPANY
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Limited liability company

2. Share capital
3. Bonus and right issue
4. Loan stocks and bonds
5. Reserves
6. Dividends
7. Statement of changes in
equity
Limited Liability
Company
Unlimited liability means that if the business runs up debts that it is unable to pay, the proprietors will become
personally liable for the unpaid debts and would be required, if necessary, to sell their private possessions to
repay them.
Limited liability means that the maximum amount that an owner stands to lose, in the event that the company
becomes insolvent and cannot pay off its debts, is their share of the capital in the business.
Advantage LL Disadvantag
s C es
► Less risky ► Compliance with national legislation

► Easy to raise fund ► Compliance with national accounting standards
► Easy to transfer share and/or International Financial Reporting Standards
► Tax advantages ► Formation and annual registration costs
Share
Capital
Share
capital
Authorized
/ Legal
capital
Issued capital Unissued

capital
Called
Uncalled
up
capital
capital
Paid up capital Unpaid capital

Bonus and Right
Issues Bonus issues Right issues
Advantages Disadvantages Advantages Disadvantages
► Increases capital without

diluting current ► Does not raise any cash ► Raises cash for the
shareholders' holdings company ► Dilutes shareholders'
► Could jeopardise holdings if they do not
► Capitalise reserves, so payment of future ► Keeps reserves available take up rights issue
they cannot be paid as dividends if profits fall for future dividends
dividends
Objectives Objectives
Increase the share capital

Increase marketability Raise additional financing
Loan Stocks or
Bonds
►
Loan stocks or Bonds
Loan providers are Creditors ►
Share capital
Shareholders are members of a company, while providers of
► A fixed rate of interest loan capital are creditors.
► Loan stock is often secured on company assets, ► Shareholders receive dividends (appropriations of profit)
whereas shares are not. whereas the holders of loan capital are entitled to a fixed rate
of interest (an expense charged against revenue).
► Can take a legal action against a company if their
interest is not paid when due ► Loan capital holders can take legal action against a company
if their interest is not paid when due, whereas shareholders
cannot enforce the payment of dividends
Reserv
es Shareholder’s
equity
Ordinary share
Other equity capital
(reserves) (Irredeemable
preference share)
Revaluatio
Share premium Retained Others
n
earnings
surplus
Non statutory reserves/

Statutory reserves Revenue reserves
reserves which a company is required to reserves consisting of profits which are

set up by law, and which are not distributable as dividends, if the
available for the distribution of company so wishes.
dividends.
Statement of Changes in
Equity
summary QUESTION
Fill in the blanks.
.......... share capital is the par value of shares issued to
shareholders. ............. share capital is the amount payable to
date by the shareholders.
ANSWER:
Issued share capital is the par value of shares issued to
shareholders. Called-up share capital is the amount payable to
date by the shareholders.
CHARTER 19: PREPARATION OF
COMPANIES
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Presentation of FSs (IAS 1)

2. Statement of financial position
3. Statement of profit or loss and
other comprehensive income
Presentation of Financial
Statements
THE PROCESS OF PREPARING FSs
Year-end
Ledger accounts adjustment and Trial balance
Transactions recorded in Trial balance
balanced and Ledger accounts used to prepare
ledger accounts extracted
closed off closed off FSs
DISCLOSED THE ITEMS ON FINANCIAL STATEMENTS
1. Must appear on the face of the SFP, SPL

2. Can appear in a note to FSs instead
3. Recommended formats are given which entities may or may not follow
Statements of Financial
Position
LEARNING OUTCOMES
The statement of financial position makes use of the accounting equation concept that:
Assets = Capital + Liabilities
The statement of financial position is also prepared according to the business entity convention, that a business
is separate from its owners.
Statement of
financial position
Current position
Liabilities
Assets Non-current
position
Equity
The operating cycle of an entity is the time between
the acquisition of assets for processing and their
realisation in cash or cash equivalents.
Statement of profit or loss and other comprehensive
income
Statement of changes in
equity
The statement of profit or loss and other comprehensive income is a straightforward measure of the financial performance of
the entity, in that it shows all items of income and expense recognised in a period. It is then necessary to link this result with
the results of transactions with owners of the business, such as share issues and dividends. The statement making the link
is the statement of changes in equity
Notes to the financial
statements
Disclosure notes are required for a variety of reasons, including:
► to explain the accounting policies used in preparing the accounts
► to explain the movement between the opening and closing balances of major statement of financial positionitems
► to show how certain balances are calculated, and
► to provide further detail/explanation to users of the financial statements, as necessary for the accounts to be
understandable to the users
For examples:
► Tangible non-current assets (Chapter 8) & Intangible non-current assets (Chapter9)
► Provisions (Chapter 11)
► Events after the reporting period (Chapter 21)
► Inventory (Chapter 7)
QUESTION
summary According to IAS 1, which of the following items must appear on

the face of the statement of profit or
loss and other comprehensive income?
1. Tax expense
2. Revenue
3. Cost of sales
4. Profit or loss
A. 4 only
B. 2 and 4 only
C. 1, 2 and 4 only
D. 2 and 3 only
ANSWER: C
CHARTER 20: EVENTS
AFTER
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Definition
Events after the reporting
2. Types of events period
3. Disclosures
Adjusting Non-adjusting
Definitio
n
►
►
Events after the reporting period which provide additional evidence of conditions existing at the reporting date will
cause adjustments to be made to the assets and liabilities in the financialstatements.
IAS 10 Events after the reporting period requires the provision of additional information in order to facilitate such an
understanding. IAS 10 deals with events after the reporting date which may affect the position at the reportingdate.
► Events after the reporting period: An event which could be favourable or unfavourable, that occurs between the
reporting period and the date that the financial statements are authorised for issue. (IAS 10)
► Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the
reporting period.
Adjusting events Non-adjusting events

Events that provide further evidence Events which do not affect the situation
of conditions that existed at the at the reporting date should not be
reporting date should be adjusted for adjusted for, but should be disclosed in
in the financial statements. the financial statements.
Adjusting Events and Non Adjusting
Events
ADJUSTING EVENTS
IAS 10 An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.
► Evidence of a permanent diminution in property value prior to the year end
► Sale of inventory after the end of the reporting period for less than its carrying value at the year end
► Insolvency of a customer with a balance owing at the year end
► Amounts received or paid in respect of legal or insurance claims which were in negotiation at the year end
► Determination after the year end of the sale or purchase price of assets sold or purchased before the year end
► Evidence of a permanent diminution in the value of a long-term investment prior to the year end
► Discovery of fraud or errors that show that the financial statements are incorrect
NON ADJUSTING EVENTS
IAS 10 An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting
period.
► Acquisition, or disposal, of a subsidiary after the year end
► Announcement of a plan to discontinue an operation
► Major purchases and disposals of assets
► Destruction of a production plant by fire after the end of the reporting period
► Announcement or commencing implementation of a major restructuring
► Share transactions after the end of the reporting period
► Litigation commenced after the end of the reporting period.
► Dividends proposed or declared after the end of the reporting period are not recognised as a liability in the accounts at the reporting date,
but are disclosed in the notes to the accounts
summary QUESTION
Which of the following items are adjusting events?
1. Inventory found to have deteriorated
2. Dividends proposed at the year end
3. A building destroyed by fire after the reportingdate
A. 1 only
B. 2 only
C. 3 only
D. None of the above
ANSWER: A. 1 only
CHARTER 21: STATEMENT
OF CASH
FLO
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Preparing Statement of cash

flows The need for a cash flow statement
2. Classification of activities in
cash flows
3. Cash flows accounting
Format of a cash flow statement
Preparation of cash flow statement
Interpretation using a cash flow

statement
Preparing Statement of Cash
flows
Statements of cash flows are a useful addition to the financial statements of a company because accounting
profit is not the only indicator of performance. They concentrate on the sources and uses of cash and are a
useful indicator of a company's liquidity and solvency.
IAS 7
Objectives Scope
Provide information for users of financial statements A statement of cash flows should be presented as an
about an entity's ability to generate cash and cash integral part of an entity's financial statements. All
equivalents, as well as indicating the cash needs of types of entity can provide useful information about
the entity. The statement of cash flows provides cash flows, as the need for cash is universal,
historical information about cash and cash whatever the nature of their revenue-producing
equivalents, classifying cash flows between activities. Therefore all entities are required by the
operating, investing and financing activities. standard to produce a statement of cash flows.
Classification of activities in cash flows
The standard gives the following definitions, the most important of which
are cash and cash equivalents. Operating
► Cash comprises cash on hand and demand deposits. activities
► Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value.
► Cash flows are inflows and outflows of cash and cash equivalents.
Investing
► Operating activities are the principal revenue-producing activities of activities
the enterprise and other activities that are not investing or financing
activities.
► Investing activities are the acquisition and disposal of non-current
assets and other investments not included in cash equivalents.
Financing
► Financing activities are activities that result in changes in the size activities
and composition of the equity capital and borrowings of the entity.
Method
s
2 ways of
Direct method creating a Indirect method
cash flow
statement
net profit or loss is adjusted for

the effects of transactions of a
non- cash nature, any deferrals
disclose major classes of gross or accruals of past or future
cash receipts and gross cash operating cash receipts or
payments payments, and items of income
or expense associated with
investing or financing cash
flows
Indirect
method
The net profit or loss for the period is adjusted for the following:
(a) Changes during the period in inventories, operating receivables and payables
(b) Non-cash items, eg depreciation, provisions, profits/losses on the sales of assets
(c) Other items, the cash flows from which should be classified under investing or financing activities
Indirect
method
Principles
The treatment is logical if you think in terms of cash:
(a)Increase in inventory is treated as negative (in brackets). This is because it represents a cash outflow;
cash is being spent on inventory.
(b)An increase in receivables would be treated as negative for the same reasons; more receivables
means less cash.
(c)By contrast, an increase in payables is positive because cash is being retained and not used to settle
accounts payable. There is therefore more of it.
Step 3
Step 2 Calculate the Step 5
Begin with the cash flow figures Step 4
Step 1 Be able to
reconciliation of for dividends Open up a
Set out the complete the
profit before tax paid, purchase working for the
proforma statement by
to net cash from or sale of NCA, trading, income
statement of slotting in the
operating issue of shares and expense
cash flows figures given or
activities as far and repayment account
calculated
as possible of loans if these
are not already
Cash Flows
Accounting ability to
generate cash
satisfies the more

needs of all comprehensive
users
Advantages
a better means
of comparing the easier to
results prepare
Creditors are
more interested
summary
QUESTION
Fill in the blanks.
The objective of IAS 7 is to provide information for ...... about the company's ability to
generate ............. and ........ ..............
ANSWER:
The objective of IAS 7 is to provide information for users about the company's ability to
generate cash and cash equivalents.
CHARTER 22: INTRODUCTION TO
GROUP AND CONSOLIDATED
CASE
STUDY
DISCUSSION
PANNEL
overview
LEARNING OUTCOMES
1. Group and consolidation

2. Subsidiaries
3. Associates and trade investments
4. Consolidated Financial statements
OVERVIEW
Group
account/consolidation
IAS 27 IAS 28 IFRS 3 IFRS 10 IFRS 11 IFRS 12

Separate financial Investment in Business Consolidated Joint Disclosure of interest
statements associates combinations financial statements arrangements in other entities
Business Controls
present its
Accounting for combinations Consolidated
investments in the Joint venture
associates Recognition financial statements Disclosures
separate financial Joint operations
Equity method Measurement Procedures
statements
(GW, NCI) Investment entities
Introduction to Group
Account Types of Investment
Subsidiaries Associates Joint arrangements Other investments
Acquisition accounted for as

method and Joint ventures using a financial
Accounting
apply full Equity method equity method instrument in line
method
consolidation Joint operations with IAS
procedures 39 or IFRS 9
Significant
Criteria Control Joint Control Other
influence
Share 174 ≥50% 20% to <50% Equal Other

Introduction to Group
Account
No Concepts Definition
1 Control An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through power over the investee
2 Power Existing rights that give the current ability to direct the relevant activities of the
investee
3 Subsidiary An entity that is controlled by another entity
4 Parent An entity that controls one or more subsidiaries
5 Group A parent and all its subsidiaries
6 Associate An entity over which an investor has significant influence and which is neither a
subsidiary nor an interest in a joint venture
7 Significant The power to participate in the financial and operating policy decisions of an
influence investee but it is not control or joint control over those policies
Basic Principles of
Consolidation
► Consolidation means adding together (uncancelled items).
► Consolidation means cancellation of like items internal to thegroup.
► Consolidate as if you owned everything then show the extent to which you do not.
Keep these basic principles in mind as you work through the detailed techniques of consolidated financial statements.
Basic Principles of
Consolidation
owns more than half (ie over 50%) of the voting power of an
entity unless it can be clearly shown that such ownership does
not constitute control (these situations will be very rare)
over more than 50% of the voting rights by virtue of agreement

with other investors
govern the financial and operating policies of the entity by

IFRS 10 Control
statute or under an agreement.
power to appoint or remove a majority of members of the board of

Business entity concepts
directors (or equivalent governing body)
Ignore the legal boundaries power to cast a majority of votes at meetings of the board of
directors
Basic Principles of
Consolidation
Representation on the board of directors (or equivalent)
of the investee
Participation in the policy making process
Significant
Associates Material transactions between investor and investee
influence
Interchange of management personnel

Equity
method
Provision of essential technical information

Consolidated Financial
Statements
Objectives of IFRS 10
Accounting Investment
Consolidated FS Control
requirements entities
Exemption from
preparing group
accounts
a wholly-owned not in the

ultimate or
subsidiary or it is not publicly process of
intermediate
a partially owned traded issuing
parent
subsidiary securities
Statements Non-controlling interest
NCI
be presented in the consolidated statement

The equity in a subsidiary not attributable,
of financial position within equity, separately
directly or indirectly, to a parent
from the parent shareholders’ equity
Group structure
Direct interest Indirect holdings
P P
S 60%
S1 S2 S3
55% 60% SS 70%

80%
Statements Non-controlling interest
NCI
be presented in the consolidated statement

The equity in a subsidiary not attributable,
of financial position within equity, separately
directly or indirectly, to a parent
from the parent shareholders’ equity
Group structure
Direct interest Indirect holdings
P P
S 60%
S1 S2 S3
55% 60% SS 70%

80%
Consolidated statement of financial
position
position The financial statements of a parent and its subsidiaries are combined on a line-by-line basis by
Basic procedures
adding together like items of assets, liabilities, equity, income andexpenses.
Parent Subsidiary Group Action
Investment in subsidiary Portion of equity Eliminated
Intra-group trading Intra-group trading Eliminated
Internal balances Internal balances Eliminated
Dividend received from Dividend paid to parent Eliminated

subsidiary
NCI of net income Adjusted to net income attributedto
owners of parent
NCI of net asset Presented separately in the
consolidated SOFP
Goodwill (GW) IFRS 3
18
3
position
Calculated NCI
Proportionate share Full (fair) value
NCI value = fair value of NCI's holding at acquisition

NCI value = NCI % × S’s net assets at acquisition
(number of shares NCI own × subsidiary share price)
Fair value of NCI in subsidiary just before acquisition
Goodwill attributable to NCI

Goodwi
ll Consideration transferred
INVESTMENT
VALUE
NCI value at acquisition
CARRYING VALUE
OF NET ASSETS Ordinary shares
Subsidiary’s net assets Reserves on acquisition
FAIR VALUE OF
NET ASSETS Fair value of net assets Retained earnings (RE)
Fair value adjustment
GOODWILL GOODWILL
Goodwi
ll Cash paid
Contingent consideration Fair value
Consideration Unwinding discount (PV x cost of capital) is

Deferred consideration discounted
transferred charged to finance cost
Share exchange @ published prices at acquisition date
Lawyers, audit fees, accounting fees are

Expense and issue cost
written off as incurred
Issue costs are deducted from theproceeds
Goodwill impairment Goodwill arising on consolidation is subjected to an annual impairment review and impairment may be
expressed as an amount or as a percentage.
DEBIT Impairment expenses (PL) (Group retained earnings-BS)/ CREDIT Goodwill(BS)
When NCI is valued at fair value the goodwill in the statement of financial position includesgoodwill
attributable to the NCI.
DEBIT Impairment expenses (PL) (Group retained earnings-BS)/ DEBIT NCI/ CREDIT Goodwill(BS)
Intra Group
Transactions
Parent (P) Subsidiary (S) Group Adjustments
P sells at mark-up S buys at mark-up but not Unrealised profit (URP) at P DR Group RE
sells out to customers Closing inventory at S CR Group Inventory (URP)
P buys at mark-up but not S sells at mark-up Unrealised profit at S DR Group RE
sells out to customers Closing inventory at P DR NCI
CR Group Inventory (URP)
P sells Non-current assets at S buys Non-current assets Unrealised profit (URP) at P DR Group RE (URP)
mark-up from P at mark-up NCA at S and unreal CR NCA
additional depreciation at S CR Depreciation
P buys Non-current assets S sells Non-current assets at Unrealised profit (URP) at S DR Group RE (URP)
from S at mark-up mark-up NCA at P and unreal DR NCI
additional depreciation at P CR NCA
CR Depreciation
Consolidated
Procedures
Working Procedures
Working 1 Group structure
P S
Working 2 Net assets of subsidiary At the date of At the reporting Post-acquisition

acquisition date
Share capital (SC) XXX XXX -
Share premium (SP) XXX XXX -
Reserves (RS) XXX XXX XXX
Retained Earnings (RE) XXX XXX XXX
XXX XXX XXX
Fair value adjustment XXX XXX
Fair value of net assets XXX XXX

Consolidated
Procedures
Working Procedures
Working 3 Goodwill
Investment value (IV) XXX
Fair value of net assets (FV) – (W2) (XXX)
Goodwill XXX
Impairment of GW (LOS 3) (XXX)
XXX
Working 4 Non-controlling interest
NCI value at acquisition (LOS 3) XXX
NCI share of post-acquisition reserves (W2) XXX
NCI share of impairment (fair value method only) (XXX)
XXX
Consolidated
Procedures
Working Procedures
Working 5 Group Retained Earnings (RE)
P's retained earnings (100%) XXX
P's % of sub's post-acquisition retained earnings (W2) XXX
Less: Parent share of impairment (W3) (XXX)
XXX
Working 6 Eliminate Intra-group transactions
Working 7 Aggregate assets and liabilities
Working 8 Share capital
Only P’s accounts

Cancellation
entries
No. Contents Notes
W1 Recording fair value of consideration given
DR Investment in S
CR Payable to S Record contingent or deferred consideration
DR RE – P (interest expense)
CR Payable to S Record interest expense on unwinding the discount
W2 Cancellation of carrying value of S’s net assets
DR OS/SP/Reserve – S
DR RE – S @ acq
CR Investment in S
CR NCI
Cancellation
entries
No. Contents Notes
W3 Recording Goodwill and fair value adjustment
DR Goodwill
DR Assets
CR Investment in S
CR NCI
CR Liabilities
DR RE – P Adjusted accumulated depreciation expenses for

depreciable assets
DR NCI
CR Assets
Cancellation
entries
Inter-co sales of Non-current assets
Downstream transaction (P sells to S)
1 DR RE – P (gain) Eliminate gain on sales of assets
CR Assets
2 DR Assets Adjust accumulated depreciation expenses
CR RE - P
Upstream transaction (S sells to P)
1 DR RE – P (gain) Eliminate gain on sales of assets
DR NCI
CR Assets
2 DR Assets Adjust accumulated depreciation expenses
CR RE - P
CR NCI
Cancellation
entries
No. Contents Notes
Inter-co dividend Not affect the SFP
Inter-co payable/receivables
DR Payables
CR Receivables
Payment in transit
1 DR Cash Eliminate payment in transit
CR Receivables
2 DR Payables Eliminate AR/AP
CR Receivables
Cancellation
entries
No. Contents Notes
Inter-co dividend Not affect the SFP
Inter-co payable/receivables
DR Payables
CR Receivables
Payment in transit
1 DR Cash Eliminate payment in transit
CR Receivables
2 DR Payables Eliminate AR/AP
CR Receivables
QUESTION
summary How should trade investments be accounted for in the consolidated

financial statements of the investor?
A. They should be consolidated on a line by line basis.

B. They should be equity accounted for.
C. A percentage of the investment's profits and assets and liabilities
should be consolidated on a line by line basis.
D. The amount paid for the investment at cost should be shown in the
statement of financial position.
ANSWER: D
A trade investment is simply shown as an investment in the statement of
financial position. The investor will only produce consolidated accounts if
they also have subsidiaries.
CHARTER 23: CONSOLIDATED STATEMENT
OF PROFIT AND LOSS AND OTHER
CASE
STUDY
DISCUSSION
PANNEL
overview
1. The consolidated statement of

profit or loss (and other
comprehensive income)
2. Disposals
Consolidated
SOCI
No. Contents Notes
Step 1 Aggregate revenue and expenses (100% P + 100% S)
Step 2 Eliminate intra-group items from both revenue and costs of sales
Goods sold by P. Increase cost of sales by unrealised profit
Goods sold by S. Increase cost of sales by full amount of unrealised profit

and decrease non-controlling interest by their share of unrealisedprofit
Step 3 Fair value adjustment

If the value of S’s NCA have been subjected to FV uplift then any additional
depreciation must be charged to PL. NCI will need to be adjusted for their
share.
Impairment of Goodwill
Eliminate dividend paid by subsidiary DR Dividend income (PL)

DR NCI
CR Retained Earnings (RE)
Consolidated
SOCI
No. Contents Notes
Step 4 Calculate NCI
S’s profit after tax as per statement of P/L XXX
LESS Unrealized profit (*) (XXX)
Profit on disposal of NCA (*) (XXX)
Additional depreciation due to FV adjustments (XXX)
ADD Additional depreciation due to disposal of NCA (*) XXX
XXX
NCI (%) XXX
Step 5 Present profit attributable to owners of P and NCI separately
Notes (*) ALL sales of goods and non-current assets made by subsidiary
Only the post-acquisition profits of the subsidiary are brought intothe

Consolidated PL
Dispos
al
The consolidated statement of profit or loss will include the results of subsidiaries disposed of up to the date
of disposal. When a subsidiary is disposed of, this must be accounted for in both the parent's separate
financial statements and the consolidated financial statements.
Gain to parent company
The gain is reported as an exceptional item – must be disclosed separately on the face of the parent’s P&L
after profit from operations.
Profit/ (loss) on disposal = Sales proceed – carrying amount of investment disposed
Group financial statements

(a) Statement of profit or loss and other comprehensive income
(i) Consolidate results and non-controlling interest to the date of disposal.
(ii) Show the group profit or loss on disposal.
(b) Statement of financial position
There will be no non-controlling interest and no consolidation as there is no subsidiary at the date the
statement of financial position is being prepared.
This gain will be included in the Consolidated SPL
Dispos
al Group carrying amount carrying amount
NCI at date
Sales of net assets at
profit/(loss) on of goodwill at
proceed of disposal
disposal date of disposal date of disposal
carrying amount of net assets at date of disposal

= Net asset b/f + Profit/(loss) for current period to disposal date - Dividends paid prior to disposal
carrying amount of goodwill at date of disposal

= Goodwill at acq date – impairment to date of disposal
NCI at date of disposal

= NCI at acquisition + NCI % of S's retained profits post – acq up to disposal – NCI % ofimpairment
summary
summary
QUESTION
The following information is relevant for questions 1 and 2
Hardy has a 90% subsidiary, Lawrence. During the year ended 31 December 20X2 Lawrence sold goods to Hardy for $25,000,which
was at a mark-up of 25%. At 31 December 20X2 $10,000 of these goods remained unsold.
1. In the consolidated statement of profit or loss for the year ended 31 December 20X2, what will revenue be reducedby?
A. $18,750
B. $22,500
C. $20,000
D. $25,000
ANSWER: D. Revenue is reduced by the full amount of intra-group sales.
2. In the consolidated statement of profit or loss for the year ended 31 December 20X2, what will gross profit be reduced by?
A. $1,800
B. $2,000
C. $2,250
D. $2,500
ANSWER: B. Gross profit is reduced by the element of unrealised profit which is 10,000 25/125 = $2,000.
CHARTER 24: INTERPRETATION OF
CASE
STUDY
DISCUSSION
PANNEL
overview
1. Financial analysis
2. Limitations of ratios analysis Interpretation of financial
3. Ratios statements
Review the raw Ratio

data analysis
Profitabilit Liquidit Efficienc Positio

y y y n
Financial
Analysis
Comparison
s across
companies
Trend
analysis
Financial
analysis
Trend
Analysis Changes in
Different degrees
of diversification
the nature of
the business
Different
Different effects of
production and
government purchasing
Changes in
Trend Unrealistic
depreciation
incentives Comparability policies
accounting analysi rates under
historical cost
between
policies companies
s accounting
The
changing
value of the Different
Different financing
currency accounting
policies
unit being policies
reported
The Broad Categories of
Ratios RATIO
ANALYSIS
Long-term solvency Short-term solvency Efficiency (turnover Shareholders'

Profitability and return
and stability and liquidity ratios) investment ratios
► Return on
capital ► Gearing
employed ► Receivables ratio/leverage
► Net profit as a collection period ► EPS
► Debt ratios
percentage of ► Payables ► Dividend cover
► Gearing ► Current ratio
sales payment period ► Dividend per
ratio/leverage ► Quick ratio
► Asset turnover ► Inventory share
ratio ► Interest cover turnover period ► Price earning
► Gross profit as a ratios
percentage of
sales
The Broad Categories of
Ratios
To help you to understand liquidity ratios, it is useful to begin with a brief explanation of the cash cycle. The
cash cycle describes the flow of cash out of a business and back into it again as a result of normal trading
operations.
The Cash
Cycle
Cash goes out to pay for supplies, wages and salaries and other expenses, although payments can be
delayed by taking some credit. A business might hold inventory for a while and then sell it. Cash will come
back into the business from the sales, although customers might delay payment by themselves taking some
credit.
The main points about the cash cycle are as follows:
► Cash flows out can be postponed by taking credit. Cash flows in can be delayed by having receivables
► The time between making a purchase and making a sale also affects cash flows
► Holding inventories and having payables can therefore be seen as two reasons why cash receipts are
delayed.
► Similarly, taking credit from creditors can be seen as a reason why cash payments are delayed.
The liquidity ratios and working capital turnover ratios are used to test a company's liquidity, length of
cash cycle and investment in working capital.
Limitations of Ratios
Analysis
Information
problems
Comparison
problems:
trend
analysis
Comparison
problems:
across
companies
summary QUESTION
What are the formulae for:
(a) The current ratio?
(b) The quick ratio?
(c) The accounts receivable collection period?
(d) The inventory turnover period?
ANSWER
(a) Current assets/current liabilities
(b) Current assets minus inventories/current liabilities
(c) Trade receivables/credit sales x 365
(d) Inventory/cost of sales x 365

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FINANCIAL

A. The context and purpose of

► Explain the context and purpose of

1. The purpose of financial reporting

1. Financial reporting is a way of recording, Management

1. Businesses of whatever size or nature

Income: Increases in economic benefits

Expenses: Decrease in economic benefits

An asset is a resource controlled by

A liability is a present obligation of

1. The role of the regulatory system.

BUSINESS FINANCIAL INFORMATION FINANCIAL

THE REGULATORY FRAMEWORK

1. A number of factors have shaped the development of financial

1. IFRSs are created in accordance with due process.

IAS 1 - Presentation IAS 24 – Related party IAS 33 - Earnings per

IAS 2 - Inventories IAS 20 - Accounting for IFRS 16 - Leases

Items on BS/PL IFRS 7 - Financial

IFRS 8 - Operating segments

1. The qualitative characteristics of

BUSINESS FINANCIAL INFORMATION FINANCIAL

THE REGULATORY FRAMEWORK

Fundamental qualitative Enhancing qualitative

1. Business transactions Chapter 4 Chapter 5

Sales day book Purchase day book

Sales returns day book Purchase returns day book

q The cash book may be a manual record or a Petty cash book

Transactions Book of prime entry

Your business pays A Brown (a supplier)$450.00

You send D Smith (a customer) an invoice for $650

Your accounts manager asks you for $12 urgently in orderto

You pay D Smith $500

F Jones (a customer) returns goods to the value of $250

You return goods to J Green to the value of $504

F Jones pays you $500

Your business pays A Brown (a supplier)$450.00 Cash book

You pay D Smith $500 Cash book

F Jones pays you $500 Cash book

1. Financial accounting process

SOURCE BOOKS OF LEDGER

BUSINESS FINANCIAL INFORMATION FINANCIAL

DOCUMENTI RECORDING SUMMARISING or PRESENTI

OPENING NET ASSETS CLOSING NET ASSETS

INTRODUCED CAPITAL OPENING NET ASSETS

PROFIT INTRODUCED CAPITAL Retained

DRAWINGS DRAWINGS Reserves

Summary of steps to record a transaction

Receivables (Sales) ledger

QUESTION 2 : The double entry to record a purchase of DR = increase CR = increase

QUESTION 3 : Individual customer accounts are kept in the …………?

The double entry for this type of contra is:

The individual receivable and payable memorandum

Agree the opening

summary 2 During a period, A Co has the following transactions on receivables

ANSWER: A RECEIVABLES CONTROL

Bal b/d (bal. figure) 22,000 Cash 50,000

Bal c/d 95,000

1. The Trial balance (TB)

STATEMENT OF FINANCIAL POSITION

Step 1 Step 2 Step 3 Step 4

Balance sheet ledger accounts Profit or Loss ledger accounts

1. Capital expenditure and

► Acquisition of non-current assets ► Trade of the business