IFRS Financial Accounting

Academic year 2020-2021

Assoc. Prof. ELENA-MIRELA NICHITA

Assist. Prof. ELENA NECHITA
 Introduction
Evaluation
Final written exam = 50% (in session)
Tests during lectures = 15%
Tutorial activities = 35%
(i) 30% Test 1 seminar (covering IAS 16, IAS 38, IAS 36, IAS 37)
(ii) 40 % Test 2 seminar (covering all topics)
(iii) 20% Assignments – online (Homework)
(iv) 10% Participation

Guest speakers:
Prof. Andrei FILIP, ESSEC, Paris.
Cristina GUTU, KPMG

International accreditation: ACCA

References:
Feleaga L. et al. (2018) IFRS Financial Accounting, Bucharest: ASE Publishing House
www.ifrs.org

Agenda:
Week Topic
Week 1 IAS 16 Property, Plant and Equipment (I)
Week 2 IAS 16 Property, Plant and Equipment (II)
Business Case - Financial reports
GlaxoSmithKline
Week 3 IAS 38 Intangibles
Prof. Andrei FILIP
Week 4 IAS 36 Impairment of Assets
Prof. Andrei FILIP
Week 5 IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Prof. Andrei FILIP
Week 6 Mid-term Review
IAS 16 Property Plant and Equipment, IAS 38 Intangible Assets, IAS 36 Impairment of Assets,
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Business Case - Financial reports
Daimler Benz (Mercedes)
Beiersdorf (Nivea)
Week 7 Test 1
Week 8 Conceptual Framework (accounting principles), IAS 2 Inventories (I)
Week 9 IAS 2 Inventories (II)
Business Case - Financial reports
Inditex (Zara)
Week 10 IAS 1 Presentation of Financial Statements (I)
Week 11 IAS 1 Presentation of Financial Statements (II), IAS 7 Statement of Cash Flows (I)
Week 12 IAS 7 Statement of Cash Flows (II)
Business Case - Financial reports
Pandora
AirFrance KLM
Week 13 Test 2
Week 14 Final results, Final review: Q&A
1
 REVIEW

IAS 16 & IAS 36

1. Test my understanding!
a. On 31st March 2016, Golden Star Company purchased an equipment for using it in business. The invoice
for the equipment shows the following:
-k-
Equipment $1,780
Additional parts as management required $ 190
Delivery $ 20
Installation $ 40
Administrative costs (fee to negotiate the acquisition) $ 50
Residual value $ 20

Depreciation method is straight-line over 5 years.

(2) Yearly depreciation (years ending 31 st of March 2017, 2018, 2019) recognised in Golden Star’s
financial statements is __________________.

Income statement: expenses with dep for each year

(3) On 31st of March 2019, the value in use is _____________________.

(4) On 31st of March 2019, the fair value less costs to sell is _____________________.

(5) On 31st of March 2019, the recoverable value is _____________________.

2
(6) Carrying amount of equipment before power failure is _____________________.

(7) At reporting date 31st of March 2019, the impairment of equipment is _______________.

(8) Depreciation after impairment loss (year ending 2020) is __________________.

2 years
Yearly dep = 280k/2yrs= 140k/ yr
(9) The depreciation charge is required to be based on:
A The profitability of the asset being depreciated
B The replacement cost of the asset being depreciated
C The expected useful life of the asset being depreciated
D A period not exceeding 5 years for plant and machinery, and 20 years for buildings and land

b. Oscar Co. acquired its head office on 1 st of January 2011 at a cost of EUR 1 million. The company’s
depreciation policy is to depreciate property over 50 years on a straight-line basis. Estimated residual
value is zero.
On 31st of December 2015, Oscar Co. revalued its head office to EUR 1.6 million.
In accordance with IAS 16 Property plant and equipment the company has elected not to transfer annual
amounts out of revaluation reserves as assets are used.
In 6th of January 2021 storm damage occurred and the recoverable amount of the head office property
fell to EUR 0.58 million.
According to IAS 36, what impairment charge should be recognised in the Statement of comprehensive
income arising from the impairment review in January 2021?

(1) Yearly depreciation before revaluation is 20.000

3
 I need deprecaivle value, dep method and useful life
DV= 1 mil -0= 1 mil
STL
50yrs
Yearle dep = 1mil/50=20.000/ yr

(2) Revaluation:

Carrying amount = cost- acc dep= 1 mil -5*20.000=0..9 mil

Fair value 1.6 mil

= SURPLUS FROM REVALUATION => rev RESERVES =700.000=0.7

(3) Recording the revaluation (entries)

(1) Cancel the acc depreciation

Acc dep= building 100.000
(2) Recording the revaluation (surplus)
Building= rev reserves 700.000

(4) Yearly depreciation after revaluation is __________________

DV= C-RV= 1.6-0=1.6 MIL
STL
45 YRS
Yearle dep = 1.6 mil/ 45yrs= 35.555/ yr

(5) Accumulated depreciation (period 1st of January 2016 – 6ian 2021)

5 years
Acc dep = yearly dep *years =35.555*5=177.775

(6) Carrying amount of office building before storm is _____________________.

CA= COST- ACC DEP – 1.6 m -177.775= 1.422.225

(7) The impairment of office building is _______________.

Impairment= ca-rv= 1.422.225- 580.000= 842.225 (loss)

Only if ca> rv
(8) Recording the impairment loss in accounting (entries):

: revaluated asset
Rev rsseres
% = Impairment 842.225
700.000 Rev reserves
142.225 Expenses with impairment
4
(8) Depreciation after impairment loss is __________________.
Dv= c-rv = 580.000- 0=580.000
Stl
40 yrs
Yearly dep= 580.000/40=14.500

c. When being impaired as part of a cash generating unit, which of the following assets would usually
already be held at recoverable amount, and therefore not usually have any impairment allocated to it?

A Goodwill
B Property
C Trade Receivables
D Patents

d. GK purchased a piece of development land on 31 October 2010 for EUR 500,000. GK revalued the land
on 31 October 2014 to EUR 700,000. The latest valuation report, dated 31 October 2020, values the land at
EUR 450,000. GK has adjusted the land balance shown in non-current assets at 31 October 2020.
Which ONE of the following shows the correct debit entry in GK’s financial statements for the year ended
31 October 2020?

A DR Revaluation reserve EUR 50,000 and DR Statement of profit or loss EUR 200,000
B DR Revaluation reserve EUR 250,000
C DR Revaluation reserve EUR 200,000 and DR Statement of profit or loss EUR 50,000
D DR Statement of profit or loss EUR 250,000

31 oct 2010- 500k

31 oct 2014 700k
SURPLUS 200K (rev reserves)

Value 700.000
31 oct 2020 450.000
Minus 250.000

! revaluated asset
Rev serves= 200k
% = land 250.000
200.000 Rev reserves
50.00 Expenses

e. Silver Co. acquired a piece of equipment on 1st September 2017 for 96,000 EUR and started
depreciation on a straight-line basis over an estimated period of 8 years.
At 31st December 2020, the equipment was tested for impairment as a result of a decrease in demand for
Silver’s products. It was found to have a value in use of 26,000 EUR and the fair value less costs of
disposal was 42,000 EUR.

The recoverable amount is __________ EUR.

5
 The carrying amount before impairment test is ___________ EUR.

The impairment loss is __________ EUR.

f. An asset's carrying amount is $ 25,000. Its fair value less costs of disposal is $ 15,000 and its value in
use is $19,000. There is an impairment loss of:
a) none
b) 4,000
c) 6,000
d) 10,000
e) None, the correct answer is _________.

2. Cash generating unit (CGU)

a. Define CGU.

b. Case study
A cash generating unit comprises the following:
Building 150,000 EUR
Plant and equipment 350,000 EUR
Brand 125,000 EUR
Goodwill 45,000 EUR
Current assets 100,000 EUR.
Following a downturn in the market, an impairment review has been undertaken and the recoverable
amount of cash generating unit is estimated to be 570,000 EUR. The brand is considered fully impaired.

What is the impairment loss of cash generating unit?

Answer: ___________ EUR

CA= SUMA LOR = 770.000

RA= 570.000
IMP LOSS OF 200.000

Initial Impaiment After

BUILDING 150 9 141
PPE 350 21 329
BRAND 125 125 0
GW 45 45 0
CA 100 0 100
TOTAL 770 200 570

RULES:
6
 1. GW
2. Other intangibles asstes/ intangibles => brand (fully impaoird)
3. Never alocate impairment to CA
4. Restul se distrib proportional – tabgible asseta
BUILD 150 (30%)
PPE 350 (70%)
TOTAL 500
Impairment will be allocated to Ta= 30K

IMP allocated for building = 150/500*30=9

What is the carrying amount of building after the adjusting for the impairment loss?
Answer: ___________ EUR

What is the carrying amount of plant and equipment after the adjusting for the impairment loss?
Answer: ___________ EUR

What is the carrying amount of brand after the adjusting for the impairment loss?
Answer: ___________ EUR

What is the carrying amount of goodwill after the adjusting for the impairment loss?
Answer: ___________ EUR

What is the carrying amount of current assets after the adjusting for the impairment loss?
Answer: ___________ EUR

7
 IAS 37 Provisions, Contingent Liabilities and Contingent Assets

1. Define provisions.

2. Define contingent liability.

3. Define contingent asset.

4. Clients’ warranties
Walter Company sells devices for cardio equipment for fitness clubs and has a policy of offering a two-
year guarantee for the goods it sells. Based on previous years’ information, the entity established that
4% of the goods were returned for major defects and 8% were returned for minor defects, while the rest
of the products were not defective.
Minor defects cost, on average, 7 EUR / unit.
Major defects cost, on average, 33 EUR / unit.
If needed, the product is replaced. For the last 2 years, this wasn’t the case.
In the current year, Walter Company sold 1,200 devices.
Analyse the implication for the entity’s financial statements in terms of the policy for guarantees,
according to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

8
5. Provision for dismantling the assets
At the beginning of financial year 2019, company Alpha Trading Ltd. purchased an equipment at the
acquisition price of 475,000 lei. Operating in a protected area, at the end of useful life of assets, Alpha
Trading Ltd. has to remove the asset and to restore the vegetation. All these costs are estimated to
25,000 lei. Managers estimate a useful life of 5 years and the depreciation method that fits best the
equipment usage is the straight-line method.
Which is the correct accounting treatment for the asset according to IAS 16 Property, Plant and
Equipment and IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

9
 IAS 2 Inventories

Based on the lecture materials, identify the elements included in the acquisition cost of inventories.

Enumerate the options to obtain an inventory item.

Initial recognition Cost Example of items part of the cost

Case studies.

1. Initial recognition - acquisition. Stylish Shoes S.R.L. is a local shoes retailer. In October 20X8, the
company purchases 5,000 pairs of shoes from its Italian supplier LeScarpe S.R.L. at a purchase price of
25 euro/pair. Also, the supplier offers a 2% trade discount. The NBR exchange rate at the acquisition
date is 4.6 lei/euro. For the delivery of the goods, Stylish Shoes S.R.L. uses a local supplier, Fast
Courier S.R.L., which issues an invoice in amount of 5,000 lei, VAT 19%.

Determine the acquisition cost of the shoes and present the corresponding accounting treatment
according to IAS 2.

10
2. a. Initial recognition – production. Company Authentic Products Ltd. purchased in March 2021 raw
materials in amount of 10,000 RON, in addition to the inventory of 5,000 RON worth of raw materials
at the beginning of March, and still had 3,000 RON of them at the end of the month.
During the month, the company incurs salaries of 20,000 RON for the production personnel, 15,000
RON for the employees in distribution, and 10,000 RON for administrative workers.
Of the monthly usage of equipment, recognised as depreciation costs of 60,000 RON, ¾ correspond to
production facilities, and the rest equally to distribution and administration. The entity’s total
consumption of utilities for March amounts to 20,000 RON, of which 12,000 RON is attributable to
manufacturing operations and the rest to administrative purposes.

Determine the cost of the finished goods obtained by the entity in March 2021 according to IAS 2.

2. b. Initial recognition – production. A company which makes only one type of product incurs fixed
production overheads of €18,000 for an accounting year. Actual production during the year was 2,040
units. Normal production is 2,400 units per annum. The raw materials expenses are €20,000, salaries for
workers €45,000, advertising expenses (TV and radio campaign) €5,000.
Compute the production cost of finished good. according to IAS 2.

11
3. Measurement at disposal – Cost formulas. On 01.12.2020, Retailers Co. opening balance of
merchandise consists of 100,000 lei (1,000 pcs x 100 lei/pc.). During December, the following
transactions took place with respect to the merchandise inventory:
- On 03.12.2020, the company purchases 1,000 pieces at the unit price of 110 lei/piece, delivery costs in
amount of 10,000 lei;
- On 15.12.2020 1,200 pieces are sold at a selling price of 150 lei/piece;
- On 18.12.2020, the company purchases 200 pieces at the unit price of 160 lei/piece, with a trade
discount of 10%;
- On 23.12.2020 900 pieces are sold at a selling price of 175 lei/piece.

Requirements:
a. Determine the cost of merchandise sold and the merchandise ending balance at 31.12.2020,
knowing that FIFO (first-in, first-out) cost formula is used for the disposal of goods, according to
IAS 2 Inventories.

FIFO
WAC OR AVCO

INPUT/ OUTPUT CLOSING BALANCE

Q cost value q cost Value
01.12.2020 1000 100 100.000
03.12.2020 1.000 120 120.000 1000 100 100.000
Input 1000 120 120.000
=2.000 =220.000
15.12.2020 1200 800 120 96.000
Output First 1.000 100 100.000
Then 200 120 24.000
18.12.2020 200 144 28.000 800 120 96.000+
Input 200 144 28.800
= 124.800
23.12.2020 900
output First 800 120 96.000 100 144 14.400
Then 100 144 14.400

3.12.2020 cost of aqc= price 110*1000+ transportation 10.000= 110.000+10.000= 120.000

Acq cost per unit= 120.000/1.000= 120 lei/ unit

12
13
 b. Determine the cost of merchandise sold and the merchandise ending balance at 31.12.2020,
knowing that WAC (Weighted average cost) or AVCO (Average Cost) is used as cost formula
for the disposal of goods, according to IAS 2 Inventories.

INPUT/ OUTPUT CLOSING BALANCE

Q cost value q cost Value
01.12.2020 1.000 100 100.000
03.12.2020 1.000 120 120.000 2.000 AVCO1= 220.000
Input 110
15.12.2020 1.200 110= 132.000 800 AVCO1= 88.000
Output AVCO1 110
18.12.2020 200 144 28.800 1.000 AVCO2 116.800
Input 116.8
23.12.2020 900 116.8 105.120 100 AVCO2 11.680
output 116.8

AVCO= (1.000*100+1000*120)/(2000)= 110 lei/ unit

AVCO2 =800*110+200*144)/1000= 116.8 lei/ unit

14
 c. Analyse the impact in the financial statements after applying the cost formulas allowed by IAS 2.
USE JUST COSTS FOR TABLES!!!!!! AQ COST OR PRODUCTION COST
Impacted FIFO WAC (AVCO)
financial
statement
Costs (disposal) IS 15.12.2020= 124.000 15.12.2020= 132.000
FIFO COST IS 23.12.2020= 110.40 23.12.2020= 105.120
lower that TOTAL 234.400 TOTAL 237.120
AVCO
Revenue (selling IS 15.12.2020= 1200*150= 15.12.2020= 1200*150=
price) 180.000 180.000
Sale 23.12.2020= 900*175= 157.500 23.12.2020= 900*175=
NO IMPACT TOTAL 337.500 157.500
ON REVENUE TOTAL 337.500
Profit / Loss IS- bottom Rev- exp= 103.00 profit 100.380 profit
Profit HIGHER line
in FIFO THAN BS- Capital
IN AVCO and reserved
OE
Ending balance N/A 100 100
of inventory Just for
(quantity) internal acc
Ending balance BS 14.400 11.680
of inventory Inventories
(value)
FIFO IS HIGHE
RTHAN AVCO

Test my understanding!
4. On 01.12.2020, Smart Goods Co. opening balance of merchandise consists of 2,200 lei (100 pcs x 22
lei/pc.).
During December, the following transactions took place with respect to the merchandise inventory:
- On 03.12.2020, the company purchases 500 pieces at the unit cost of 25 lei/piece;
- On 15.12.2020, 1,000 pieces are sold at a selling price of 75 lei/piece;
- On 18.12.2020, 900 pieces are sold at a selling price of 75 lei/piece;
- On 22.12.2020, company purchases 500 pieces at the unit cost of 28 lei/piece.

15
Requirements:
a. Determine the cost of merchandise sold and the merchandise ending balance at 31.12.2020, knowing
that FIFO cost formula is used for the disposal of goods, according to IAS 2 Inventories.

b. Fill in with values the following statements:

(1) The cost of merchandise recorded on 15.12.2020 is _____________________________ lei.

(2) The revenues from sale of merchandise recorded on 18.12.2020 is _________________ lei.
(3) The ending balance of merchandise is ___________pieces, valuing ________________ lei.

MIN( COST, NRV)

COST=> ACQ COST or prod cost

NRV= estimation

5. Measurement in the statement of financial position. The following information is known about
finished goods FG1, FG2 and FG3 in financial year 20X1:

Finished good Cost of production Net realisable value MIN

FG1 100,000 110,000 100.000
FG2 150,000 170,000 150.000
FG3 250,000 170,000 170.000 WRITEDOWN
IN VALUE of FG
(expense)
Total 500,000 450,000

IAS 2 ; EXP WITH INVENTORY = INVENTORY 80.000

ROMANIAN STADARD: EXP WITH ADJUSMENTS= WRITEDOWN IN INVENNTORY 80.000
For financial year 20X2, knowing that no transactions with the 3 types of finished goods took place
during the year, the following data is applied for their measurement:

Finished good Cost Net realisable value min

FG1 100,000 110,000 100.000
FG2 150,000 170,000 150.000
FG3 250,000 200,000 200.000 (WRITEDOWN
IN VALUE OF FG
500,000 480,000
Total

REVERSE 30.000
IAS2: IVENTORY= REVENUE WITH INVENTORY ---- JUST FOR ADJUSMENTS 30.000

16
Ro version: WRITEDOWN IN INV = REVENUE FROM CANCELATION OF
WRITEDOWN/RESERSAL

In accordance with IAS 2, which are the amounts the finished goods will be disclosed at in the
company’s statement of financial position of 20X1 and 20X2? To this respect, journalise the necessary
adjustments, if case.

17
Homework.

1. During April 20X9 the following transactions take place with respect to a raw materials inventory:
1) 10.04., acquisition of 500 pieces raw materials at the price of 100 CU/piece, with a trade
discount of 10%; il iau in considerare IGNOR DOARE DACA E FINANCIAL DISCOUNT
2)
3) 15.04., acquisition of 300 pieces raw materials at the price of 110 CU/piece and a delivery fee
1,000 CU;
4) 20.04., consumption of 600 pieces raw materials.
The opening balance of raw materials on 01.04.20X9 is 0.
Requirements:
a. Journalise all the transaction in April 20X9, under FIFO cost formula according to IAS 2;
b. Journalise all the transaction in April 20X9, under WAC (AVCO) cost formula according to IAS
2;
c. Analyse the impact of each formula on key financial indicators included in the table:

Impacted FIFO WAC (AVCO)

financial
statement
Costs (disposal) IS 15.12.2020= 124.000 15.12.2020= 132.000
FIFO COST IS 23.12.2020= 110.40 23.12.2020= 105.120
lower that TOTAL 234.400 TOTAL 237.120
AVCO
Revenue (selling IS 15.12.2020= 1200*150= 15.12.2020= 1200*150=
price) 180.000 180.000
Sale 23.12.2020= 900*175= 157.500 23.12.2020= 900*175=
NO IMPACT TOTAL 337.500 157.500
ON REVENUE TOTAL 337.500
Profit / Loss IS- bottom Rev- exp= 103.00 profit 100.380 profit
Profit HIGHER line
in FIFO THAN BS- Capital
IN AVCO and reserved
OE
Ending balance N/A 100 100
of inventory Just for
(quantity) internal acc
Ending balance BS 14.400 11.680
of inventory Inventories
(value)

18
 FIFO IS HIGHE
RTHAN AVCO

2. The following information is known about the merchandise inventory of Vintage Furniture at the end
of 2020:

Merchandise Acquisition Cost (lei) Net realisable value (lei)

Sofas 32,870 30,500
Chairs 44,120 40,200
Furniture 178,900 190,500
Beds 48,400 41,200

Compute the adjustments for each item of furniture and advise the company of how to recognise it in the
financial reports.

3. Which of the following statements define the concept ‘net realisable value’?
a) The estimated selling price in the ordinary course of business plus the estimated costs of
completion less the estimated costs necessary to make the sale
b) The estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale
c) The estimated cost of completion less selling price in the ordinary course of business
d) The estimated costs necessary to make the sale plus selling price in the ordinary course of
business less the estimated costs of completion

4. Which of the following does the cost (acquisition and production) of inventories comprise?
a) Costs of purchase
b) Costs of conversion
c) Costs incurred in bringing the inventories to their present location
d) Costs incurred in bringing the inventories to their present condition
e) A and C
f) All of the above

5. Which of the following items cannot be included in the production cost of inventories?

a) Fixed production overheads
b) Direct costs (e.g. raw materials and wages)
c) Variable production overheads
d) The cost of abnormal wastage of materials and labour

6. The net realisable value of inventories is defined by IAS2 as:

a) Selling price
b) Selling price less costs of completion
c) Selling price less costs of completion and selling costs
d) Acquisition cost

7. On 31 December, a company has partly-completed inventory with a cost to date of €26,300. It is

expected that further costs of €8,900 will be incurred in order to complete the inventory. It will then be
sold for €47,500. Selling costs will be €2,000. The cost and the net realisable value of this inventory at
31 December are:
19
 a) €26,300 and €36,600
b) €35,200 and €47,500
c) €26,300 and €38,600
d) €35,200 and €45,500
e) None, the correct answer is__________

8. At the end of an accounting period, the cost of a company's inventory is €450,000. This includes
damaged items with a cost of €25,000 which are expected to be sold for only €10,000 (less selling
expenses of 5%). All other items of inventory have a net realisable value which exceeds cost.
The amount at which the company's inventory should be recognised at the end of the period is:
a) 435,000
b) 425,000
c) 450,000
d) 434,500
e) None, the correct answer is__________

9. A company which makes only one type of product incurs fixed production overheads of €180,000 for
an accounting year. Actual production during the year was 24,000 units. Normal production is 30,000
units per annum. The amount of fixed production overheads that should be allocated to each unit of
production is:
a) €30
b) €7.50
c) €6
d) None, the correct answer is__________

IASB Conceptual Framework for Financial Reporting

Topics on the IASB Conceptual Framework

1. Users of accounting information

a. Users and their needs

Category of users What they want? Examples of information

Investors

Financial creditors
(banks, lenders)

Others – (Based on recommended Bibliography, fill in the subsequent rows)

Government

20
 Customers

Employees

Suppliers

Public

b. Which of the following items in the financial statements of a company would be a particular interest
to a customer?
a. Operating profit
b. Retained earnings
c. Dividend payments
d. Directors remuneration

c. Which of the following groups of users would primary be interested in a company’s annual financial
reports?
a. Shareholders and suppliers
b. Management and employees
c. Shareholders and providers of finance
d. General public, environmental NGOs

d. Analyse the group of users reported by Orange Company – report uploaded on online.ase.ro.

2. Characteristics of accounting information

Based on your course materials identify:

a. The fundamental characteristics of accounting information

b. The enhancing characteristics of accounting information

21
3. Going concern and Accrual accounting

a. Based on the course materials discuss the Going concern concept.

b. Case study.
Pacific Ltd commences business on 1st January and buys inventory of 20 washing machines, each
costing 100 EURO. During the year they sell 17 machines at 150 EURO selling price each. How should
the remaining machines be valued at 31st December in the following circumstances?
(a) They are forced to close down the business at the end of year and the remaining machines will be
sold only 60 EURO each in a forced sale.
(b) They intend to continue the business into the next year.

c. Based on the course materials, discuss the Accrual accounting concept.

d. Case study.
Amma sells T-shirts. The company purchased (on credit) 20 T-shirts at the cost of 5 euro each and sold
12 of them (on cash) at the price of 8 euro each.
Compute the profit/loss, value of remaining inventory (closing balance), and the variation in cash (cash
flow).

22
Amma sells T-shirts. The company purchased (on cash) 20 T-shirts at the cost of 5 euro each and sold
12 of them (on credit) them at the price of 8 euro each.
Compute the profit/loss, value of remaining inventory (closing balance), and the variation in cash (cash
flow).

IAS 1 Presentation of financial statements

The set of financial statements comprises:

The elements disclosed in the Statement of Financial Position (Balance sheet) include:

Policies to prepare the Statement of Financial Position (Balance sheet) refer to:
a. Classification of assets

23
 b. Classification of liabilities

Case studies.
1. The following elements are extracted from the financial documents of Rainbow Co. at the end of year
2020 (in alphabetical order):
 advance payments to suppliers for merchandise 200 lei,
 buildings 7,500 lei, NCA
 cash at banks 4,500 lei, CA
 current profit 1,000 lei, E
 customers 600 lei, CA
 deferred income 600 lei, CL
 equipment 8,000 lei, NCA
 goods for resale 350 lei, CA
 investments in other entities 200 lei (out of which 100 lei will be sold within 12 months),
CA- NCA 100 EACH
 long term loans 3,000 lei (out of which 200 lei due in the following year as current
annual instalment), 200- CL 2800 NCA
 profit tax payable 100 lei, CL
 provisions 300 lei, CL
 rent paid in advance for the next 3 months 300 lei, CA
 reserves 500 lei, E
 retained earnings X lei – to be determined, E
 share capital 200 lei, E
 short-term financial investments 300 lei (out of which 100 lei being held as warranty for
a loan due in 5 years), CA NCA

24
  short-term loans at banks 800 lei (for the amount of 250 lei the due date was postponed
by 2 years), CL NCL
 suppliers 1,500 lei. CL

Rainbow Co. prepares the Statement of financial position using the horizontal layout, assets are
classified from highly liquid to less liquid, and liabilities from short-term to long-term.

Determine the retained earnings and prepare the statement of financial position according to IAS 1.

A=L+E
A- DE LA CELE MAI LICHIDE PANA LA NON CLC DECI => 1st CA then NCA
L- from ST TO LT

(pretentii) Claims= L+E

Rainbow Co. (entity)

Statement of financial position

For the year ended 31.12.2020

Items Values (lei

Current assets 6250
Cash at banks 4500
Investments financial 200
Investment in other companies 100
Goods for relase 350
Customers 600
Advance patments 200
Rent paid in advance 300
Non-current assets 15700
Building 7500
Equipmants 8000
Investments financial 100
Investment in other companies 100
TOTAL ASSETS 21950
Current liabilities 3250
Deffered income 600
Income tax on prifit 100
Provision 300
Suppliers 1500
LONG TERM BANK LOANS 200
Short term loans at banks 550

Non-current liabilities 3050

LONG TERM BANK LOANS 2800
25
 Short term loans at banks 250
Owners’ equity 15650
Share capital 200
Current profit 1000
Reserves 500
Retained earnings – X= A- L-E= 13950 13950
TOTAL OWNERS’ EQUITY AND LIABILITIES

Analyse the Statement of Financial Position prepared for the following companies (uploaded on
online.ase.ro):
a. Aston Martin

b. Swatch

c. Iceland air

Homework.
The following elements are extracted from Fashion Today Ltd. financial documents: reserves 500 lei,
suppliers 150,000 lei (out of which 100,000 lei due in a period that exceeds 12 months), headquarter
building 150.000 lei, buildings depreciation 72,000 lei, equipment 280,000 lei, equipment depreciation
125,000 lei, investments in Green Life Co. 40,000 (out of which 10,000 lei will be sold within 12
months), long term loans 300,000 lei (out of which 5% due in the following year), lease contract
123,000 lei (out of which 5% due in the following year) merchandise 35,000 lei, software 15,000 lei,
prepaid rent 20,000 lei, share capital 2,000 lei, cash in banks 6,000 lei, salaries to be paid 24,000 lei,
current profit or loss – to be determined.

Fashion Today Ltd. prepares the Statement of financial position using the vertical layout, assets are
classified from less liquid to highly liquid, and liabilities from long-term to short-term.

Prepare the Statement of financial position according to IAS 1 at the end of year 2020.

____________________________ (entity)

______________________________________

________________

26
27
Workings.

28
 IAS 1 Presentation of financial statements (cont.)

The elements disclosed in the Statement of Comprehensive Income are:

Policies to prepare the Statement of Comprehensive Income refer to:

a. Classification of expenses and revenues

b. Layout of reporting

Case studies.
1. Use the following information extracted from the accounting documents of Metropolis Ltd. for the
year 2020, to prepare the Statement of comprehensive income according to IAS 1, applying the
classification of expenses by nature and by function (all amounts are disclosed in lei):
- raw materials expenses 13,000;
- expenses with wages and salaries 150,000 (of which 85,000 for production, 35,000 for distribution,
and 15,000 for administrative personnel, and 15,000 for researchers);
- interest expenses 1,000;
- expenses with merchandise 15,000;

29
- expenses with services rendered by third parties 100,000 CU (of which 30% for production, 50%
distribution, 10% administration purposes, 10% research activity);
- revenues from the sale of merchandise 25,000;
- expenses with depreciation 20,000 (of which 60% for production, 20% distribution, 10%
administration purposes, 10% research activity);
- revenue from sales of finished goods 550,000;
- expenses with utilities 50,000 (of which 40,000 for production, 9,000 distribution, 1,000
administration purposes);
- revenue from exchange rate differences 1,500;
- revaluation surplus (revaluation of non-current assets) 4,000.

Additional information:
In case of profit, assume income tax rate of 30%.
The company opts for reporting the Statement of comprehensive income in a single statement.

a. Classification by nature
Company _______________
Statement of comprehensive income
Date __________________

Operating revenue

Operating expenses

Operating Profit or Loss

Financial revenue

Financial expenses

Financial Profit or Loss

Profit before tax
Income tax
Net income for the year
Other comprehensive income
Gains
Losses
Comprehensive income for the year

30
 b. Classification by function

Classification Functions Total

by function expenses

Classification
by nature

TOTAL

Company _______________
Statement of comprehensive income
Date __________________

SALES (Turnover)

COST of GOODS SOLD (cost of sales)

Gross profit
Other operating revenue
Administrative costs
Distribution / Marketing costs
Research costs
Other operating expenses
Finance costs

Profit before tax

Income tax
Net income for the year
Other comprehensive income
Gains
Losses
Comprehensive income for the year

31
Homework.
Prepare both statement of financial position and statement of profit or loss for company Apollo Co. at
31.12.2020 in accordance with IAS 1, based on the following information: advance payments to
suppliers for raw materials 20,000 CU, deferred revenues from rent 120,000 CU, expenses with rent and
royalties 15,000 CU, short-term financial investments 150,000 CU, investments in other entities 150,000
(out of which 100,000 CU will be sold within 12 months), revenue from sales of finished goods 610,000
CU, buildings (carrying amount) 750,000 CU, equipment 207,000 CU, expenses with depreciation
107,000 CU, goods for resale 250,000 CU, interest expenses 25,000 CU, accumulated depreciation of
equipment 57,000 CU, long-term loans received 2,000,000 CU (out of which, 5% is payable in the next
year), retained earnings (profit) 150,000 CU, wages and salaries expenses 120,000 CU, salaries to be
paid 50,000 CU, revenues from services rendered 250,000 CU, cash at banks 300,000 CU, energy, fuel
and postage (utilities) costs 50,000 CU.

In order to prepare the company’s financial statements, determine the current profit or loss, as well as
the share capital.
Do not compute income tax, in case of profit.

Policies for preparing the financial statements:

a. Statement of financial position is using horizontal layout, starting with non-current assets, and
liabilities are organised starting with non-current liabilities, followed by current liabilities.
b. Statement of comprehensive income is reported in a single statement and uses classification of
expenses by their nature.

IAS 7 The statement of cash flows

32
Explain the following concepts:

- Cash

- Cash equivalents

Provide a synonym for cash inflows and cash outflows.

Name the categories of activities under which IAS 7 recommends to classify cash flows:

In which category is it possible to classify dividends and interest paid? What about dividends and
interest received?

Case studies.

33
1. The following information is known for company Beta Trading Ltd.:
- initial balance (IB) salaries payable = 500 lei
- ending balance (EB) salaries payable = 600 lei
- expenses with salaries for the current period = 700 lei.

Determine the cash flow from the payment of salaries.

A: IB+ INCREASES= EB + DECREASES
IB+REVENUES = EB+ CASH INFLOW

L: IB+INCREASES= CB+ DECREASES

IB+EXPENSES=EB + CASH OUTFLOWN

500+700= 600+ CASH OUTFLOWS

THE SALARIES PAID ARE = 600 LEI => OPERATING

2. The following information is known for company Gamma Services Inc.:

- income tax payable at the beginning of the financial year 200 lei
- income tax payable at the end of the financial year 500 lei
- income tax expense for the current period 400 lei.

Reconcile the cash flow related to payments of income tax.

200+400=500+ Cash outflow

 income tax paid =100 OP

3. Categorize the following items into activities of cash flows.

Prepare the Statement of Cash Flows for Silver Company using the following information

Activity
 inflows from customers lei 3,000 O
 outflows to suppliers lei 15,000 O
 outflows to employees lei 2,500 O
 interest payments lei 100 2
OPTIONS:
O OR F
 income tax payments lei 6,000 O
 outflows for purchases of lands lei 1,000 I
 outflows for purchases of equipment lei 14,000 I
 inflows from sales of equipment lei 5,000 I
 dividends collected lei 12,000 O OR I
 inflows from long-term bank loans lei 8,500 F
 payments related to a lease contract lei 5,000 F
 inflows from sales of investments lei 1,500 I
 receipts from shares issues lei 20,000 F

34
Additional information for preparing the cash flow statement:
Cash at the beginning of the year lei 2,000.
Cash equivalents at the beginning of year lei 150.
Silver Co. opts for presenting interest cash flows under operating activities and dividends cash
flows outside the operating activities.

Silver CO.
SCF, dec 31st 2020 lei
Operating cash inflows
inflows from customers 3.000
Operating cash inflows 3.000
Operating cash outflows
 outflows to suppliers 15.000
 outflows to employees 2.000
Interest payments 100
Income tax payments 6.000
Operating cash outflows op act 23.600

CASH FLOW (INF- OUT) (20.600)

Cash inf from inv act
Inf from sale of equipment 5.000
Inf from sale of investments 1.500
Cash inflow from inv act 6.500
Cash outflow from inv act

35
36
Homework.

1. The following information is known for company Bethesda Ltd.:

- initial balance (IB) long-term bank loans = 1500 lei
- ending balance (EB) long-term bank loans = 600 lei
- new loans received during the period = 700 lei.

Determine the financing cash flows.

2. Categorize the following items into activities of cash flows.

Prepare the Statement of Cash Flows for Famous Company using the following information:

Activity
 cash inflows from shareholders lei 9,800 FIN
 dividends paid lei 500 FIN
 income tax payments lei 970 OP
 inflows from customers lei 3,000 OP
 inflows from long-term bank loans lei 7,500 FIN
 inflows from sales of equipment lei 550 INV
 interest payments lei 100 OP
 outflows for purchases of equipment lei 4,000 INV
 outflows for purchases of investments lei 1,000 INV
 outflows to employees lei 1,100 OP
37
  outflows to suppliers lei 4,800 OP
 payments of the current instalment of a bank lei 500 FIN
loan
 rent paid in advance lei 300 OP

Additional information for preparing the cash flow statement:

Cash at the beginning of the year lei 200.
Famous Co. opts for presenting interest cash flows under operating activities and dividends cash
flows outside the operating activities.

IAS 7 Statement of cash flows (cont.)

Indirect method

Indicate below the necessary steps when preparing the operating cash flows by applying indirect
method.

Remember: Only the operating cash flows may be calculated using both methods!

Direct method Indirect method

38
 (cash inflow – cash outflow) ……………………………
Operating cash flow
Investing cash flow
Financing cash flow

Case studies.

1. The following information is available about the transactions of Max Company for the year ended 31
December 2020:

Depreciation Lei 880

Cash paid for expenses Lei 2,270
Increase in inventories Lei 370
Cash paid for employees Lei 2,820
Decrease in receivables Lei 280
Cash paid to suppliers Lei 4,940
Decrease in payables Lei 390
Cash received from customers Lei 12,800
Profit before taxation Lei 2,370

Compute the net cash flow for Max Company:

a) Using the direct method (approach)
b) Using the indirect method (approach).

Direct method (cash inflow – cash

Indirect method
outflow)

39
2. On December 31, 2020, the inventories of Turner Co. increased with 2,000 lei, the current liabilities
decreased with 3,000 lei, and receivables with 1,000 lei. The company registered 1,200 lei profit by
selling non-current assets, and other tangibles were revaluated by 5,000 lei. Expenses with the
depreciation of PPE for the year is 5,000 lei and intangibles’ amortization is 400 lei. The profit before
tax for the year 2020 is 10,000 lei.
Compute net operating cash flows.

3. The following elements are extracted from the financial documents of Best Products Ltd.:

Value No impact
Operating Investing Financing
(EUR) on CF
Expenses with non-current assets 320
depreciation
Inventories as at 01.01.N 500
Suppliers as at 31.12.N 900
Interest expenses 120
Profit before income tax 1,700
Payments for the acquisition of 300
shares on the stock exchange
(long-term investments)
Cash receipts from issuing new 100
shares (increase of share capital
through cash contribution)
Clients as at 01.01.N 300
Revenues from the sale of non- 20
current assets (cashed in)
Suppliers as at 01.01.N 580
Share capital contributions through 500
property, plant and equipment
Inventories as at 31.12.N 450
Receive of a long-term loan 600
Expenses with the sale of non- 100
current assets
Clients as at 31.12.N 600
Expenses with income tax 500
40
 Value No impact
Operating Investing Financing
(EUR) on CF
Repayments of long-term bank 300
loans
Income tax payable as at 01.01.N 450
Income tax payable as at 31.12.N 250
Interest payments 50
Payments to suppliers of non- 150
current assets

Cash and cash equivalents at the beginning of the financial year are 460.
Interest and dividends are not classified under operating activities.

Requirement: Prepare the Statement of cash flows as at 31.12.2020.

41
42
4. Consider the following items: profit before tax 25,000 lei, depreciation expenses 1,700 lei, exchange
rate loss 1,200 lei, financial revenues 3,600 lei, receivables: opening balance 4,000 lei, ending (closing)
balance 4,600 lei; inventories: opening balance 7,000 lei, ending (closing) balance 1,500 lei; accounts
payable: opening balance 4,600 lei, ending (closing) balance 3,500 lei, interest paid related to operating
activities 1,200 lei, income tax paid 1,400 lei, insurance cashed in 200 lei.
The net operating cash flow is:
a) lei 15,700
b) lei 24,500
c) lei 24,300
d) lei 15,900
e) lei 25,700

Quiz. Here is a cash flow statement prepared by a junior accountant:

Operating cash flow EUR Your

comment
Profit before taxes 28
Non-current assets’ depreciation (9)
Profit before changes in working capital 19
Decrease in inventories 3
Increase in receivables (4)
Increase in current liabilities (8)
Net operating cash flow 10

Is this cash flow statement correct?

Homework.

1. The following information is available about the transactions of Smart company for the year
ended 31 December 2020:

Depreciation Lei 880

Cash paid for travel expenses Lei 2,270
Cash paid for employees Lei 2,820
Cash paid to suppliers Lei 4,940
Cash received from customers Lei 12,800
Cash received from bank as a long-term Lei 8,940
loan
Profit before taxation Lei 2,370
Cash paid to shareholders Lei 1,270

Compute the operating cash flows for Smart company. Pay attention to the items not included as cash
flows.

43
 2. The following elements are extracted from the financial documents of Rocket Ltd.:

Value
Operating Investing Financing
(EUR)
Cash receipts from issuing new shares (increase of 1,100
share capital through cash contribution)
Income tax paid 100
Acquisition in cash of non-current assets 1,000
Interest paid 100
Interest received 100
Payments for the acquisition of shares on the stock 1,100
exchange (long-term investments)
Payments to suppliers of merchandise 100
Receive of a long-term loan 1,100
Repayments of long-term bank loans 100
Revenues from the sale of non-current assets (cashed 1,100
in)
Salaries paid 1,100
Rent received in advance (3 months) in cash 100
Cash received from services rendered to customers 1,100
TOTAL
*Interest and dividends received and paid are classified under operating activities.

Total cash flow is _______________________.

3. Identify which transactions affect the cash flow, which affect the P&L, as well as the
corresponding amount.

During March, 2020, FineArt was engaged in the following transactions:

Only Cash Only P&L Cash flow +

P&L
1. On March 1, FineArt paid 6,000 EURO representing
six months' rent commencing March 1.
2. Advertising to appear in April’s newspaper was paid
on March 5; 500 EURO
3. On March 15, FineArt provided some services for a
client, totalling 7,000 EURO; the amount of 2,000
EURO was collected immediately into the bank account
and the balance will be received in April.
4. On March 31, salaries of EURO 12,000 were paid to
the employees.
5. The March utility bill was received on March 31 but
will not be paid until the due date of April 15; EURO
800.

44
 4. The following financial statements accounts and amounts are from the records of Realty for the
year ended April 30, 2020 and the company’s first year of operations (all amounts in EUR).
 Accounts payable lei 19,000
 Accounts receivable 104,000
 Cash 90,000
 Revenues from sales 375,000
 Share capital 100,000
 Equipment 47,000
 Income taxes expense 27,000
 Income taxes payable 6,000
 Marketing expense 18,000
 Office and equipment rent expense 91,000
 Salaries expenses 172,000
 Salaries payable 78,000
 Raw materials 2,000
 Raw materials expenses 6,000
 Utilities expenses 21,000
Prepare the Statement of financial position (Balance sheet), the Statement of profit or loss and calculate
the Net operating cash flows for Realty.

OPERATING INVESTING FINANCING

CUSTOMERS SUNDRY DEBTORS BANK LOANS (LONG
SUPPLIERS SUPPLIERS OF NCA TERM)
EMPLOYEES DIVIDENTS
AUTHORITIES
45
 NCA INVESTING CF
CA OPERATING
NCL FINANCING
CL OPERATING
EQUITY FINANCING

DIVIDENDS ARE PAID by the company

a. Operating activity
b. Financing activity
ARE RECEIVED
a. Operating activity
b. Investing activity
The same happens for INTEREST

Cash flows from operating activity

-
--
-
-
-
Cash outflown from op activity
--
-
-

CASH FLOW FROM OPERATING

Cash inflow from INVESTING AXCTIVITY
CAash outflow from INVESTING ACTIVITY
CASH FLOW FROM
CASH INFLOW FROM FINANCING ACTIVITY
CASH OUTFLOW FROM FINANCING ACTIVITY
CASH FLOW FINANCING ACTIVITY
TOTAL CASHFLOW( op+inv+fin)
INITIAL BALANCE OF CASH AND CASH EQ(balance sheet)
TOTAL CASHFLOW
CLOSING BALANCE OF CASH AND CASH EQ

46