04-Jul-22

PART E: PREPARING A TRIAL

BALANCE
Control accounts
Bank reconciliations
Correction of errors
Tr
un
g
Tâ
m

104
Đ
ào
Tạ

CONTROL ACCOUNTS
o
IA
P

105
Chapter 17

105

1
 04-Jul-22

DEFINITION

 An account in the nominal ledger in which

a record is kept of the total value of a
number of similar but individual items.
Tr

 Control accounts are mainly for debtors

and creditors.
un
g
Tâ

106
m

106
Đ
ào

TYPES OF INTERNAL CHECKS

Tạ

 A trial balance
o

 Bank reconciliation
IA

 Control account reconciliation

 Segregation of duties
P

 Authorization

107

107

2
 04-Jul-22

Sales Ledger (Debtors) Control

 Notes
 credit balances are unusual in the debtors
control account.
 They represent debtors to whom the
Tr

business owes money

 Probably as a result of the over payment of
un

debts or for advance payments of debts for

which no invoices have yet been sent
g
Tâ

108
m

108
Đ
ào

Reasons for having control accounts

Tạ

 Provide check on accuracy

 Compare total balance on the debtors control
o

account with the total of individual balances of the

IA

personal accounts
 Compare total balance on creditors control account
with the total of individual balances
P

 Provides internal check through separation of

duties
 To extract simply and quickly
109

109

3
 04-Jul-22

Control account reconciliation

 The control account should be balance
regularly and the balance should be agreed
at all times.
 Likely mistakes or errors that may occur
Tr

due to the following:

un

 Incorrect amount may be posted

 A transposition error
g

 An entry in ledger is missed out

 Incorrectly extracted or miscast
Tâ

110
m

110
Đ
ào
Tạ
o
IA

BANK RECONCILIATION
P

111

4
 04-Jul-22

BANK RECONCILIATION

***A bank reconciliation compares the

balance of cash in the business’s records
to the balance held by bank
Tr

***The cause of differences will be errors,

un

bank charges or bank interest, or timing

differences
g
Tâ

112
m

112
Đ
ào
Tạ

Bank reconciliation
o
IA
P

113

113

5
 04-Jul-22

CASH CONTROL: 1/ CASH RECEIVING (Chapter 6-8)

2/ CASH PAYMENT (Chapter 9 – 12)

Procedures for performing a bank reconciliation

Step 1: Identify the cash book balance and the bank balance.
Step 2: Add up the cash book for the period since the last reconciliation and identify and note any errors
found.
Step 3: Examine the bank statements for the same period and identify items which appear on the
statement but not have been entered in cash book and make a list of all those found:
+ Standing orders and direct debits
+ Dividend receipts from investments
+ Bank charges and interest
Tr

Step 4: Identify all reconciling items due to timing differences

- Proforma Bank Reconciliation

Bank Reconciliation
un

* Cash book B/L XXX Should be the

(+) Add correction XXX same
(-) Less correction XXX
Corrected Balance XXX
* Balance per Bank statement XXX
g

(+) Add correction XXX

(-) Less correction XXX
Corrected Balance XXX
Tâ

114
m

114
Đ
ào

Bank reconciliation
Tạ
o
IA
P

115

115

6
 04-Jul-22

CORRECTION OF ERRORS
Tr
un
g
Tâ
m

116
Đ
ào

TRIAL BALANCE ERRORS

Tạ

 Error of transposition is when two digits in an amount are accidentally

recorded the wrong way round.
o

 Error of omission means failing to record a transaction at all, or making

a debit or credit entry, but not the corresponding double entry.
IA

 When a transaction entered with wrong amt -> error of original entry.

 Error of principle involves making a double entry in the belief that the
P

transaction is being entered in the correct accounts, but subsequently

finding out that the accounting entry breaks the “rules” of an accounting
principle or concept. (e.g. Capital Expenditure & revenue expenditure;
or Cash received being credited to cash instead of debited to cash)

 Error of commission are where the bookkeeper makes a mistake in

carry out his or her task of recording transactions in the accounts.

 Compensating errors are errors which are, coincidentally, equally and

opposite to one another. (e.g. Debit of £100 is exactly cancelled by
credit of £100 error elsewhere)

117

7
 04-Jul-22

CORRECTION OF ERRORS-JOURNAL ENTRY

 Journal entries is used when Error make the total Debit =

total Credit in ledger account
 Journal entry requires total debit = total credit → any errors
makes debit = credit → after using Journal entries to correct
→ account is still balance.
 Example: Bookkeeper posted bill for $100 to local tax
Tr

account instead of telephone account.

 Analysis and solution
un

Both accounts are expenses → Total Dr = total Cr

(assume other correct).
g

Using Journal: Dr Telephone $100

Cr Tax $100
Tâ
m

118
Đ
ào

CORRECTION OF ERRORS-SUSPEND ACCOUNT

Tạ

 Suspense account is temporary open when Trial balance

does not balanced.
 Bookkeeper knows where to post 1 site of double entry i.e. Dr
o

(Cr) into correct account but don’t know where to post the
other.
IA

→ Suspense account being used to correct some error and

also opened when it is not know immediately where to post →
when these problems solved → Close suspense account.
P

 Example: Accountant prepares Trial balance and found Dr

side is greater than Cr side $890 due to reduce in purchase
 Solution
Step 1: Open suspense account.
Step 2: Use suspense account to make account balance
Dr Suspense account $890
Cr Purchase $890

119

8
 04-Jul-22

PART F: PREPARING BASIC FINANCIAL

STATEMENTS

Incomplete records
Preparation of financial statements for sole
traders
Tr

Introduction to company accounting

Preparation of financial statements for
un

companies
Events after the reporting period
g

Statement of cash flows

Tâ
m

120
Đ
ào
Tạ

INCOMPLETE RECORDS
o
IA
P

121

9
 04-Jul-22

Some relevant issues in incomplete

records
The opening statement
Credit sales and trade accounts receivable
Purchases and trade accounts payable
Tr

Purchases, inventory and the cost of sales

Stolen goods or goods destroyed
un

The cash book

g

Accruals and prepayments

Drawings.
Tâ
m

122
Đ
ào

THE OPENING STATEMENT

Tạ

Accounting equation: Assets = Liabilities +

o

Capital
IA

Business equation: Closing net assets =

beginning equity + newly introduced
P

capital+ NI - Drawings

123

10
 04-Jul-22

ISSUES RELATING TO COSTS OF GOODS SOLE AND

LOST/STOLEN GOODS

 Mark-up (%) = Gross profit / COGS

 Gross profit margin (%) = Gross profit / Sales
 COGS and lost = beginning inventory +
Purchase – ending Inventory
Tr

 COG loss / stolen = COG sold and loss-COGS

(at cost)
un
g
Tâ
m

124
Đ
ào

ISSUES RELATING TO COSTS OF GOODS SOLE AND

LOST/STOLEN GOODS
Tạ

Accounting treatment for Inventory destroyed, stolen or

lost
o

 If the lost goods were not insured.

Dr Income statement (expense)
IA

Cr Income statement (Calculation of gross profit)

P

 If the lost goods were insured

Dr Insurance claim account (receivable account)
Cr Income statement (calculation of gross profit)
(With the cost of the loss)

 When received the payment from Insurance Company

 Dr Cash/bank
Cr Insurance claim account
125

11
 04-Jul-22

THE CASH BOOKS AND THE THEFT OF THE

CASH

Total cash = cash in bank + cash in hand

(in till)
Theft of cash from the till
Tr

* Dr I&E account
Cr Cash in hand
un

* Dr Insurance claim (receivable)

Cr Cash in hand
g
Tâ
m

126
Đ
ào
Tạ

Preparation of financial
o

statement for sole traders

IA
P

127

12
 04-Jul-22

STEPS

Transfer all the balances on the individual

ledger account for income statement items
(revenue & expenses items) to the I&E
Income statement.
Tr

Transfer the final balance on the I/S (net

un

profit) to the capital account.

Transfer the balance on the drawings
g

account to capital account.

Tâ
m

128
Đ
ào

INTRODUCTION TO COMPANY ACCOUNTING

Tạ

Limited liability and accounting records

o

Share capital
IA

Reserves
Bonus and right issues
P

Ledger accounts and limited liability

companies

129

13
 04-Jul-22

THE SHARE CAPITAL OF LIMITED LIABILITY COMPANY

When the company set up for the first

time, it issues shares (share capital),
which are paid for by investor who become
shareholders of the company
Tr
un
g
Tâ
m

130
Đ
ào

PREFERRED (PREFERENCE) SHARES

Tạ

 Preferred shares are shares which confer certain preferential

rights on their holder.
o

Preferred shareholders have a priority right over ordinary

shareholders to a return of their capital if the company goes
IA

into liquidation.
P

Preferred shares do not carry a right to vote.

If the preferred shares are cumulative, it means that before a
company can pay an ordinary dividend, it must not only pay
the current year’s preferred dividend, but must also make
good any arrears of preferred dividends unpaid in previous
year.

131

14
 04-Jul-22

PREFERRED (PREFERENCE) SHARES

 There are two types of preference shares:
 Redeemable preference shares: The Company will redeem (repay)
the nominal value of those shares at a later date -> treat like loans
and are included as long-term liabilities in the balance sheet.
If redemption is due within 12 months, it will be current
liabilities.
Tr

Dividends paid on redeemable preference shares are treated like

interest paid on loans and are included in financial costs in the
income statement.
un

 Irredeemable preference shares: treat just like other shares. They

form part of equity and their dividends are treated as
appropriations of profit.
g

In the examination, it is assume that any preference shares are

irredeemable, unless the question specifically states that the
Tâ

shares are redeemable preference shares.

m

132
Đ
ào

ORDINARY SHARES
Tạ

 Ordinary shares holder only receives a dividend after fixed

dividends have been paid to preference shareholders.
o

 Ordinary shareholders normally carry voting rights and thus

the effective owners of a company. They own the “equity”
IA

and any reserves of the business -> equity shareholders

P

133

15
 04-Jul-22

DIVIDEND AND PROFIT RETAINED

Dividends
 Dividends are appropriations of profit after tax. Many
companies pay dividends in two stages during the course of
their accounting year.
 In mid year, after half-year financial results are known, the
company might pay an interim dividend
Tr

 At the end of the year, the company might pay a further final
dividend
un

 The total dividend for the year is the sum of the interim
and the final dividend
The profits retained
g

 Not all profit are distributed as dividends, some will be

retained in the business to finance future projects.
Tâ
m

134
Đ
ào

RESERVES-INTRODUCTION
Tạ

 Share capital and reserves are “owned” by the shareholders

=> known as “shareholders’ equity”
o

 Shareholders’ equity consists of the followings:

IA

The par value of issue capital (minus any amounts not yet
called up on issued shares)
P

Share premium (capital paid-up in excess of par value)

Revaluation surplus
Reserves
Retained earnings

135

16
 04-Jul-22

THE SHARE PREMIUM ACCOUNT

 A share premium account is an account into which sums received
as payment for shares in excess of their nominal value must be
placed.
 The share premium account only comes into being when company
issues shares at the price in excess of their par value.
 The share premium account cannot be distributed as dividend
under any circumstances. It constitutes capital of the company =>
Tr

capital reserve and may be used to finance the issue of bonus shares.
 The accounting entry for issuing share exceeds its par value is:
un

$ $
DR Cash ×
CR Ordinary shares ×
g

CR Share premium account ×

Tâ

 Practice: Bourbon issues 200,000 25c shares at a price of $1.75

each. Show this transaction using ledger accounts.
m

136
Đ
ào

REVALUATION SURPLUS
Tạ
o

The result of an upward revaluation is a

revaluation surplus. This is non-
IA

distributable as it represents unrealized

P

profits on the revalued assets and it is

another capital reserve.
It become realized when the asset is sold or
the revaluation surplus may fall if the asset
suffered a fall in value in the next
revaluation.

137

17
 04-Jul-22

RESERVES

Statutory reserves, which are reserves

which a company is required to set up by
law and which are not available for the
distribution of dividends (capital reserves
Tr

such as share premium, revaluation).

Non-statutory reserves, which are
un

reserves consisting of profits which are

distributable as dividends, if the company
g

so wishes (revenue reserves).

Tâ
m

138
Đ
ào

RETAINED EARNINGS
Tạ

 This is the most significant reserve and is variously described as:

 Revenue reserve
o

 Retained profits
 Accumulated profits
IA

 Undistributed profits
P

 Un-appropriated profits
 These are profits earned by the company and not appropriated by
dividends, taxation or transfer to another reserve account.
 Example: If a company makes a loss of $100,000 in one year, yet has
in-appropriated profits from previous years totaling $250,000, it can
pay a dividend not exceeding $150,000. One reason for retaining
some profit each year to enable the company to pay dividends even
when profits are low. Another reason is usually shortage of cash.
139

18
 04-Jul-22

DISTINCTION BETWEEN RESERVES AND PROVISIONS

 A reserve is an appropriation of distributable profits for a

specific purpose (plant replacement) while provision is an
amount charged against revenue as an expense and the
Tr

amount of which
 Provision or allowances (for depreciation ect) are dealt with
un

in company accounts in the same way as in the accounts of

other types of business while Reserve may vary to
g

company
Tâ
m

140
Đ
ào

STATEMENT OF CHANGES IN EQUITY

Tạ

SC SP RR REs Total
$ $ $ $ $
Bal b/f at 01 .01. X9 × × × ×
Change in accounting policy (×) (×)
o

Restate balance × × × × ×
Gain on revaluation × ×
Profit for the period × ×
IA

Dividends (×)
Issue of share capital × × ×
Bal c/d at 31. 12. X9 × × × × ×
P

 The bottom line shows the amounts for the current statement of financial
position.
 Dividends paid during the year are not shown on the IS, they are shown in
the SOCIE.

141

19
 04-Jul-22

BONUS (CAPITALIZATION) ISSUES

A company may wish to increase its share capital without needing
to raise additional finance by issuing new shares. It is open to such a
company to re-classify some of its reserves as share capital. This is
purely a paper exercise which raises no funds.
Adv:
 Increases capital without diluting current shareholders’
holdings
Tr

Capitalizes reverses, so they cannot be paid as dividends

Dis-adv:
un

Does not raise any cash, EPS will be reduced

Could jeopardize payment of future dividends if profits fall
Practice: Ginger Knut, a limited liability company, has 20,000 50c
g

shares in issue (each issued for $1.25) and makes a 1 for 4 bonus
issue, capitalizing the SP account.
Tâ

What are the balances on the SC and SP accounts after this transaction?
m

142
Đ
ào

RIGHT ISSUES
Tạ

 A rights issue is an issue of shares for cash. The rights

are offered to existing shareholders, who can sell them if
o

they wish. Because the shares are usually issued at a

discount to the current market price, this is beneficial for
IA

existing shareholders.
Adv:
P

 Raise cash for the company

 Keep reserves available for future dividends
Dis-adv:
Dilutes shareholders’ holding if they do not take up
rights issue

143

20
 04-Jul-22

LOAN STOCKS OR BONDS

Limited liability companies may issue loan stock or bonds. They are
different from share capital in the following ways
 Shareholders are members of a company, while the providers of
loan capital are creditors.
 Shareholders receive dividends, the holders of loan capital are
entitled to a fixed rate of interest (an expense charged against
revenue)
Tr

 Loan capital holders can take legal action against a company if their
interest is not paid when due, shareholders cannot enforce the
payment of dividends.
un

 Loan stock is often secured on company assets, whereas shares are

not
→ The holder of loan capital is generally in a less risky position than
g

the shareholder.
Tâ
m

144
Đ
ào

LOAN STOCKS OR BONDS

Tạ

 Practice: Custard Creameries is an incorporate business which

needs to raise funds to purchase plant and machinery. On 1 March
2011, it issues $150,000 10% loan notes, redeemable in 10 years’
o

time. Interest is payable half yearly at the end of August and

February.
 What accounting entries are required in the year ended 31
IA

December 2011? Show relevant extracts from the Statement of

financial position?
P

145

21
 04-Jul-22

LEDGER ACCOUNTS AND LIMITED LIABILITY

COMPANIES
The only difference between the ledger accounts of companies and sole
traders is the nature of some of the transactions, assets and liabilities
for which accounts need to be kept.
Taxation: Tax charged
DR I&E account
CR Taxation account (tax payable)
Tax payment
Tr

DR Taxation account
CR Cash
un

Dividends: Dividends declares out of profits will be disclosed in the

notes if they are unpaid at year end, no dividends payable will be
shown.
g

When they are paid:

Dividends payment: DR Dividends paid
Tâ

CR Cash
m

146
Đ
ào

LEDGER ACCOUNTS AND LIMITED LIABILITY

COMPANIES
Tạ

Loan stock: Being a long-term liability shown as a credit balance in a

loan stock account.
o

Interest payable on such loans is not credited to the loan

account but is credited to a separate payables account for interest until
IA

it is eventually paid
Interest charged: DR Interest account
P

CR Interest payable
Share capital and reverses: There will be a separate account for each
different class of share capital and each different type of reserve.

147

22
 04-Jul-22

Tr

EVENTS AFTER
un

REPORTING PERIOD
g
Tâ
m

148
Đ
ào

IAS 10
Tạ

IAS 10
o

Events after the reporting period are those

IA

events, both favorable and unfavorable,

that occur between the reporting date and
P

the date on which the financial statements

are authorized for issue.

149

23
 04-Jul-22

Tr
un
g
Tâ
m

150
Đ
ào

 Events requiring adjustment:

Events after the reporting date which provide
Tạ

additional evidence of conditions existing at the

reporting date, will cause adjustments to be made
o

to the assets and liabilities in the financial

statements => An entity shall adjust the amounts
IA

recognized in its financial statements to reflect

adjusting events after the reporting period.
P

 Events not requiring adjustment

Events which do not affect the situation at the
reporting date should not be adjusted for, but
should be disclosed in the financial statements.

151

24
 04-Jul-22

Tr EXAMPLE OF ADJUSTING EVENTS

un
g
Tâ
m

152
Đ
ào

EXAMPLE
Tạ
o
IA
P

153

25
 04-Jul-22

STATEMENT OF
Tr

CASHFLOW
un
g
Tâ
m

154
Đ
ào

IAS 7-STATEMENT OF CASHFLOW

Tạ
o
IA
P

155

26
 04-Jul-22

IAS 7-STATEMENT OF CASHFLOW

Tr
un
g
Tâ
m

156
Đ
ào

INDIRECT METHOD
Tạ
o
IA
P

157

27
 04-Jul-22

Tr
un
g
Tâ
m

158
Đ
ào

DIRECT METHOD
Tạ
o
IA
P

159

28
 04-Jul-22

PREPARATION OF CASH FLOW STATEMENT

Technique
Tr
un
g
Tâ
m

160
Đ
ào

CASH ACCOUNTING
Tạ
o
IA
P

161

29
 04-Jul-22

CRITICISMS OF IAS 7
Tr
un
g
Tâ
m

162
Đ
ào
Tạ
o

PART G: INTRODUCTION TO
IA

CONSOLIDATED FINANCIAL
P

STATEMENTS

163

30
 04-Jul-22

PART G: PREPARING SIMPLE CONSOLIDATED

FINANCIAL STATEMENTS

Introduction to consolidated financial

statements
The consolidated statement of financial
position
Tr

The consolidated statement of

un

comprehensive income
g
Tâ
m

164
Đ
ào

TERMINOLOGIES
 Control: The power to govern the financial and operating
Tạ

policies of an entity so as to obtain benefits from its

activities.
 Subsidiary: An entity that is controlled by another entity
o

 An associate: an entity over which another entity exerts

significant influence. Associates are accounts for in the
IA

consolidated statements using the equity method.

 Parent: An entity that has one or more subsidiaries
P

 Group: a parent and all its subsidiaries

 Consolidated financial statements: The financial
statements of a group presented as those of a single
economic entity.
 Non-controlling interest: the equity in a subsidiary not
attributable, directly or indirectly, to a parent.
 A trade/single investment: an investment in the shares of
another entity held for the accretion of wealth, not an
associate or a subsidiary.

165

31
 04-Jul-22

CONSOLIDATION
 Definition: presenting the results, assets and liabilities of a
group of companies as if they were on company.
 Involvement:
 Adding together item by item
 Cancellation of like items internal to the group (i.e. intra-
group receivables, payables)
Tr

 Showing separately the non-controlling interest (of

minor shareholders) in the equity section of consolidated
un

SFP.
 Relevant IFRS for consolidation:
g

 IAS 27- Consolidated and separate financial statements

 IAS 28- Investment in associates
Tâ

 IFRS 3- Business combination

m

166
Đ
ào

SUBSIDIARIES
 In vestment in subsidiaries: (IAS 27)
Tạ

Control exists when the parent

Owns more than half of the voting power
o

Owns only 50% or less of the voting power, but parent

has:
IA

 Power over more than 50% of the voting rights by

virtue of agreement with other investors
P

 Power to govern the financial and operating policies

of the entity by statue under an agreement.
 Power to appoint or remove a majority of members of
the board of directors (or equivalent body)
 Power to cast a majority of votes at meetings of the
BOD

167

32
 04-Jul-22

SUBSIDIARIES-ACCOUNTING TREATMENT

IAS 27 requires
Parent presents consolidated financial
statement (i.e. group account)
Substance, rather than the legal form, of
Tr

the relationship b/w parent and

subsidiaries will be presented
un

Consolidated financial statements should

consolidate ones from both foreign and
g

domestic (ignore the legal boundaries)

Tâ
m

168
Đ
ào

ASSOCIATES
Tạ

Investment in associates
 Significant influence (IAS 28): power to participate but is
not control or joint control.
o

 Significant influence exists when an investor holds 20%

IA

or more of the voting power of the entity.

 Evidence of significant influence:
P

Representation on the BOD of the investee

Participation in the policy making process
Material transactions between investor and investee
Interchange of management personnel
Provision of essential technical information

169

33
 04-Jul-22

ASSOCIATES-ACCOUNTING TREATMENT
Equity method
 IAS 28 requires the use of equity method for investment in
associates. (not consolidation)
 Method
 In the statement of financial position of investor:
Investment in associate account
Tr

Recorded at cost (purchase price) at the time of

acquiring associate’s shares
End of each period: Adjust for the shared profits and
un

dividends to the investment in associate account.

 In the income statement/other comprehensive income of
investor
g

Record the group’s share of associate’s profit after

tax (whether or not the associate distributes the
Tâ

earnings as dividends)
m

170
Đ
ào

TRADE INVESTMENT
Tạ

A simple investment in the shares of another

company, that is held for the accretion of
o

wealth.
IA

Trade investments are shown as

investments under non-current assets in the
P

consolidated statement of financial position

of the group.

171

34
 04-Jul-22

CONSOLIDATED FINANCIAL
STATEMENTS
Presenting the results of the group, not
replace the separate financial statements
of the individual group companies.
Most parent companies present their own
Tr

individual accounts and their group

un

accounts in a single package

g
Tâ
m

172
Đ
ào
Tạ
o

- THE CONSOLIDATED STATEMENT OF

IA

FINANCIAL POSITION
P

- THE CONSOLIDATED INCOME

STATEMENT

173

35
 04-Jul-22

SFP-BASIC CONSOLIDATION PROCEDURE

 Take the individual accounts of the parent and each
subsidiary and cancel out items appearing as an asset in one
company and a liability in another. Cancelled items may
include:
 The asset account “investment in subsidiaries” (in parent’s
accounts) matched with the liability “share capital” (in
subsidiary’s account)
Tr

 Intra group trading (i.e. contra transactions)

 Add together all the un-cancelled assets and liabilities on a
un

line-by-line basis
 Showing separately the non-controlling interest (of minor
shareholders) in the equity section of consolidated SFP.
g

 The consolidated capital account are the parent’s capital

accounts (not adding) (The target’s capital accounts have
Tâ

been cancelled against the parent’s investment account in

target)
m

174
Đ
ào

CONSOLIDATED’S EQUITY ACCOUNT

 Share capital = pre-acquisition share capital of parent’s
Tạ

(No addition- the subsidiary’s share capital has been

cancelled off the parent’s investment account)
o

 Share premium (in case of consideration transferred by

parent’s shares)
IA

 Retained earning
 At the acquisition time: R/E = R/E of parent
P

 Post-acquisition time: R/E = R/E parent + group share

of post-acquisition R/E in subsidairy.
 Non-controlling interest = the portion not acquired the
parent (minority interest)
NCI = Fair value of NCI at acquisition + NCI’s share of
post acquisition R/E in subsidiary

175

36
 04-Jul-22

GOODWILL ARISING ON
CONSOLIDATION
The difference between the actual acquiring
cost and the target’s net asset par value
(including share capital, pre-acquisition R/E,
revaluation surplus) is recognized as
“Goodwill”, an intangible asset in the
Tr

consolidated statement of financial position.

Goodwill = Fair value of consideration
un

transferred + Fair value of non-controlling

interest at acquisition – Net acquisition-date
g

fair value of identifiable assets acquired and

liabilities assumed.
Tâ
m

176
Đ
ào

GOODWILL-CALCULATION
 Goodwill =
Tạ

Consideration transferred (acquiring cost;

amount of parent’s “investment account” at
o

cost)
Plus fair value of non-controlling interest at acquisition
IA

Less subsidiary’s acquisition-date fair value net

assets
P

Share capital
Share premium
Pre-acquisition R/E
Fair value adjustment at acquisition (i.e.
Surplus valuation reserve)

177

37
 04-Jul-22

INTRA-GROUP TRADING
Cancel the Intra-group receivable and
payable
Remove the unrealized profit on intra-
group trading = Consolidated SFP just
recognizes the only profits earned by the
Tr

group to outsiders
un
g
Tâ
m

178
Đ
ào

ACQUISITION OF A SUBSIDIARY PART WAY

THROUGH THE YEAR
Tạ

 The profits for the period need to be apportioned

between pre and post-acquisition
o

 Only post-acquisition profits are included in the

group’s consolidated SFP.
IA

 Implication:
Pre-acquisition profits: used to determine the
P

goodwill
Post-acquisition profits: used to calculate group
retained earning
Assume the profits accrue evenly over the
year.

179

38
 04-Jul-22

CONSOLIDATED INCOME STATEMENT-BASIC

CONSOLIDATION PROCEDURE
 Prepared by combining the income statements of each group
company on a line-by-line basis.
 Intra-group trading: (unrealized profit)
Revenue: 100% P + 100% S – intra group sales
COS: 100% P + 100% S - intra group sales + unrealized
profit
Tr

Gross profit: 100%P + 100% S- unrealized profit

un

NCI = % of NCI (not owned by the parent/group) *net profit

of S - Unrealized profit attributable to NCI
 Unrealized profit
g

Unrealized profit = % of goods remained * intra-group

gross profit
Tâ

Intra-group gross profit = intra-group sales – COS

m

180
Đ
ào

CONSOLIDATED INCOME STATEMENT-

BASIC CONSOLIDATION PROCEDURE
Tạ

 NP’s Owners of the parents (group profit) (bal. figure) + NCI =

total group’s net profit
o

 Movement on retained earnings

Group profit for the year + Beginning R/E = Ending group R/E
IA

Where: Beginning R/E = R/E of P + group share of post-

acquisition R/E of S
P

 Acquisition part way through the year

Only the post-acquisition element of income statement
balances are included on consolidation.
 The consolidated statement of comprehensive income:
FFA/F3: item of “the revaluation of property, plant and
equipment”.→ apportioned the revaluation value (gain/loss)
between the group profit and NCI.

181

39
 04-Jul-22

PART H: INTERPRETATION
OF FINANCIAL RATIOS
Tr
un
g
Tâ
m

182
Đ
ào

LIQUIDITY RATIOS
Tạ

Current ratio
o

Quick ratio
IA

Accounts receivable collection period

Accounts payable payment period
P

Average inventory turnover period

183

40
 04-Jul-22

Profitability ratios
Return on capital employed
Net profit as a percentage of sales
Asset turnover ratio
Tr

Gross profit as a percentage of sales

un
g
Tâ
m

184
Đ
ào

GEARING RATIOS
Tạ

Debt ratios
o

Gearing ratio/leverage
IA

Interest cover
P

185

41