Accounting Unit 1 Wolmer’s Trust High School for Girls

FINANCIAL STATEMENTS
For CAPE Accounting financial statements for companies will be prepared using IFRS FOR
SMEs.

SMALL AND MEDIUM-SIZED ENTITIES (SMEs)

An SME is defined as an entity that:

 Does not have public accountability

 Publishes general-purpose financial statements for external users

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) FOR SMEs

On July 9, 2009, the IASB issued the IFRS for SMEs. This is the first set of international
accounting requirements developed specifically for small and medium-sized entities (SMEs).
It has been prepared on IFRS foundations but is a stand-alone product that is separate from
the full set of International Financial Reporting Standards (IFRS). The IFRS for SMEs has
simplification that reflect the needs of users of SMEs financial statements and cost-benefit
considerations. Compared with full IFRSs, it is less complex in a number of ways:

 Topics not relevant to SMEs are omitted.

 Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only
the easier option.
 Many of the principles for recognizing and measuring assets, liabilities, income and
expenses in full IFRSs are simplified.
 Significantly fewer disclosures are required.
 And the standard has been written in clear, easily translatable language.

BENEFITS OF USING IFRS FOR SMEs

1. Global recognition. Since IFRS for SMEs is a globally recognized set of financial
reporting standards, SMEs that consistently apply them will improve both
transparency and comparability. Access to capital through global lenders and
investors is a potential benefit for SMEs that were historically limited to entities with
securities traded on public capital markets.
2. Becoming fluent in IFRS is going to be a prerequisite for accountants in order to
secure a successful career path. SMEs that will offer opportunities to work in an
IFRS environment are likely to be more appealing to accountants compared to SMEs
that continue to prepare accounts according to local GAAP.

3. In preparation for IPOs. Growing companies that are considering listing their shares
on overseas stock exchanges might want to consider applying IFRS for SMEs as an
intermediate step that will facilitate the implementation of full IFRS when it is
required to be applied for the purposes of the Initial Public Offering (IPO).

4. Simplification. The IFRS for SMEs is a self-contained standard of about 230 pages
tailored to the needs and capabilities have been pervasively introduced throughout all
areas of IFRSs/IAs: recognition, measurement, derecognition and disclosures. In
addition, some topics in full IFRS, not relevant to SMEs have been omitted.
 FORMAT OF FINANCIAL STATEMENTS

Any Company Ltd

Statement of Comprehensive Income
For the year ended December 31, 20XX

$ $ $
Sales X
Less: Sales Returns, Allowances and Discounts X
Net sales X
Less: Cost of goods sold
Beginning inventory X
Purchases X
Add: Freight-in/Carriage Inwards/Import Duties X
Less: Purchases Returns, Allowances and Discounts X
Net purchases X
Cost of goods available for sale X
Less: ending inventory X
Cost of goods sold X
Gross profit X
Other Operating Income:
Commission Revenue X
Interest Revenue X
Rent Revenue X X
X
Less Operating Expenses:
Selling and Distribution Expenses:
Freight-out/Carriage outwards/Transportation out X
Advertising X
Depreciation on Delivery vehicle X
Bad debt expense X
Total Selling expense X
Administrative Expenses:
Rent and rates X
Director remuneration X
Depreciation on Buildings X
Total Administrative Expenses X
Other Expenses:
Loss due to hurricane X
Total Operating Expenses X
Operating Profit before interest and tax X
Less Finance Cost:
Interest Expense X
Operating Profit before tax X
Taxation X
Profit after tax X
Other Comprehensive Income:
Gain from the revaluation of Land X
Total Comprehensive Income for the year X
Other Comprehensive Income

Other income consists of income earned from activities that are not related to the entity's
main business. For example, other income of an entity that manufactures electronic
appliances may include:

 Gain on disposal of fixed assets

 Interest income on bank deposits

 Exchange gain on translation of a foreign currency bank account

Selling and Distribution Cost

Distribution cost includes expenses incurred in delivering goods from the business premises
to customers.

Administrative Expenses

Administrative expenses generally comprise of costs relating to the management and support
functions within an organization that are not directly involved in the production and supply of
goods and services offered by the entity.

Examples of administrative expenses include:

 Salary cost of executive management

 Legal and professional charges

 Depreciation of head office building

 Rent expense of offices used for administration and management purposes

 Cost of functions / departments not directly involved in production such as finance

department, HR department and administration department

Other Expenses

This is essentially a residual category in which any expenses that are not suitably classifiable
elsewhere are included.

Finance Charges

Finance charges usually comprise of interest expense on loans and debentures.

 Any Company Ltd
Statement of Financial Position
as at December 31, 20XX
ASSETS $ $ $
Non-Current Assets
Intangible: X
Goodwill X X
Organization cost
Tangible:
Land X
Office Equipment X
Less Accumulated Depreciation X X X
Long-Term Investments:
Stock Investments
Debt Investments X
X X
Total Non-current assets X
Current Assets
Ending Inventory X
Accounts Receivable X
Less Allowance for doubtful debts X X
Short-term investments X
Prepaid expense X
Cash X
Total Current Assets X
Total Assets X
EQUITY AND LIABILITIES
Equity:
Preference shares, x%, $x par value, x shares
authorized, x shares issued X
Ordinary shares, $x par value, x shares authorized,
x shares issued X
Share premium X
General reserves X
Retained earnings X
X
Less: Treasury stock X
Total Equity X
Non-Current Liabilities:
Mortgage payable X
Bonds payable X
Total Non-current liabilities X
Current Liabilities:
Accounts payable X
Dividends payable X
Income tax payable X
Accrued expenses X
Total Current liabilities X
Total Equity and Liabilities X
 Statement of Changes in Equity
The statement of retained earnings shows the changes in equity during the year.

Any Company Ltd.

Statement of Changes in Equity
For the year ended December 31, 20XX

Share Share General Retained Treasury Total

Capital Premium Reserves Earnings Stock
$ $ $ $ $ $
Beginning X X X X X XX
balance
Issue of
Shares X X XX

Tranfer to
reserves X (X) -

Share
buyback (X) (XX)

Net income X XX

Dividends (X) (XX)

Ending
balance XX XX XX XX (XX) XX

Following are the most common changes in equity:

 Issue of new share capital: it increases the common stock and share premium component.
 Net income (loss) for the period: it increases (decreases) retained earnings.
 Payment of cash dividends: it decreases retained earnings.
 Purchase of treasury stock: it increases treasury stock component and eventually decreases
total net equity.
 Sale of treasury stock: it decreases treasury stock component and affects retained earnings
and additional paid-up capital and ultimately increases total equity.
 Issue of bonus shares: affects common stock, share premium and retained earnings.
 Revaluation of fixed assets: increases revaluation surplus.
Limitations of Accounting & Financial Statements

Accountancy assists users of financial statements to make better financial decisions. It is

important however to realize the limitations of accounting and financial reporting when
forming those decisions.

Different accounting policies and frameworks

Accounting frameworks such as IFRS allow the preparers of financial statements to use
accounting policies that most appropriately reflect the circumstances of their entities.

Whereas a degree of flexibility is important in order to present reliable information of a

particular entity, the use of diverse set of accounting policies amongst different entities
impairs the level of comparability between financial statements.

The use of different accounting frameworks (e.g. IFRS, US GAAP) by entities operating in
different geographic areas also presents similar problems when comparing prepare their
financial statements. The problem is being overcome by the growing use of IFRS and the
convergence process between leading accounting bodies to arrive at a single set of global
standards.

Accounting estimates

Accounting requires the use of estimates in the preparation of financial statements where
precise amounts cannot be established. Estimates are inherently subjective and therefore lack
precision as they involve the use of management's foresight in determining values included in
the financial statements. Where estimates are not based on objective and verifiable
information, they can reduce the reliability of accounting information.

Professional judgment

The use of professional judgment by the preparers of financial statements is important in

applying accounting policies in a manner that is consistent with the economic reality of an
entity's transactions. However, differences in the interpretation of the requirements of
accounting standards and their application to practical scenarios will always be inevitable.
The greater the use of judgment involved, the more subjective financial statements would
tend to be.

Verifiability

Audit is the main mechanism that enables users to place trust on financial statements.
However, audit only provides 'reasonable' and not absolute assurance on the truth and
fairness of the financial statements which means that despite carrying audit according to
acceptable standards, certain material misstatements in financial statements may yet remain
undetected due to the inherent limitations of the audit.
Use of historical cost

Historical cost is the most widely used basis of measurement of assets. Use of historical cost
presents various problems for the users of financial statements as it fails to account for the
change in price levels of assets over a period of time. This not only reduces the relevance of
accounting information by presenting assets at amounts that may be far less than their
realizable value but also fails to account for the opportunity cost of utilizing those assets.

Measurability

Accounting only takes into account transactions that are capable of being measured in
monetary terms. Therefore, financial statements do not account for those resources and
transactions whose value cannot be reasonably assigned such as the competence of workforce
or goodwill.

Limited predictive value

Financial statements present an account of the past performance of an entity. They offer
limited insight into the future prospects of an enterprise and therefore lack predictive value
which is essential from the point of view of investors.

Fraud and error

Financial statements are susceptible to fraud and errors which can undermine the overall
credibility and reliability of information contained in them. Deliberate manipulation of
financial statements that is geared towards achieving predetermined results (also known as
'window dressing') has been an unfortunate reality in the recent past and has been popularized
by major accounting disasters such as the Enron Scandal.