unit 1 2022

External Financial Statements
Unit in Unit in
Section Title Weight % Gleim Old Gleim New
2020 2021
External
A Financial 15 1,2,3, 4 1,2,3,4,5,6
Reporting
Planning
B Budgeting and 20 9, 10 12,13,14
Forecasting
Performance
C 20 11, 12 15,16
Management
Cost
D 15 5,6,7,8 7,8,9,10,11
Management
Internal
E 15 13,14 17,18
Controls
Technology
F 15 15,16 19,20
and Analytics
1.1 Concepts of Financial Accounting
1.2 Statement of Financial Position
1.3 Income Statement and Statement of Comprehensive Income
1.4 Statement of Changes in Equity and Equity Transactions
1.5 Statement of Cash Flows
Concepts of Financing Accounting
The objectives of the General Purpose Financial Statements
1. To provide Financial information that is useful to the users in making financial decisions
2. Information about financial performance is useful for
a) Understanding the return on economic resources, its variability, and its
components
b) Evaluating management and
c) Predicting future returns
3. General purpose financial statements must be prepared in accordance with GAAP.
Concepts of Financing Accounting
CMA Candidates, Please Note
1. CMA exam test some knowledge of IFRS.

2. Differences between IFRS and GAAP would be highlighted.
3. When there is a difference between IFRS and GAAP, follow GAAP
Financial Accounting and Management Accounting

1. Financial accounting follows GAAP/IFRS, Management accountancy does not
2. Financial accounting has a historical perspective, management accounting is future
oriented
3. Financial Accounting is for external users whereas management accountancy is for
internal decision making, planning and control
Users of Financial Statements
Users may directly or indirectly have an economic interest
Users with direct interests include
1. Investors or potential investors
2. Suppliers and creditors
3. Employees
4. Management
Users having indirect interests include
1. Financial advisors and analysts
2. Stock markets or exchanges
3. Regulatory authorities

External users use financial statements to determine whether doing business
with the firm will be beneficial.
1. Investors.
2. Creditors
3. Financial advisors and analysts to evaluate particular investments.
4. Stock exchanges need financial statements to evaluate whether to accept
firm’s stock for listing or whether to suspend the stock’s trading.
5. Regulatory agencies

Internal users use financial statements to make decisions affecting the
operations of the business. These users include management, employees,
and the board of directors.
1. Management needs financial statements to assess financial strengths and
deficiencies, to evaluate performance results and past decisions, and to
plan for future financial goals and steps toward accomplishing them.
2. Employees want financial information to negotiate wages and fringe
benefits based on the increased productivity and value they provide to a
profitable firm.
A full set of financial statements includes the following statements
1. Statement of Financial Position (Also called balance Sheet)
2. Income Statement
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Statement of Cash Flows
Some Features and Concepts of Financial Statements
1. Relevant Information
2. Usefulness
3. Comparable
4. Going concern Assumptions
Financial Statement Relationships

1. Financial Statements complement each other
2. Components of one statement are linked to another
Accrual Basis of Accounting

1. Transactions are recorded when they occur not when cash is paid or received.
2. Revenue is recognized in the period in which it is earned not in the future when cash is
received
3. Expenses are recognized when they are incurred not when cash is paid in the future
4. GAAP only allows accrual accounting not cash.
Current and Noncurrent Liabilities
Current liabilities also include other obligations expected to be liquidated in the
ordinary course of business
These include
1. Short-term notes given to acquire capital assets
2. Payments required under sinking-fund provisions
3. Payments on the current portion of serial bonds
4. Long-term obligations that are or will become callable by the creditor because of the
debtor’s violation of a provision of the debt agreement at the balance sheet date
Current liabilities do not include short-term debt if an entity
1. Intends to refinance them on a noncurrent basis and
2. Demonstrates an ability to do so.
3. The ability to refinance may be demonstrated by entering into a refinancing agreement
before the balance sheet is issued.
Equity
The following are the major items of
equity:
1. Capital contributions by owners .
2. Retained earnings. (Retained earnings can be restricted or unrestricted
depending on the board of directors’ intent.)
3. Treasury stock is the firm’s own stock that has been repurchased.
4. Accumulated other comprehensive income items not included in net income.
1.2 Statement of Financial Positionc
Major Note Disclosures

1. significant accounting policies, such as the use of estimates and rules for
revenue recognition.
Footnote disclosures and schedules specifically related to the balance sheet
include
1. Investment securities
2. Property, plant, and equipment holdings
3. Maturity patterns of bond issues
4. Significant uncertainties, such as pending litigation
5. Details of capital stock issues
Limitations of Balance Sheet

1. At a single point in time;
2. May vary significantly a few days before or after the publication of the balance
sheet.
3. Many balance sheet items, such as fixed assets, are valued at historical costs,
which may bear no resemblance to the current value of those items.
4. Even those assets reported at their current fair values may not always faithfully
represent what a company could sell those items for on an open market.
Effects of Off-Balance Sheet Financing
Temporary (Nominal Accounts)

1. GP%
2. NP%
3. Matching Principle
Share-Based payments and employees benefits
1. Share Based Payment
1. Call Options
2. Share appreciation Rights
3. Share Ownership Plans
2. Stock Compensation
1. Fair value
IFRS 2 Difference
1. More stringent
2. No distinction between pubic or private company
3. Treatment in taxation is different
Extra-Ordinary Items
Limitations of the Income Statement
1. Not always show all items
2. Other comprehensive income Vs Income Statement
3. Accrual-basis results for the period.
4. Income statement itself is not sufficient
Statement of Comprehensive Income
1. Comprehensive income includes all changes in equity (net assets) of a
business
2. during a period except those from investments by and distributions to
owners.
3. It consists of
• (1) net income or loss (the bottom line of the income statement) and
• (2) other comprehensive income (OCI).
1. Certain income items are excluded from the calculation of net income and
instead are included in comprehensive income.
2. The following are the major items included in other comprehensive income:
i. The effective portion of a gain or loss on a hedging instrument in a cash flow hedge
ii. Unrealized gains and losses due to changes in the fair value of available-for-sale securities
iii. Translation gains and losses for financial statements of foreign operations
iv. Certain amounts associated with accounting for defined benefit postretirement plans
All items of comprehensive income are recognized for the period in
either
1. One continuous financial statement that has two sections, net
income and OCI, or
2) Two separate but consecutive statements.
1. Prior-period adjustments include prior-period financial statement errors etc.

2. These items require retrospective application
3. Thus, corrections of prior-period errors etc must not be included in the
calculation of current-period net income.
1. Retained earnings are sometimes appropriated

(restricted)
2. An appropriation must be clearly displayed within
equity.
3. Purposes include
• (a) compliance with a bond indenture (bond contract),
• (b) retention of assets for internally financed expansion,
• (c) anticipation of losses, or
• (d) adherence to legal restrictions.
Common and Preferred Stock

1. The most widely used classes of stock are common and preferred.
2. Stock authorized.
3. Stock issued.
4. Stock outstanding.
5. The common shareholders are the owners of the firm. They have voting
rights, and they select the firm’s board of directors and vote on
resolutions.
1. Common shareholders are not entitled to dividends unless so declared by

the board of directors.
2. A firm may choose not to declare any.
3. liquidating distributions
4. Preemptive rights.
5. WHY?
6. This way the preemptive rights safeguard a common shareholder’s
proportionate interest in the firm.
1. Preferred stock has features of debt and equity.

2. Preferred stock has a fixed charge, but payment of dividends is not an
obligation.
3. No voting rights.
4. Preferred shareholders receive Dividends before common
shareholders may receive any
5. And Distributions before common shareholders, but after creditors, in
the event of firm bankruptcy (liquidation).
The following are common features of preferred stock:

1. Cumulative vs Non cumulative
2. Participatory vs non participatory
3. Convertible preferred stock vs Non convertible
4. Redeemable vs Irredeemable
1. Direct costs of issuing stock (underwriting, legal, Accounting, tax,

registration, etc.)
2. must not be recognized as an expense.
3. Instead, they reduce the net proceeds received and additional paid-in
capital.
1. On the date of declaration,

2. the board of directors formally approves a dividend.
3. A declaration of a dividend decreases (debits) the retained earnings
account.
4. All holders of the stock on the date of record are legally entitled to receive
the dividend.
5. The date of payment is the date on which the dividend is paid.
Equity Transactions – Property Dividend

1. When an entity declares a dividend consisting of tangible property,
2. First, the property is remeasured to fair value as of the date of
declaration,
3. And any gain or loss on the remeasurement is recognized in the
statement of income
4. Second, the carrying amount of retained earnings is decreased for the
fair value of the property to be distributed
5. Third, the property is distributed as a dividend
1. A stock dividend involves no distribution of cash or other property.

2. Stock dividends are accounted for as a reclassification of different equity
accounts, not as liabilities.
3. The recipient does not recognize income.
4. It has the same proportionate interest in the entity and the same total
carrying amount as before the stock dividend.
5. The accounting for stock dividends depends on the percentage of new
shares to be issued.
1. An issuance of shares less than 20% to 25% of the previously outstanding

common shares should be recognized as a stock dividend.
2. An issuance of more than 20% to 25% of the previously outstanding common
shares should be recognized as a stock split in the form of a dividend.
3. In accounting for a stock dividend, the fair value of the additional shares issued
is reclassified from retained earnings to common stock (at par value) and the
difference to additional paid-in capital.
1.5 Statement of Cash Flow
Cash Flow
statement
Activities
Cash Flow from

Operations Cash Flow From Cash Flow from
Investing (CFI) Financing (CFF)
(CFO)
Cash Flows (Operating Activities)

Inflows Outflows
Payment to employees and
From Customers
Suppliers
Interest/Dividends
Other Expenses
Received
Sales of Trading Securities Purchase of Trading Securities
- Interest Paid
- Taxes Paid
Cash Flows (Investing Activities)

Inflows Outflows
Sale of Fixed Assets Acquisition of Fixed Assets
Acquisition of Debt/Equity
Sale of Debt/Equity investments
Investments
Principal received from loan made to
Loan Made to others
others
Cash Flows (Financing Activities)

Inflows Outflows
Principal amounts of debts
Principal paid on debt or leases
issued
Proceeds from issuing stock Payment to reacquire stock
- Dividends paid to shareholders
Transaction GAAP IFRS

Interest Received Operating Operating or Investing
Dividends Received Operating Operating or Investing
Interest Paid Operating Financing or Operating
Dividends Paid Financing Financing or Operating
Income Taxes Operating Operating Unless Specifically
associated with financing or investing
activities
1.5 Statement of Cash flows

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unit 1 2022

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External Financial Statements

The objectives of the General Purpose Financial Statements

Concepts of Financing Accounting

CMA Candidates, Please Note

1. CMA exam test some knowledge of IFRS.

Financial Accounting and Management Accounting

Users of Financial Statements

Users of Financial Statements

Financial Statement Relationships

Accrual Basis of Accounting

Major Note Disclosures

Limitations of Balance Sheet

Temporary (Nominal Accounts)

1. Prior-period adjustments include prior-period financial statement errors etc.

1. Retained earnings are sometimes appropriated

Common and Preferred Stock

1. Common shareholders are not entitled to dividends unless so declared by

1. Preferred stock has features of debt and equity.

The following are common features of preferred stock:

1. Direct costs of issuing stock (underwriting, legal, Accounting, tax,

1. On the date of declaration,

Equity Transactions – Property Dividend

1. A stock dividend involves no distribution of cash or other property.

1. An issuance of shares less than 20% to 25% of the previously outstanding

Cash Flow from

Cash Flows (Operating Activities)

Cash Flows (Investing Activities)

Cash Flows (Financing Activities)

Transaction GAAP IFRS

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