CHAPTER 1

PUBLISHED ACCOUNTS
 OBJECTIVES:

Presentation of Financial
Statements
Preparing a set of
financial statements
Some important points
about preparing the
statements
2 TYPES OF STEREOTYPE ACCOUNTANT

Introvert Extrovert
This chapter is about preparing financial statements,
taking account of the rules laid down by the accountancy
profession. This can be complicated undertaking because
history has shown that the directors of companies do not
always wish to report truthfully .
Hopefully, there are very few companies who publish
distorted financial statements, but it can be difficult to
distinguish the companies who report honestly from those
who do not.
The rules published by the accountancy profession are
intended to deal with some of the concerns that
shareholders and other readers might have.
 PRINCIPALS AND AGENTS
Agency theory is, a branch of economics that is devoted to the
behavioural implications of entrusting decisions to a third party.
The shareholders are the principals
The directors are their agents.
The simplest and most obvious form of abuse would be outright theft
from the company
The directors could misbehave in more subtle ways that might cause
more harm than stealing from the company.
The agency problems can be tackled to some extent by trying to design
reward packages that motivate the directors to act in the shareholders
interest.
 WHAT DO YOU LIKE TO SEE?

Profit before tax and interest

Return on capital employed =
Shareholders equity + long term liabilities

The numerator is the pre tax return earned for the shareholders
and lenders who provided the company with its long term finance.
The lenders are entitled to interest. We divide the figure by the
shareholders and lenders to arrive at a measure of management’s
ability to generate a return from a given investment.
WHAT DO YOU LIKE TO SEE?
Long term liabilities
Gearing =
Shareholders equity + long term liabilities

Gearing is just the proportion of long term finance that comes

from borrowing.
A higher ratio implies an increased risk.
Heavy borrowing means a higher annual interest, which means
that there is a possibility that any downturn will leave a little or no
profit left over for the shareholders.
PRESENTATION
OF FINANCIAL
STATEMENTS
 PRESENTATION OF FINANCIAL STATEMENTS
THIS SECTION IS THE FOUNDATIONS AT THE FORMATTING REQUIREMENTS FOR THE MAIN
FINANCIAL STATEMENTS.

The main rules relating to the format of a

set of accounting statements is
INTERNATIONAL ACCOUNTING
STANDARD 1, PRESENTATION OF
ACCOUNTING STATEMENTS (IAS 1).
 PRESENTATION OF FINANCIAL STATEMENTS
THIS SECTION IS THE FOUNDATIONS AT THE FORMATTING REQUIREMENTS FOR THE MAIN
FINANCIAL STATEMENTS.

Two statements that will be focusing:

1. The statement of financial position (also
known as the balance sheet)
2. The statement of financial position- broken
down into two: income statement and
comprehensive income.
 THE STATEMENT OF FINANCIAL POSITION
FORMAT:
ABC plc
Statement of financial position as at 31 December 2018
₤m
ASSETS
Non current assets
Properly, plant, and equipment 30
Goodwill 15
Other intangible assets 11
Financial assets 5
61
Current assets
Inventories 8
Trade receivables 9
Other current assets 2
Cash and cash equivalents 4
23
Total assets 84

EQUITY AND LIABILITIES

Equity
Share capital 20
Retained earnings 21
Other components of equity 1
Total equity 42

Non current liabilities

Long term borrowings 16
Long term provisions 4
Total current liabilities 20
Current liabilities
Trade and other payables 8
Short term borrowings 5
Current portion of long term borrowings 2
Current tax payable 3
Short term provisions 4
Total current liabilities 22

Total liabilities 42
Total equity and liabilities 84

 Thus, the statement of financial position shows the company’s assets, broken down between NON
CURRENT and CURRENT ASSETS and further subdivided within each category.
 The format shown above should be regarded as mandatory. Even if you have use an alternative
approach in previous studies IAS 1 lists a number of specific items that must appear on the face of the
statement of financial position and provides a very similar example to the above as an illustration of
good practice.
ABC plc
Statement of comprehensive income for the year ended
31 December 2018
₤m
Revenue 56
Cost of sales (24)
Gross profit 32
Other income 2
Distribution costs (4)
Administrative expenses (7)
Other expenses (1)
Finance cost (3)
Profit before tax 19
Income tax expense (5)

PROFIT OF THE YEAR 14

Other comprehensive income:
Gains on property revaluation 1

TOTAL COMPREHENSIVE INCOME FOR YEAR 15

The statement of comprehensive income format:

ABC plc
Statement of comprehensive income for the year ended
31 December 2018
₤m
Revenue 56
Other income 2
Changes in inventories of finished goods and 3
work in progress
Raw material and consumables used (9)
Employee benefits expense (16)
Depreciation and amortisation expense (12)
Other expenses (2)
Finance costs (3)
Profit before tax 19
Income tax (5)

PROFIT FOR THE YEAR 14

Other comprehensive income:

Gains on property revaluation 1

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 15

The statement of comprehensive income format:

 A third Statement provides an overview of changes in equity.
PREPARING A
SET OF
FINANCIAL
PREPARING A SET OF FINANCIAL STATEMENTS

To prepare a set of financial statements all

relevant notes is an important skill.
If it is mastered properly, It can be seen a
problem solving technique that can be
applied.
The following are the steps:
STEPS: Generally, the students who struggle with
Establish a clear
preparing financial statements do so because
objective they are reactive.
In other words, they do not break the task
Identify the first
step in solving the down into a series manageable steps and
problem
quickly get bogged down in the detail of
question.
Obtain the information
required for that step It might be necessary to process a great deal
of data in order to arrive at the end of the
Repeat for each
successive step until the
product.
objective is achieved
That can be simplified using the IAS 1
formats as a source of structure.
The following question is a typical example:
DFG Ltd
Trial balance as at april 2019
A Debit Credit
£000 £000
Administrative wages 2 500
Bank 600
Delivery vehicle running expenses 700
Delivery vehicle 2 400
Inventory at 1 may 2018 4 000
Machinery 3 200
Purchases 12000
Rent on factory 800
Retained earnings 1 100
Returns from customers 500
Sales 19 000
Selling expenses 1 200
Share capital 8 400
Trade payables 1 400
Trade receivable 2 000
――――――――――――――――――――――
29 900 29 900
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Inventory at 30 April 20X9 was valued at ₤4 200 000.
WE NEED TO START A SECOND SHEET OF WORKINGS.
WE CALCULATE REVENUE AS FOLLOWS:

Workings
Revenue
Sales 19 000
Returns from customers (500)
――――――
18 500
‗‗‗‗‗‗‗‗‗‗‗‗
DFG Ltd
Statement of Comprehensive income for the year ended
30 April 20X9
£000
Revenue 18 500
Cost of sales
WORKING THE STATEMENT LINE BY LINE, PREPARING WORKINGS AND ANY NOTES
ALONG THE WAY, YIELDS A FULL SET OF FINANCIAL STATEMENTS:

DFG Ltd
Statement of Comprehensive income for the year ended 30 April 20X9
₤000
Revenue18 500
Cost of sales (12 600) ¯¯¯¯¯¯¯¯¯¯¯
Gross profit 5 900
Distribution cost (1 900)
Administrative expenses ( 2 500)
PROFIT FOR THE YEAR 1500
Other Comprehensive Income: __ __________
TOTAL COMPREHENSIVE INCOME 1500
FOR THE YEAR ‗‗‗‗‗‗‗‗‗‗‗‗‗
DFG Ltd
Statement of Comprehensive income for the year ended 30 April 20X9
Share Capital Retained Earnings Total equity
£000 £000 £000
Balance at 1 May 20X8 8 400 1 100 9 500
Profit for the Year 1 500 1 500
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
Balance at 30 April 20X9 8 400 2 600 11 000
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
DFG Ltd
Statement of Comprehensive income for the year ended 30 April 20X9
Notes £000
ASSETS
Non-Current assets
Property, Plant, and Equipment 1 5 600
 Notes £000
Current assets
Inventories 4 200
Trade receivables 2 000
Cash and Cash equivalent 600
6 800
¯¯¯¯¯¯¯¯¯¯
Total Assets 12 400
‗‗‗‗‗‗‗‗‗‗‗‗‗
EQUITY AND LIABILITIES
Equity
Share Capital 8 400
Retained earnings 2 600
Total equity ---------------------------------- 11 000
Current Liabilities
Trade and other payables 1 400
Total equity and liabilities 12 400
‗‗‗‗‗‗‗‗
Notes
1.Property ,Plant and equipment £000
Machinery 3 200
Delivery vehicles 2 400
5 600 ‗‗‗‗‗‗‗‗
Workings
Revenue
Sales 19 000
Returns from customers (500)
18 500
Cost of sales
Inventory at 1 May 20X8 4 000
Purchase 12 000
Rent of factory 800
Inventory at 30 April 20X9 (4 200)
12 600
Distribution costs
Delivery vehicle running expenses 700
Selling expenses 1 200

Administrative expenses
Administrative wages 2500
 SOME IMPORTANT POINTS ABOUT PREPARING THE
STATEMENTS:
-NOTES VERSUS WORKINGS
The notes are part of the financial statements and so they are cross
referenced to the accounting statements themselves.
The working are not part of the statements and they would not be
shown to anybody.
Workings should not be cross referenced to the statements because
that might create the impression that you would publish these rough
calculations alongside the statements and notes.
Always have two separate sheets of paper for notes and working.
Never head up a single sheet of paper as “Notes and workings” and
leave examiner to guess.
WORK NEATLY

Accountancy is about communicating

information to inform decisions. Accounting
statements are intended to be read and
understood.
Working neatly is also a sign of a calm and
methodical approach.
A FEW POINTS ABOUT THE IAS 1
FORMATS

The best way of dealing with the

ambiguity about the headings is to
provide clear workings.
Do not waste time trying to memorize
the formats.
 Page 1 Page 2

Statement of
comprehensive Statement of financial
position
income

Page 3
Page 4
Workings
Notes
THANK YOU!