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FAF3 ACCA derestion

2. FINANCIAL
ACCOUNTING

3. Some notes for learning F3
EFFECTIVE LEARNING
Active reading
Take notes
Revision
Further reading
Scan Ask Read Recall Review
Technical
articles
IFRS box
Practice exam standard
questions
Mind map/diagrams
Your own word
key points, headings
Learning outcomes

4. Some notes for learning F3
F3 Detailed Syllabus
A.The context and purpose of
financial reporting
B.The qualitative characteristics of
financial information
C.The use of double-entry and
accounting systems
D.Recording transactions and events
E.Preparing a trial balance
F.Preparing basic financial
statements
G.Preparing simple consolidated
financial statements
H.Interpretation of financial
statements

5. Some notes for learning F3
OVERVIEW
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
LEDGER
ACCOUNTS
TRIAL BALANCE
FINANCIAL
STATEMENTS
BUSINESS
TRANSACTIONS
Chapter 4 Chapter 5
Chapter 6 &
14-16
Chapter 17-22
Chapter 7-13
CONSOLIDATED
FINANCIAL
STATEMENTS
Chapter 23-25
FINANCIAL INFORMATION
Chapter 3
THE REGULATORY FRAMEWORK
Chapter 2

6. Some notes for learning F3
LEARNING OBJECTIVES
►Explainthecontextandpurposeof
financialreporting.
►Definethequalitativecharacteristicsof
financialinformation.
►Demonstratetheuseofdoubleentryand
accountingsystems.
►Recordtransactionsandevents.
►Prepareatrialbalance(including
identifyingandcorrectingerrors).
►Preparebasicfinancialstatementsfor
incorporatedand unincorporated
entities.
►Preparesimpleconsolidatedfinancial
statements
►Interpretationoffinancialstatements

7. INTRODUCTION TO
ACCOUNTING

8. Overview and learning outcomes
1.The purpose of financial reporting
2.Types of business entity
3.Stakeholders
4.Introduction to financial statements
5.Those charged with governance
OVERVIEW LEARNING OUTCOMES

9. Introduction to financial statements
ASSETS
Non-current assets
Properties, plant and
equipment (PPE)
Long-term investment
Other NCA
Current assets
Cash and cash equivalents
Inventories
Trade receivables
Short-term investment
Other CA
LIABILITIES
Non-current liabilities
Long-term borrowings
Long-term provisions
Current liabilities
Trade and other payables
Short-term borrowings
Bank overdraft
Taxation
Other CL
EQUITY
Share capital/premium
Retained Earnings (RE)
Reserves
STATEMENT OF FINALCIAL POSITION (SOFP)
Revenue
Cost of sales
Gross profit
Other income
Expenses
Selling expenses
Operations and administrative exp
Other expenses
Finance cost
Profit before tax (PBT)
Income tax expenses
Profit for the year (net profit after
tax)
Income statement (IS)

10. Format of Income Statement
An income statement summarizes the income
and expenditureof the company over a period
of time. If income exceeds expenditure, the
business gets a profit, if vice versa, a loss occurs
Income: Increases in economic benefitsduring
the accounting period In the form of
-inflows or enhancements of assets; or
-decreases of liabilities
that result in increase in equity, other than
those relating to contributions to equity
participants
Expenses:Decrease in economic benefits
during the accounting period in the form of
-outflows or depletions of assets;
-incurrences of liabilities
that result in decreases in equity, other than
those relating to distributions to equity
participants

11. Format of Statement of Financial Position
TheStatementofFinancial
Positionisastatementofassets
owned,liabilitiesowedandequity
ofabusinessataparticulardate.
Anassetisaresourcecontrolledby
anentityasaresultofpastevents
andfromwhichfutureeconomic
benefitsareexpectedtoflowtothe
entity.
Aliabilityisapresentobligationof
theentityarisingfrompastevents,
thesettlementofwhichis
expectedtoresultinanoutflow
fromtheentityofresources
embodyingeconomicbenefits

12. TheStatementofFinancialPositionisastatementofassetsowned,
liabilitiesowedandequityofabusinessataparticulardate.
Anassetisaresourcecontrolledbyanentityasaresultofpast
eventsandfromwhichfutureeconomicbenefitsareexpectedtoflow
totheentity.
Aliabilityisapresentobligationoftheentityarisingfrompastevents,the
settlementofwhichisexpectedtoresultinanoutflowfromtheentityof
resourcesembodyingeconomicbenefits

13. Format for the Statement of Cash Flow
Acashflowstatementsummarizesthecashinflows
(receipts)andcashoutflows(payments)foragivenperiod.
Thecashflowstatementprovideshistoricalinformation
aboutcashandcashEquivalents.

14. SOURCES, RECORDS AND BOOKS
OF PRIME ENTRY

15. Learning outcomes and overview
1.Business transactions
2.Sources of documents
3.Books of prime entry
►Sales/Salesreturnsdaybook
►Purchase/Purchasereturns
daybook
►Cash/Pettycashbook
►Journal
LEARNING OUTCOMES
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
BUSINESS
TRANSACTIONS
Chapter 4
LEDGER
ACCOUNTS
Chapter 5
FINANCIAL
STATEMENTS
FINANCIAL
INFORMATION
Chapter 3

16. Business transactions
Cash
transactions Discounts
Credit
transactions

17. Sources of documents
Documents Content Purpose
Quotation Quantity/description/details of goods required.To establish price from various suppliers and cross refer to
purchase requisition
Purchase orderDetails of supplier, e.g. name, address.
Quantity/description/details of goods
required and price. Terms and conditions of
delivery, payment, etc.
Sent to supplier as request for supply. To check to the
quotation and delivery note.
Sales order Quantity/description/details
of goods required and price.
Cross checked with the order placed by customer.
Sent to the stores/warehouse department for
processing of the order.
Receipt Details of payment received. Issued by the selling company indicating the
payment received.
Goods
despatched
note –GDN
Details of supplier, e.g. name and address.
Quantity and description of goods
Provided by supplier. Checked with goods
received and purchase order.
Goods received
note (GRN)
Quantity and description of
goods.
Produced by company receiving the goods as proof of
receipt. Matched with delivery note and purchase order.
Invoice Name and address of supplier and customer;
details of goods, e.g. quantity, price, value, sales
tax, terms of credit, etc.
Issued by supplier of goods as a request for payment. For
the supplier selling the
goods/services this will be treated as a sales invoice. For
the customer this will be treated as a purchase invoice.

18. Sources of documents
Documents Content Purpose
Statement Details of supplier, name and address.
Date, invoice numbers and values,
payments made, refunds, amount owing.
Issued by the supplier. Checked with other
documents to ensure that the amount owing is
correct.
Credit noteDetails of supplier, name and address.
Contains details of goods returned, quantity,
price, value, sales tax, terms of
Credit.
Issued by the supplier. Checked with documents
regarding goods returned.
Debit note Details of the supplier. Contains details of
goods returned, e.g. quantity, price, value,
sales tax, terms of credit, etc.
Issued by the company receiving the goods. Cross
referred to the credit note issued by the supplier.
Remittance
advice
Method of payment, invoice number,
account number, date, etc.
Sent to supplier with, or as notification of, payment.

19. Books of prime entry
Booksof prime entry Transaction type
Sales day book Credit sales
Purchases day book Credit purchases
Sales returns day book Returns of goods sold on credit
Purchases returns day
book
Returns of goods bought on credit
Cash book All bank transactions
Petty cash book All small cash transactions
The journal All transactions not recorded elsewhere
All transactions are initially recordedin a book of prime entry. This is a simple note of the transaction, the
relevant customer/supplier and the amount of the transaction. It is, in essence, a long list of daily transactions.

20. Books of prime entry
Sales day book
Thesalesdaybookisthebookofprimeentryfor
creditsales.Thesalesdaybookisusedtokeepalist
ofallinvoicessentouttocustomerseachday.
Purchase day book
Abusinessalsokeepsarecordinthepurchaseday
bookofalltheinvoicesitreceives.Thepurchaseday
bookisthebookofprimeentryforcreditpurchases.
Sales returns day book
Whencustomersreturngoodsforsomereason,a
creditnoteisraised.Allcreditnotesarerecordedin
thesalesreturnsdaybook.
Thesalesreturnsdaybookisthebookofprime
entryforcreditnotesraised.
Where a business has very few sales returns, it may
record a credit note as a negative entry in the sales
day book.
Purchase returns day book
Thepurchasereturnsdaybookrecordscreditnotes
receivedinrespectofgoodswhichthebusinesssends
backtoitssuppliers.
Thepurchasereturnsdaybookisthebookofprime
entryforcreditnotesreceivedfromsuppliers.
Abusinesswithveryfewpurchasereturnsmayrecord
acreditnotereceivedasanegativeentryinthe
purchasedaybook

21. Books of prime entry
Cash book
The cash book may be a manual record or a
computer file. It records all transactions that go
through the bank account.
The cash book deals with money paid into and out of
the business bank account.
The cash book is the book of prime entry for cash
receipts and payments.
Bank statements
Weekly or monthly, a business will receive a bank
statement. Bank statements should be used to check
that the amount shown as a balance in the cash book
agrees with the amount on the bank statement, and
that no cash has 'gone missing'.
Petty cash book
Mostbusinesseskeeppettycashonthepremises,
whichistoppedupfromthemainbankaccount.Under
theimprestsystem,thepettycashiskeptatan
agreedsum,sothateachtoppingupisequaltothe
amountpaidoutintheperiod.
Asmallamountofcashonthepremisestomake
occasionalsmallpaymentsincash,egstaff
refreshments,postagestamps,topaytheoffice
cleaner,taxifares,etc.Thisisoftencalledthecash
floatorpettycashaccount.
Apettycashbookisacashbookforsmallpayments.

22. LEDGER ACCOUNTS AND DOUBLE
ENTRIES

23. Learning outcomes and overview
1.Financial accounting process
2.Ledger accounts
3.The accounting/business equation
4.Double entry bookkeeping
5.The receivables and payables ledger
LEARNING OUTCOMES
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
BUSINESS
TRANSACTIONS
Chapter 4
LEDGER
ACCOUNTS
Chapter 5
FINANCIAL
STATEMENTS
FINANCIAL INFORMATION
Chapter 3

24. The Accounting Equation
Concepts Description
Stocks/Inventories Unsold goods
Account receivables (AR) Amounts owed to the business by its customers
Account payables (AP) Amount owed by the business to its suppliers
Retained earnings (RE) Profit generated from operation by a business but not yet
distributed to its owners
Drawings Amounts of money or assets taken out of a business by its
owners
Return inwards Goods returned to the business
Return outwards Goods returned by the business
Gross profit Gross profit = Sales –Cost of goods sold (COGS)
Net profit Net profit = Gross profit –Expenses

25. Ledger Account
►Nominalledger(Generalledger/GL)isanaccountingrecordwhichcontainstheprincipleaccountsand
whichsummarizesthefinancialaffairsofabusiness
►Themethodusedtosummarisetheserecords:ledgeraccountinganddoubleentry.
►Formatofanominalledger
Account Name
Dr Cr

26. An accountshows the effect of transactions on a given
asset, liability, equity, revenue, or expense account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and
crediting another.
DEBITS must equal CREDITS.
Debits and Credits
LO 1
Ledger Account

27. Account Name
Debit / Dr. Credit / Cr. Debits and Credits
An arrangement that shows the
effect of transactions on an
account.
Debit = “Left”
Credit = “Right”
Account
An Account can be
illustrated in a T-
Account form.
LO 1

28. Account Name
Debit / Dr. Credit / Cr. $10,000 Transaction #2$3,000
8,000
Transaction #1
Transaction #3
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Debits and Credits
LO 1

29. Account Name
Debit / Dr. Credit / Cr. $10,000 Transaction #2$3,000
8,000
Balance
Transaction #1
Transaction #3
If the sum of Debit entries are less than the sum of
Credit entries, the account will have a credit balance.
Debits and Credits
LO 1

30. Chapter
3-23
Assets
Debit / Dr. Credit / Cr.
Normal Balance Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Expense Chapter
3-24
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Equity Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Revenue Normal
Balance
Credit
Normal
Balance
Debit
Debits and Credits Summary
LO 1

31. Statement of Financial
Position
= + -Asset LiabilityEquityRevenueExpense
Debit
Credit
Debits and Credits Summary
Income Statement
LO 1

32. Relationship among the assets, liabilities and equity of a
business:
The equation must be in balance after every transaction. For
every Debitthere must be a Credit.
The Accounting Equation

33. Relationship among the assets, liabilities and equity of a
business:
The equation must be in balance after every transaction. For
every Debitthere must be a Credit.
The Accounting Equation

34. Financial
Statements
and Ownership
Structure
Investments by shareholders
Net income retained in the
business

35. FROM TRIAL BALANCE TO
FINANCIAL STATEMENTS

36. DISCUSSION PANNEL
CASE STUDY

37. Learning outcomes and overview
1.The Trial balance (TB)
2.The Statement of Profit or Loss (PL)
3.The Statement of Financial position (SFP)
4.Balancing off/Closing off ledger accounts and preparing the FSs.
LEARNING OUTCOMES
SOURCE
DOCUMENTS
BOOKS OF
PRIME ENTRY
Chapter 4
LEDGER
ACCOUNTS
Chapter 5
TRIAL BALANCE
Chapter 6 &
14-16

38. The Trial Balance (TB)
Atsuitableintervals,theentriesineachledgeraccountaretotaledandabalanceisstruck.Balancesareusuallycollected
inatrialbalancewhichisthenusedasabasisforpreparingastatementofprofitorlossandastatementoffinancial
position.
Atrialbalanceisalistofledgerbalancesshownindebitandcreditcolumns.
StepstopreparetheTrialBalance(TB):
►Step1:Collectofledgeraccounts
►Step2:Balanceledgeraccounts
►Step3:Collectthebalances
►Step4:Checkandreconcile

39. Financial Statements
Aprofitorlossledgeraccountisopeneduptogatherallitemsrelatingtoincomeandexpenses.Whenrearranged,
theseitemsmakeupthestatementofprofitorloss.
STATEMENT OF PROFIT AND LOSS
STATEMENT OF FINANCIAL POSITION
Thebalancesonallremainingledgeraccounts(includingtheprofitorlossaccount)canbelistedandrearrangedto
formthestatementoffinancialposition.
Theseremainingaccountsmustalsobebalancedandruledoff,butsincetheyrepresentassetsandliabilitiesofthe
business(notincomeandexpenses)theirbalancesarenottransferredtotheP/Laccount.Insteadtheyarecarried
downinthebooksofthebusiness.Thismeansthattheybecomeopeningbalancesforthenextaccountingperiod
andindicatethevalueoftheassetsandliabilitiesattheendofoneperiodandthebeginningofthenext.

40. Balancing off/Closing off ledger accounts
Step 1 Step 2 Step 3
Total both sides
of the T-account
and find the
larger total
Put the larger
total in the total
box on the debit
and credit side.
Insert a balancing
figure to the side
which does not
currently add up to
the amount in the
total box. Call this
balancing figure
‘balance c/f’ (carried
forward) or ‘balance
c/d’ (carried down).
Step 4
Carry the
balance down
diagonally and
call it ‘balance
b/f’ (brought
forward) or
‘balance b/d’
(brought down).
BALANCING OFF A LEDGER ACCOUNT

41. Balancing off/Closing off ledger accounts
BALANCING OFF A LEDGER ACCOUNT
Balance sheet ledger accounts
Assets/liabilitiesattheendofaperiod=Assets/liabilities
atstartofthenextperiod.
Balancingtheaccountwillresultin:
►Abalancec/f(beingtheasset/liabilityattheendof
theaccountingperiod)
►Abalanceb/f(beingtheasset/liabilityatthestartof
thenextaccountingperiod).
Profit or Loss ledger accounts
►Attheendofaperiodanyamountsthatrelatetothat
periodaretransferredoutoftheincomeand
expenditureaccountsintoanotherledgeraccount
calledprofitorloss.
►Donotshowabalancec/forbalanceb/fbutinstead
putthebalancingfigureonthesmallestsideandlabel
itļËx¯Þü orloss'.

42. Shows the
balance of all
accounts, after
adjusting entries,
at the end of the
accounting period.
Proves the
equality of the
total debit and
credit balances
Adjusted
Trial
Balance

45. Closing Entries
Service Revenue 106,000
Profit or Loss 106,000
Profit or Loss 73,000
Salaries & Wages Expense46,000
Supplies Expense 15,000
Rent Expense 9,000
Insurance Expense 500
Interest Expense 500
Depreciation Expense 400
Bad Debt Expense 1,600
Profit or Loss 33,000
Retained Earnings 33,000
Retained Earnings 5,000
Dividends 5,000
Closing Journal Entries

47. CORRECTION OF ERRORS
ERRORS OF
TRANPOSITION
ERRORS OF
OMISSIONS
ERRORS OF
PRINCIPLE
ERRORS OF
COMMISSION
COMPENSATING
ERRORS

48. ERRORS OF TRANSPOSITION
Anerroroftranspositioniswhentwodigitsinafigureareaccidentallyrecordedthewrongwayround.
Forexample,supposethatasaleisrecordedinthesalesaccountas$6,843,butithasbeenincorrectly
recordedinthetotalreceivablesaccountas$6,483.Theerroristhetranspositionofthe4andthe8.The
consequenceisthattotaldebitswillnotbeequaltototalcredits.Youcanoftendetectatranspositionerrorby
checkingwhetherthedifferencebetweendebitsandcreditscanbedividedexactlyby9.Forexample,$6,843–
$6,483=$360;$360/9=40.

49. ERRORS OF OMISSIONS
Anerrorofomissionmeansfailingtorecordatransactionatall,ormakingadebitorcreditentry,butnotthe
correspondingdoubleentry.
(a)Ifabusinessreceivesaninvoicefromasupplierfor$250,thetransactionmightbeomittedfromthebooks
entirely.Asaresult,boththetotaldebitsandthetotalcreditsofthebusinesswillbeincorrectby$250.
(b)Ifabusinessreceivesaninvoicefromasupplierfor$300,thepayablescontrolaccountmightbecredited,but
thedebitentryinthepurchasesaccountmightbeomitted.Inthiscase,thetotalcreditswouldnotequaltotal
debits(becausetotaldebitsare$300lessthantheyoughttobe).

50. ERRORS OF PRINCIPLE
Anerrorofprincipleinvolvesmakingadoubleentryinthebeliefthatthetransactionisbeingenteredinthe
correctaccounts,butsubsequentlyfindingoutthattheaccountingentrybreaksthe'rules'ofanaccounting
principleorconcept.
(a)Forexample,repairstoamachinecosting$150shouldbetreatedasrevenueexpenditure,anddebitedtoa
repairsaccount.If,instead,therepaircostsareaddedtothecostofthenon-currentasset(capital
expenditure)anerrorofprinciplewouldhaveoccurred.Asaresult,althoughtotaldebitsstillequaltotal
credits,therepairsaccountis$150lessthanitshouldbeandthecostofthenon-currentassetis$150
greaterthanitshouldbe.
(b)Similarly,supposethattheproprietorofthebusinesssometimestakescashoutofthetillfortheirpersonal
useandduringacertainyearthesewithdrawalsonaccountofprofitamountto$280.Thebookkeeperstatesthat
theyhavereducedcashsalesby$280sothatthecashbookcouldbemadetobalance.Thiswouldbeanerror
ofprinciple,andtheresultofitwouldbethatthewithdrawalaccountisunderstatedby$280,andsoisthetotal
valueofsalesinthesalesaccount.

51. COMPENSATING ERRORS
Compensatingerrorsareerrorswhichare,coincidentally,equalandoppositetooneanother.
Forexample,althoughunlikely,intheorytwotranspositionerrorsof$540mightoccurinextractingledger
balances,oneoneachsideofthedoubleentry.Intheadministrationexpensesaccount,$2,282mightbewritten
insteadof$2,822while,inthesundryincomeaccount,$8,391mightbewritteninsteadof$8,931.Boththedebits
andthecreditswouldbe$540toolow,andthemistakewouldnotbeapparentwhenthetrialbalanceiscast.
Consequently,compensatingerrorshidethefactthatthereareerrorsinthetrialbalance.

52. SUSPENSE ACCOUNT
Asuspenseaccountisatemporaryaccountwhichcanbeopenedforanumberofreasons.Themostcommon
reasonsareasfollows.
(a)Atrialbalanceisdrawnupwhichdoesnotbalance(ietotaldebitsdonotequaltotalcredits).
(b)Thebookkeeperofabusinessknowswheretopostthecreditsideofatransaction,butdoesnotknowwhere
topostthedebit(orviceversa).Forexample,acashpaymentmightbemadeandmustobviouslybecreditedto
cash.Butthebookkeepermaynotknowwhatthepaymentisfor,andsowillnotknowwhichaccounttodebit.

53. SALES TAX

54. Definition
Salestaxisanindirecttaxleviedonthesaleofgoodsandservices.Itisusuallyadministeredbythelocaltax
authorities.
Somesalestaxisirrecoverable.Wheresalestaxisirrecoverableitmustberegardedaspartofthecostofthe
itemspurchasedandincludedinthestatementofprofitorlosschargeorinthestatementoffinancialposition
asappropriate.
Sales tax paid on purchases
(input tax)
Dr Purchases –(net cost)
Dr Sales tax (sales tax)
Cr Payables/cash –(gross cost)
Sales tax charged on sales
(output tax)
Dr Receivables/cash (gross selling price)
Cr Sales –(net selling price)
Cr Sales tax (sales tax)

55. INVENTORY

56. Learning outcomes
1.Definition of Inventory, cost of
sales
2.Methods of valuing inventory
3.IAS 02 ÛINVENTORY
LEARNING OUTCOMES
Inventory
Valuation Adjustment
Cost NRV Opening Closing

58. Cost of goods sold
Cost of good sold (COGS) = Opening inventory + purchases ±closing inventory
Format:
Opening inventory value X
+ Add cost of purchases (or, in the case of a manufacturing company, the cost of
production)
X
X
-Less closing inventory value (X)
Cost of goods sold X
Thevalueofclosinginventoriesisaccountedforinthenominalledgerbydebitinganinventoryaccountand
creditingtheprofitorlossaccountattheendofanaccountingperiod.Inventorywillthereforehaveadebit
balanceattheendofaperiod,andthisbalancewillbeshowninthestatementoffinancialpositionasacurrent
asset.

59. CARRIAGE INWARDS & OUTWARDS
Cost of carriage inwards
Cost of carriage
outwards
Usually added to COST of PURCHASE
Selling & distribution expense in SOPL

60. VALUING INVENTORY
Inventory
measurement
Cost
Net realisablevalue
(Fair value –cost to sell)
Purchase
cost
Cost of
conversion
Other cost bringing the
inventories to their present
location and condition
Purchase
price
Import
duties
Other directly
attributable cost
Trade
discounts
Costs directly related to
the units of production
Fixed and variable
production overheads
Purchase
cost
Cost of
conversion
Purchase
price
Import
duties
Other directly
attributable cost
Trade
discounts
Costs directly related to
the units of production

61. TANGIBLE NON-CURRENT
ASSETS

62. Learning outcomes and overview
1.Capital expenditure and
revenue expenditure
2.Capital income and revenue
income
3.Depreciation accounting
4.NCA ÛRevaluation
5.NCA ÛDisposal
LEARNING OUTCOMES OVERVIEW

63. CAPEX AND OPEX
Capital expenditure
►Acquisitionofnon-currentassets
►Improvementstoexistingnon-currentassets
►Recognitionofanon-currentassetinthestatementof
financialposition
Revenue expenditure
►Tradeofthebusiness
►Maintaintheexistingearningcapacityofnon-current
assets
►ExpenseintheIncomestatement
Capital Income
Theproceedsfromthesaleofnon-tradingassets
(includinglong-terminvestments).
Revenue Income
Incomederivedfromthefollowingsources.
►(a)Thesaleoftradingassets,suchasgoodsheldin
inventory
►(b)Theprovisionofservices
►(c)Interestanddividendsreceivedfrominvestments
heldbythebusiness

64. Measurement & Recognition
Recognition
►Probablethatfutureeconomicbenefitsassociatedwiththeasset
►Costoftheassettotheentitycanbemeasuredreliably
►Periodover12months
Initial
measurement
COST
Purchase price excluding any trade discount
and sales tax
costs of dismantling and removing,
restoring the site
Directly attributable costs of bringing the
asset to working condition
cost of site preparation
Initial delivery and handling costs
Installation and assembly costs
Professional fees (lawyers,
architects, engineers)
Costs of testing after deducting the
net proceeds from selling samples

65. Measurement & Recognition
Subsequent
measurement
COST model
REVALUATION
model
Revaluation –Acc depreciation –
Impairment loss
Cost –accumulated depreciation
Subsequent
expenditure
IMPROVEMENT Upgrade
Modification
New production process

66. Depreciation Accounting
The cost of a non-current asset, less its estimated residual value, is allocated fairly between accounting periods
by means of depreciation. Depreciation is both of the following:
►Chargedagainstprofit(PL);
►Deductedfromthevalueofthenon-currentassetinthestatementoffinancialposition.
Twomethodsofdepreciationarespecifiedinyoursyllabus.
►Thestraightlinemethod
►Thereducingbalancemethod
Depreciation charge = (Cost –Residual value)/Useful lifeStraight-line method
Reducing balance
method
Depreciation charge = X % ×carrying amount
Dr Depreciation expense
Cr Accumulated depreciation
Double entry

67. Depreciation Accounting
Theperiodoverwhichadepreciableassetisexpectedtobeusedbytheenterprise;orthenumberofproduction
orsimilarunitsexpectedtobeobtainedfromtheassetbytheenterprise.
Thefollowingfactorsshouldbeconsideredwhenestimatingtheusefullifeofadepreciableasset.
►Expectedphysicalwearandtear
►Obsolescence
►Legalorotherlimitsontheuseoftheassets
USEFUL LIFE
Thenetamountwhichtheentityexpectstoobtainforanassetattheendofitsusefullifeafterdeductingthe
expectedcostsofdisposal
RESIDUAL VALUE
►Expectedusefullife
►methodofdepreciation
►residualvalue
CHANGE PROSPECTIVELY

68. Revaluation of Non-current Assets
Whenanon-currentassetisrevalued,depreciationischargedontherevaluedamount.
Thegainonrevaluationisrecognisedinthestatementofprofitorlossandothercomprehensiveincome,as
othercomprehensiveincome.Fromhere,the'gain'istransferredtoarevaluationsurplus(sometimescalleda
revaluationreserve),partofcapitalinthestatementoffinancialposition.
IfNon-currentassetsweretobesubsequentlysoldfortherevaluedamount,theprofitwouldberealizedand
couldbetakentothestatementofprofitorloss.
Theaccountingentriestorecordthedepreciationchargeeachyearwouldthereforebeasfollows:
►Torecordthenewannualdepreciationcharge
DEBITDepreciationexpense(statementofprofitorloss)
CREDITAccumulateddepreciationaccount(statementoffinancialposition)
►Torecordthetransferoftheexcessdepreciation
DEBITRevaluationsurplus(statementoffinancialposition)
CREDITRetainedearnings(statementoffinancialposition)
►Torecordrevaluationdownwards
DEBITRevaluationsurplus
DEBITNCA-Accumulateddepreciationaccount
CREDITNCA-Cost

69. Non-current assets disposal
Whenanon-currentassetissold,thereislikelytobeaprofitorlossondisposal.Thisisthedifference
betweenthenetsalepriceoftheassetanditscarryingamountatthetimeofdisposal.
Profit/lossondisposalischargeddirectlytoPLinthatperiod.
Theledgeraccountingentriesareasfollows:
►withthecostoftheassetdisposedof.
DEBITDisposalofnon-currentassetaccount
CREDITNon-currentassetaccount
►withtheaccumulateddepreciationontheassetasatthe dateofsale.
DEBITAccumulateddepreciationaccount
CREDITDisposalofnon-currentassetaccount
►withtheincomefromdisposal
DEBITReceivableaccountorcashbook
CREDITDisposalofnon-currentassetaccount

70. Non-current assets disposal
A business purchased a non-current asset on 1 January 20X1 for $25,000. It had an estimated life of 6 years and an
estimated residual value of $7,000. The asset was eventually sold after 3 years on 1 January 20X4 to another trader
who paid $17,500 for it.
What was the profit or loss on disposal, assuming that the business uses the straight line method for depreciation?

71. INTANGIBLE NON-CURRENT
ASSETS

72. Learning outcomes and overview
1.Definition
2.Research and development
costs
3.Accounting treatment
LEARNING OUTCOMES OVERVIEW

73. Definition
Tangible Non-current Assets
►Normallyhavephysicalsubstance,e.glandand
buildings
►Normallyinvolveexpenditurebeingincurred
►Costofthetangiblenon-currentassetis
capitalized
►Depreciationisareflectionofthewearingoutof
theasset
Intangible Non-current Assets
►Donotnormallyhavephysicalsubstance,e.g
copyright
►Canbepurchasedormaybecreatedwithina
businesswithoutanyexpenditurebeingincurred,
i.einternallygenerated,e.gbrands.
►Purchasedintangiblenon-currentassetsare
capitalized.Generally,internallygeneratedassets
maynotbecapitalized.
►Amortizationisareflectionofawearingoutofthe
(capitalized)assets
Intangibleassetsarenon-currentassetswithnophysicalsubstance.

74. Research and Development costs
originalandplannedinvestigationundertakenwiththe
prospectofgainingnewscientificortechnicalknowledge
andunderstanding
Research Development
theapplicationofresearchfindingsorotherknowledgeto
aplanordesignfortheproductionofneworsubstantially
improvedmaterials,devices,products,processes,
systemsorservicespriortothecommencementof
commercialproductionoruse
R&D Costs
AllcoststhataredirectlyattributabletoR&Dactivities,orthat
canbeallocatedonareasonablebasis(Salaries,wages,
costsofmaterialsandservices,depreciation,overheadcosts
andothercosts)
be recognisedas an
expensein the period in
which they are incurred
be recognisedas an
intangible asset (deferred
development expenditure)
IAS
38

75. Learning outcomes and overview
1.Definition
2.Accounting treatment
LEARNING OUTCOMES OVERVIEW
Accruals concept
Expenditure Income
PrepaidAccrued

76. Definition
Accruals
►Accruedexpenses(accruals)areexpenses
relatetoanaccountingperiodbuthavenotbeen
paidfor.Theyareshowninthestatementof
financialpositionasaliability.
►Accrualsareincludedinpayablesincurrent
liabilities,astheyrepresentliabilitieswhichhave
beenincurredbutforwhichnoinvoicehasyet
beenreceived
►Enteranyaccruals
DRExpenses
CRAccruals
Prepayments
►Prepaidexpenses(prepayments)areexpenses
whichhavealreadybeenpaidbutrelatetoa
futureaccountingperiod.Theyareshowninthe
statementoffinancialpositionasanasset.
►Prepaymentsareincludedinreceivablesin
currentassetsinthestatementoffinancial
position.Theyareassets,astheyrepresent
moneythathasbeenpaidoutinadvanceofthe
expensebeingincurred.
►Enteranyprepayments
DRAssets
CRExpenses

77. IRRECOVERABLE AND
ALLOWANCE

78. Learning outcomes and overview
1.Irrecoverable debts
2.Allowances for AR
►Doubtfuldebts
►Accountingtreatment
3.Presentation
LEARNING OUTCOMES OVERVIEW
Trade receivables
Irrecoverable debts Allowances

79. Irrecoverable debts
►Irrecoverabledebtsarespecificdebtsowedtoabusinesswhichitdecidesarenevergoingtobepaid.They
arewrittenoffasanexpenseinthestatementofprofitorloss.
►Anirrecoverable(or'bad')debtisadebtwhichisdefinitelynotexpectedtobepaid.Anirrecoverabledebt
couldoccurwhen,forexample,acustomerhasgonebankrupt.
►AccordingtotheConceptualFrameworkanassetisaresourcecontrolledbyanentityfromwhichfuture
economicbenefitsareexpectedtoflow.Ifthecustomercan'tpay,thennoeconomicbenefitsareexpectedto
flowfromthetradereceivable.Sothetradereceivablenolongermeetsthedefinitionofanassetanditmust
beremovedfromthestatementoffinancialpositionandischargedasanexpenseinthestatementofprofitor
loss.
Writingoffirrecoverabledebts
DEBITIrrecoverabledebtsexpense(statementofprofitorloss)
CREDITTradereceivables(statementoffinancialposition)
Subsequentlypaid
DEBITCashaccount(statementoffinancialposition)
CREDITIrrecoverabledebtsexpense(statementofprofitorloss)

80. Allowances for receivables
Irrecoverable debts
Irrecoverabledebtsarespecificdebtswhichare
definitelynotexpectedtobepaid.
Doubtful debts
►Adoubtfuldebtisadebtwhichispossibly
irrecoverable.
►Doubtfuldebtsmayoccur,forexample,whenan
invoiceisindispute,orwhenacustomerisin
financialdifficulty.
►Thereisdoubtoverwhetherthedebtwillbepaid,anallowanceforreceivablesismadeagainstthedoubtfuldebt.Allowance
forreceivables.Animpairmentamountinrelationtoreceivablesthatreducesthereceivablesassettoitsrecoverable
amountinthestatementoffinancialposition.Itisoffsetagainsttradereceivables,whichareshownatthenetamount.
►Theallowanceagainstthetradereceivablesbalanceismadeafterwritingoffanyirrecoverabledebts.
Accounting treatment
►Whenanallowanceisfirstmade
DEBIT Irrecoverable debts expenses (SPL)
CREDIT Allowances for receivables (SFP)
►Whenanallowancealreadyexists,theincreaseinallowanceischargedasanexpense,decreaseinallowanceiscredited
backtothestatementofprofitorlossfortheperiodinwhichthereductioninallowanceismade.

81. PROVISIONS AND
CONTIGENCIES

82. Learning outcomes and overview
1.Provisions
2.Contingencies
LEARNING OUTCOMES OVERVIEW

83. Contingencies
Contingent assets
Apossibleassetthatarisesfrompast
eventsandwhoseexistencewillbe
confirmedbytheoccurrenceofoneor
ormoreuncertainfutureeventsnot
whollywithintheenterprise'scontrol.
Contingent liabilities
Apossibleobligationthatarisesfrompasteventsandwhoseexistencewillbeconfirmed
onlybytheoccurrenceornon-occurrenceofoneormoreuncertainfutureeventsnot
whollywithintheentity'scontrol;or
Apresentobligationthatarisesfrompasteventsbutisnotrecognisedbecause:
►Itisnotprobablethatatransferofeconomicbenefitswillberequiredtosettlethe
obligation;or
►Theamountoftheobligationcannotbemeasuredwithsufficientreliability.
must not be recognized, but
should be disclosed
Virtually certain > 95%
Probable 51% –95%
Possible 5% –50%
Remote < 5%
Probability of
occurence
Outflow Inflow
Virtuallycertain Provide Recognise
Probable Provide Disclosurenote
Possible Disclosurenote Ignore
Remote Ignore Ignore

84. Contingencies -Disclosure
Contingent assets
Whereaninflowofeconomicbenefitsisprobable,an
anentityshoulddisclose:
Abriefdescriptionofitsnature,andwhere
practicable;
Anestimateofthefinancialeffect
Contingent liabilities
Unlessremote,discloseforeachcontingentliability:
Abriefdescriptionofitsnature,andwherepracticable;
Anestimateofthefinancialeffect;
Anindicationoftheuncertaintiesrelatingtotheamountor
timingofanyoutflow;
Thepossibilityofanyreimbursement

85. Revision and Chapter summary

86. CONTROL ACCOUNTS

87. Learning outcomes and overview
1.Control accounts
2.Contra entry
3.Refund
4.Reconciliation of AR and AP
LEARNING OUTCOMES OVERVIEW
Control accounts
Memorandum accounts/
lists of balance
Control account
reconciliations

88. Control Accounts
Acontrolaccountkeepsatotalrecordofanumberofindividualitems.Itisanimpersonalaccountwhichispartofthedouble
entrysystem.
Acontrolaccountisanaccountinthenominalledgerinwhicharecordiskeptofthetotalvalueofanumberofsimilarbut
individualitems.Controlaccountsareusedchieflyfortradereceivablesandpayables.
►(a)Areceivablescontrolaccountisanaccountinwhichrecordsarekeptoftransactionsinvolvingallreceivablesintotal.
Thebalanceonthereceivablescontrolaccountatanytimewillbethetotalamountduetothebusinessatthattimefrom
itsreceivables.
►(b)Apayablescontrolaccountisanaccountinwhichrecordsarekeptoftransactionsinvolvingallpayablesintotal.The
balanceonthisaccountatanytimewillbethetotalamountowedbythebusinessatthattimetoitspayables.
Acontrolaccountisan(impersonal)ledgeraccountwhichwillappearinthenominalledger
Total credit sales from
sales day book
Total cash received from
debtors and discounts
Receivables control
accounts
Total credit purchases
from purchase day book
Total cash paid to debtors
and discounts received
Payables control accounts

89. Control Accounts & Personal Accounts
Thepersonalaccountsofindividualcustomersofthebusinessarekeptinthereceivablesledger,andtheamountowedby
eachreceivablewillbeabalanceonthereceivable'spersonalaccount.Theamountowedbyallthereceivablestogether(ieall
thetradereceivables)willbeabalanceonthereceivablescontrolaccount.
Atanytimethebalanceonthereceivablescontrolaccountshouldbeequaltothesumoftheindividualbalancesonthe
personalaccountsinthereceivablesledger.

90. ACCOUNTING FOR DISCOUNTS
TRADE DISCOUNTS
RECEIVED ALLOWED
deducted
from the cost
of purchases
deducted
from sales
CASH DISCOUNTS
RECEIVED ALLOWED
included
as 'other
income' of
the period
expenses in
the period
Tradediscountreceived:
CompanyApurchasesinventoryoncreditfromSupplierBatagrosscostof$100,andreceivesa
tradediscountof5%fromthesupplier.Thedoubleentryforthepurchaseisasfollows:
DrInventory/CrPayables:$95
Tradediscountallowed:
CompanyBsellsinventoryoncredittoCustomerAatagrosssalepriceof$100andoffersatrade
discountof10%tothecustomer.Thedoubleentryforthesaleisasfollows:
DrIncome/CrTradereceivables:$90

91. ENTRIES IN CONTROL ACCOUNT

92. ENTRIES IN CONTROL ACCOUNT

93. Contra/debts off-setting
Thesituationmayarisewhereacustomerisalsoasupplier.Insteadofbothowingeachothermoney,itmaybe
agreedthatthebalancesare OxXüËÅ_ ,i.e.cancelled.
Thedoubleentryforthistypeofcontrais:
DrPayablesledgercontrolaccount
CrReceivablesledgercontrolaccount
Theindividualreceivableandpayablememorandumaccountsmustalsobeupdatedtoreflectthis.

94. BANK RECONCILIATION

95. Learning outcomes and overview
1.Definition
2.Differences analysis
3.Bank reconciliation process
4.Presentation
LEARNING OUTCOMES OVERVIEW
Cash book Bank statement
Reconciliation

96. Definition and Process
Intheory,theentriesappearingona
business'sbankstatementshouldbe
exactlythesameasthoseinthe
businesscashbook.Thebalance
shownbythebankstatementshould
bethesameasthecashbookbalance
onthesamedate.
Abankreconciliationisa
comparisonofabankstatement(sent
monthly,weeklyorevendailybythe
bank)withthecashbook.Differences
betweenthebalanceonthebank
statementandthebalanceinthecash
bookwillbeerrorsortiming
differences,andtheyshouldbe
identifiedandsatisfactorilyexplained.
Common explanations
Timing
differen
ces
Errors
Bank
charges
or Bank
interest
Cash
book
Bank
statement
Differences
►Errors?usuallyinthecashbook
►Omissions ?suchasbankchargesnot
postedinthecashbook
►Timingdifferences ? suchas
unpresentedcheques
A bank
reconciliation
Corrections and
adjustments to the cash
book
Items reconciling the
corrected cash book balance
to the bank statement

97. BANK RECONCILIATION
Correctionsandadjustmentstothecashbook:
(i)Paymentsmadeintothebankaccountorfromthebankaccountbywayofstandingorderor
directdebit,whichhavenotyetbeenenteredinthecashbook
(ii)Dividendsreceived(oninvestmentsheldbythebusiness),paiddirectintothebankaccount
butnotyetenteredinthecashbook
(iii)Bankinterestandbankcharges,notyetenteredinthecashbook
(iv)Errorsinthecashbookthatneedtobecorrected
Thecorrectedcashbookbalanceisthebalancethatisshowninthestatementoffinancial
position.

98. BANK RECONCILIATION
Itemsreconcilingthecorrectedcashbookbalancetothebankstatement
(i)Chequesdrawn(iepaid)bythebusinessandcreditedinthecashbook,whichhavenotyet
beenpresentedtothebank,or'cleared',andsodonotyetappearonthebankstatement.These
arecommonlyknownasunpresentedchequesoroutstandingcheques.
(ii)Chequesreceivedbythebusiness,paidintothebankanddebitedinthecashbook,butwhich
havenotyetbeenclearedandenteredintheaccountbythebank,andsodonotyetappearon
thebankstatement.Thesearecommonlyknownasoutstandinglodgementsordeposits
creditedafterdate.
(iii)Electronicpaymentsthathavenotyetbeencleared.

99. At30September20X6,thebalanceinthecashbookofWordsworthCowas$805.15debit.A
bankstatementon30September20X6showedWordsworthCotobeincreditby$1,112.30.
Oninvestigationofthedifferencebetweenthetwosums,itwasestablishedthat:
(a)Thecashbookhadbeenundercastby$90.00onthedebitside*
(b)Chequespaidinnotyetcreditedbythebankamountedto$208.20,calledoutstanding
lodgements
(c)Chequesdrawnnotyetpresentedtothebankamountedto$425.35calledunpresented
cheques
*Note.'Casting'isanaccountant'stermforaddingup.
Required
(a)Showthecorrectiontothecashbook.
(b)Prepareastatementreconcilingthebalanceperbankstatementtothebalancepercash
book.

100. On31January20X8acompany'scashbookshowedacreditbalanceof$150onitscurrentaccountwhichdid
notagreewiththebankstatementbalance.Inperformingthereconciliationthefollowingpointscametolight.
$
Not recorded in the cash book :
Bankcharges 36
Transferfromdepositaccounttocurrentaccount 500
Not recorded on the bank statement :
Unpresentedcheques 116
Outstandinglodgements 630
Itwasalsodiscoveredthatthebankhaddebitedthecompany'saccountwithachequefor$400inerror.
Whatwastheoriginalbalanceonthebankstatement?

101. INCOMPLETE RECORDS

102. Incompleterecordsquestionsmaytestyourabilitytoprepareaccountsinthefollowingsituations.
•Atraderdoesnotmaintainaledgerandthereforehasnocontinuousdoubleentryrecordof
transactions.
•Accountingrecordsaredestroyedbyaccident,suchasfire.
•Someessentialfigureisunknownandmustbecalculatedasabalancingfigure.Thismayoccurasa
resultofinventorybeingdamagedordestroyed,orbecauseofmisappropriationofassets.
Thetaskofpreparingthefinalaccountsinvolvesthefollowing.
(a)Establishingthecostofpurchasesandotherexpenses
(b)Establishingthetotalamountofsales
(c)Establishingtheamountofaccountspayable,accruals,accountsreceivableand
prepaymentsattheendoftheyear

103. The accounting equation: assets = capital + liabilities
The business equation:
closing net assets = opening
net assets + capital introduced
+ profit tdrawings

104. Credit sales and trade receivables

105. Purchases and trade payables

106. Establish COGS

107. Stolen goods
or goods
destroyed
The cost of the goods lost is the
difference between (a) and (b).
(a) The cost of goods sold
(b) Opening inventory of the goods
(at cost) plus purchases less closing
inventory of the goods (at cost)

108. Example: cost of goods destroyed
OrleanFlamesisashopwhichsellsfashionclothes.On1January20X5,ithadtradeinventorywhich
cost$7,345.Duringtheninemonthsto30September20X5,thebusinesspurchasedgoodsfrom
supplierscosting$106,420.Salesduringthesameperiodwere$154,000.Theshopmakesagross
profitof40%oncostforeverythingitsells.On30September20X5,therewasafireintheshopwhich
destroyedmostoftheinventoryinit.Onlyasmallamountofinventory,knowntohavecost$350,was
undamagedandstillfitforsale.
Howmuchoftheinventorywaslostinthefire?

110. Accounting for inventory destroyed, stolen or otherwise
lost
Ifthelostgoodswerenot
insured,thebusinessmust
beartheloss,andthelossis
shownPL
DREXPENSE (Eg:Admin
expense)
CRCOGS
Lostgoodswereinsured,the
businesswillnotsufferaloss,
becausetheinsurancewillpay
backthecostofthelostgoods
DR INSURANCE CLAIM
(RECEIVABLE)
CRCOGS

111. ACCRUAL & PREPAYMENT

112. PREPARATION OF
FINANCIAL STATEMENTS FOR SOLE TRADERS

113. Learning outcomes and overview
1.Preparation of financial
accounts
LEARNING OUTCOMES OVERVIEW

114. Preparation of final accounts
You should now be able to prepare a set of final accounts for a sole trader from a trial balance after
incorporating period-end adjustments for depreciation, inventory, prepayments, accruals, irrecoverable
debts, and allowances for receivables
Adjustments to accounts
Draft Trial balance Final Trial balance
Financial statements

115. IFRS 15-Revenue from contracts with customer
IFRS15governstherecognitionofrevenuearisingfromcontractswithcustomers.
Revenueisincomearisingintheordinarycourseofanentity'sactivities,suchassalesandfees.
(1) Identify the contract(s) with a customer
(2) Identify the performance obligations in the contract
(3) Determine the transaction price
(4) Allocate the transaction price to the performance obligations in the contract
(5) Recogniserevenue when (or as) the entity satisfies a performance obligation

116. Revenueisincomearisinginthecourseofanentity’sordinaryactivities.
Incomeisincreasesineconomicbenefitsduringtheaccountingperiodintheformofinflowsor
enhancementsofassetsordecreasesofliabilitiesthatresultinanincreaseinequity,otherthan
thoserelatingtocontributionsfromequityparticipants.
Acontractisanagreementbetweentwoormorepartiesthatcreatesenforceablerightsand
obligations.
Acustomerisapartythathascontractedwithanentitytoobtaingoodsorservicesthatarean
outputoftheentity’sordinaryactivitiesinexchangeforconsideration.
Aperformanceobligationisapromiseinacontractwithacustomertotransfertothe
customereither:agoodorservice(orabundleofgoodsorservices)thatisdistinct;oraseries
ofdistinctgoodsorservicesthataresubstantiallythesameandthathavethesamepatternof
transfertothecustomer.
Transactionpriceistheamountofconsiderationtowhichanentityexpectstobeentitledin
exchangefortransferringpromisedgoodsorservicestoacustomer,excludingamounts
collectedonbehalfofthirdparties.

117. Cash/settlement discounts allowed
Ifacustomerisexpectedtotakeupacash/settlementdiscountallowed,thediscountisdeducted
fromtheinvoicedamountwhenrecordingtherevenue.Ifthecustomersubsequentlydoesnottake
upthediscount,thediscountisthenrecordedasrevenue.
Ifthecustomerisnotexpectedtotakeupthediscount,thefullinvoicedamountisrecognisedas
revenuewhenrecordingthesale.Ifthecustomersubsequentlydoestakeupthediscount,revenue
isthenreducedbythediscount.

118. TDFisacompanythatmanufacturesofficefurniture.Acustomerplacedanorderon22December
20X4foranofficedeskatapriceof$300plussalestaxat20%of$60.Thedeskwasdeliveredtothe
customeron25January20X5,whoacceptedthegoodsassatisfactorybysigningadeliverynote.TDF
theninvoicedthecustomerforthegoodson1February20X5.Thecustomerpaid$360toTDFon1
March20X5.
Required
HowshouldTDFaccountforrevenue?

119. Applyingthefivestepmodel:
(1)Identifythecontract(s)withacustomer:
Acustomerplacedanorderforadesk.Thisrepresentsacontracttosupplythedesk.
(2)Identifytheperformanceobligationsinthecontract:
Thereisoneperformanceobligation,thedeliveryofasatisfactorydesk.
(3)Determinethetransactionprice:
Thisisthepriceagreedaspertheorder,ie$300.Notethatsalestaxisnotincludedsincetransactionpriceas
definedbyIFRS15doesnotincludeamountscollectedonbehalfofthirdparties.
(4)Allocatethetransactionpricetotheperformanceobligationsinthecontract:
Thereisoneperformanceobligation,thereforethefulltransactionpriceisallocatedtotheperformanceofthe
obligationofthedeliveryofthedesk.
(5)Recogniserevenuewhen(oras)theentitysatisfiesaperformanceobligation:
Sincethecustomerhassignedadeliverynotetoconfirmacceptanceofthegoodsassatisfactory,thisis
evidencethatTDFhasfulfilleditsperformanceobligationandcanthereforerecognise$300inJanuary20X5.

120. INTRODUCTION TO
COMPANY ACCOUNTING

121. DISCUSSION PANNEL
CASE STUDY

122. Preference shares
Preference shares carry the right to a final dividend which is expressed as a percentage of their par value.
Eg: 6% $1 preference share carries a right to an annual dividend of 6c. Preference dividends have priority over ordinary
dividend
Rights of Preference shares:
1.Preference shareholders have a priority right to a return of their capital over ordinary shareholders if the company goes
into liquidation.
2.Preference shares do not carry a right to vote.
3.If the preference shares are cumulative, it means that before a company can pay an ordinary dividend it must not only pay
the current year's preference dividend but must also make good any arrears of preference dividends unpaid in previous
years

123. Preference shares
ClassificationDefinition Examples Treatment
Redeemable
preference
shares
thecompanywill
redeem(repay)the
nominalvalueof
thosesharesata
laterdate.
Redeemable5%$1preferenceshares
20X9'meansthatthecompanywillpay
theseshareholders$1foreveryshare
theyholdonacertaindatein20X9.The
shareswillthenbecancelledandno
furtherdividendspaid.
•Treatedlikeloansandareincluded
asnon-currentliabilitiesinthe
statementoffinancialposition;
•Reclassifythemascurrent
liabilitiesiftheredemptionisdue
within12months;
•Dividendspaidonredeemable
preferencesharesaretreatedlike
interestpaidonloansandare
includedinfinancialcostsinthe
statementofprofitorloss.
Irredeemable
preference
shares
treatedjustlikeothershares.Theyformpartofequityandtheirdividendsaretreatedasappropriations
ofprofit.

124. Ordinary shares
Ordinary shares are shares which are not preferred with regard to dividend payments. Thus a holder only receives a
dividend after fixed dividends have been paid to preference shareholders.
Example:
GardenGlovesCohasissued50,000ordinarysharesof50centseachand20,0007%preferencesharesof$1each.Its
profitsaftertaxationfortheyearto30September20X5were$8,400.Themanagementboardhasdecidedtopayan
ordinarydividend(ieadividendonordinaryshares)whichis50%ofprofitsaftertaxandpreferencedividend.
Required
Showtheamountintotalofdividendsandofretainedprofits,andcalculatethedividendpershareonordinary
shares

125. Loan stock or bonds
•Limited liability companies may issue loan stock or bonds.
•These are long-term liabilities. In some countries they are described as loan capital because they are a means of raising
finance, in the same way as issuing share capital raises finance
SHARECAPITAL LOAN STOCK
Shareholders are members of a company Providers of loan capital are creditor
Shareholders receive dividends (appropriations of profit)
Holders of loan capital are entitled to a fixed rate of
interest (an expense charged against revenue)
Shareholders cannot enforce the payment of dividends.
Loan capital holders can take legal action against a
company if their interest is not paid when due
Notsecured on company assets Loan stock is often secured on company assets

126. Reserves
^ZŒZ}oŒ [‹µ]šÇ
Ordinary share capital
(Irredeemable
preference share)
Other equity (reserves)
Share premium
Revaluation
surplus
Retained earnings Others
Statutory reserves
Non statutory reserves/
Revenue reserves
reserves which a company is required to set
up by law, and which are not available for
the distribution of dividends.
reserves consisting of profits which are
distributable as dividends, if the company so
wishes.

127. Reserves
^ZŒZ}oŒ [
equity
Par value of issued
capital (minus any
amount not yet called
up on issued shares)
Other equity:
•Capital paid-up in excess
of par value (share
premium)
•Revaluation surplus
•Reserves
•Retained earnings

128. Share premium account
'premium' means the difference between the issue price of the share and its par value. The account is sometimes called
'capital paid-up in excess of par value.
The difference between cash received by the company and the par value of the new shares issued is transferred to the share
premium account.
Share premium account cannot be distributed as a dividend under any circumstances.
Eg: if X Co issues 1,000 $1 ordinary shares at $2.60 each. What would be the accounting entries?
Debit Cash $ 2,600
CreditOrdinaryshares $ 1,000
Credit
Share premium
account
$ 1,600

129. Bonus and Right Issues
Bonus issues
Right issues
Advantages Disadvantages
Objectives
Advantages Disadvantages
Objectives
Increase the share capital
Increase marketability
Raise additional financing
►Increasescapitalwithout
diluting current
shareholders'holdings
►Capitalisereserves,so
theycannotbepaidas
dividends
►Doesnotraiseanycash
►Could jeopardise
payment offuture
dividendsifprofitsfall
►Raisescashforthe
company
►Keepsreservesavailable
forfuturedividends
►Dilutes shareholders'
holdingsiftheydonot
takeuprightsissue

130. Statement of Changes in Equity

131. EVENTS AFTER THE REPORTING
PERIOD

132. Learning outcomes and overview
1.Definition
2.Types of events
3.Disclosures
LEARNING OUTCOMES OVERVIEW
Events after the reporting period
Adjusting Non-adjusting

133. Definition
►Eventsafterthereportingperiodwhichprovideadditionalevidenceofconditionsexistingatthereportingdatewill
causeadjustmentstobemadetotheassetsandliabilitiesinthefinancialstatements.
►IAS10Eventsafterthereportingperiodrequirestheprovisionofadditionalinformationinordertofacilitatesuchan
understanding.IAS10dealswitheventsafterthereportingdatewhichmayaffectthepositionatthereportingdate.
►Eventsafterthereportingperiod:Aneventwhichcouldbefavourableorunfavourable,thatoccursbetweenthe
reportingperiodandthedatethatthefinancialstatementsareauthorisedforissue.(IAS10)
►Adjustingevent:Aneventafterthereportingperiodthatprovidesfurtherevidenceofconditionsthatexistedatthe
reportingperiod.
Adjusting events
Eventsthatprovidefurtherevidence
ofconditionsthatexistedatthe
reportingdateshouldbeadjustedfor
inthefinancialstatements.
Non-adjusting events
Eventswhichdonotaffectthesituation
atthereportingdateshouldnotbe
adjustedfor,butshouldbedisclosedin
thefinancialstatements.

134. Adjusting Events and Non Adjusting Events
IAS10Anentityshalladjusttheamountsrecognisedinitsfinancialstatementstoreflectadjustingeventsafterthereportingperiod.
►Evidenceofapermanentdiminutioninpropertyvaluepriortotheyearend
►Saleofinventoryaftertheendofthereportingperiodforlessthanitscarryingvalueattheyearend
►Insolvencyofacustomerwithabalanceowingattheyearend
►Amountsreceivedorpaidinrespectoflegalorinsuranceclaimswhichwereinnegotiationattheyearend
►Determinationaftertheyearendofthesaleorpurchasepriceofassetssoldorpurchasedbeforetheyearend
►Evidenceofapermanentdiminutioninthevalueofalong-terminvestmentpriortotheyearend
►Discoveryoffraudorerrorsthatshowthatthefinancialstatementsareincorrect
IAS10Anentityshallnotadjusttheamountsrecognisedinitsfinancialstatementstoreflectnon-adjustingeventsafterthereporting
period.
►Acquisition,ordisposal,ofasubsidiaryaftertheyearend
►Announcementofaplantodiscontinueanoperation
►Majorpurchasesanddisposalsofassets
►Destructionofaproductionplantbyfireaftertheendofthereportingperiod
►Announcementorcommencingimplementationofamajorrestructuring
►Sharetransactionsaftertheendofthereportingperiod
►Litigationcommencedaftertheendofthereportingperiod.
►Dividendsproposedordeclaredaftertheendofthereportingperiodarenotrecognisedasaliabilityintheaccountsatthereportingdate,
butaredisclosedinthenotestotheaccounts
ADJUSTING EVENTS
NON ADJUSTING EVENTS

135. Adjusting Events and Non Adjusting Events
Dividendsproposedordeclaredaftertheendofthereportingperiodarenotrecognisedasaliabilityinthe
accountsatthereportingdate,butaredisclosedinthenotestotheaccounts.
Thefollowingdisclosurerequirementsaregivenformaterialeventswhichoccurafterthereportingperiodwhichdo
notrequireadjustment.Ifdisclosureofeventsoccurringafterthereportingperiodisrequiredbythisstandard,the
followinginformationshouldbeprovided.
(a)Thenatureoftheevent
(b)Anestimateofthefinancialeffect,orastatementthatsuchanestimatecannotbemade
DIVIDENDS
DISCLOSURES

137. STATEMENT OF CASH FLOW

138. Learning outcomes and overview
1.Preparing Statement of cash
flows
2.Classification of activities in
cash flows
3.Cash flows accounting
LEARNING OUTCOMES OVERVIEW
The need for a cash flow statement
Format of a cash flow statement
Preparation of cash flow statement
Interpretation using a cash flow
statement

139. Preparing Statement of Cash flows
Statementsofcashflowsareausefuladditiontothefinancialstatementsofacompanybecauseaccounting
profitisnottheonlyindicatorofperformance.Theyconcentrateonthesourcesandusesofcashandarea
usefulindicatorofacompany'sliquidityandsolvency.
IAS 7
Objectives Scope
Provideinformationforusersoffinancialstatements
aboutanentity'sabilitytogeneratecashandcash
equivalents,aswellasindicatingthecashneedsof
theentity.Thestatementofcashflowsprovides
historicalinformationaboutcashandcash
equivalents,classifyingcashflowsbetween
operating,investingandfinancingactivities.
Astatementofcashflowsshouldbepresentedasan
integralpartofanentity'sfinancialstatements.All
typesofentitycanprovideusefulinformationabout
cashflows,astheneedforcashisuniversal,
whateverthenatureoftheirrevenue-producing
activities.Thereforeallentitiesarerequiredbythe
standardtoproduceastatementofcashflows.

140. Classification of activities in cash flows
Thestandardgivesthefollowingdefinitions,themostimportantofwhich
arecashandcashequivalents.
►Cashcomprisescashonhandanddemanddeposits.
►Cashequivalentsareshort-term,highlyliquidinvestmentsthatare
readilyconvertibletoknownamountsofcashandwhicharesubject
toaninsignificantriskofchangesinvalue.
►Cashflowsareinflowsandoutflowsofcashandcashequivalents.
►Operatingactivitiesaretheprincipalrevenue-producingactivitiesof
theenterpriseandotheractivitiesthatarenotinvestingorfinancing
activities.
►Investingactivitiesaretheacquisitionanddisposalofnon-current
assetsandotherinvestmentsnotincludedincashequivalents.
►Financingactivitiesareactivitiesthatresultinchangesinthesize
andcompositionoftheequitycapitalandborrowingsoftheentity.
Operating
activities
Investing
activities
Financing
activities

141. Operating activities
Mostofthecomponentsofcashflowsfromoperatingactivitieswillbethoseitemswhichdeterminethenetprofitorlossof
theenterprise,ietheyrelatetothemainrevenue-producingactivitiesoftheenterprise.
Thestandardgivesthefollowingasexamplesofcashflowsfromoperatingactivities:
(a)Cashreceiptsfromthesaleofgoodsandtherenderingofservices
(b)Cashreceiptsfromroyalties,fees,commissionsandotherrevenue
(c)Cashpaymentstosuppliersforgoodsandservices
(d)Cashpaymentstoandonbehalfofemployees
Certainitemsmaybeincludedinthenetprofitorlossfortheperiodwhichdonotrelatetooperationalcashflows;for
example,theprofitorlossonthesaleofapieceofplantwillbeincludedinnetprofitorloss,butthecashflowswillbe
classedasinvesting.

142. Investing activities
Thecashflowsclassifiedunderthisheadingshowtheextentofnewinvestmentinassetswhichwillgeneratefutureprofit
andcashflows.Thestandardgivesthefollowingexamplesofcashflowsarisingfrominvestingactivities.
(a)Cashpaymentstoacquireproperty,plantandequipment,intangiblesandothernon-currentassets,includingthose
relatingtocapitaliseddevelopmentcostsandself-constructedproperty,plantandequipment
(b)Cashreceiptsfromsalesofproperty,plantandequipment,intangiblesandothernon-currentassets
(c)Cashpaymentstoacquiresharesordebenturesofotherenterprises
(d)Cashreceiptsfromsalesofsharesordebenturesofotherenterprises
(e)Cashadvancesandloansmadetootherparties
(f)Cashreceiptsfromtherepaymentofadvancesandloansmadetootherparties

143. Financing activities
Thestandardgivesthefollowingexamplesofcashflowswhichmightariseundertheseheadings.
(a)Cashproceedsfromissuingshares
(b)Cashpaymentstoownerstoacquireorredeemtheenterprise'sshares
(c)Cashproceedsfromissuingdebentures,loans,notes,bonds,mortgagesandothershort-orlongtermborrowings
(d)Cashrepaymentsofamountsborrowed

144. Methods
2 ways of
creating a cash
flow statement
Direct method Indirect method
disclose major classes of gross cash
receipts and gross cash payments
net profit or loss is adjusted for the
effects of transactions of a non-
cash nature, any deferrals or
accruals of past or future operating
cash receipts or payments, and
items of income or expense
associated with investing or
financing cash flows

145. Direct method example
BoggisCohadthefollowingtransactionsduringtheyear.
(a)Purchasesfromsupplierswere$19,500,ofwhich$2,550wasunpaidattheyearend.Broughtforwardpayableswere$1,000.
(b)Wagesandsalariesamountedto$10,500,ofwhich$750wasunpaidattheyearend.Theaccountsforthepreviousyearshowedanaccrualfor
wagesandsalariesof$1,500.
(c)Interestof$2,100onalong-termloanwaspaidintheyear.
(d)Salesrevenuewas$33,400,including$900receivablesattheyearend.Broughtforwardreceivableswere$400.
(e)Interestoncashdepositsatthebankamountedto$75.

146. Indirect method
Thenetprofitorlossfortheperiodisadjustedforthefollowing:
(a)Changesduringtheperiodininventories,operatingreceivablesandpayables
(b)Non-cashitems,egdepreciation,provisions,profits/lossesonthesalesofassets
(c)Otheritems,thecashflowsfromwhichshouldbeclassifiedunderinvestingorfinancingactivities

147. Indirect method
(a)Depreciationisnotacashexpense,butisdeductedinarrivingattheprofitfigureinthestatementofprofitor
loss.Itmakessense,therefore,toeliminateitbyaddingitback.
(b)Bythesamelogic,alossonadisposalofanon-currentasset(arisingthroughunderprovisionofdepreciation)
needstobeaddedbackandaprofitdeducted.
(c)Anincreaseininventoriesmeanslesscash–youhavespentcashonbuyinginventory.
(d)Anincreaseinreceivablesmeansthecompany'sreceivableshavenotpaidasmuch,andthereforethereisless
cash.
(e)Ifwepayoffpayables,causingthefiguretodecrease,againwehavelesscash

148. Interest & Dividends
Cash flows from interest and dividends received and paid should each be disclosed separately. Each should be classified in a
consistent manner from period to period.
(a)Interest paidshould be classified as an operating cash flow or a financing cash flow.
(b) Interest received and dividends received should be classified as operating cash flows or, more usually, as investing cash
flows.
(c) Dividends paid by the enterprise should be classified as an operating cash flow, so that users can assess the enterprise's
ability to pay dividends out of operating cash flows or, more usually, as a financing cash flow, showing the cost of obtaining
financial resources.

150. Indirect method
Principles
Thetreatmentislogicalifyouthinkintermsofcash:
(a)Increaseininventoryistreatedasnegative(inbrackets).Thisisbecauseitrepresentsacash
outflow;cashisbeingspentoninventory.
(b)Anincreaseinreceivableswouldbetreatedasnegativeforthesamereasons;morereceivables
meanslesscash.
(c)Bycontrast,anincreaseinpayablesispositivebecausecashisbeingretainedandnotusedtosettle
accountspayable.Thereisthereforemoreofit.
Step 1
Set out the
proforma
statement of
cash flows
Step 2
Begin with the
reconciliation of
profit before tax
to net cash from
operating
activities as far
as possible
Step 3
Calculate the
cash flow figures
for dividends
paid, purchase
or sale of NCA,
issue of shares
and repayment
of loans if these
are not already
Step 4
Open up a
working for the
trading, income
and expense
account
Step 5
Be able to
complete the
statement by
slotting in the
figures given or
calculated

151. Cash Flows Accounting
Advantages
ability to
generate cash
more
comprehensive
easier to
prepare
Creditors are
more interested
a better means
of comparing the
results
satisfies the
needs of all
users

152. INTRODUCTION TO GROUP AND
CONSOLIDATED ACOUNTS

153. Learning outcomes and overview
1.Group and consolidation
2.Subsidiaries
3.Associates and trade investments
4.Consolidated Financial statements
LEARNING OUTCOMES
OVERVIEW
Group
account/consolidation
IAS 27
Separate financial
statements
IAS 28
Investment in
associates
IFRS 3
Business
combinations
IFRS 10
Consolidated
financial statements
IFRS 11
Joint
arrangements
IFRS 12
Disclosure of interest
in other entities
Business
combinations
Recognition
Measurement
(GW, NCI)
Accounting for
associates
Equity method
present its
investments in the
separate financial
statements
Controls
Consolidated
financial statements
Procedures
Investment entities
Joint venture
Joint operations
Disclosures

154. Introduction to Group Account
162
Types of Investment
Subsidiaries Associates Joint arrangements Other investments
Acquisition
method and
apply full
consolidation
procedures
Equity method
Joint ventures using
equity method
Joint operations
accounted for as
afinancial
instrumentin line
withIAS
39orIFRS 9
Criteria Control
Significant
influence
Joint Control Other
Accounting
method
Share ≥50% 20% to <50% Equal Other

155. Introduction to Group Account
No Concepts Definition
1 Control An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through powerover the investee
2 Power Existing rights that give the current ability to directthe relevant activitiesof the
investee
3 Subsidiary An entity that is controlledby another entity
4 Parent An entity that controlsone or more subsidiaries
5 Group A parentand all its subsidiaries
6 Associate An entity over which an investor has significant influenceand which is neither a
subsidiary nor an interest in a joint venture
7 Significant
influence
The power to participate in the financial and operating policy decisions of an
investee but it is not controlor joint controlover those policies

156. Basic Principles of Consolidation
►Consolidationmeansaddingtogether(uncancelleditems).
►Consolidationmeanscancellationoflikeitemsinternaltothegroup.
►Consolidateasifyouownedeverythingthenshowtheextenttowhichyoudonot.
Keep these basic principles in mind as you work through the detailed techniques of consolidated financial statements.

157. Basic Principles of Consolidation
Control
ownsmorethanhalf(ieover50%)ofthevotingpowerofan
entityunlessitcanbeclearlyshownthatsuchownershipdoes
notconstitutecontrol(thesesituationswillbeveryrare)
over more than 50% of the voting rights by virtue ofagreement
with otherinvestors
govern the financial and operating policies of the entity by
statute orunder an agreement.
power to appoint or remove a majority of members of the board of
directors (orequivalent governing body)
power to cast a majority of votes at meetings of the board of
directors
IFRS 10
Business entity concepts
Ignorethe legal boundaries

158. Basic Principles of Consolidation
Significant
influence
Representationontheboardofdirectors(orequivalent)
oftheinvestee
Participation in the policy making process
Material transactions between investor and investee
Interchange of management personnel
Provision of essential technical information
Associates
Equity
method

159. Consolidated Financial Statements
Objectives of IFRS 10
Consolidated FS Control
Accounting
requirements
Investment
entities
Exemption from
preparing group
accounts
a wholly-owned
subsidiary or it is
a partially owned
subsidiary
not publicly
traded
not in the
process of
issuing
securities
ultimate or
intermediate
parent

160. Consolidated Financial Statements
Non-controlling interest
NCI
The equity in a subsidiary not attributable,
directly or indirectly, to a parent
be presented in the consolidated statement
of financial position within equity, separately
from the parent shareholders’ equity
Group structure
Direct interest Indirect holdings
P
S2S1 S3
P
S
SS
60%
70%
60%55%80%

161. Consolidated Financial Statements
Non-controlling interest
NCI
The equity in a subsidiary not attributable,
directly or indirectly, to a parent
be presented in the consolidated statement
of financial position within equity, separately
from the parent shareholders’ equity
Group structure
Direct interest Indirect holdings
P
S2S1 S3
P
S
SS
60%
70%
60%55%80%

162. Consolidated statement of financial position

163. Consolidated statement of financial position
171
Basic procedures
The financial statements of a parent and its subsidiaries are combined on a line-by-line basisby
adding together like items of assets, liabilities, equity, income and expenses.
Parent Subsidiary Group Action
Investment in subsidiaryPortion of equity Eliminated
Intra-group trading Intra-group trading Eliminated
Internal balances Internal balances Eliminated
Dividend received from
subsidiary
Dividend paid to parent Eliminated
NCI of net income Adjusted to net income attributed to
owners of parent
NCI of net asset Presented separately in the
consolidated SOFP
Goodwill (GW) IFRS 3

164. Consolidated statement of financial position
Calculated NCI
Proportionate share Full (fair) value
NCI value = NCI % ×S’s net assets at acquisition
NCI value = fair value of NCI's holding at acquisition
(number of shares NCI own ×subsidiary share price)
Fair value of NCI in subsidiary just before acquisition
Goodwill attributable to NCI

165. Goodwill
Consideration transferred
NCI value at acquisition
Subsidiary’s net assets
Ordinary shares
Reserves on acquisition
Retained earnings (RE)
Fair value adjustment
Fair value of net assets
GOODWILL
INVESTMENT
VALUE
FAIR VALUE OF
NET ASSETS
CARRYING VALUE
OF NET ASSETS
GOODWILL

166. Goodwill
Consideration
transferred
Cash paid
Deferred consideration
Share exchange
Expense and issue cost
Contingent consideration
discounted
Fair value
@ published prices at acquisition date
Lawyers, audit fees, accounting fees are
written off as incurred
Issue costs are deducted from the proceeds
Unwinding discount(PV x cost of capital) is
charged to finance cost
Goodwill impairment Goodwill arising on consolidation is subjected to an annual impairment review and impairment may be
expressed as an amount or as a percentage.
DEBIT Impairment expenses (PL) (Group retained earnings-BS)/ CREDIT Goodwill (BS)
When NCI is valued at fair value the goodwill in the statement of financial position includes goodwill
attributable to the NCI.
DEBIT Impairment expenses (PL) (Group retained earnings-BS)/ DEBIT NCI/ CREDIT Goodwill (BS)

167. Intra Group Transactions
Parent (P) Subsidiary (S) Group Adjustments
P sells at mark-up S buys at mark-up but not
sells out to customers
Unrealisedprofit (URP) at P
Closing inventory at S
DR Group RE
CR Group Inventory (URP)
P buys at mark-up but not
sells out to customers
S sells at mark-up Unrealisedprofit at S
Closing inventory at P
DR Group RE
DR NCI
CR Group Inventory (URP)
P sells Non-current assets at
mark-up
S buys Non-current assets
from P at mark-up
Unrealisedprofit (URP) at P
NCA at S and unreal
additional depreciation at S
DR Group RE (URP)
CR NCA
CR Depreciation
P buys Non-current assets
from S at mark-up
S sells Non-current assets at
mark-up
Unrealisedprofit (URP) at S
NCA at P and unreal
additional depreciation at P
DR Group RE (URP)
DR NCI
CR NCA
CR Depreciation

168. Consolidated Procedures
Working Procedures
Working 1 Group structure
P S
Working 2 Net assets of subsidiary At the date of
acquisition
At the reporting
date
Post-acquisition
Share capital (SC) XXX XXX -
Share premium (SP) XXX XXX -
Reserves (RS) XXX XXX XXX
Retained Earnings (RE) XXX XXX XXX
XXX XXX XXX
Fair value adjustment XXX XXX
Fair value of net assets XXX XXX

169. Consolidated Procedures
Working Procedures
Working 3 Goodwill
Investment value (IV) XXX
Fair value of net assets (FV) –(W2) (XXX)
Goodwill XXX
Impairment of GW (LOS 3) (XXX)
XXX
Working 4 Non-controlling interest
NCI value at acquisition (LOS 3) XXX
NCI share of post-acquisition reserves (W2) XXX
NCI share of impairment (fair value method only) (XXX)
XXX

170. Consolidated Procedures
Working Procedures
Working 5 Group Retained Earnings (RE)
P's retained earnings (100%) XXX
P's % of sub's post-acquisition retained earnings (W2) XXX
Less: Parent share of impairment (W3) (XXX)
XXX
Working 6 Eliminate Intra-group transactions
Working 7 Aggregate assets and liabilities
Working 8 Share capital
Only P’s accounts

171. Cancellation entries
No. Contents Notes
W1 Recording fair value of consideration given
DR Investment in S
CR Payable to S Record contingent or deferred consideration
DR RE –P (interest expense)
CR Payable to S Record interest expense on unwinding the discount
W2 Cancellation of carrying value of S’s net assets
DR OS/SP/Reserve –S
DR RE –S @ acq
CR Investment in S
CR NCI

172. Cancellation entries
No. Contents Notes
W3 Recording Goodwill and fair value adjustment
DR Goodwill
DR Assets
CR Investment in S
CR NCI
CR Liabilities
DR RE –P Adjusted accumulated depreciation expenses for
depreciable assets
DR NCI
CR Assets

173. Cancellation entries
Inter-co sales of Non-current assets
Downstream transaction (P sells to S)
1 DR RE –P (gain) Eliminate gain on sales of assets
CR Assets
2 DR Assets Adjust accumulated depreciation expenses
CR RE -P
Upstream transaction (S sells to P)
1 DR RE –P (gain) Eliminate gain on sales of assets
DR NCI
CR Assets
2 DR Assets Adjust accumulated depreciation expenses
CR RE -P
CR NCI

174. Cancellation entries
No. Contents Notes
Inter-co dividend Not affect the SFP
Inter-co payable/receivables
DR Payables
CR Receivables
Payment in transit
1 DR Cash Eliminate payment in transit
CR Receivables
2 DR Payables Eliminate AR/AP
CR Receivables

175. Cancellation entries
No. Contents Notes
Inter-co dividend Not affect the SFP
Inter-co payable/receivables
DR Payables
CR Receivables
Payment in transit
1 DR Cash Eliminate payment in transit
CR Receivables
2 DR Payables Eliminate AR/AP
CR Receivables

176. CONSOLIDATED STATEMENT OF PROFIT
AND LOSS AND OTHER COMPREHENSIVE
INCOME

177. Learning outcomes and overview
1.The consolidated statement of
profit or loss (and other
comprehensive income)
2.Disposals
LEARNING OUTCOMES OVERVIEW

178. Consolidated SOCI
No. Contents Notes
Step 1 Aggregate revenue and expenses (100% P + 100% S)
Step 2 Eliminate intra-group items from both revenue and costs of sales
Goods sold by P. Increase cost of sales by unrealisedprofit
GoodssoldbyS.Increasecostofsalesbyfullamountofunrealisedprofit
anddecreasenon-controllinginterestbytheirshareofunrealisedprofit
Step 3 Fair value adjustment
IfthevalueofS’sNCAhavebeensubjectedtoFVupliftthenanyadditional
depreciationmustbechargedtoPL.NCIwillneedtobeadjustedfortheir
share.
Impairment of Goodwill
Eliminate dividend paid by subsidiary DR Dividend income (PL)
DR NCI
CR Retained Earnings (RE)

179. Consolidated SOCI
No. Contents Notes
Step 4 Calculate NCI
S’s profit after tax as per statement of P/L
XXX
LESS
Unrealized profit (*) (XXX)
ProfitondisposalofNCA(*) (XXX)
Additional depreciation due to FV adjustments
(XXX)
ADD
AdditionaldepreciationduetodisposalofNCA(*) XXX
XXX
NCI (%) XXX
Step 5 Present profit attributable to owners of P and NCI separately
Notes (*) ALL sales of goods and non-current assets made by subsidiary
Only the post-acquisitionprofits of the subsidiary are brought into the
Consolidated PL

180. INTERPRETATION OF
FINANCIAL STATEMENTS FOR COMPANIES

181. Learning outcomes and overview
1.Financial analysis
2.Limitations of ratios analysis
3.Ratios
LEARNING OUTCOMES OVERVIEW
Interpretation of financial statements
Ratio analysisReview the raw data
ProfitabilityLiquidity Efficiency Position

182. Financial Analysis
Financial
analysis
Trend
analysis
Comparison
s across
companies

183. Trend Analysis
Trend
analysis
Changes in
the nature of
the business
Unrealistic
depreciation
rates under
historical cost
accounting
The
changing
value of the
currency
unit being
reported
Changes in
accounting
policies
Different
degrees of
diversification
Different
production and
purchasing
policies
Different
financing
policies
Different
accounting
policies
Different effects
of government
incentives
Comparability
between
companies

184. The Broad Categories of Ratios
►Return on
capital
employed
►Netprofitasa
percentageof
sales
►Assetturnover
ratio
►Grossprofitasa
percentageof
sales
►Debtratios
►Gearing
ratio/leverage
►Interestcover
►Currentratio
►Quickratio
►Receivables
collectionperiod
►Payables
paymentperiod
►Inventory
turnoverperiod
►Gearing
ratio/leverage
►EPS
►Dividendcover
►Dividendper
share
►Priceearning
ratios
Profitability and return
Long-term solvency
and stability
Short-term solvency
and liquidity
Efficiency (turnover
ratios)
Shareholders'
investment ratios
RATIO
ANALYSIS

185. ROCE
Profit
margin
Asset
turnover
PBIT/ SALES SALES / CAPITAL EMPLOYED
A warning about comments on profit margin and asset turnover
(a)A high profit margin means a high profit per $1 of sales but, if this also means that sales prices are
high, there is a strong possibility that sales turnover will be depressed, and so asset turnover lower.
(b) A high asset turnover means that the company is generating a lot of sales, but to do this it might
have to keep its prices down and so accept a low profit margin per $1 of sales.

186. Debt ratio
(a) Assets consist of non-current assets at their statement of financial position value, plus current assets.
(b) Debts consist of all payables, whether they are due within one year or after more than one year.
Thereisnoabsoluteguidetothemaximumsafedebtratiobut,asaverygeneralguide,youmightregard50%as
asafelimittodebt.Inpractice,manycompaniesoperatesuccessfullywithahigherdebtratiothanthis,but50%is
nonethelessahelpfulbenchmark

187. Gearing/leverage
Gearingorleverageisconcernedwithacompany'slong-termcapitalstructure.Wecanthinkofa
companyasconsistingofnon-currentassetsandnetcurrentassets(ieworkingcapital,whichiscurrent
assetsminuscurrentliabilities).Theseassetsmustbefinancedbylong-termcapitalofthecompany,whichis
either:
(a)Shareholders'equity
(b)Long-termdebt
Thereisnoabsolutelimittowhatagearingratio
oughttobe.Acompanywithagearingratioof
morethan50%issaidtobehighlygeared,
whereaslowgearingmeansagearingratioofless
than50%

188. Leverage is the term used to describe the converse of gearing, iethe proportion of total assets financed by
equity, and which may be called the equity to assets ratio. It is calculated as follows

189. Interest cover
TheinterestcoverratioshowswhetheracompanyisearningenoughPBITtopayitsinterestcostscomfortably,
orwhetheritsinterestcostsarehighinrelationtothesizeofitsprofits,sothatafallinPBITwouldthenhavea
significanteffectonprofitsavailableforordinaryshareholders

190. Short-term solvency and liquidity
Liquidityistheamountofcashacompanycanputitshandsonquicklytosettleitsdebts(andpossiblyto
meetotherunforeseendemandsforcashpaymentstoo).
Liquidfundsconsistof:
(a)Cash
(b)Short-terminvestmentsforwhichthereisareadymarket
(c)Fixed-termdepositswithabankorotherfinancialinstitution,forexample,asixmonthhigh-interestdepositwith
abank
(d)Tradereceivables(becausetheywillpaywhattheyowewithinareasonablyshortperiodoftime)

191. The Cash Cycle
Cashgoesouttopayforsupplies,wagesandsalariesandotherexpenses,althoughpaymentscanbe
delayedbytakingsomecredit.Abusinessmightholdinventoryforawhileandthensellit.Cashwillcome
backintothebusinessfromthesales,althoughcustomersmightdelaypaymentbythemselvestakingsome
credit.
Themainpointsaboutthecashcycleareasfollows:
►Cashflowsoutcanbepostponedbytakingcredit.Cashflowsincanbedelayedbyhavingreceivables
►Thetimebetweenmakingapurchaseandmakingasalealsoaffectscashflows
►Holdinginventoriesandhavingpayablescanthereforebeseenastworeasonswhycashreceiptsare
delayed.
►Similarly,takingcreditfromcreditorscanbeseenasareasonwhycashpaymentsaredelayed.
Theliquidityratiosandworkingcapitalturnoverratiosareusedtotestacompany'sliquidity,lengthof
cashcycleandinvestmentinworkingcapital.

192. Liquidity ratios: current ratio and quick ratio
A current ratio in excess of 1 should be expected.
Thequickratioshouldideallybeatleast1forcompanieswithaslowinventory
turnover.Forcompanieswithafastinventoryturnover,aquickratiocanbe
comfortablylessthan1withoutsuggestingthatthecompanyshouldbeincash
flowtrouble

193. Efficiency ratios: control of receivables and inventories and payables