F3内部讲义

Task1 Financial position approach
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Task 1
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Financial position approach
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What is Financial Accounting
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Two Assumption
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Definition
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Accounting is a way of recording, analysing and
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summarising transactions of a business.
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ASSUMPTION:
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Accrual Base vs. Cash Base
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Going Concern
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Company A Sales
Cost of sales
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Asset A
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Cash Profit for the year
Inventory
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PPE
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Liability A
Revaluation gain in PPE
Equity A
Total comprehensive income
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Accounting equation
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Asset Liability Equity
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Asset
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Expense Liability Equity Income
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Asset
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Past events
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Resource controlled
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Future economic benefits
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Liability
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Past events
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Present obligation
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outflow
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Equity
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Asset deducts liability
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Income
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Accounting period
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Inflow
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Increase of asset or decrease of liability
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Expense
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Accounting period
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Outflow
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Decrease of asset or increase of liability
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Task 2.1 How from business transaction to financial statements
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Task 2.1
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How from business transaction
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to financial statements
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The framework of the process
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Books of prime entry
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The framework of the process
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This is achieved by having accounting records to record each stage of the process:
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Assorted transactions
(eg invoices)
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Categorised
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(in Books of Prime Entry)
Summarised
(eg nominal ledger, trial balance)
FINANCIAL STATEMENTS
(eg Statement of Financial Position and Statement of Profit or Loss)
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Books of prime entry
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Cash book (receipts)
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Cash book (payments)
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Sales day book
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Memorandum ledgers
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Receivables ledger
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Lecture Example
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Which of the following statements about the accounting system are corrrect?
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1. It provides useful accounting information and helps comply with organisation policies and
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deadlines
2. The sales day book shows amounts owed by individual customers and the purchase day
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books shows amounts owed to individual suppliers
3. Transactions are categorised in the books of prime entry, summarised in the nominal ledger
and extracted from the trial balance to produce financial statements
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A
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Entities do not need accounting systems to prepare their annual financial statements
1 and 3
B 2 and 4
C 1, 2 and 3
D 1, 2, 3 and 4
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Answer
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A
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Statement (2) is incorrect as the receivables ledger (not the sales day book) shows how
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much individual customers owe and the payables ledger (not the purchase day book)
shows how is owed to individual suppliers. Statement (4) is incorrect as accounting
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systems are necessary to record, categorise and summarise transactions for the
preparation of financial statements. Statements (1) and (3) are both correct making A the
correct option. cc 高
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Task 2.2 T-Account and Double entry
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Task 2.2
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T-Account and Double entry
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T-Account
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Double entry
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The form of T-Account
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Principles of double entry bookkeeping
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General rule
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(a) DEBIT entry represents:
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① an increase in an asset;
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② a decrease in a liability;
③ an item of expense.
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(b) CREDIT entry represents:
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① an increase in a liability;
② a decrease in an asset;
③ an item of income.
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General rule
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This can be remembered as follows
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Debits Credits
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(increase) (increase)
Expenses Liabilities
Assets cc 高 Income
Drawings Capital
(and credits will decrease these) (and debits will decrease these)
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Lecture Example
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(a) A sole trader pays $6,000 in the business bank account:
Cash increases by $6,000
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Capital increases by $6,000
(b) A sole trader purchase on credit some goods for sale for $400:
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Purchases increase by $400
Trade payables increase by $400
(c) A sole trader sells some of those goods for cash of $150:
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Cash increase by $150
Sales increase by $150
(d) A sole trader pays his rent with cash for $100:
Rent expenses increase by $100
Cash decreases by $100
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Answer
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Lecture Example
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Douglas
Douglas had the following transactions during January:
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(1) Introduced $5,000 cash as capital;
(2) Purchased goods on credit from Richard, worth $2,000;
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(3) Paid rent for one month, $500;
(4) Paid electricity for one month, $200;
(5) Purchased car for cash, $1,000;
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(6) Sold half of the goods on credit to Tish for $1,750;
(7) Drew $300 for his own expenses;
(8) Sold goods for cash, $2,100.
Post transactions (1) to (8) to the relevant ledger accounts.

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Answer
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Balancing off the ledger accounts
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Definition
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The totals from the books of prime entry may be posted to the nominal ledger
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each month. A business will want to know the balance on each account. This is
done by 'balancing off' each account.
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Steps
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(1) Add the debit and credit sides separately.
(2) Fill in the higher of the two totals on both sides.
(3) Literally 'balance' the account (what number do we need and on which side to
make the two sides equal?) – balance c/d
(4) Complete the 'double entry' – balance b/d on opposite side.
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Task 2.3 Trial Balance
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Task 2.3
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Trial Balance
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Trial Balance
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How to complete
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Trial Balance
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Miss Smith – Trial Balance at as 31 December 20X7:
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Lecture Example
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Douglas
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Using the ledger accounts for Douglas, prepare the trial balance
as at the end of January
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Answer
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Trial Balance
Debit Credit
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$ $
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Cash 5,100
Capital 5,000
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Trade payables 2,000
Purchases 2,000
Rent cc 高 500
Electricity 200
Car 1,000
Drawings 300
Trade receivables 1,750
Sales 3,850
10,850 10,850
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Statement of profit or loss
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Lecture Example
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Douglas
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Draw up a statement of profit or loss for the period and a statement

of financial position at the end of January.
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Answer
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DOUGLAS
STATEMENT OF PROFIT OR LOSS FOR THE MONTH OF JANUARY
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$ $
Sales 3,850
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Less cost of sales:
Purchases (2,000)
2,000
Gross profit cc 高 1,850
Less expenses:
Rent 500
Electricity 200
(700)
Net profit 1,150
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Statement of financial position
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DOUGLAS
STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY
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NON-CURRENT ASSET $ $
Motor vehicle 1,000
CURRENT ASSETS
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Trade reveivables 1,750
Cash 5,100
6,850
7,850
PROPRIETOR'S INTEREST
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Capital introduced on 1 January
$
5,000
$
Profit for the year 1,150

Less: drawings (300)
Balance 31 January 5,850
CURRENT LIABILITIES
Trade payables 2,000
7,850
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Drawings
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Drawings are amounts being taken out of a business by its owner.
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Drawings are generally in the form of cash, but an owner may also
take inventory out of the business. Drawings of inventories are
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recorded at the cost of the inventories not the sales price.
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Task 3
Sales Tax
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Recoverable sales tax
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Irrecoverable sales tax
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Discounts
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Sales Tax
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Definition
A business' sales and purchases are often subject to sales tax. This is an indirect
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tax, as it is not levied directly on the individual like personal income tax. Sales
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tax is collected by traders who charge it on the goods they sell to the customer.
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A business charges sales tax on its sales (output tax) and suffers sales tax on its
purchases (input tax). Typically, a business which is registered for sales tax
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only needs to make a payment to the tax authorities of the net amount of sales
tax (i.e. sales tax owed on outputs less sales tax suffered on inputs).
ILLUSTRATION
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Sales tax is a cumulative tax, collected at various stages of a product's life. In the
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illustrative example below, a manufacturer of a television buys materials and
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components and then sells the television to a wholesaler, who in turn sells it to a retailer,
who then sells it to a customer. It is assumed that the rate for sales tax is 15% on all
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items. All the other figures are for illustration only.
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Price net Sales tax Total
of sales tax 15% price
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$ $ $
(a) (i) Manufacturer purchases raw materials
and components 40 6 46
(ii) Manufacturer sells the completed television
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The manufacturer hands over to tax authorities
(b ) (i) Wholesaler purchases television
200
200
30
24
30
230
230
(ii) Wholesaler sells television to a retailer 320 48 368
Wholesaler hands over to tax authorities 18
(c) (i) Retailer purchases television 320 48 368
(ii) Retailer sells television 480 72 552
Retailer hands over to tax authorities 24
(d) Customer purchases television 480 72 552
Sales Tax
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Purchases Sales
Goods into factory Goods out of factory
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(input tax) (output tax)
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Recognition
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A registered business shows:
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(a) items of income and expenditure net of sales tax;
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(b) trade receivables and trade payables gross of sales tax.
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Accounting Treatment
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Recording a credit purchase with sales tax:
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Dr Purchases net
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Dr Sales tax control account tax
Cr Trade payables gross
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Recording a credit sale with sales tax:
Dr Trade receivables
Cr Sales
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net
Cr Sales tax control account tax
Lecture Example
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A business buys goods for $1,000 plus 15% sales tax. They then sell those goods for
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$1,500 + 15% sales tax.
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The purchases will cost ($1,000 × 1.15) = $1,150
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The sales will raise ($1,500 × 1.15) = $1,725
The sales tax payable to tax authorities will be:
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$
Payable on outputs (sales) (15% × $1,500) 225.00
Reclaimable on inputs (purchases) (15% × $1,000) (150.00)
Net sales tax to tax authoritiescc 高 75.00
As the business is purely collecting the sales tax for the tax authorities, and is able to set
off its sales tax suffered it does not include sales tax as either an expense or income in
the statement of profit or loss. The sales tax is accounted for when the transaction occurs.
Lecture Example
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Required
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(a) Post the double entry to the ledger account below.
$ $
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Dr Purchases 1,000
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Dr Sales tax control account 150
Cr Trade payables 1,150
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Points to note
Purchases – NET
Trade payables – GROSS cc 高
(b) Post the double entry to the ledger account below.
$ $
Dr Trade receivables 1,725
Cr Sales 1,500
Cr Sales tax control account 225
Answer
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Irrecoverable sales tax
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In some tax regimes, sales tax on certain inputs is never recoverable. For example, sales tax
on business entertaining or on cars may not be recoverable. In this case the tax is a genuine
expense of the business and is charged to the statement of profit or loss or included in the
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cost of an asset to be depreciated. For example, the double entry for buying a car where the
sales tax is irrecoverable would be:
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Dr Motor vehicles account Cost + sales tax
Cr Cash account Cost + sales tax
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Lecture Example
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During 20X1 Fergus buys two vans and a car each costing $10,000 plus sales tax at 15%. The car
will be used 70% for business use and 30% personal use. The vans will be used exclusively for
business use. He depreciates vehicles on a straight line basis, vans over five years and cars over
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six years.
In the tax regime in which Fergus operates sales tax is only recoverable on items used wholly for
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business purposes.
What is his depreciation expense to the nearest $ for the year?

A $5,666
B $5,917
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C $6,100
D $6,517
Answer
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B
Sales tax on the car is not recoverable as it is not wholly used for
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business purposes. Sales tax is however recoverable on the vans.
£
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Vans (2 × $10,000) ÷ 5 = 4,000
Car ($10,000 × 115%) ÷ 6 = 1,917
5,917
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Discounts
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Many businesses offer discounts to their customers. There are two types:
• Trade discounts
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• Settlement discounts
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Sales tax is calculated on the amount after all discounts.
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The calculation and accounting treatment of discounts is covered in later in the
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Task 4.1
Inventory
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How to calculate inventory
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Cost VS NRV
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Definition
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The standard gives the following important definitions.
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Inventories are assets:
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held for sale in the ordinary course of business;
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in the process of production for such sale; or
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in the form of materials or supplies to be consumed in
the production process or in the rendering of services.
Definition
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Inventories can include any of the following:
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 Goods purchased and held for resale, eg goods held for sale
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by a retailer, or land and buildings held for resale
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 Finished goods produced
 Work in progress being produced

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 Materials and supplies awaiting use in the production process
(raw materials)
Inventory System
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PERPETUAL INVENTORY Inventory COS
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When purchase material, the accounting treatment: 100 50
Dr Inventory (50)
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Cr Cash/Trade payable 60 70
(70)
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40
When the inventory sell, the accounting treatment:
Dr Cash/Trade receivable
Cr Sales
Dr Cost of sales
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Cr Inventory
Inventory System
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PERIODIC INVENTORY
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When purchase the material, the accounting treatment:
Dr Cost of sales
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Cr Cash/Trade payable
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When sell the inventory, the accounting treatment:
Dr Inventory
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Dr Cash/Trade receivable
Cr Sales
COS SELL Inventory
100 (50) 50
Lecture Example
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Perry P Louis, trading as the Umbrella Shop, ends his financial year on 30
September each year. On 1 October 20X4 he had no goods in inventory. During
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the year to 30 September 20X5, he purchased 30,000 umbrellas costing $60,000
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from umbrella wholesalers and suppliers. He resold the umbrellas for $5 each, and
sales for the year amounted to $100,000 (20,000 umbrellas). At 30 September
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there were 10,000 unsold umbrellas left in inventory, valued at $2 each.
Required cc 高
What was Perry P Louis's gross profit for the year?
Answer
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Perry P Louis purchased 30,000 umbrellas, but only sold 20,000. Purchase costs
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of $60,000 and sales of $100,000 do not represent the same quantity of goods.
The gross profit for the year should be calculated by 'matching' the sales value
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of the 20,000 umbrellas sold with the cost of those 20,000 umbrellas. The cost of
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sales in this example is therefore the cost of purchases minus the cost of goods
in inventory at the year end.
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$ $
Sales (20,000 units) 100,000
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Purchases (30,000 units)
Less closing inventory (10,000 units @ $2)
60,000
(20,000)
Cost of sales (20,000 units) 40,000
Gross profit 60,000
Lecture Example Continued
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We shall continue the example of the Umbrella Shop into its next accounting
year, 1 October 20X5 to 30 September 20X6. During the course of this year,
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Perry P Louis purchased 40,000 umbrellas at a total cost of $95,000. During
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the year he sold 45,000 umbrellas for $230,000. At 30 September 20X6 he
had 5,000 umbrellas left in inventory, which had cost $12,000.
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Required
What was his gross profit for the year?
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Answer
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In this accounting year, he purchased 40,000 umbrellas to add to the 10,000 he
already had in inventory at the start of the year. He sold 45,000, leaving 5,000
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umbrellas in inventory at the year end.
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Once again, gross profit should be calculated by matching the value of 45,000
units of sales with the cost of those 45,000 units.
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The cost of sales is the value of the 10,000 umbrellas in inventory at the
beginning of the year, plus the cost of the 40,000 umbrellas purchased, less the
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value of the 5,000 umbrellas in inventory at the year end.
Answer
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$ $
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Sales (45,000 units) 230,000
Opening inventory (10,000 units) 20,000
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Add purchases (40,000 units) 95,000
Less closing inventory (5,000 units) (12,000)
Cost of sales (45,000 units) 103,000
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Gross profit 127,000
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NRV
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Net realisable value is the estimated selling price in the ordinary
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course of business less the estimated costs of completion and the
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estimated costs necessary to make the sale. (IAS 2)
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How to calculate NRV
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It is calculated as:
$
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Estimated selling price X
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Less: estimated costs of completion (X)
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Less: estimated selling and distribution costs (X)
X
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Lecture Example
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Jessie is trying to value her inventory. She has the following information
available:
$
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Selling price 35
Costs incurred to date 20
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Cost of work to complete item 12
Selling costs per item 1
Required
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What is the net realisable value of Jessie's inventory?
Answer
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Net realisable value is:
$
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Estimated selling price 35
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Less: costs of completion (12)
Less: selling costs (1)
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22
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COST VS NRV
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The basic rule per IAS 2:
Inventories is:
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'Inventories should be measured at the lower of cost
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and net realisable value.'
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Lecture Example
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Lucas Wagg, trading as Fairlock Fashions, ends his financial year on 31 March. At 1
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April 20X5 he had goods in inventory valued at $8,800. During the year to 31 March
20X6, he purchased goods costing $48,000. Fashion goods which cost $2,100 were still
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held in inventory at 31 March 20X6, and Lucas Wagg believes that these could only
now be sold at a sale price of $400.
The goods still held in inventory at 31 March 20X6 (including the fashion goods) had
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an original purchase cost of $7,600. Sales for the year were $81,400.
Required cc 高
Calculate the gross profit of Fairlock Fashions for the year ended 31 March 20X6.
Answer
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INVENTORY COUNT
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At cost Realisable Amount written down
value
$ $ $
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Fashion goods 2,100 400 1,700
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Other goods (balancing figure) 5,500 5,500
7,600 5,900 1,700
GROSS PROFIT CALCULATION
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$ $
Sales 81,400
Value of opening inventory 8,800
Purchases
Less closing inventory

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56,800
5,900
Cost of goods sold 50,900
Gross profit 30,500
By using the figure of $5,900 for closing inventories, the cost of goods sold
automatically includes the inventory written down of $1,700.
No netting off
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The IAS 2 rule 'lower of cost and net realisable value' should be
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applied as far as possible on an item by item (or line by line) basis.
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Illustration
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Suppose an entity has four items of inventories on hand at the year end. Their costs and
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NRVs are as follows:
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Inventory item Lower of cost
Cost NRV and NRV
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$ $ $
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1 27 32 27
2 14 8 8
3 43 55 43
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4 29 40 29
113 135 107
It would be incorrect to compare total cost of $113 with total NRV of $135 and state
inventories as $113. cc 高
A loss on item 2 of $6 can be foreseen and should therefore be recognised.
The comparison should be made for each item of inventory and thus a value of $107
would be attributed to inventories.
This would be accounted for by the journal entry:
$ $
Dr Inventories (SOFP) 107
Cr Cost of sales (SPL) 107
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Task 4.2
Inventory
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Cost criteria
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FIFO VS AVCO
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Cost cretiria
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The cost of an item of inventory includes:
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For example:
• Purchase price
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Cost of purchase
• Import duties
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But not:
• Sales tax
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• Trade discounts
Costs of conversion Relating to productions:

cc 高 • Direct labour
• Direct/variable overheads
• An allocation of fixed overheads
(based on normal level of activity)
Other costs incurred in bringing For example:
the inventories to their present For • Carriage inwards
example: location and condition
Lecture Example
n
od 经
According to IAS 2: Inventories, which of the following should not be
.c
included in determining the cost of the inventories of an entity?
ga 财
un
1. Labour costs
2. Transport costs to deliver goods to customers
3. Administrative overheads
a. 顿
4. Depreciation on factory machine
A
B
All four items
1 only
cc 高
C 2 and 3 only
D 2, 3, and 4 only
Answer
n
od 经
.c
C
Transport costs to deliver goods to customers are an example of carriage
ga 财
un
outwards and should not be included. Administrative overheads do not
relate to production and cannot therefore be included.
a. 顿
The depreciation of the factory machine is a production overhead and
should be included.
cc 高
FIFO VS AVCO
n
(a) FIFO
od 经
.c
Under FIFO it is assumed that:
(i) First goods purchased/produced will be the first to be sold
ga 财
(ii) Remaining inventories are the from the most recent purchases/production.
un
(b) Average Cost (AVCO)
a. 顿
There are two average costs available:
(i) Simple average cost
The cost of all purchases/production during the year is divided by the total
cc 高
number of units purchased
(ii) Weighted average cost
The weighted average of the cost of similar items is recalculated each time a
new item is purchased/produced during the period (IAS 2 requires the weighted
average to be used).
Lecture Example
n
If you are preparing financial accounts you would normally expect to use FIFO or AVCO for the valuation of
od 经
inventory. IAS 2 Inventories does not permit the use of LIFO. You should note furthermore that terms such as
.c
AVCO and FIFO refer to pricing techniques only. The actual components can be used in any order.
To illustrate FIFO and AVCO, the following transactions will be used in each case.
TRANSACTIONS DURING MAY 20X7
ga 财
Quantity Unit cost Total cost Market value per unit on
un
date of transactions
Units $ $ $
Opening balance 1 May 100 2.00 200 100 2.00 200
a. 顿
Receipts 3 May 400 2.10 840 2.11 400 2.10 840 2.11
Issues 4 May 200 2.11 200 2.11
Receipts 9 May 300 2.12 636 2.15 300 2.12 636 2.15
Issues 11 May 400 2.20 400 2.2
Issues 20 May 100 2.35
Closing balance 31 May
cc 高
Receipts 18 May 100 2.40 240 2.35 100
100
200
2.40 240
1916
2.35
2.35
2.38
Receipts mean goods are received into store and issues represent the issue of goods from store.
The problem is to put a valuation on the following.
(a) The issues of materials
(b) The closing inventory
How would issues and closing inventory be valued using FIFO and AVCO?
Answer FIFO(first in, first out)
n
FIFO assumes that materials are issued out of inventory in the order in which they were
od 经
delivered into inventory, ie issues are priced at the cost of the earliest delivery remaining in
.c
inventory.
The cost of issues and closing inventory value in the example, using FIFO, would be as follows.
ga 财
Date of issue Quantity Value issued Cost of issues
un
Units $ $
4 May 200 100 OI* at $2 200
100 at $2.10 210
a. 顿
410
11 May 400 300 at $2.10 630
100 at $2.12 212
842
20 May
Closing inventory value

cc 高 100
200
100 at $2.12
100 at $2.12 212

212
1,464
100 at $2.40 240

452
1,916
*OI = opening inventory
Note that the cost of materials issued plus the value of closing inventory equals the cost of
purchases plus the value of opening inventory ($1,916).
Answer AVCO(average cost)
n
od 经
There are various ways in which average costs may be used in pricing inventory
.c
issues. The most common (cumulative weighted average pricing) is illustrated below.
The cumulative weighted average pricing method calculates a weighted average
ga 财
price for all units in inventory. Issues are priced at this average cost, and the balance
un
of inventory remaining would have the same unit valuation.
A new weighted average price is calculated whenever a new delivery of
a. 顿
materials into store is received. This is the key feature of cumulative weighted
average pricing.
In our example, issue costs and closing inventory values would be as follows.
cc 高
Answer AVCO(average cost)
n
Total inventory
Date Received Issued Balance value Unit cost Price of issue
od 经
.c
Units Units Units $ $ $
Opening inventory 100 200 2.00
3-May 400 840 2.10
500 1,040 2.08*
ga 财
un
4-May 200 (416) 2.08** 416
300 624 2.08
9-May 300 636 2.12
600 1,260 2.10*
a. 顿
11-May 400 (840) 2.10** 840
200 420 2.10
18-May 100 240 2.40
300 660 2.20*
20-May
Closing inventory
cc 高 100 (220) 2.20** 220
1476
value 200 440 2.20 440

1916
* A new unit cost of inventory is calculated whenever a new receipt of materials occurs.
** Whenever inventories are issued, the unit value of the items issued is the current
weighted average cost per unit at the time of the issue.
Lecture Example
n
On 1 November 20X2 a company held 300 units of finished goods item No 9639 in inventory. These
od 经
.c
were valued at $12 each. During November 20X2 three batches of finished goods were received into
store from the production department, as follows.
Date Units received Production cost per unit
ga 财
un
10 November 400 $12.50
20 November 400 $14
25 November 400 $15
a. 顿
Goods sold out of inventory during November were as follows.
Date Units sold Sale price per unit
14 November 500 $20
21 November
28 November
cc 高 500
100
$20
$20
What was the profit from selling inventory item 9639 in November 20X2, applying the
following principles of inventory valuation?
(a) FIFO
(b) AVCO (using cumulative weighted average costing)
Ignore administration, sales and distribution costs.
Answer
n
od 经
(a) FIFO
.c
Issue cost Closing
Total inventory
ga 财
$$
un
Date Issue costs
14 November 300 units × $12 plus
a. 顿
200 units × $12.50 6,100
21 November 200 units × $12.50 plus
300 units × $14
cc 高 6,700
28 November 100 units × $14 1,400
Closing inventory 400 units × $15 6,000
14,200 6,000
Answer
n
(b) AVCO (cumulative weighted average cost)
od 经
Balance in Total cost Closing
.c
Unit cost inventory of issues inventory
$ $ $ $
ga 财
1 November Opening inventory 300 12.000 3,600
un
10 November 400 12.500 5,000
700 12.286 8,600
a. 顿
14 November 500 12.286 6,143 6,143
200 12.286 2,457
20 November 400 14.000 5,600
21 November
600
500
100
cc 高 13.428
13.428
13.428
8,057
6,714
1,343
6,714
25 November 400 15.000 6,000

500 14.686 7,343
28 November 100 14.686 1,469 1,469
30 November 400 14.686 5,874 14,326 5,874
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 5.1
od 经
.c
Tangible non-current assets
ga 财
un
a. 顿
cc 高
n
od 经
.c
Initial Recognition
ga 财
un
Depreciation
a. 顿
Capital VS Expenditure
cc 高
Definition of Property, Plant, Equipment
n
od 经
.c
Tangible items that:
• are held by an entity for use in the production or
ga 财
un
supply of goods or services, for rental to others, or for
administrative purpose and
a. 顿
• are expected to be used during more than one period.
cc 高
Lecture Example
n
od 经
.c
What examples of tangible non-current assets can you identify?
ga 财
Examples include:
un
(a) Land and buildings
a. 顿
(b) Plant and equipment
(c) Motor vehicles
(d) Furniture and fittings, computers
cc 高
Recognition
n
od 经
.c
• Probable that future economic benefits will
ga 财
flow to the entity and
un
• Cost can be measured reliably
a. 顿
cc 高
Initial Recognition
n
Tangible non-current assets should initially be recorded at cost.
od 经
.c
Cost includes:
• Purchase price: excluding sales tax and trade discounts but including
import duties
ga 财
un
• Directly attributable costs to bring the asset to its intended location and
ready to use. These include:
a. 顿
(a) Initial delivery and handling costs
(b) Installation and assembly costs
(c) Costs of testing whether the asset is working properly
cc 高
(d) Professional fees
The following costs may not be included:
(a) The cost of maintenance contracts
(b) Administration and general overhead costs
(c) Staff training costs
Cost of purchase + Ready for cost
Lecture Example
n
od 经
On 10 December 20X7 an entity bought a machine.
.c
The breakdown on the invoice showed:
$
ga 财
un
Cost of machine 20,000
Delivery costs 200
One-year maintenance contract 900
a. 顿
21,100
Further installation costs of $500 were also incurred.
cc 高
At what amount should the machine be capitalised in the entity's records?
A $20,000
B $20,700
C $20,200
D $21,600
Depreciation
n
od 经
Tangible non-current assets are used in the business to generate the
.c
income shown in the statement of profit or loss.
ga 财
Assets will eventually be worn out (used up) and so there is a cost of
un
generating income.
a. 顿
This cost should be shown in the statement of profit or loss to 'match'
against the income.
This is called depreciation.
cc 高
Depreciation
n
od 经
.c
'Depreciable amount' = cost/revalued amount – residual value
'Residual value' = the amount the asset is expected to be sold for at the
ga 财
un
end of its useful life (scrap value).
Land normally has an unlimited useful life and is therefore not
a. 顿
depreciated. Buildings have a limited life and, therefore, are
depreciable asset
cc 高
Depreciation Methods
n
od 经
.c
There are two main methods for calculating depreciation:
(a) Straight line method
ga 财
un
(b) Reducing balance method
a. 顿
cc 高
Straight line method
n
od 经
cost − residual value
.c
Depreciation = or (Cost – Residual value) × %
useful life (years)
ga 财
un
where:
Residual value
a. 顿
= expected proceeds/scrap value at the end of the asset's useful life.
Useful life cc 高
= the number of years the business expects to make use of the asset.
This method is suitable for assets which are used up evenly over their
useful life.
Lecture Example
n
od 经
.c
A business buys a machine for $2,500. It is expected to have a useful life
of three years after which time it will have a scrap value of $250.
ga 财
un
Required
a) Calculate the annual depreciation charge.
a. 顿
b) Calculate the cost, accumulated depreciation and net book value
(NBV) for each year of the asset's life. Note: NBV = cost –
cc 高
accumulated depreciation to date.
Answer
n
Straight line method:
od 经
.c
$2,500 – $250
(a) Depreciation charge =
ga 财
3 years
un
= $750 per annum
a. 顿
(b) Year Cost Accumulated NBV
cc 高 depreciation
$ $ $
1 2,500 750 1,750
2 2,500 1,500 1,000
3 2,500 2,250 250
Reducing balance depreciation
n
od 经
This method is suitable for those assets which generate more revenue in
.c
earlier years than in later years; for example a machine which may
become progressively less efficient as it gets older.
ga 财
Under this method the depreciation charge will be higher in the earlier
un
years and reduce over time.
a. 顿
Depreciation = Depreciation rate (%) × Net Book Value (NBV)
cc 高
where: net book value (NBV) = cost – accumulated depreciation to date
Note: This method does not take account of any residual value, since
the NBV under this method will never reach zero. The depreciation
rate percentage will be provided in the question.
Lecture Example
n
od 经
A business buys a machine costing $6,000. The depreciation rate is 40%
.c
on a reducing balance basis.
ga 财
un
Required
Calculate depreciation expense, accumulated depreciation and net book
a. 顿
value of the asset for the first three years.
cc 高
Answer
n
od 经
.c
Reducing balance method:
NBV b/d Dep’n Dep’n Accumulated NBV c/d
ga 财
rate expense depreciation
un
$ $ $
Year 1 (6,000 – 0) × 40% 2,400 2,400 3,600
a. 顿
Year 2 (6,000 – 2,400) × 40% 1,440 3,840 2,160
Year 3 (6,000 – 3,840) × 40% 864 4,704 1,296
cc 高
n
od 经
.c
Depreciation has a dual effect which needs to be accounted for:
a) It reduces the value of the asset in the statement of financial position.
ga 财
b) It is an expense in the statement of profit or loss.
un
The asset remains at its original cost in the asset account.
a. 顿
Two accounts are set up to record depreciation:
Dr Depreciation expense
cc 高
Cr Accumulated depreciation
Depreciation Policy
n
od 经
Depreciation will either be charged:
.c
• on a monthly pro-rata basis (‘proportionate depreciation in the year of
purchase and disposal’);
ga 财
un
• a full year in the year of purchase and none in the year of disposal.
a. 顿
The question will tell you which policy to apply.
cc 高
Depreciation Revisited
n
od 经
.c
The useful life and residual value of an item of property, plant and equipment
should be reviewed at least every financial year-end and, if expectations are
ga 财
un
significantly different from previous estimates, the depreciation charge for
current and future periods should be revised.
a. 顿
This is achieved by writing the net book value (less the new residual value)
off over the asset's revised remaining useful life.
cc 高
Lecture Example
n
od 经
1.1.X1 Asset cost $40,000
.c
Estimated useful life = five years
ga 财
Residual value = $5,000
un
1.1.X3 Total useful life revised to four years.
Residual value revised to $4,000
a. 顿
Required
cc 高
Calculate the depreciation charge, accumulated depreciation and NBV for
each year of the asset's life (year end 31 December).
Answer
n
od 经
Review of useful life and residual value:
.c
Year Depreciation Accumulated NBV
charge depreciation
ga 财
un
$ $ $
20X1 (40,000 − 5,000)/5 = 7,000 7,000 33,000
(40,000 − 5,000)/5
a. 顿
20X2 = 7,000 14,000 26,000
20X3 (26,000 − 4,000)/2 = 11,000 25,000 15,000
20X4 (26,000 − 4,000)/2 = 11,000 36,000 4,000 *
cc 高 36,000
n
od 经
a) Capital expenditure: results in the acquisition, replacement or
.c
improvement of non-current assets.
b) Revenue expenditure:
ga 财
un
– for the trade of the business, or
– to repair, maintain and service non-current assets.
a. 顿
Capital expenditure results in the appearance of a non-current asset
cc 高
in the statement of financial position of the business.
Revenue expenditure results in an expense in the statement of profit
or loss.
n
Capitalised $30
od 经
.c
→ PPE=$120 RV = 120-120/9 = 107 …
UL=10yrs
ga 财
un
Y0 Y1 Y2 Scenario 1
a. 顿
PPE=$100 $90 cc 高 Scenario 2
Expensed $20 RV = 90-90/9 = 80 …

→PPE=$90
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 5.2
od 经
.c
Tangible non-current assets
ga 财
un
a. 顿
cc 高
n
od 经
.c
Disposal
ga 财
un
a. 顿
Revaluation VS Cost
cc 高
Disposal of non-current assets
n
Everything to do with the disposal is transferred to a Disposal Account.
od 经
.c
Steps:
(1) Remove the cost of the asset:
Dr Disposal account
ga 财
un
Cr Non-current asset
(2) Remove the accumulated depreciation charged to date:
Dr Accumulated depreciation
a. 顿
Cr Disposal account
Note: Steps (1) and (2) have effectively transferred the NBV of the asset to the
disposal account.
cc 高
(3) Account for the sales proceeds:
Dr Cash
Cr Disposal account
(4) Balance off disposal account to find the profit or loss on disposal.
A gain on disposal is shown in the statement of profit or loss as sundry income, a loss as an
expense.
Lecture Example
n
od 经
A business includes $110,000 worth of machinery at cost in its
.c
accounts. Its policy is to make a provision for depreciation at 20%
ga 财
per annum straight line. The total provision now stands at $70,000.
un
The business sells for $19,000 a machine which it purchased exactly
a. 顿
two years ago for $30,000.
Required: cc 高
Show the relevant ledger entries
Answer
n
PLANT AND MACHINERY ACCOUNT
od 经
.c
$ $
Balance b/d 110,000 Plant and machinery disposals a/c 30,000
Balance c/d 80,000
ga 财
110,000 110,000
un
Balance b/d 80,000
PLANT AND MACHINERY ACCUMULATED DEPRECIATION
$ $
a. 顿
Plant and machinery disposals 12,000 Balance b/d 70,000
(20% of $30,000 for 2 years)
Balance c/d 58,000
PLANT AND MACHINERY DISPOSALS

cc 高
70,000 70,000
Balance b/d 58,000
$ $
Plant and machinery account 30,000 Accumulated depreciation 12,000
I & E a/c (profit on sale) 1,000 Cash 19,000
31,000 31,000
Part Exchange
n
od 经
.c
Exchange or part exchange of assets occurs frequently for items of
property, plant and equipment. IAS 16 states that the cost of an item
ga 财
un
obtained through (part) exchange is the fair value of the asset received
(unless this cannot be measured reliably).
a. 顿
cc 高
Lecture Example
n
od 经
.c
Taking the example above assume that, instead of the machine being sold
for $19,000, it was exchanged for a new machine costing $60,000, a
ga 财
credit of $19,000 being received upon exchange. In other words $19,000
un
is the trade-in price of the old machine. Now what are the relevant ledger
account entries?
a. 顿
cc 高
Answer
n
PLANT AND MACHINERY ACCOUNT
od 经
$ $
.c
Balance b/d 110,000 Plant disposal 30,000
Cash $(60,000 – 19,000) 41,000 Balance c/d 140,000
Plant disposals 19,000
ga 财
un
170,000 170,000
Balance b/d 140,000
The new asset is recorded in the non-current asset account at cost $(41,000 + 19,000) = $60,000.
a. 顿
PLANT AND MACHINERY ACCUMULATED DEPRECIATION
$ $
Plant disposals (20% of $30,000 12,000 Balance b/d 70,000
for 2 years)
Balance c/d cc 高 58,000
70,000
Balance b/d
70,000
58,000
PLANT AND MACHINERY DISPOSALS
$ $
Plant and machinery 30,000 Accumulated depreciation 12,000
I & E a/c (profit on disposal) 1,000 Plant and machinery-part exchange 19,000
31,000 31,000
Revaluation Model VS Cost Model
n
If an entity owns a property it may notice that its value increases over time.
od 经
.c
IAS 16 requires tangible non-current assets to initially be recorded at cost. The entity can
then either keep the asset at cost (and depreciate it) or choose to revalue it (depreciation is
ga 财
un
still required).
This is a choice of accounting policy
a. 顿
If an entity chooses a policy of revaluation then all items in the same class of assets
must be revalued.
cc 高
Examples of classes of assets are:
• Land and buildings
• Plant and machinery
• Motor vehicles
Revaluations must be carried out sufficiently often so that the assets carrying
value is not materially different from its market value.
n
od 经
1. Adjust cost account to revalued amount.
.c
2. Remove accumulated depreciation charged on the asset to date.
3. Put the balance to the revaluation surplus (sometimes referred to as the
ga 财
‘revaluation reserve’).
un
Note: The balance posted to the revaluation surplus will equal the new
a. 顿
revalued amount less the previous net book value.
cc 高
The required journal is:
Dr Non-current asset cost account

Dr Accumulated depreciation
Cr Revaluation surplus
Lecture Example
n
od 经
A building costing $100,000 on which depreciation of $20,000 has been charged is to
.c
be revalued to $150,000.
ga 财
un
Required
a) Show the double entry to record the revaluation and make the postings to the
a. 顿
ledger accounts.
b) What would be the depreciation charge for the year if the building has a remaining
useful life of 40 years?
cc 高
Answer
n
(a) The double entry is
od 经
.c
$ $
Dr Non-current asset – building (150 – 100) 50,000
Dr Accumulated depreciation – building 20,000
ga 财
Cr Revaluation surplus (β) 70,000
un
a. 顿
cc 高
Answer
n
od 经
.c
ga 财
un
a. 顿
$150,000
cc 高
(b) Depreciation charge is
40 years
= $3,750
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 6
od 经
.c
Intangible non-current assets
ga 财
un
a. 顿
cc 高
n
od 经
.c
Capitalize VS Expenditure
ga 财
un
Research VS Development
a. 顿
Amortization
cc 高
Definition
n
od 经
An intangible non-current asset is an identifiable non monetary
.c
asset without physical substance.
ga 财
The difference between tangible and intangible non-current assets
un
is that tangible assets have physical substance whereas intangible
a. 顿
assets do not.
The following are examples of intangible assets:

cc 高
• Development expenditure
• Goodwill
• Concessions, patents, licences, trade marks
n
od 经
Many companies, such as pharmaceutical companies, spend huge amounts on
.c
research and development every year in order to maintain or enhance their
competitive position
ga 财
un
Companies need to account for these costs and whilst the credit entry will be to
either cash (if paid) or a current liability (if owed), the question remains as to
a. 顿
where the debit entry should be shown.
The choices are: cc 高

(a) to debit the statement of profit or loss with an expense, or
(b) to debit the statement of financial position with an intangible non-
current asset.
An intangible non-current asset should only be recorded when the entity is
confident that the expenditure will generate future profit.
n
od 经
Research is original and planned investigation undertaken with the
.c
prospect of gaining new scientific or technical knowledge and
understanding.
ga 财
un
Development is the application of research findings or other
a. 顿
knowledge to a plan or design for the production of new or substantially
improved materials, devices, products, processes, systems or services
cc 高
before the start of commercial production or use.
n
Research Development
od 经
.c
• No certainty that the expenditure • Future profits are expected
will generate future profit
• MUST capitalise as an intangible
ga 财
• Show as an expense in statement
un
noncurrent asset if all of the relevant
of profit or loss criteria are satisfied
• Dr Research expense (SPL) Cr
a. 顿
• Dr Intangible non-current assets (SOFP)
Bank/payables Cr Bank/payables
Probable future economic benefits
cc 高 Intention to complete and use/sell asset
Resources adequate and available to complete and use/sell asset
Ability to use/sell the asset
Technical feasibility of completing asset for use/sale
Expenditure can be measured reliably
• Amortise asset over its useful life once
asset is ready for use
Expenditure
n
od 经
 Internally generated  Expensed
.c
• Brands • Start-up costs
ga 财
• Mastheads • Training
un
• Publishing titles • Advertising/ promotion
a. 顿
• Customer lists • Recognitions/ relocations
• Other similar items
cc 高
They are not capitalized. They are expensed.
Lecture Example
n
od 经
Z Co incurred the following costs during the year ended 31 August 20X8.
.c
(1) $20,000 on salaries for market research staff sent out to canvass drivers'
opinions on a potential new car.
ga 财
(2) $100,000 to purchase a machine to manufacture components for the new car.
un
It has an = estimated useful life of 10 years.
(3) $25,000 on materials to manufacture a prototype and $50,000 on salaries
a. 顿
relating to its = design and manufacture. The new car is expected to go on
sale in 20X9.
Required
cc 高
How should each of the above items be shown in the financial statements for the
year ended 31 August 20X8?
Answer
n
1. Market research would take place at an early stage in any development process.
od 经
.c
Its purpose is to gather information about whether there may be interest in a
potential product. At this point in time an entity cannot be certain that the
ga 财
expenditure will lead to profits and so the costs are research costs. $20,000
un
should be shown as an expense in the statement of profit or loss.
2. A machine is a tangible non-current asset and is accounted for under IAS 16
a. 顿
regardless of its use. The $100,000 should be capitalised as a tangible non-
current asset and depreciated over its useful life of 10 years.
cc 高
3. Material costs and design and manufacture salaries are part of the development
process. They should be capitalised as an intangible non-current asset provided
that all of the 'PIRATE' criteria are met. The costs should be amortised in 20X9
once the car is available to be sold on the market.
Amortization
n
A tangible non-current asset, such as a machine, is capitalised and then
od 经
.c
depreciated over its useful life. This is to allocate its costs over the accounting
periods which benefit from its use.
ga 财
un
In the same way development expenditure which is incurred now will
generate revenue and profits in the future.
a. 顿
The cost of the development expenditure should be matched against the
revenue it produces. This is called amortisation
cc 高
The 'depreciable amount' (cost less residual value) should be amortised over
the useful life in the same way that revenues are expected to be generated.
Amortisation should begin when the asset is ready for use.

n
od 经
.c
It is an expense in the statement of profit or loss and is accounted
for using the following entry:
ga 财
un
Dr Amortisation expense (SPL)
Cr Accumulated amortisation (SOFP)
a. 顿
cc 高
Lecture Example
n
od 经
Development Co incurs the following expenditure in years 20X1 – 20X5.
.c
Research Development
$ $
ga 财
20X1 35,000 55,000
un
20X2 – 65,000
20X3 – –
– –
a. 顿
20X4
20X5 38,000 –
The development expenditure meets the IAS 38 criteria that require capitalisation
cc 高
('PIRATE'). The item developed in 20X1 and 20X2 goes on sale on 1.1.X3 and it will be
three years from then until any competitor is expected to have a similar product on the
market.
Required
Show statement of profit or loss and statement of financial position extracts for the years
20X1 – 20X5 inclusive.
Answer
n
od 经
Statement of profit or loss extracts
.c
Expenses X1 X2 X3 X4 X5
$ $ $ $ $
ga 财
Research expenditure 35,000 - - - 38,000
un
Amortisation of
development expenditure - - 40,000 40,000 40,000
a. 顿
Statement of financial position extracts
Non-current assets X1 X2 X3 X4 X5
Development expenditure
Amortisation
cc 高 $
55,000
-
$
120,000
-
120,000
$
(40,000)
120,000
$
(80,000)
$
120,000
(120,000)
Net book value 55,000 120,000 80,000 40,000 -
Lecture Example
n
od 经
Which of the following statements best describes the difference between
.c
tangible and intangible non-current assets?
A. Tangible non-current assets are of a long-term nature; intangible non-current
ga 财
un
assets are of a short-term nature.
B. Tangible non-current assets must be depreciated but intangible non-current
assets should not be amortised.
a. 顿
C. Tangible non-current assets are always recognised initially in the statement of
financial position; intangible assets are always recognised initially in the
cc 高
statement of profit or loss.
D. Tangible non-current assets are perceptible by touch but intangible non-
current assets are not.
ANSWER
n
od 经
.c
D
Tangible non-current assets have physical substance and intangible non-current
ga 财
assets do not.
un
A is incorrect because both tangible and intangible non-current assets are of a
long-term nature.
a. 顿
B is incorrect because intangible non-current assets must be amortised if they
have a finite useful life.
C is incorrect because some intangibles are initially recognised in the statement
cc 高
of financial position.
Lecture Example
n
od 经
.c
Which of the following statements best explains the purpose of amortisation
of intangible non-current assets?
ga 财
A. To show the true value of the intangible non-current assets in the statement
un
of financial position.
B. To improve the profit figure in the year of purchase of the asset by spreading
a. 顿
the cost of the asset’s useful life.
C. To match the cost of the asset to future economic benefits generated by the
asset.
cc 高
D. To record the replacement cost of an intangible asset in profit or loss.
ANSWER
n
od 经
.c
C
The purpose of amortisation is to match the cost of the intangible
ga 财
un
non current asset to the economic benefits generated by the asset.
a. 顿
cc 高
Subsequent Measurement
n
od 经
Cost model
.c
 Revaluation model
ga 财
• To FV only if active market (IFRS13): ‘transactions for the asset
un
take place with sufficient frequency and volume to provide pricing
information on an ongoing basis’
a. 顿
• No active market → cost model
• cc 高
Revalue whole class
• Revalue regularly such that BV not materially diff to FV
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 7.1
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.c
Accruals and prepayments
ga 财
un
a. 顿
cc 高
n
od 经
.c
Accruals & Prepayment
ga 财
un
Reversing out accruals and payments
a. 顿
cc 高
Definition of Accruals
n
Definition
od 经
.c
Accruals are expenses incurred by the business during the
accounting period but not yet paid for, i.e. expenses in arrears.
ga 财
un
Example
a. 顿
Fred prepares accounts to 31 December each year. On 1 January 20X8, he
pays a telephone bill of $60 which relates to the period October-December
20X7. cc 高
Although the payment does not go through the cash book until 20X8, this
expense must be included in the accounts for the year ended 31 December
20X7, as it was incurred during this period.
Accounting treatment of Accruals
n
od 经
.c
Accruals
ga 财
Dr Expense (SPL)
un
Cr Accruals (SOFP)
a. 顿
cc 高
Definition of Prepayments
n
Definition
od 经
.c
Prepayments arise when expenses are paid for before they have
been used, i.e. expenses
ga 财
un
in advance.
a. 顿
Example
On 20 December 20X7 Fred pays for insurance on his business
premises for the 12 months commencing 1 January 20X8.
cc 高
Although the payment was made in 20X7, the expense should not
appear in the accounts for 20X7. The accounts for 20X7 will show
a prepayment for the full amount of the insurance cost and the
expense will be recorded in 20X8.
Accounting treatment of Prepayment
n
od 经
.c
Prepayments
Dr Prepayments (SOFP)
ga 财
Cr Expense (SPL)
un
Dr Prepayments
a. 顿
Cr Cash
Dr
Cr
Expense or P/L
Cash
cc 高
Dr Prepayment
Cr Expense or P/L
Lecture Example
n
Fiona set up a business on 1 January 20X7. Her cash payments for the year to 31
od 经
.c
December 20X7 included:
ga 财
un
a. 顿
cc 高
Note: On 6 March 20X8 Fiona received an electricity bill for $168 for the
quarter to 28 February 20X8.
Lecture Example
n
od 经
.c
Required
a) Calculate the expense incurred by Fiona for electricity and rent
ga 财
un
for the year ended 31 December 20X7.
b) Calculate the amount of any accruals/prepayments at the end of
a. 顿
the year.
cc 高
Answer (a)
n
$
od 经
Electricity expense
.c
Cash paid: 10.3.X7 96
12.6.X7 120
ga 财
14.9.X7 104
un
10.12.X7 145
465
a. 顿
December expense missing ( 1/3 ×$168) 56
521
Rent expense
cc 高 $
Cash paid: 1.2.X7 375

6.4.X7 1,584
1,959
Less: expense relating to Jan – March ×( 3/12 ×$1,584) (396)
1,563
Answer (b)
n
od 经
.c
Electricity accrual is $56
$ $
Dr Electricity expense (SPL) 56
ga 财
un
Cr Accruals (SOFP) 56
Being: electricity expense accrued at 31 December 20X7.
a. 顿
Rent prepayment is $396
$ $
Dr Prepayments (SOFP) 396
Cr Rent expense (SPL) cc 高
Being: rent expense prepaid at 31 December 20X7.
396
Lecture Example
n
Fiona set up a business on 1 January 20X7. Her cash payments for the year to 31
od 经
.c
December 20X7 included:
ga 财
un
a. 顿
cc 高
Note: On 6 March 20X8 Fiona received an electricity bill for $168 for the
quarter to 28 February 20X8.
Lecture Example
n
od 经
.c
Required
Complete the necessary entries in Fiona’s ledger accounts as at
ga 财
un
31 December 20X7, then balance off the accounts.
a. 顿
cc 高
Answer
n
od 经
.c
ga 财
un
a. 顿
Balance off
Rent expense
cc 高 $ $
1.2.x7 cash 375 31.12x7 prepayments 396
6.4x7 cash 1,584
Balance off 1,563
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Reversing out accruals
n
od 经
.c
Accounting treatment
Reversal of accrual
ga 财
un
Dr Accruals (SOFP)
Cr Expense (SPL)
a. 顿
Dr Accruals
Cr Cash cc 高
Dr expense or P/L
Cr Cash
Dr Accruals
Cr Expense or P/L
Lecture Example
n
od 经
In 20X8 Fiona paid the following electricity bills
.c
ga 财
un
a. 顿
During March 20X9 Fiona received an electricity bill for $189 for the quarter to 28
February 20X9.
Required
cc 高
Calculate the electricity expense and accrual for the year ended 31 December 20X8
and complete the ledger accounts.
Balance off
Answer
cc 高 585
a. 顿
ga 财
od 经
un
.c
n
Answer
n
od 经
.c
$ $
1.1x8 Accrual reversed 56 1.1x8 56
ga 财
un
31.12x8 Electricity accrual 63
Balance off 63
a. 顿
cc 高
Lecture Example
n
od 经
The following transactions related to Colin’s gas expense ledger account
.c
for the year ended 31 December 20X8:
$
ga 财
un
Prepayment brought forward 1,100
Cash paid 10,800
Accrual carried forward 1,300
a. 顿
What amount should be charged to the statement of profit or loss in
cc 高
the year ended 31 December 20X8 for gas?
A $10,800
B $13,200
C $10,600
D $11,000
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Reversing out Prepayment
n
od 经
.c
Prepayments
Dr Expense (SPL)
ga 财
un
Cr Prepayments (SOFP)
a. 顿
cc 高
Lecture Example
n
od 经
Terry Trunk commences business as a landscape gardener on 1 September
.c
20X5. He immediately decides to join his local trade association, the
Confederation of Luton Gardeners, for which the annual membership
ga 财
subscription is $180, payable annually in advance. He paid this amount on 1
un
September. The Confederation makes up its accounts to 30 June each year.
a. 顿
In the first period to 30 June 20X6, Terry has paid a full year's
membership, but only ten twelfths of the subscription should be charged
to the period (ie 10/12  $180 = $150). There is a prepayment of two
cc 高
months of membership subscription (ie 2/12  $180 = $30).
Answer
n
od 经
.c
At 1.Sep.2005 Dr expense 180
Cr cash 180
ga 财
Dr prepayments 180
un
Cr expense 180
a. 顿
At 30. Jun.2006 Dr expense 150
Cr prepayments
cc 高 150
Summary
n
od 经
.c
Cash paid – accrual(reverse) – prepayments(current period) +
accrual(current period) + prepayments(reverse)
ga 财
= Expense(current period)
un
There are four steps to follow:
a. 顿
(1) Reverse opening accrual/prepayment.
(2) Post cash paid during the year.
cc 高
(3) Post closing accrual/prepayment.
(4) Balance off the accounts.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 7.2
od 经
.c
Accrued income & Deferred income
ga 财
un
a. 顿
cc 高
n
od 经
.c
Accrued income & Deferred income
ga 财
un
Reverse
a. 顿
cc 高
Definition
n
od 经
.c
This relates to when income has been earned during the
ga 财
accounting period but not invoiced or received.
un
a. 顿
cc 高
ILLUSTRATION
n
od 经
Jenny owns a property which she rents out for $3,000 per quarter. The property
.c
was occupied all year; however Jenny only received $9,000 in rent because she
forgot to send out the final invoice of the year.
ga 财
As the property was let for 12 months, Jenny's statement of profit or loss should
un
show income of $12,000 (4 × $3,000) as this is what she has earned.
She will therefore need to accrue the 'missing' income of $3,000 as a year end
a. 顿
journal and also show a receivable for "rent in arrears".
The adjustment is:
$ $
Dr Rent in arrears (SOFP)
Cr Rental income (SPL)
cc 高 3,000
3,000
The rent in arrears is shown in the statement of financial position within current
assets.
Definition
n
od 经
.c
This relates to when income is received in advance of
ga 财
un
it being earned.
a. 顿
cc 高
ILLUSTRATION
n
od 经
Ben has a year end of December and rents out his property for $1,000 per
.c
month. His tenant pays on time each month and during December 20X7 paid
Ben $2,000 as he would be away when the January 20X8 payment was due.
ga 财
Ben has received income of $13,000 but only $12,000 of this relates to the
un
current year. He must therefore remove $1,000 of income from this year's
accounts because it relates to next year. A liability will also be shown for "rent
a. 顿
in advance".
The adjustment is:
$ $
Dr Rental income (SPL)
Cr Rent in advance (SOFP)
cc 高 1,000
1,000
The rent in advance is shown in the statement of financial position within
current liabilities.
ILLUSTRATION
n
od 经
.c
Dr Cash 1000
ga 财
Cr P/L or Income 1000
un
Dr Rental income 1000
a. 顿
Cr Deferred income 1000
cc 高
Reverse Accrued income
n
od 经
.c
Dr cash
ga 财
Cr P/L
un
Dr P/L
Cr Accrued income
a. 顿
cc 高
Reverse Accrued income
n
od 经
.c
Dr Deferred income
ga 财
un
Cr P/L
a. 顿
cc 高
Lecture Example
n
od 经
A company receives rent from a large number of properties. The total received
.c
in the year ended 30 June 20X7 was $962,400.
The following were amounts of rent in advance and in arrears at 30 June 20X6
ga 财
and 30 June 20X7:
un
30 June 20X6 30 June 20X7
$ $
a. 顿
Rent received in advance 57,400 62,400
Rent in arrears (all subsequently received) 42,400 36,800
What amount of rental income should appear in the company’s statement

cc 高
of profit or loss for the year ended 30 June 20X7?
A $973,000
B $921,800
C $1,003,000
D $951,800
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Summary
n
od 经
Cash received – accrued income(reverse) + deferred income(reverse)
.c
+accrued income (current period) – deferred income (current period)
ga 财
= Income (current period)
un
The approach for accrued income and deferred income is exactly the
a. 顿
same as for accruals and prepayments.
There are four steps to follow:
cc 高
(1) Reverse opening rent in arrears/advance.
(2) Post cash received during the year.
(3) Post closing rent in arrears/advance.
(4) Balance off the accounts.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 8.1
od 经
.c
Irrecoverable debts and Allowances
ga 财
un
a. 顿
cc 高
n
od 经
.c
Bad debts & Doubtful debts
ga 财
un
a. 顿
cc 高
Background
n
Businesses offer credit facilities to customers in order to encourage
od 经
.c
them to buy products and services. Goods or services sold on credit
result in trade receivables being recorded in the statement of financial
ga 财
position of the seller’s books (with a corresponding trade payable in the
un
buyer’s books).
a. 顿
The associated risks of offering credit facilities to customers are slow
payment or even non-payment.
To minimise the risk of non-payment, the business should set credit
cc 高
limits for their customers and prepare an aged receivables analysis to
identify debts at risk of going bad.
A trade receivable should only be classed as an asset if it is probable
that it is recoverable (ie that the customer will pay the amounts due).
Definition of Debts
n
od 经
.c
If a debt is definitely irrecoverable it should be written off to
the statement of profit or loss as a bad debt. This is an example
ga 财
of prudence.
un
a. 顿
cc 高
n
od 经
.c
Dr Bad debt expense (SPL)
ga 财
Cr Trade receivables (SOFP)
un
a. 顿
cc 高
Lecture Example
cc 高
a. 顿
ga 财
od 经
un
.c
n
Definition of Doubtful assets
n
od 经
.c
If a debt is possibly irrecoverable an allowance for the
potential irrecoverability of that debt should be made. A new
ga 财
un
account is created, Allowance for receivables, this account is
offset against the trade receivables’ balance on the statement of
a. 顿
financial position and the expense taken to the statement of
profit or loss.
cc 高
n
od 经
.c
Dr Doubtful debts expense (SPL)
ga 财
un
Cr Allowance for receivables (SOFP
a. 顿
cc 高
Lecture Example
n
od 经
A further review of Fight & Co's customer files indicates there is some
.c
uncertainty as to whether a debt of $3,500 owed by Bugner is recoverable.
a) Calculate the allowance for receivables shown on the statement of
ga 财
un
financial position.
b) Calculate the doubtful debts expense shown in the statement of profit
or loss.
a. 顿
c) Show how the information from Lecture examples 1 and 2 would be
shown in extracts from the statement of profit or loss and statement of
cc 高
financial position.
Answer
n
Allowance for receivables:
od 经
.c
a) The allowance for receivables shown on the statement of financial position is $3,500
b) The doubtful debts expense shown in the statement of profit or loss is $3,500
ga 财
un
a. 顿
cc 高
Answer
n
od 经
Statement of profit or loss extract
.c
$
Expenses
ga 财
un
Bad debts (see Lecture Example 1) (15,000)
Doubtful debts expense (3,500)
a. 顿
Statement of financial position extract
Current assets
cc 高 $

Less: allowance for receivables (3,500)
46,500
Types of Allowance
n
od 经
.c
Specific: provided against a particular/named individual customer.
General: percentage applied to total trade receivables after:
ga 财
I. Writing off bad debts;
un
II. Deducting full balance of any customers for which specific
allowance has been created.
a. 顿
cc 高
Order of calculation
n
od 经
(a) Write up trade receivables and account for credit sales and cash received
.c
in period.
(b) Write off bad debts
ga 财
un
Dr Bad debt expense (SPL)
a. 顿
(c) Make any entries for specific allowances:
Dr Doubtful debts expense (SPL)
Cr Allowance for receivables (SOFP)
cc 高
(d) In workings, calculate the general allowance on trade receivables (after
bad debts written off and excluding full amounts for which specific
allowance has been made).
Order of calculation
n
od 经
(e)
.c
$
ga 财
Total trade receivables 100
un
Less: specific allowances (20)
80
a. 顿
General allowance @ 5% = 4
∴total allowance:
Specific
General
cc 高 20
4
24
Lecture Example
n
od 经
A business’s trade receivables account showed a year end balance of $47,440.
.c
It was decided that amounts totalling $340 should be written off as
irrecoverable, a specific allowance was to be made against an amount of $400
ga 财
un
due from Dodgy Co, a customer, and a general allowance of 2% was to be
made against remaining debts.
a. 顿
Required
a) Calculate the allowance for receivables shown in the statement of
financial position.cc 高
b) Calculate the bad and doubtful debts expense shown in the statement of
profit or loss.
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Answer
cc 高
a. 顿
ga 财
Balance off
od 经
un
.c
n
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 8.2
od 经
.c
Irrecoverable debts and Allowances
ga 财
un
a. 顿
cc 高
cc 高
Reverse
a. 顿
ga 财
od 经
un
.c
n
Effect in subsequent periods
n
od 经
.c
Bad debts written off last year, customer pays this year
ga 财
If a bad debt is recovered having previously been written off, it
un
is credited to the bad debt expense account, i.e. the accounting
a. 顿
treatment from the original write-off is reversed.
cc 高
n
od 经
.c
(1) Cash received
Dr Cash
ga 财
un
Cr Trade receivables
Reverse original write off
a. 顿
Dr Trade receivables
Cr Bad debt expense
OR cc 高
(2) Short method
Dr Cash
Cr Bad debt expense
Lecture Example
n
od 经
Fight & Co has trade receivables at 31 December 20X7 of
.c
$65,000. A review of customer files indicates that two customers,
ga 财
Ali and Tyson, which owe $7,000 and $8,000 respectively, have
un
gone bankrupt and their debts are considered irrecoverable.
a. 顿
Fight & Co subsequently receive a cheque of $7,000 from Ali.
Required cc 高
Show the treatment of this recovery in the relevant ‘T’ accounts.
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
n
Doubtful debts – specific allowance last year, customer pays
od 经
.c
outstanding amounts this year
A credit entry for the cash is made to the trade receivables account because
ga 财
the debt is still included in the total trade receivables figure.
un
The allowance is then reversed as it is no longer needed.
a. 顿
(a) Record the cash received
Dr Cash (SOFP)
then:
cc 高
(b) Remove allowance

Dr Allowance for receivables (SOFP)
Cr Doubtful debts expense (SPL)
This
Lecture Example
n
od 经
Fight & Co has trade receivables at 31 December 20X7 of
.c
$65,000. A review of customer files indicates that two
customers, Ali and Tyson, which owe $7,000 and $8,000
ga 财
un
respectively, have gone bankrupt and their debts are considered
irrecoverable.
a. 顿
Required
Show the accounting treatment for Fight & Co if, having made
cc 高
a specific allowance , during the next year Bugner repays his
debt of $3,500 to Fight & Co in cash
Answer
n
od 经
.c
ga 财
$
un
$
Cash 3,500
Balance off 46,500
a. 顿
cc 高
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
n
od 经
Doubtful debts – specific allowance last year, goes bad this
.c
year
The debt is no longer doubtful, but definitely bad (irrecoverable). It should
ga 财
un
therefore be written off in the usual way.
Dr Bad debts expense (SPL)
a. 顿
Dr Allowance cc 高
Cr doubtful debts expense
Lecture Example
n
od 经
.c
Required
Following on from the information used in Lecture example before,
ga 财
suppose that in the next accounting period, the debt from Bugner is
un
considered to have gone bad.
a. 顿
What double entry would be required to record this?
cc 高
Answer
n
od 经
.c
$ $
Dr Bad debts expense (SPL) 3,500
ga 财
un
Cr Trade receivables (SOFP) 3,500
a. 顿
cc 高
n
od 经
.c
Doubtful debts - general allowance
Allowance is usually changed at the end of each period to
ga 财
un
reflect the change in value of total trade receivables.
a. 顿
cc 高
n
(1) Remove opening allowance
od 经
.c
Dr Allowance for receivables
Cr Doubtful debts expense
ga 财
Replace with closing allowance
un
Dr Doubtful debts expense
Cr Allowance for receivables
a. 顿
OR
(2) Short method:
cc 高
Increase/decrease opening allowance to arrive at required closing allowance
Increase:
Dr Doubtful debts expense
Cr Allowance for receivables
Decrease:
Dr Allowance for receivables
Cr Doubtful debts expense
Lecture Example
n
od 经
.c
The following information is available for A Co.
Year ended 31 December 20X7: Trade receivables $20,000
ga 财
Year ended 31 December 20X8: Trade receivables $30,000
un
A Co requires a general allowance of 5% of trade receivables in each year.
a. 顿
Required
Show the required adjustment to the allowance for receivables account in the
year ended 31 December 20X8 using both methods described in section 4.5
cc 高
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 9
od 经
.c
Provisions & Contingencies
ga 财
un
a. 顿
cc 高
n
od 经
.c
Provision
ga 财
un
Contingent liability
a. 顿
Contingent asset
cc 高
Definition
n
od 经
.c
A provision is a liability of uncertain timing or amount.
ga 财
un
a. 顿
cc 高
Recognition
n
A provision should only be recognised (ie. included in the
od 经
.c
financial statements) when:
a) An entity has a present obligation (legal or constructive) as
ga 财
un
a result of a past event;
b) It is probable that an outflow of economic resources will be
a. 顿
required to settle the obligation; and
c) A reliable estimate can be made of the amount of the
obligation. Unless all three conditions are met, no provision
cc 高
can be recognised.
Legal obligation
n
od 经
.c
A legal obligation usually arises out of a contract or a
ga 财
piece of legislation.
un
a. 顿
cc 高
ILLUSTRATION
n
od 经
.c
Grass Co sells lawnmowers and offers a one-year warranty on all
models.
ga 财
un
Once Grass Co sells a lawnmower (the past event) it has a legal
obligation to repair any defects according to the warranty agreement.
a. 顿
It should therefore make an estimate of the probable costs of repair
cc 高
and make a provision for this amount in its financial statements.
Constructive obligation
n
od 经
.c
A constructive obligation arises through past behaviour and
actions where the entity has raised a valid expectation that
ga 财
un
it will carry out a particular action.
a. 顿
cc 高
ILLUSTRATION
n
od 经
Seed Co also sells lawnmowers. It does not offer a warranty on its
.c
products; however it has a reputation for making free reasonable
repairs to lawnmowers bought from the business.Customers buying
ga 财
un
from Seed Co all expect to receive this benefit.
a. 顿
Here no warranty is offered and so Seed Co does not have a legal
obligation. Its past actions however have created a constructive
cc 高
obligation. It should also therefore make a provision for the
probable costs of repairs.
Probable outflow
n
od 经
.c
Probable is defined as ‘more likely than not to occur’. This
ga 财
can be interpreted as a greater than a 50% chance of
un
occurring
a. 顿
cc 高
Measurement
n
od 经
.c
The amount recognised as a provision shall be the best estimate of the
expenditure required to settle the present obligation.
ga 财
un
If there is uncertainty surrounding the amount:
• for a large population of items, the expected value should be
a. 顿
used;
• for a single obligation, the individual most likely outcome may
cc 高
be the best estimate of the liability.
n
od 经
The provision represents both a cost to the business and a potential liability:
.c
Dr Expense (SPL)
Cr Provision (SOFP)
ga 财
un
The required provision will be reviewed at each year end and increased or
decreased as necessary.
a. 顿
To increase a provision:
Dr Expense (SPL)
Cr Provision (SOFP)
cc 高
To decrease a provision:
Dr Provision (SOFP)
Cr Expense (SPL)
Lecture Example
n
od 经
Grass Co is reviewing its warranty obligations. Based on sales during 20X7 it
.c
has established that if all lawnmowers sold required minor repairs this would
cost $1m whereas if major repairs were required this would cost $6m.
ga 财
un
Grass Co expects that 75% of lawnmowers will have no faults, 20% will need
minor repairs and 5% major repairs.
Required
a. 顿
a) What provision should be made in 20X7 and what accounting entry is
needed to record it?
cc 高
b) What entry should be made in 20X8 assuming the provision required then
is $0.75m?
c) What entry should be made in 20X9 assuming the provision required then
is $0.3m?
Answer
n
od 经
(a) A provision should be made using expected values:
.c
($1m × 20%) + ($6m × 5%) = $0.5m
Dr Warranty cost expense (SPL) $0.5m
ga 财
un
Cr Provisions (SOFP) $0.5m
(b) In 20X8 the provision needs to increase by $0.25m ($0.75m – $0.5m).
a. 顿
Entry is:
Dr Warranty cost expense (SPL) $0.25m
Cr Provisions (SOFP) $0.25m
cc 高
(c) In 20X9 the provision needs to decrease by $0.45m ($0.75m – $0.3m).
Entry is
Dr Provisions (SOFP) $0.45m
Cr Warranty cost expense (SPL) $0.45m
Contingent liabilities
n
A contingent liability is an uncertain liability that does not meet the three
od 经
.c
criteria for recognising a provision.
IAS 37 defines a contingent liability as the following:
ga 财
a) A possible obligation that arises from past events and whose
un
existence will be confirmed only the occurrence or non-occurrence of
one or more uncertain future event not wholly within the control of the
a. 顿
entity; or
b) A present obligation that arises from past events but is not
recognised because:
cc 高
I. It is not probable that an outflow of economic resources will be
required to settle the obligation; or
II. The amount of the obligation cannot be measured with sufficient
reliability.
Contingent liabilities should be disclosed in the notes unless probability
of an outflow of resources embodying economic benefits is remote.
ILLUSTRATION
n
od 经
Company A has entered into an agreement to act as guarantor on a bank
.c
loan taken out by Mr Smith. Mr Smith is a financially secure individual,
and the directors are of the opinion that the chances of him defaulting on
ga 财
un
the loan are slim.
How should company A account for this guarantee?
a. 顿
Company A has a present obligation (it is legally obliged to honour the
guarantee). However, as the likelihood of Company A having to pay out
cc 高
under the guarantee is not probable then no provision for the liability should
be made. Instead, the guarantee should be disclosed in the notes as a
contingent liability (unless considered remote, in which case it should be
ignored altogether).
Lecture Example
n
od 经
.c
Edward Co owns a chain of supermarkets. In the year ended 30 September 20X5, a
customer slipped on a spilt yoghurt in one of the supermarkets and was seriously injured.
Prior to the year end, the customer began legal proceedings seeking damages from
ga 财
un
Edward Co. Edward Co’s lawyers have stated that there is a 30% chance that Edward
Co will win the case and if they lose, damages of $50,000 are likely.
a. 顿
Which of the following is the correct accounting treatment for the legal proceedings
in the financial statements for the year ended 30 September 20X5?
A
B
cc 高
Edward Co should neither provide for nor disclose the legal proceedings
Edward Co should provide for the expected cost of the damages of $50,000
C Edward Co should provide for an expected cost of $15,000
D Edward Co should disclose a contingent liability of $50,000
Answer
n
od 经
.c
B
There is a present legal obligation and the outflow is probable because
ga 财
the lawyers believe that there is more than a 50% chance of Edward Co
un
losing the case. As there is a single obligation, the provision should be
a. 顿
measured at the most likely outcome of $50,000.
cc 高
Contingent assets
n
od 经
A possible asset that arises from past events and whose existence will be
.c
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
ga 财
un
Contingent assets should be disclosed in the notes where an inflow of
economic benefits is probable, otherwise they should be ignored.
a. 顿
If the probability of an inflow of economic benefits is virtually certain then
the asset is not a contingent asset and should be recognised in the financial
statements. cc 高
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 10
od 经
.c
Capital structure and finance cost
ga 财
un
a. 顿
cc 高
n
od 经
.c
Ordinary share VS Preference share
ga 财
un
Dividend
a. 顿
Share premium&Bonus issue&Right issue
Long term borrowings
cc 高
Income tax
Terminology
n
Limited Company Sole trader
od 经
.c
Total comprehensive income statement Statement profit or loss
Sales x Sales x
ga 财
Cos (x) Cos (x)
un
Gross profit x Gross profit x
Expense (x) Expense (x)
a. 顿
Profit before tax x Net profit x
Tax expense (x)
Profit for the year cc 高 x
Other components income

Revaluation surplus/reserves x
…
Total x
Terminology
n
od 经
Limited Company
.c
Sole trader
Equity Proprietor`s interest
ga 财
Share capital Capital
un
Share premium Profit/loss
Retained earning Withdraw
a. 顿
Revaluation surplus/reserves
cc 高
Type of SPL
n
Statement of profit or loss for the year ended 31 March 20X7
od 经
.c
$'000
Revenue X
ga 财
un
Cost of sales (X)
Gross profit X
a. 顿
Other income X
Distribution costs (X)
Administrative expenses
cc 高 (X)
Finance costs (X)
Profit before tax X
Income tax expense (X)
Profit for the year X
Type of SPL
n
Statement of financial position as at 31 March 20X7
$'000
od 经
ASSETS
.c
Non-current assets
Property, plant and equipment X
Other intangible assets X
X
ga 财
Current assets
un
Inventories X
Trade receivables X
Other current assets X
Cash and cash equivalents X
a. 顿
X
Total assets X
EQUITY AND LIABILITIES
Equity
Share capital X
Share premium account
Retained earnings
Revaluation surplus
cc 高 X
X
X
X
Non-current liabilities
Long term borrowings X
Long term provisions X
X
Current liabilities
Trade payables X
Short term borrowings X
Current tax payable X
Short term provisions X
Total equity and liabilities X
Ordinary share VS Preference share
n
od 经
.c
ga 财
un
a. 顿
cc 高
Preference shares
n
There are two types of preference shares – redeemable (the company is
od 经
.c
obliged to repay the nominal value of the shares at a later date) and
irredeemable (no obligation to repay).
ga 财
un
In substance, redeemable preference shares behave like debt because they
contain an obligation, meeting the Conceptual Framework definition of a
a. 顿
liability. Therefore, they should be treated as a liability (non-current until one
year before redemption) in the statement of financial position and the
dividends should be treated as a finance cost (i.e. interest) in the statement of
profit or loss.
cc 高
Irredeemable preference shares contain no obligation so should be treated
as equity i.e. in the same way as ordinary shares. The dividends should be
treated as an appropriation of profit (see below).
n
Dividends on ordinary shares and irredeemable preference shares are
od 经
.c
charged directly to retained earnings as they are an appropriation of
profits earned to date. They are not an expense in the statement of profit or
ga 财
loss.
un
The double entry for dividends on ordinary shares and irredeemable
a. 顿
preference shares is:
Dr Retained earnings (SOFP)
Cr Cash (if paid)/Dividends payable (if declared) (SOFP)
cc 高
Dividends on redeemable preference shares are treated as a finance cost
(interest):
Dr Finance costs (SPL)
Cr Cash (SOFP)
Lecture Example
n
od 经
ABC Co has the following share capital:
.c
100,000 6% $1 irredeemable preference shares
200,000 50c ordinary shares
ga 财
Retained earnings at the beginning of the year were $125,000.
un
During the year ended 31 December 20X7 it made the following profit:
$
a. 顿
Profit before tax 60,000
Income tax expense 10,000
dividend paid
cc 高
Ordinary dividends paid and declared during the year were as follows:
5c per share
Required
Show the movement in retained earnings for ABC Co for the year ended 31
December 20X7.
Answer
n
ABC Co
od 经
.c
Reconciliation of movement in retained earnings for year ended 31
December 20X6
ga 财
$ $
un
Retained earnings at beginning of year 125,000
a. 顿
Dividends
– irredeemable preference ($100,000 × 6%) 6,000
– ordinary (200,000 shares × 5 cents)
cc 高 10,000
(16,000)
Retained earnings at end of year 159,000
Accounting treatment of Share capital
n
od 经
.c
Rab Co started business on 1 January 20X6 issuing 100,000
ordinary shares of 50c each for 50c per share. The initial statement
ga 财
of financial position would be:
un
$
Cash 50,000
a. 顿
Share capital – 50c ordinary shares 50,000
cc 高
Accounting treatment of Share premium
n
od 经
.c
Where shares are issued for more than their nominal value,
ga 财
the excess must be credited to a share premium account.
un
a. 顿
cc 高
Lecture Example
n
od 经
.c
On 1 June 20X6 Rab Co issued a further 200,000 ordinary shares
of 50c each for 80c per share.
ga 财
un
Required
Show how this issue of shares would be accounted for and what
a. 顿
the equity section of the statement of financial position
(excluding retained earnings) would look like immediately after
the issue.
cc 高
Answer
n
od 经
Rab Co
.c
$ $
Dr Cash (200,000 × 80c) 160,000
ga 财
Cr Share capital (200,000 × 50c)
un
100,000
Cr Share premium account (200,000 × 30c) 60,000
a. 顿
Statement of financial position (extract) as at 1 June 20X0
Equity $
Share premium account

cc 高
Share capital – 50c ordinary shares (50,000 + 100,000) 150,000
60,000
210,000
Bonus issue
n
od 经
.c
This is used when a company wishes to increase its share
capital without needing to raise additional finance by
ga 财
un
issuing new shares. Any reserve may be used including the
share premium account.
a. 顿
cc 高
Lecture Example
n
Rab Co
od 经
.c
Statement of financial position (extract)
$
ga 财
un
Share premium account 60,000
Retained earnings 200,000
a. 顿
410,000
Several years later Rab Co is to make a bonus issue on a 1 for 4 basis.
Required
cc 高
Show how this issue of shares would be accounted for and prepare the equity
section of the statement of financial position of Rab Co immediately after the
issue.
Answer
n
Bonus Issue
od 经
.c
New share capital: 300,000 × 50c = $37,500
4
ga 财
Double entry:
un
$ $
Dr Share premium account 37,500
a. 顿
Cr Share capital 37,500
cc 高 $
Share capital – 50c ordinary shares (150,000 + 37,500) 187,500
Share premium account (60,000 – 37,500) 22,500
410,000
Right issue
n
od 经
.c
a) A rights issue is an issue of shares for cash (unlike a bonus
issue) to existing shareholders for less than their market value.
ga 财
b) ‘Rights’ are offered to the existing shareholders who can sell
un
them if they wish.
a. 顿
cc 高
Lecture Example
n
od 经
One year later, Rab Co is to make a rights issue on a 1 for 5 basis. The rights price is
.c
$1.50. All shareholders take up their rights.
The following statement of financial position extract shows the position before the issue
ga 财
Rab Co
un
$
Share capital – 50c ordinary shares
a. 顿
187,500
Required
cc 高 440,000
Show how this issue of shares would be accounted for and prepare the equity section of
the statement of financial position of Rab Co immediately following the issue.
Answer
n
Rights Issue $ $
od 经
New share capital: 375,000 × 50c
.c
37,500
5
Share premium: 375,000 × $1 75,000
ga 财
un
5
$ $
Dr Cash 112,500
a. 顿
Cr Share capital 37,500
Cr Share premium account 75,000
Rab Co cc 高
$
552,500
Long term borrowings
n
od 经
.c
A company may choose to raise finance by issuing shares
(equity).
ga 财
Alternatively it can raise funds by issuing debt.
un
One way of raising long term finance is for a company to issue
a. 顿
loan notes (also called loan stock or debentures).
cc 高
Finance cost
n
od 经
.c
The interest expense incurred on long term borrowings will
be shown as an expense called 'finance costs' in the
ga 财
statement of profit or loss.
un
a. 顿
It will be accounted for as follows:
Dr Finance costs (ISPL)
Cr Bank (SOFP)
cc 高
Income tax
n
Companies must pay income tax on their profits. This tax is payable
od 经
.c
after the end of the financial year and so the financial statements will
include an accrual for the directors' best estimate of the tax due on the
profit for the period.
ga 财
un
The tax is shown as an expense in the statement of profit or loss and a
a. 顿
current liability in the statement of financial position and will be
accounted for as follows:
Dr Income tax expense (SPL)
cc 高
Cr Current tax payable (SOFP)
Often the actual amount of tax paid will be different from the amount
that was recorded in the financial statements.
This over or under provision is simply adjusted in the next financial
statements.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 11
od 经
.c
Control Account
ga 财
un
a. 顿
cc 高
n
od 经
.c
Contra entry
ga 财
un
Return, Credit notes and Refunds
a. 顿
Discounts
cc 高
Reconciliation
Terminology
n
od 经
.c
In the nominal ledger:
• Receivables ledger control account (trade
ga 财
receivables/RLCA): total owed by all credit customers.
un
• Payables ledger control account (trade payables/PLCA):
total owed to all credit suppliers.
a. 顿
cc 高
The flow information
cc 高
a. 顿
ga 财
od 经
un
.c
n
Conclusion
n
od 经
The information in the receivables ledger control account (RLCA) and
.c
receivables ledger (RL) is posted from the same source documents.
ga 财
Therefore the balance on the RLCA should equal the sum of all
un
balances from the RL
Similarly the balance on the PLCA should equal the sum of all balances
a. 顿
from the PL
If the balances do not agree then an error has been made. This will be
cc 高
identified through a control account reconciliation
Lecture Example
n
A Co has the following information:
od 经
.c
10 January 20X6
Sells $150 of goods to customer A
Sells $200 of goods to customer B
ga 财
un
15 January 20X6
A Co purchases $100 of goods from supplier Y
a. 顿
A Co purchases $1,300 of goods from supplier Z
21 January 20X6
A Co receives full payment from customer B and this money is used to pay supplier Y.
Required
cc 高
1. Record the above transactions in the books of prime entry and the memorandum
ledgers.
2. Post the totals from the BOPE to the nominal ledger.
3. Balance off nominal ledger accounts.
4. Reconcile the memorandum ledgers to the control accounts.
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Answer
n
Reconciliation
od 经
.c
Balance per list of balances
$
Receivables ledger
ga 财
un
Customer A 150
Customer B –
a. 顿
150
Balance per RLCA 150
Balance per list of balances
Payables ledger
cc 高 $
Supplier Y –
Supplier Z 1,300
1,300
Balance per PLCA 1,300
Contra entry
n
Sometimes a business may have a customer which also supplies the business with goods.
od 经
Illustration:
.c
P Co is a printing business which sells stationery to F Co, a florist. F Co supplies P Co with
flowers and plants for its offices.
ga 财
During October, P Co sells stationery worth $200 to F Co and F Co delivers flowers and
un
plants to P Co worth $70.
P Co has the following amounts in its books:
Receivables: $200
a. 顿
Payables: $70
The two businesses agree to offset the balances receivable and payable via a contra.
The contra will be for the lower of the two amounts: $70. This will decrease both
cc 高
receivables and payables by $70 and the remaining $130 can then be paid in cash.
A contra entry is always recorded as:

Dr PLCA
Cr RLCA
This will reduce both receivables and payables.
Note that the memorandum ledgers will also need to be updated for the contra entry.
Returns, Credit and Refunds
n
od 经
.c
Sometimes when a business has made a sale, the customer will return the
goods. Equally when the business has purchased some goods on credit, it
ga 财
un
may return them to the supplier.
a. 顿
cc 高
Steps for sales returns
n
(1) Goods are sold to the customer for $250:
od 经
.c
Dr RLCA $250
Cr Sales $250
(2) Customer pays for goods:
ga 财
un
Dr Bank $250
Cr RLCA $250
At this point the balance on the receivables ledger control account is nil.
a. 顿
(3) Customer returns the goods and is issued with a credit note:
Dr Sales (returns) $250
Cr RLCA $250
cc 高
This entry reverses the original sale.
The receivables ledger control account will show a credit balance reflecting that
the business owes money to the customer. This could be offset against future sales
or the customer may request a refund.
(4) The business refunds the customer:
Dr RLCA $250
Cr Bank $250
Once again the balance on the receivables ledger control account is nil.
Steps for purchase returns
n
od 经
.c
(1) Goods are purchased from the supplier for $100:
Dr Purchases $100
ga 财
Cr PLCA $250
un
(2) The business pays the supplier:
a. 顿
Dr PLCA $100
Cr Cash $100
At this point the balance on the payables ledger control account is nil.
cc 高
Steps for purchase returns
n
(3) The business returns the goods to the supplier and is issued with a credit note:
od 经
.c
Dr PLCA $100
Cr Purchases (returns) $250
ga 财
This entry reverses the original purchase.
un
The payables ledger control account will show a debit balance reflecting
that the supplier owes money to the company. This could be offset against
a. 顿
future purchases or the business may request a refund.
(4) The supplier refunds the business:

cc 高
Dr Bank $250
Cr PLCA $250
Once again the balance on the payables ledger control account is nil.
Again, the memorandum ledgers must also be updated.

Over payment
n
od 经
.c
If a customer pays too much to settle an invoice or pays an invoice
twice the business will owe the excess to the customer.
ga 财
This may be held and treated like a credit note or the monies
un
refunded to the customer.
a. 顿
Equally if the business pays too much to a supplier, the supplier will
owe the excess to the business and as for sales, this may be held and
treated like a credit note or the monies refunded by the supplier
cc 高
Interest on overdue accounts
n
od 经
If a customer is late in settling their account then an entity may decide to
.c
charge them interest.
This will increase the amount they owe and will be shown as interest
ga 财
un
receivable in the statement of profit or loss.
The same could apply to late payment to suppliers.
Interest on overdue accounts is recorded using the following journal:
a. 顿
On trade receivables:
Dr RLCA
cc 高
Cr Interest receivable (SPL)
On trade payables:
Dr Interest payable (SPL)
Cr PLCA
Discounts
n
od 经
There are two types of discounts:
.c
(a) Trade discounts
I. Given at the time of the sale/purchase, they reduce the
ga 财
un
selling price as an inducement to purchase;
II. Usually for regular customers or bulk buyers.
a. 顿
(b) Settlement discounts
I. Offered, but not necessarily taken, as an inducement to
settle a debt early;
cc 高
II. eg. 5% discount if settled within 14 days.
Discounts allowed
n
Discounts allowed: offered by the business to their customer.
od 经
.c
Sales are recorded net of (i.e. after) trade discounts but inclusive
ga 财
un
of (i.e. before) settlement discounts.
a. 顿
Therefore trade discounts never appear in the financial statements.
Settlement discounts allowed are recorded as discounts allowed and
are shown as an expense in the statement of profit or loss:
cc 高
Dr Discounts allowed (SPL)
Cr RLCA (SOFP)
Lecture Example
n
od 经
(a) On 1 January 20X7 a business made a sale on credit for $12,000.
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A trade discount of $2,000 was available with a further 10%
settlement discount if payment were made within 10 days.
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Required
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Record the initial sale.
a. 顿
(b) On 4.1.X7, the customer pays for the goods taking advantage of the
settlement discount. The discount will be 10% of sales value.
Required
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Record the full settlement of the amount owed.
(c) Required
What would your answer be to part (b) if the settlement discount were
not taken?
Answer
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a. 顿
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Answer
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Answer
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Discounts received
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Discounts received: received by a business from their supplier.
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Purchases are recorded net of trade discounts but inclusive of settlement
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discounts.
Again trade discounts never appear in the financial statements.
a. 顿
Settlement discounts received are recorded as discounts received and are
shown as sundry income in the statement of profit or loss.
Dr PLCA (SOFP) cc 高
Cr Discounts received (SPL)
Lecture Example
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Ryan Co purchases goods worth $5,000 from Austin Co. Ryan Co will
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receive a 5% settlement discount if the goods are paid for within seven
days. Ryan Co has every intention of taking advantage of the settlement
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discount.
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Required
a. 顿
In the books of Ryan:
a) Show the initial recording of the purchase.
b) Record the payment for the goods assuming Ryan pays within seven
cc 高
days.
c) Record the payment for the goods if payment is made after seven
days.
Answer
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a. 顿
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Answer
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Answer
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Sales tax and Discounts
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Sales tax is calculated on the amount after all
discounts, regardless of whether the discount is
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taken or not.
a. 顿
cc 高
Lecture Example
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Brick buys goods with a list price of $50,000 from Cement. Brick receives a
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trade discount of 12% from Cement and a further discount of 4% if payment
is made within 10 days. Sales tax is at 15%.
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What amount should Brick show in Cement's payables ledger to record
this purchase?
a. 顿
A $48,576
B $50,336
C $50,600
D $57,500
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Answer
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B
$
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List price 50,000
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Less: trade discount (12%) (6,000)
Record purchase at this value 44,000
a. 顿
Less: settlement discount (4%) (1,760) $50,336
Calculate sales tax on this value 42,240
Sales tax at 15%

cc 高 6,336
Control account reconciliations
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(a) Required
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Post the following transactions to and balance off the receivables ledger control
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account.
1. Opening balance $614,000
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2. Credit sales made during the month $302,600
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3. Receipts from customers $311,000
4. Bad debts were written off $32,000
a. 顿
5. Discounts allowed for prompt payment $3,400
6. Contras against amounts due to suppliers in payables ledger $8,650
(b) The receivables ledger list of balances totals to $563,900.
cc 高
You have found the following errors:
I. The total of the sales day book was undercast by $3,600.
II. A credit balance of $450 was included in the list of balances as a debit.
III. A customer balance of $2,150 was left out when the receivables ledger list
of balances was totalled.
Required
Reconcile the receivables ledger control account to the receivables ledger list of
balances.
Answer
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Task 12
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Bank reconciliation
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a. 顿
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a. 顿
Terminology
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Introduction
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This is designed to enable you to explain and apply the approach to
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identifying and correcting errors through the use of bank reconciliations.
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The cash book is used to record the detailed transactions of receipts and
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payments into and out of the bank account. These are then posted to the
nominal ledger periodically using
a. 顿
double entry. At the end of each accounting period, the balance on the
cash book should equal the balance in the nominal ledger cash account.
cc 高
Bank statements provide an independent record of the balance on the
bank account but this balance is unlikely to agree exactly to the cash
book balance – therefore a reconciliation is
Difference reasons
n
Differences essentially occur for three reasons:
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(a) Timing differences:
I. Outstanding lodgements/deposits credited after date
(money paid into the bank by the business but not yet
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appearing as a receipt on bank statement)
II. Unpresented/outstanding cheques (cheques paid out by
a. 顿
business which have not yet appeared on bank statement).
(b) Errors by the business (i.e. in the cash book):
I. Omissions, such as:
standing orders
direct debits
cc 高
bank charges Dishonoured cheque
interest
II. Transposition errors
III. Casting errors
(c) Errors by the bank.
Identification
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In the books of the business:
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POSITIVE BANK BALANCE = ASSET = DEBIT
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NEGATIVE BANK BALANCE (OVERDRAFT) = LIABILITY = CREDIT
But from the bank’s point of view:
a. 顿
POSITIVE BALANCE = LIABILITY = CREDIT (the bank owes you your money)
cc 高
NEGATIVE BALANCE (OVERDRAFT) = ASSET = DEBIT
(you owe the bank ∴ this is an asset for the bank)
Preparing a bank reconciliation
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a. 顿
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Lecture example
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The cash account of Graham showed a debit balance of $204 on 31 March 20X8.
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A comparison with the bank statements revealed the following.
$
(1) Cheques drawn but not presented 3,168
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(2) Amounts paid into the bank but not credited 723
(3) Entries in the bank statements not recorded in the cash account
I. Standing order payments 35
a. 顿
II. Interest on bank deposit account 18
III. Bank charges 14
(4) Balance on the bank statement at 31 March 20X8 2,618
Required
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Make any necessary adjustments to the cash book balance and complete the bank
reconciliation statement as at 31 March 20X8.
Answer
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Task 13
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Correction of errors
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a. 顿
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Types of errors
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Suspense account
a. 顿
Correction of errors
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Types of errors
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The following errors will still allow the trial
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balance to balance.
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Error of omission
Error of commission
a. 顿
Error of principle
Compensating errorcc 高
Types of errors
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The trial balance will not balance if total debits do not equal total
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credits.
This could be due to the following:
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(1) Transposition error
(2) An entry has been posted where
a. 顿
a) Debits ≠ credits
b) A debit entry has been posted and no corresponding credit made
cc 高
(or vice versa)
c) Two debit entries or two credit entries have been posted.
These errors will be corrected by creating a suspense account and
making a journal entry to correct the error.
Suspense accounts
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Definition
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A suspense account is a temporary account. They never appear in
the final accounts.
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It is used for two main reasons:
1. To account for a debit or credit entry when the accountant is unsure
a. 顿
as to where it should go
2. To make a preliminary trial balance balance when an error has been
detected. cc 高
Steps to clear a suspense account.
1. Determine the original accounting entry which was made.
2. Decide what entry should have been made.
3. Make the required adjustment
Illustration
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W Co sold goods with a value of $2,500 to James, a credit customer. When
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recording the sale W Co posted the transaction to the correct accounts but made
two debit entries.
Steps
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(1) Entry made was:
Dr Trade receivables $2,500
Dr Sales $2,500
a. 顿
(2) Entry should have been:
Dr Trade receivables $2,500
Cr Sales $2,500
(3) Correction: cc 高
The trade receivables entry is correct but sales have been debited by $2,500
when they should have been credited by that amount.
The correction is therefore twice the original error:
Dr Suspense account $5,000
Cr Sales (2 × $2,500) $5,000
Being: correction of sales posting.
Lecture example
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Dan, the bookkeeper of Tiffany's, has made his usual mess of things and
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produced the following attempt at a trial balance for the year ended 30
April 20X7.
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$ $
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Property, plant and equipment
At cost 60,000
a. 顿
Provision for depreciation 31,000
Capital at 1 May 20X6 53,000
Inventory, at cost cc 高
Receivables ledger control account
Payables ledger control account
14,000
9,600
6,500
Balance at bank 1,640
85,240 102,800
Lecture example
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As chief accountant you discover the following:
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1. A rent payment of $350 in March 20X7 had been debited in the receivables
ledger control account.
2. Discounts allowed of $500 during the year ended 30 April 20X7 had not been
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recorded in the books.
3. No entry had been made for the refund of $2,620 made by cheque to V Woolf in
March 20X7, in respect of defective goods returned to Tiffany. V Woolf, who had
a. 顿
already paid for the goods, returned them on 28 February 20X7.
4. The total column of the cash receipts book had been overcast by $1,900 in March
20X7.
cc 高
5. The purchase of stationery for $1,460 cash in June 20X6 has been correctly
entered in the cash account, but no entry has been made to the appropriate
expense account.
6. Capital of $35,000 was recorded incorrectly as $53,000.
Required
Prepare
(a) Journal entries to correct the above errors;
(b) A suspense account showing how it is cleared.
Answer
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(a) Journal entries
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Dr Cr
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$ $
(1) Rent and rates 350
Trade receivables 350
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(2) Discounts allowed 500
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(3) Trade receivables 2,620
Cash at bank 2,620
a. 顿
(4) Suspense account 1,900
Cash at bank 1,900
(5) Stationery and postage 1,460
Suspense account
(6) Capital
Suspense account
cc 高
18,000
1,460
18,000
Continued Lecture example
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Dan, the bookkeeper of Tiffany's, has made his usual mess of things and
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produced the following attempt at a trial balance for the year ended 30
April 20X7.
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$ $
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At cost 60,000
a. 顿
Provision for depreciation 31,000
Capital at 1 May 20X6 53,000
Inventory, at cost cc 高
Receivables ledger control account
Payables ledger control account
14,000
9,600
6,500
Balance at bank 1,640
85,240 102,800
Continued Lecture example
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As chief accountant you discover the following:
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1. A rent payment of $350 in March 20X7 had been debited in the receivables
ledger control account.
2. Discounts allowed of $500 during the year ended 30 April 20X7 had not been
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recorded in the books.
3. No entry had been made for the refund of $2,620 made by cheque to V Woolf in
March 20X7, in respect of defective goods returned to Tiffany. V Woolf, who had
a. 顿
already paid for the goods, returned them on 28 February 20X7.
4. The total column of the cash receipts book had been overcast by $1,900 in March
20X7.
cc 高
5. The purchase of stationery for $1,460 cash in June 20X6 has been correctly
entered in the cash account, but no entry has been made to the appropriate
expense account.
6. Capital of $35,000 was recorded incorrectly as $53,000.
Required
Prepare a statement of adjustments to profit for Lecture example
Answer
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Adjustment of profits statement for the year ended 30 April 20X7
Decreases Increases
$ $ $
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Draft profit
Adjustments 12,300
a. 顿
Rent (1) 350
Discounts allowed (2) 500
Stationery (5) 1,460
Total adjustments
Revised profit
cc 高 2,310 (2,310)
9,990
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Task 14
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Preparation of financial
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statement for sole traders
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Financial statement of sole traders
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a. 顿
cc 高
Lecture Example
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You have been given the information below and asked to prepare the accounts of Mugg for the year ended 31
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December 20X7.
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Trial balance as at 31 December 20X7. Dr Cr
$ $
Capital account at 1 January 20X7 2,377
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Rent 500
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Inventories 1 January 20X7 510
Electricity 240
Insurance 120
Wages 1,634
a. 顿
Sales 15,542
Repairs 635
Purchases 9,876
Discounts received 129
Drawings 1,200
Petty cash
Bank
Motor vehicles at cost
Furniture and fixtures at cost
cc 高 5
762
1,740
830
Accumulated depreciation at 1 January
20X7
– Motor vehicles 435
– Furniture and fixtures 166
Travel and entertaining 192
Trade payables 700
Suspense account 433
19,349 19,349
Lecture Example
n
The following information is also available:
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1. Closing inventories, valued at cost, amounts to $647;
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2. Mugg has drawn $10 a month and these drawings have been charged to wages;
3. Depreciation is to be provided at 25% on cost on motor vehicles, and 20% on
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cost on furniture and fixtures;
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4. Bad debts totalling $37 are to be written off;
5. $180 received from a credit customer was correctly entered in the trade
receivables account and credited to the bank account;
a. 顿
6. Mugg has taken goods from inventories for his own use. When purchased by his
business these goods cost $63 and they would have been sold for $91;
7. The annual rental of the business premises is $600, and $180 paid for electricity
cc 高
in August 20X7 covers the 12 months to 30 June 20X8;
8. Discounts allowed of $73 have only been recorded in the trade receivables
account.
Required
a) Prepare journal entries to record items (1) – (8).
b) Clear the suspense account.
c) Produce a statement of profit or loss for the year ended 31 December 20X7
and a statement of financial position as at that date.
Answer
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(a)
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(1) Dr Cr
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$ $
Dr Inventories (SOFP) 647
Cr Closing inventories (SPL) 647
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Being: adjustment to record year end closing inventories.
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(2)
$ $
Dr Drawings (12 × $10) (SOFP) 120
a. 顿
Cr Wages (SPL) 120
Being: correction of cash drawings posted as wages.
(3)
$ $
Dr Depreciation expense (SPL)cc 高
Cr Accumulated depreciation (SOFP):
Motor vehicles ($1,740 × 25%)
601
435
Furniture and fittings ($829 × 20%) 166
Being: adjustment to record depreciation for the year
(4)
$ $
Dr Bad debt expense (SPL) 37
Cr Trade receivables (SOFP) 37
Being: write off of irrecoverable customer balance.
Answer
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(5)
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$ $
.c
Dr Bank (2 × $180) (SOFP) 360
Cr Suspense account 360
Being: adjustment to correct cash receipt from trade receivables.
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(6)
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$ $
Dr Drawings (SOFP) 63
Cr Purchases (SPL) 63
a. 顿
Being: adjustment for goods drawn from business (removed at cost value)
(7)
$ $
Dr Rent expense (600 – 500) (SPL) 100
Cr Accruals (SOFP) 100
cc 高
Being: accrual of rent expense.
Dr Prepayments ($180 × 6/12) (SOFP)

$
90
$
Cr Electricity expense (SPL) 90

Being: prepayment of electricity expense.
(8)
$ $
Dr Discounts allowed (SPL) 73
Cr Suspense account 73
Being: adjustment for discounts allowed omitted.
Answer
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Answer
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(c) Mugg
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Statement of profit or loss for the year ended 31 December 20X7
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$ $
Sales 15,542
Less: cost of sales
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Opening inventories 510
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Purchases (9,876 – 63) 9,813
10,323
Less: closing inventories 647
a. 顿
9,676
Gross profit 5,866
Discounts received 129
5,995
Less expenses:
Rent (500 + 100) cc 高
Electricity (240 – ( 6/12 ×180))
Insurance
600
150
120
Wages (1,634 – 120) 1,514
Repairs 635
Depreciation 601
Travel and entertaining 192
Bad debts 37
Discounts allowed 73
3,922
Profit for the period 2,073
Answer
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Mugg
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Statement of financial position as at 31 December 20X7
Cost Accumulated NBV
depreciation
$ $ $
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Non-current assets
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Motor vehicles 1,740 870 870
Furniture and fixtures 830 332 498
2,569 1,202 1,368
Current assets
a. 顿
Inventories 647
Trade receivables (672 – 37) 635
Prepayments 90
Cash and bank balances (5 + 762 + 360) 1,127
2,499
Capital
Capital as at 1 January 20X7
Profit for the period
cc 高 $
3,867
2,377
2,073
Less: drawings (1,200 + 63 + 120) (1,383)
3,067
Current liabilities
Trade payables 700
Accruals 100
800
3,867
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Task 15
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Preparation of financial
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statements for companies
a. 顿
cc 高
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Statement of profit or loss and other income
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Statement of financial position
a. 顿
Statement of changes in equity
cc 高
Notes to the account
Contents of financial statements
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A complete set of financial statements in accordance with IAS 1 (revised)
.c
comprises:
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a) A statement of financial position
b) A statement of profit or loss and other comprehensive income
a. 顿
c) A statement of changes in equity
d) A statement of cash flows; and
e) Notes, comprising a summary of significant accounting policies and other
explanatory notes.cc 高
Proforma Statement of profit or loss
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$'000
Revenue X
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Cost of sales (X)
Gross profit X
Other income X
a. 顿
Distribution costs (X)
Administrative expenses (X)
Finance costs
Profit before tax
cc 高 (X)
X
Income tax expense (X)
Profit for the year X
Proforma Statement of profit or loss and other comprehensive income
n
Statement of profit or loss and other comprehensive income
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Financial statements have always included a statement of profit or loss and a
statement of financial position
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Following a revision to IAS 1, financial statements should also include a statement
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of profit or loss and other comprehensive income.
This statement shows all of the realised gains and losses from the statement of
a. 顿
profit or loss and the unrealised gains and losses from the statement of financial
position in one statement of performance.
Realised
cc 高
Statement of profit or loss Statement of financial position
Unrealised
gains and losses gains and losses
(posted to income or expense in SPL) (posted directly to reserves)
eg profit for the year eg revaluation gains
Statement of profit or loss and other comprehensive income

Two types
n
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The statement can be presented in one of two ways:
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• As one single statement (proforma 1)
• As two separate statements (proforma 2)
a. 顿
cc 高
Single statement
n
Proforma 1 – one single statement
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Statement of profit or loss and other comprehensive income for the year ended 31
March 20X7
20X7 20X6
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$’000 $’000
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Revenue X X
Cost of sales (X) (X)
Gross profit X X
a. 顿
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Finance costs
Investment income
Profit before tax
cc 高 (X)
X
X
(X)
X
X
Income tax expense (X) (X)
Profit for the year X X
Other comprehensive income:
Gains on property revaluation X X
Total comprehensive income for the year X X
Two separate statements
n
Proforma 2 – two separate statements
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20X7 20X6
$’000 $’000
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Revenue X X
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Cost of sales (X) (X)
Gross profit X X
Other income X X
a. 顿
Distribution costs (X) (X)
Administrative expenses (X) (X)
Finance costs (X) (X)
Investment income X X
Profit before tax
Income tax expense
Profit for the year
cc 高 X
(X)
X
X
(X)
X
Statement of other comprehensive income for the year ended 31 March 20X7
20X7 20X6
$’000 $’000
Profit for the year X X
Gains on property revaluation X X
Total comprehensive income for the year X X
Lecture Example
n
Below are the statement of profit or loss and statement of financial position for Arrow Co
od 经
for the year ended 30 September 20X6
.c
Arrow Co
Statement of profit or loss for the year ended 30 September 20X6
$'000
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Revenue 12,740
un
Cost of sales (7,040)
Gross profit 5,700
Distribution costs (2,060)
a. 顿
Administrative expenses (2,375)
Finance costs (72)
Income tax expense (270)
Profit for the year cc 高
923
The following information was accounted for when the above financial statements were
produced:
1. During the year the company made a rights issue on a 1 for 6 basis. The issue was fully
subscribed and the rights price was $1.27. Prior to the rights issue Arrow Co had 3,000,000
50c ordinary shares in issue.
2. The property, plant and equipment were revalued by $600,000 during the year.
3. A dividend of $300,000 was paid during the year.
Lecture Example
n
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Using the illustration, Arrow Co, prepare the statement of profit or loss
and other comprehensive income for the year ended 30 September
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20X6:
(a) Showing the statement as one statement
(b) Showing the statement as two separate statements.
a. 顿
cc 高
Answer
n
(a)
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One single statement
Statement of profit or loss and other comprehensive income for the year
ended 30 September 20X6
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$’000
Revenue 12,740
a. 顿
Gross profit 5,700
Finance costs
Profit before tax
cc 高 (72)
1,193
Profit for the year 923
Gains on property revaluation 600
Total comprehensive income for the year 1,523
Answer
n
(b) Two separate statements
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Statement of profit or loss for the year ended 30 September 20X6
.c
$’000
Revenue 12,740
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Gross profit 5,700
a. 顿
Finance costs (72)
Profit for the year cc 高 923
Statement of other comprehensive income for the year ended 30 September 20X6
$’000
Gains on property revaluation 600
Total comprehensive income for the year 1,523
Proforma statement of financial position
n
Statement of financial position as at 31 March 20X7
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$'000
ASSETS
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Non-current assets
un
Property, plant and equipment X
Other intangible assets X
a. 顿
X
Current assets
Inventories cc 高 X
Trade receivables X
Other current assets X
Cash and cash equivalents X
X
Total assets X
Proforma statement of financial position
n
EQUITY AND LIABILITIES
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Equity
Share capital X
Share premium account X
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Retained earnings X
Revaluation surplus X
a. 顿
X
Long term borrowings X
Long term provisions
Current liabilities
cc 高 X
Trade payables X
Short term borrowings X
Current tax payable X
Short term provisions X
Total equity and liabilities X
Proforma statement of changes in equity
n
Statement of changes in equity
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Proforma
Share
Share Retained Revaluatio Total
premium
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capital earnings n surplus equity
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account
$’000 $’000 $’000 $’000 $’000
Balance at 31 March 20X6 X X X X X
a. 顿
Issue of share capital X X X
Dividends (X) (X)
Total comprehensive income X X X
Transfer to retained earnings
Balance at 31 March 20X7
cc 高X X
X
X
(X)
X X
Lecture Example
n
Arrow Co had the following equity balances at 1 October 20X5 (the beginning of the year):
od 经
.c
$'000
Share premium account 200
ga 财
un
Revaluation surplus 800
3,750
a. 顿
Information
1. During the year the company made a rights issue on a 1 for 6 basis. The
issue was fully subscribed and the rights price was $ 1.27. Prior to the
cc 高
rights issue Arrow Co had 3,000,000 50c ordinary shares in issue.
2. A dividend of $300,000 was paid during the year.
Required
Produce a statement of changes in equity for Arrow Co for the year
ended 30 Sep 20X6
Answer
Share
n
Share Retained Revaluation
od 经
premium
capital earnings surplus
.c
account
$’000 $’000 $’000 $’000
ga 财
Balance at 30 September 20X5 1,500 200 1,250 800
un
Issue of share capital 250 385
Dividends (300)
a. 顿
Total comprehensive income 923 600
Balance at 30 September 20X6 1,750 585 1,873 1,400
Working
Rights issue: cc 高
Issue is on a 1 for 6 basis, therefore issue 3,000,000 ÷ 6 = 500,000 shares at
$1.27 each.
Record as:
Dr Bank (500,000 × $1.27) 635,000
Cr Share capital (500,000 × 50c) 250,000
Cr Share premium (500,000 × 77c) 385,000
Notes to the accounts
n
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Notes are included in a set of financial statements to give users extra
information. You should be aware of the following notes:
ga 财
un
a. 顿
Inventory
Provisions
Contingent assets
cc 高
Events after the reporting period
Property, plant and equipments
n
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.c
Land and Office
Machinery Total
buildings equipment
$ $ $ $
ga 财
un
Carrying amount at 1 April 20X6 X X X X
Additions X X X X
Revaluation surplus (X) X
a. 顿
Depreciation charge (X) (X) (X) (X)
Disposals (X) (X) (X) (X)
Carrying amount at 31 March 20X7 (X) (X) (X) (X)
cc 高
Property, plant and equipments
n
The following must also be disclosed in relation to property, plant an equipment:
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(a) The accounting policies for property, plant and equipment
(b) For each class of property, plant and equipment:
• Depreciation methods
ga 财
un
• Useful lives or depreciation rates
• Total depreciation allocated for the period
• Gross amount on depreciable assets and the related accumulated
a. 顿
depreciation at the beginning and end of the period
(c) For revalued assets:
• Effective date of revaluation
cc 高
• Whether an independent valuer was involved
• Carrying amount for each class of asset that would have been included in
the statement of financial statements has assets been carried at cost less
depreciation
• Revaluation surplus.
n
od 经
.c
ga 财
Development
un
expenditure
$
a. 顿
Carrying amount at 1 April 20X6 X
Additions X
Amortisation charge (X)
Disposals cc 高
Carrying amount at 31 March 20X7 X
(X)
X
n
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.c
The following must also be disclosed in relation to intangible assets:
(a) The accounting policies for intangible assets.
ga 财
(b) For each class of intangible asset:
un
• The method of amortisation
• The useful life of assets or the amortisation rate
a. 顿
• The gross carrying amount, the accumulated amortisation and
the accumulated impairment losses at the beginning and end
of the period
cc 高
• The carrying amount of internally-generated intangible assets
• The line item(s) of the statement of profit or loss in which
any amortisation of intangible assets is included.
Inventory
n
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.c
Inventory
$
ga 财
Raw materials X
un
Work in progress X
Finished goods X
a. 顿
X
cc 高
Provision
n
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.c
Provisions
$
ga 财
un
At 1 April 20X6 X
Increase in period X
a. 顿
Released in period (X)
At 31 March 20X7 X
cc 高
n
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.c
Unless remote, disclose for each contingent liability:
a) A brief description of its nature; and where practicable
ga 财
b) An estimate of the financial effect
un
c) An indication of the uncertainties relating to the amount or timing of any
outflow; and
a. 顿
d) The possibility of any reimbursement
cc 高
Contingent assets
n
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Contingent assets
Where an inflow of economic benefits is probable, an entity should
ga 财
disclose
un
(a) A brief description of its nature; and where practicable
a. 顿
(b) An estimate of the financial effect
cc 高
Event after the reporting period
n
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.c
In respect of non-adjusting events after the reporting period disclose
ga 财
a) The nature of the event
un
b) An estimate of its financial effect (or a statement that an estimate
a. 顿
cannot be made).
cc 高
Lecture Example
n
Harry Co had the following balances in relation to property, plant and equipment at 1
od 经
.c
January 20X5 (the beginning of the year):
Buildings Plant Total
$ $ $
ga 财
At 1 January 20X5
un
Cost 500,000 100,000 600,000
Accumulated depreciation (150,000) (40,000) (190,000)
a. 顿
Carrying amount 350,000 60,000 410,000
The following information is relevant:

• On 1 July 20X5, Harry Co purchased a new building for $200,000.
cc 高
• On 31 December 20X5, Harry Co revalued a building to $140,000. It had been
purchased on 1 January 20X1 for $130,000.
• On 31 March 20X5, Harry Co sold an item of plant for $11,000. It had been
purchased on 1 January 20X4 for $10,000.
• Plant is depreciated at 20% per annum using the reducing balance method and
buildings are depreciated at 5% per annum based on their original cost. A full year’s
depreciation is charged in the year of acquisition and none in the year of disposal.
Lecture Example
n
od 经
.c
Required
Complete the disclosure note for property, plant and equipment for
ga 财
un
the year ended 31 December 20X5 reconciling the carrying amount at
the beginning of the period to the carrying amount at the end of the
a. 顿
period.
cc 高
Answer
n
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.c
Buildings Plant Total
$ $ $
ga 财
Carrying amount at 1 January 20X5 350,000 60,000 410,000
un
Additions 200,000 200,000
Revaluation surplus (W1) 42,500 42,500
a. 顿
Depreciation charge (W3) (35,000) (10,400) (45,400)
Disposals (W2) (8,000) (8,000)
Carrying amount at 31 December 20X5
cc 高 557,500 41,600 599,100
Answer
n
Working
od 经
1 Revaluation of building
.c
$
Cost (1 January 20X1) 130,000
ga 财
Accumulated depreciation (20X1 – 20X5) (130,000 × 5% × 5 years) (32,500)
un
Carrying amount (31 December 20X5) 97,500
Revaluation surplus (balancing figure) 42,500
Revalued amount (31 December 20X5) 140,000
a. 顿
2 Carrying amount of plant at disposal date
$
Cost 10,000
Carrying amount
cc 高
Accumulated depreciation (20X4) (10,000 × 20%) * (2,000)
8,000
* Only need to deduct 1 year of depreciation (20X4) because none in year of disposal
3 Depreciation
On buildings = (B/d cost 500,000 + Additions 200,000) × 5% = $35,000
On plant = (B/d NBV 60,000 – Disposal 8,000) × 20% = $10,400
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
od 经
Task 16
.c
ga 财
un
a. 顿
cc 高
n
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Adjustment events
ga 财
un
Non-adjustments
a. 顿
cc 高
Definition
n
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Events after the reporting period: events, both
ga 财
favorable and unfavorable, that occur between the
un
end of the reporting period and the date when the
a. 顿
financial statements are authorized for issue.
cc 高
Adjustment and Non-adjustment events
n
Adjusting Events which provide evidence Non- Events that relate to conditions
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events of conditions which existed at adjustment which arose after the end of the
the end of the reporting period. reporting period
events
ga 财
un
Examples: Examples:
a. 顿
(1) Resolution of a court case (1) Destruction of major asset, e.g.by flood or fire
(2) Bankruptcy of a major customer (2) Major share transactions
(3) Evidence of NRV of inventories (3) Announcement of a plan to close
cc 高
(4) Discovery of fraud or errors that show the
financial statements were incorrect
part of a business
Accounting treatment: Accounting treatment:

Change the amounts in the financial Disclose non-adjusting event in a
statements note to the financial statements
Adjustment and Non-adjustment events
n
od 经
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(a) Dividends proposed or declared after the end of reporting
period but before the financial statements are approved
ga 财
un
should be disclosed in a note to the financial statements.
a. 顿
(b) A non-adjusting event that affects going concern becomes an
adjusting event.
cc 高
Lecture Example
n
Which of the following events after the reporting period would normally qualify
od 经
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as a non-adjusting event?
1 A fall in the market price of shares held by the entity as investments.
ga 财
2 Insolvency of a trade receivable with a balance of $200,000 outstanding
un
at the end of the reporting period.
3 Declaration of the year-end dividend by the directors.
a. 顿
4 Confirmation of the amount of damages awarded to an employee who
sued for unfair dismissal after being sacked two months before the year end.
A 2 only
B 1 and 3
cc 高
C 1, 3 and 4
D 2 and 4
B 1 and 3 are non-adjusting events as the condition did not
exist at the end of the reporting period.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 17
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.c
Incomplete Records
ga 财
un
a. 顿
cc 高
n
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.c
Cost structure
ga 财
un
Other techniques for solving incomplete record
a. 顿
Goods drawn by proprietor
cc 高
ISSUE
n
od 经
.c
Individuals running small businesses such as a newsagent or greengrocer
may not keep all of the accounting records we have studied or have a
ga 财
detailed understanding of double entry bookkeeping.
un
They still need to know how the business is performing and so will
a. 顿
produce financial statements. If some necessary information isn't
maintained by the business, it will need to be derived from other
available information
cc 高
COST STRUCTURE
n
Cost structure information is usually expressed in one of two ways, either
od 经
.c
as a margin or a mark-up.
(a) Margin: here gross profit is expressed as a percentage of sales, for
example a margin of 25% gives:
ga 财
un
Sales 100%
Cost of sales 75%
Gross profit 25%
a. 顿
(b) Mark-up: here gross profit is expressed as a percentage of cost of
sales, for example a mark-up of 35% gives:
Sales 135%
cc 高
Cost of sales 100%
Gross profit 35%
Remember that:
Cost of sales = opening inventories + purchases – closing inventories
Lecture Example
n
od 经
W Co has on average a profit margin of 40%. In 20X7 sales total
.c
$476,000.
ga 财
Required
un
What is cost of sales?
a. 顿
cc 高
Lecture Example
n
Y Co operates with a standard mark-up of 30% and has the following information
od 经
.c
available for 20X7.
$
Sales 221,000
Opening inventories 43,000
ga 财
un
Closing inventories 47,500
a. 顿
Required
What is the value for purchases in 20X7?
cc 高
Lecture Example
n
Emma is a sole trader who does not keep full accounting records. The following
od 经
details relate to her transactions with credit customers and suppliers for the year ended
.c
31 December 20X3:
$
ga 财
Trade receivables, 1 January 20X3 65,000
un
Trade payables, 1 January 20X3 30,000
Cash received from customers 343,200
Cash paid to suppliers 151,400
a. 顿
Discounts allowed 700
Discounts received 1,480
Contra between payables and receivables ledgers 1,000
cc 高
Trade receivables, 31 December 20X3
Trade payables, 31 December 20X3
90,500
42,000
What figure should appear for purchases in Emma’s statement of profit or loss
for the year to 31 December 20X3?
A $162,920
B $163,880
C $165,100
D $165,880
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Goods drawn by proprietor
n
od 经
The owners of the business may at times take goods or cash from the business for
.c
their own use. We have seen these before as drawings.
In incomplete records questions these drawings need to be included.
ga 财
Cash drawings
un
Dr Drawings
Cr Cash
a. 顿
Goods taken for own use
Dr Drawings
Cr Purchases
cc 高
These are recorded at the cost to the business not at sale price.
They are taken out of purchases and not recorded against inventories.
Lecture Example
n
During the year ended 31 December 20X7, Peter Albert, a sole trader, carried out the following
od 经
transactions:
.c
$
Sales (40 units @ $100) 4,000
Purchases (45 units @ $60) 2,700
ga 财
un
His inventories (at cost) were:
$
1 January 20X7 (5 units @ $60) 300
a. 顿
31 December 20X7 (8 units @ $60) 480
During the year he had withdrawn two units for his own use. Firstly, ignoring the drawings, an
outline trading account would appear as follows:
$ $
Sales
Cost of sales
Opening inventories
cc 高 300
4,000
Purchases 2,700
3,000
Less: closing inventories (480)
2,520
Gross profit 1,480
How should the drawings of goods be treated?
Answer
n
od 经
In the trading account, this credit entry is often shown as a separate
.c
deduction from cost of sales, i.e.:
$ $
ga 财
un
Sales 4,000
Cost of sales
Opening inventories 300
a. 顿
Purchases 2,700
Less: goods drawn by proprietor
2 units @ $60cc 高 (120)
2,880
Less: closing inventories (480)
2,400
Gross profit 1,600
n
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.c
ga 财
un
a. 顿
cc 高
n
Task 18
od 经
.c
Statement of cash flow
ga 财
un
a. 顿
cc 高
n
od 经
.c
Statement of cash flow
ga 财
un
a. 顿
cc 高
Types of cash flow
n
od 经
.c
IAS 7 splits cash flows into the following headings:
ga 财
• Cash flows from operating activities
un
• Cash flows from investing activities
a. 顿
• Cash flows from financing activities
cc 高
Cash flow form operating activities
n
od 经
Cash flows from operating activities
.c
These represent cash flows derived from operating or trading
activities.
ga 财
un
An entity should report cash flows from operating activities
using either:
a. 顿
a) The direct method, whereby major classes of gross cash
receipts and payments are disclosed, or
cc 高
b) The indirect method (as above), whereby reported profit
or loss is adjusted for the effects of transactions of a non
cash nature, any accruals or prepayments of operating
expenses, and items relating to investing or financing cash
flows.
Cash flow from investing activities
n
od 经
The cash flows included in this section are those related to the
.c
acquisition or disposal of any non-current assets or investments
ga 财
together with returns received in cash from investments, i.e.
un
dividends and interest. This section shows the extent to which
expenditures have been made for resources intended to
a. 顿
generate future income and cash flows.
cc 高
Cash flow from financing activities
n
Financing cash flows comprise receipts from or repayments to
od 经
.c
external providers of finance in respect of principal amounts of
finance. Examples of financing cash flows are:
ga 财
• Cash proceeds from issuing shares
un
• Cash proceeds from issuing debentures, loans notes, bonds,
mortgages and other short or long term borrowings
a. 顿
• Cash repayments of amounts borrowed
• Dividends paid to shareholders
cc 高
In order to calculate such figures the closing statement of
financial position figure for debt or share capital and share
premium is compared with the opening position for the same
items.
Lecture Example
n
od 经
.c
In the statements of financial position of Tacks Co as at 31 December 20X9
and 31 December 20X8 were the following amounts for income tax payable.
ga 财
31 December
un
20X9 20X8
$ $
a. 顿
Income tax payable 156,000 168,000
The statement of profit or loss tax charge for 20X9 amounted to $104,000.
Required
cc 高
What is the amount of income taxes paid during the year?
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Lecture Example
n
On 31 December 20X8 the value of plant and equipment in the books of Erosion
od 经
.c
Co was as follows: $
Plant and equipment at cost 200,000
Accumulated depreciation 80,000
ga 财
Plant and equipment at net book value 120,000
un
On 1 January 20X9 an item of plant was sold for $8,000 which had originally cost
$20,000 when new, but had a net book value of $11,000 at the time of sale. (The
a. 顿
statement of financial position values shown above do not show that this sale has
taken place.)
On 31 December 20X9 the value of plant and equipment in the statement of
financial position was: cc 高
Plant and equipment at cost
$
280,000
Accumulated depreciation 111,000
Plant and equipment at net book value 169,000
Required
Show the relevant entries for property, plant and equipment which would appear in
a statement of cash flows (under the indirect methd) for Erosion Co in 20X9.
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Lecture Example
n
od 经
.c
Distribution Co statement of financial position extract for the year
ended 31 December 20X9
ga 财
20X9 20X8
un
$'000 $'000
Dividends payable 45 35
a. 顿
Dividends charged to retained earnings were $60,000.
Required cc 高
What are the dividends paid during the year ended 31 December 20X9?
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Lecture Example
n
The summarised accounts of the Emma Co for the year ended 31 December 20X8 are as follows:
od 经
Statement of financial position as at 31 December
.c
20X8 20X7
$'000 $'000
Non-current assets
Property, plant and equipment 628 514
ga 财
Current assets:
un
Inventories 214 210
Trade receivables 168 147
Cash 7 –
a. 顿
389 357
1,017 871
Equity
Share capital ($1 ordinary shares) 250 200
Share premium account 70 60
Retained earnings
Revaluation surplus
cc 高 314
110
744
282
100
642
10% debentures 80 50
Current liabilities
Trade payables 136 121
Income tax payable 39 28
Dividends payable 18 16
Overdraf – 14
193 179
1,017 871
Lecture Example
n
Statement of profit or loss for the year ended 31 December 20X8
od 经
$'000
.c
Revenue 600
Cost of sales 319
ga 财
Gross profit 281
un
Other expenses (including depreciation of $42,000) 186
Finance costs (interest paid) 8
Profit before tax 87
a. 顿
Income tax expense 31
Movement of retained earnings
$000
Balance at 31 December 20X7
Profit for the year
Dividends
cc 高 282
56
(24)
Balance at 31 December 20X8 314
You are additionally informed that there have been no disposals of property, plant and
equipment during the year. The new debentures were issued on 1 January 20X8.
Required
Produce a statement of cash flows for Emma Co for the year ended 31 December 20X8.
Answer
n
Emma Co
Statement of cash flows for the year ended 31 December 20X8
od 经
$’000 $’000
.c
Profit before taxation 87
Adjustments for:
ga 财
Depreciation 42
un
Interest expense 8
137
Increase in trade receivables (168 – 147) (21)
Increase in inventories (214 – 210) (4)
a. 顿
Increase in trade payables (136 – 121) 15
Cash generated from operations 127
Interest paid (8)
Income taxes paid (W2) (20)
cc 高
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment (W1) (146)
99
Net cash used in investing activities (146)

Cash flows from financing activities
Proceeds from issue of shares (250+70–200–60) 60
Proceeds from issue of debentures 30
Dividends paid (W3) (22)
Net cash from financing activities 68
Net increase in cash and cash equivalents 21
Cash and cash equivalents at beginning of year (14)
Cash and cash equivalents at end of year 7
Answer
cc 高
a. 顿
ga 财
od 经
un
.c
n
Cash flow from operating activities using the direct method
n
od 经
.c
The only difference is the direct method derives the 'cash generated
from operations' figure in a different way. The operating element of
ga 财
the statement of cash flows should be shown as follows:
un
$000 $000
a. 顿
Cash receipts from customers 30,150
Cash payments to suppliers and employees (27,600)
Interest paid
cc 高
Cash generated from operations 2,550
(270)
Income taxes paid (900)
Net cash from operating activities 1,380
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 19
od 经
.c
Introduction to consolidated
ga 财
un
financial statements
a. 顿
cc 高
n
od 经
.c
Subsidiary
ga 财
un
Associate
a. 顿
Trade investment
cc 高
Background
n
od 经
.c
Companies may expand organically by building up their
business from their own trading, or by acquisitive growth
ga 财
un
(i.e. by acquiring shares in other entities).
a. 顿
cc 高
Subsidiary
n
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.c
Subsidiary (IFRS 10)
A subsidiary is an entity that is controlled by another entity.
ga 财
un
a. 顿
cc 高
Control
n
od 经
An investor controls an investee if and only if the investor has all
.c
the following:
ga 财
a) power over the investee to direct the relevant activities;
un
b) exposure, or rights, to variable returns from its involvement
with the investee; and
a. 顿
c) the ability to use its power over the investee to affect the
amount of the investor’s returns.
cc 高
Details
n
CONTROL
od 经
.c
Power to direct Exposure or rights to Ability to use power to
ga 财
affect the amount of
un
relevant activities variable returns returns
Examples of power: Examples of variable returns: An investor can have the
• Voting rights • Dividends
a. 顿
current ability to direct
• Rights to appoint, reassign or remove • Interest from debt
key management personnel the activities of an
• Changes in value of investment
• Rights to appoint or remove another investee even if it does not
• Remuneration for servicing
entity that directs relevant activities actively direct the
• Management contract
Examples of relevant activities:
cc 高
• Selling and purchasing goods/services
investee's assets or liabilities
• Fees/exposure to loss from
providing credit/liquidity support
• Residual interest in assets and
activities of the investee
• Selecting, acquiring, disposing of liabilities on liquidation

assets • Tax benefits
• Researching & developing new • Access to future liquidity
products/processes • Returns not available to other
• Determining funding interest holders, e.g. cost savings
structure/obtaining funding
Associate
n
od 经
.c
Associate (IAS 28)
ga 财
An associate is an entity over which the investor
un
has significant influence.
a. 顿
cc 高
Significant influence
n
od 经
.c
Significant influence is the power to participate in the financial and
operating policy decisions of the investee but is not control or joint
control over those policies. This could be shown by:
ga 财
un
a) representation on the board of directors
a. 顿
b) participation in policy-making processes
c) material transactions between the entity and investee
d) interchange of managerial personnel
e) cc 高
provision of essential technical information.
Presumptions
n
od 经
.c
If an investor holds, directly or indirectly:
(a) 20% or more of voting power
ga 财
– presumption of significant influence unless demonstrated otherwise.
un
(b) < 20% of voting power
a. 顿
– presumption of no significant influence unless demonstrated otherwise
cc 高
Trade investment
n
A trade investment is a simple investment in the shares of
od 经
.c
another entity that is not an associate or a subsidiary.
ga 财
un
This means that the investor does not have significant influence or control.
In absence of information to the contrary, if an investor holds less than
a. 顿
20% of the voting power, the entity is considered to be a trade investment.
Trade investments are simply shown as investments under non-current

cc 高
assets in the statement of financial position. Dividends received from
trade investments are recorded as investment income in the statement of
profit or loss and other comprehensive income.
Summary
cc 高
a. 顿
ga 财
od 经
un
.c
n
Lecture Example
n
od 经
J has a 40% shareholding in each of the following three companies:
.c
K: J has a management agreement with K stating that J is responsible
for all key operating and financial decisions in K.
ga 财
un
L: J has significant influence over the affairs of L
M: J has the right to appoint or remove a majority of the directors of M
a. 顿
Required
Which of these companies are subsidiaries of J for financial reporting
purposes?
A None of them
cc 高
B K, L and M
C K and L only
D K and M only
Answer
n
od 经
.c
D
Both K and M are subsidiaries even though J owns less than 50% of
ga 财
the ordinary shares. IAS 27 defines a subsidiary as an entity controlled
un
by another entity. J has control over K because of the management
agreement giving J responsibility for all key operating and
a. 顿
management decisions i.e. the power to direct the relevant activities of
K. J has control over M because it can appoint or remove the majority
of the directors.
cc 高
J only has significant influence over L so L is an associate of J, not a
subsidiary.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
od 经
Task 20.1
.c
ga 财
Consolidated financial statement
un
a. 顿
cc 高
n
od 经
.c
Associate accounting treatment
ga 财
un
a. 顿
cc 高
Parent separate financial statement
n
od 经
.c
When the parent company acquires shares in a subsidiary,
associate or trade investment, in the parent’s statement of
ga 财
un
financial position, an investment is recorded at cost (for exam
purposes) within non-current assets.
a. 顿
cc 高
Statement of comprehensive income
n
od 经
.c
Any dividends received from the subsidiary, associate or trade
ga 财
investment are recorded as investment income in the parent
un
company’s statement of profit or loss and other comprehensive
income.
a. 顿
cc 高
Subsidiary
n
od 经
Before investment At investment date60%1/1/20x1
.c
Company A Company A
ga 财
un
Asset A Asset A
Cash 100 Cash 90
a. 顿
Inventory 50 Inventory 50
PPE 60 PPE 60
Investment 10
Liability A 100
cc 高 Liability A 100
Equity A 110
Equity A 110
Subsidiary
n
od 经
At investment date60%31/12/20x1
.c
Company A Company A
ga 财
un
Sales
Asset A Cos
Gross profit
a. 顿
Cash +10 90
Inventory 50 Investment income 10
PPE 60 Admin expense
Finance cost
Investment cc 高
10
Profit before tax
Tax expense
Liability A 100 Profit for the year 10
OCI
Equity A +10 110 Revaluation surplus
Total 10
Group financial statements
n
od 经
Information gap
.c
The parent company’s shareholders will only have access to the parent’s
separate financial statements (not the subsidiary’s financial statements).
ga 财
un
Therefore they will only be able to see the investment as cost in the statement
of financial position and dividend income in the statement of profit or loss and
a. 顿
other comprehensive income. They will not be able to see the impact of the
parent’s control over the net assets and profit of the subsidiary.
cc 高
The purpose of group financial statements is to bridge the information gap.
Provided the parent has a controlling influence, it is required to produce an
additional set of financial statements which aim to record the substance of its
relationship with its subsidiaries (single economic entity) rather than its
strict legal form (separate legal entities).
Accounting treatment for an associate
n
od 经
.c
An investment in an associate is accounted for in consolidated
financial statements using the equity method.
ga 财
un
As the parent does not have control, 100% of the associate’s
assets, liabilities, income and expenses cannot be added to the
a. 顿
parent’s line by line. Instead, significant influence is reflected
by bringing in the group share of the associate in two lines
cc 高
in each of the consolidated statement of financial position and
statement of profit or loss and other comprehensive income.
Associate
n
od 经
.c
Company A Company B Company B
ga 财
Company A
un
Asset A Asset B Asset A Asset B
Cash 100 Cash 50 Cash 90 Cash 50
a. 顿
Inventory 50 Inventory 30 Inventory 50 Inventory 30
PPE 60 PPE 20 PPE 60 PPE 20
cc 高 Investment 10
Liability A 100 Liability B 50 Liability B 50
Liability A 100
Equity A 110 Equity B 50 Equity A 110 Equity B 50

Associate
n
At 31/12/20x1(30%) Company A
od 经
.c
Sales 100
Company A Company B Cos (50)
Company B
ga 财
un
Gross profit 50 Sales 270
Asset A Asset B Investment income 60 Cos (50)
Cash +30 90 Cash +200 50 Admin expense (5) Gross profit 220
a. 顿
Inventory 50 Inventory 30 Finance cost (10) Admin expense (5)
PPE +20 60 PPE +50 20 Profit before tax 95 Finance cost (10)
Investment Profit before tax 205
+75 10 Tax expense (5)
Liability A 100
cc 高
Liability B 50 Profit for the year 90
Tax expense
Profit for the year
(5)
200
OCI OCI
Revaluation surplus 20 Revaluation surplus 50
Equity B +250 50
Equity A +125 110 Investment income 15
Total 250
Total 125
Equity method
n
STATEMENT OF FINANCIAL POSITION
od 经
.c
IAS 28 states the following treatment:
Non-current assets
Investment in associates (Working) X
ga 财
un
Working
Cost of associate X
Share of post-acquisition retained reserves A
a. 顿
Less: impairment losses on associate to date (B)
X
Retained earnings
Per question
cc 高 Parent
X
Subsidiary
X
Associate
X
Pre-acquisition retained earnings (X) (X)
X X
Subsidiary – share of post acquisition X
Associate – share of post acquisition A
Less: impairment of associate (B)
X
Equity method
n
od 经
.c
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
ga 财
Profit or loss
un
A's Profit for the year × Group % (less impairment loss for year) X
Shown before group profit before tax.
a. 顿
Other comprehensive income
A's Other comprehensive income for the year × Group % X
cc 高
Lecture Example
n
P owns several subsidiaries. On 1 January 20X5, P purchased 30% of the ordinary
od 经
.c
shares of A for $100,000. At that date, A’s retained earnings were $40,000.
As at 31 December 20X7, A’s retained earnings had risen to $90,000. A’s profit and
ga 财
un
other comprehensive for the year ended 31 December 20X7 were $15,000 and
$6,000 respectively. A has not paid any dividends since the acquisition date.
a. 顿
Up to 31 December 20X6, there was no impairment of the investment in the
associate but during the year ended 31 December 20X7, the investment in the
associate suffered an impairment loss of $3,000.
Required
cc 高
Prepare consolidated statement of financial position and statement of profit or
loss and other comprehensive income for the year 31 Dec 20x7
Answer
n
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X7
od 经
(EXTRACT)
.c
Non-current assets
$
Investment in associate (working) 112,000
ga 财
un
Working $
Cost of associate 100,000
Share of post-acquisition retained reserves [(90,000 – 40,000) × 30%] 15,000
a. 顿
Less: impairment losses on associate to date (3,000)
112,000
Retained earnings
Parent Subsidiary Associate
Per question cc 高
Pre-acquisition retained earnings
X X
(X)
X
90,000
(40,000)
50,000
Subsidiary – share of post acquisition X
Associate – share of post acquisition 15,000
(50,0000 x 30%)
Less: impairment of associate (3,000)
X
Answer
n
od 经
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
.c
COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20X7 (EXTRACT)
ga 财
Profit or loss
un
$
Share of associate’s profit for year [(15,000 × 30%) – 3,000 impairment] 1,500
a. 顿
Shown before group profit before tax.
Other comprehensive income
Share of associate’s other comprehensive income (6,000 × 30%) 1,800
cc 高
Lecture Example
n
od 经
Which of the following statements regarding associates is true?
.c
(1) Associates are consolidated in the group financial statements
(2) An associate is an entity in which the parent has control
ga 财
un
(3) Associates are equity accounted in the group financial statements
(4) An associate is an entity in which the parent has significant influence
a. 顿
A (1) and (4)
B (1) and (2)
C
D
(3) and (4)
(2) and (3)
cc 高
Answer
n
od 经
.c
C
Statements (3) and (4) are correct as an associate is an entity in which the
ga 财
parent has significant influence. It is equity accounted in the consolidated
un
financial statements.
Statement (1) is incorrect because subsidiaries (not associates) are
a. 顿
consolidated.
Statement (2) is incorrect because if the parent has control, the entity is a
subsidiary not an associate.
cc 高
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
od 经
Task 20.2
.c
Consolidated financial statement
ga 财
un
a. 顿
cc 高
n
od 经
.c
Goodwill
ga 财
un
Retained earning
a. 顿
Reserve surplus
cc 高
NCI
Subsidiary
n
od 经
.c
Company B Company A Company B
ga 财
Company A
un
Asset A Asset B Asset A Asset B
a. 顿
Cash 100 Cash 50 Cash 40 Cash 50
Inventory 50 Inventory 30 Inventory 50 Inventory 30
PPE 60 PPE 20 PPE 60 PPE 20
Liability A 100
cc 高
Liability B 50
Investment
Liability A
60
100
Liability B 50
Equity A 110 Equity B 50 Equity B 50

Equity A 110
Subsidiary
n
od 经
.c
Company A Company B Group A
ga 财
un
Asset A Asset B Asset A+B
Cash 40 Cash 50 Cash 40+50 90
a. 顿
Inventory 50 Inventory 30 Inventory 50+30 80
PPE 60 PPE 20 PPE 60+20 80
Investment 60 Goodwill(60-50) 10
Liability A 100
cc 高
Liability B 50
Liability A +B 100+50 150
Equity B 50
Equity A 110 Equity A 110
Goodwill
n
Where the value of a business as a whole (cost of the investment + any
od 经
.c
non-controlling share not purchased) is greater than the net assets
acquired, the investor controls (and has paid for) something more than
ga 财
the net assets of the acquired business.
un
The difference is called goodwill and is measured at the acquisition date
Fair value of consideration X
a. 顿
Fair value of non-controlling interest X
Less: Fair value of net assets at acquisition
Share capital
Share premium
cc 高 X
X
Retained earnings at acquisition X
Other reserves at acquisition X
Fair value adjustments at acquisition X
(X)
Goodwill at acquisition X
n
od 经
Goodwill
.c
ga 财
un
Purchased (IFRS 3) Internally generated
• Not recognised in the books
a. 顿
Positive 'Negative' (acquired net
• Capitalise as an
intangible
cc 高
assets exceed cost)
• Reassess and then credit
noncurrent asset any remainder to profit or
loss
Consideration 40
Subsidiary NCI
Less : fair value net assets
0
(50)
n
Goodwill at acquisition date (10)
od 经
.c
Company A Company B Group A
ga 财
un
Asset A Asset B Asset A+B
Cash 60 40 Cash 50 Cash 40+50 60+50 90
a. 顿
Inventory 50 Inventory 30 Inventory 50+30 80
PPE 60 PPE 20 PPE 60+20 80
Investment 40 60 Goodwill(60-50) 40-50 10
Liability A 100
cc 高
Liability B 50
Liability A +B 100+50 150
Equity B 50
Equity A 110 Equity A +10 110
Retained earnings
n
od 经
Complete the consolidated retained earnings calculation:
.c
Parent Subsidiary
Per question X X
ga 财
Provision for unrealised profit (seller’s column) (X) (X)
un
Pre-acquisition retained earnings (X)
A
a. 顿
Group share of post acq'n ret'd earnings:
Subsidiary (A × %) X
cc 高
Note: Other reserves are treated in a similar way.
X
Lecture example
n
Pogo acquired the entire share capital of Stick for $8m on 1
od 经
.c
February 20X0 when the statements of financial position of the
two companies were as follows.
Pogo Stick
ga 财
un
$'000 $'000
Investment in Stick 8,000 –
a. 顿
Other assets 9,500 6,500
17,500 6,500
Share capital 9,000 3,000
Retained earnings
cc 高 6,000 2,000
15,000 5,000
Liabilities 2,500 1,500
17,500 6,500
Required
Prepare the consolidated statement of financial position of the Pogo
group as at 1 February 20X0.
Answer
n
od 经
Pogo Group – Consolidated statement of financial position as at 1
.c
February 20X0
$'000
ga 财
un
Goodwill (W2) 3,000
Other assets [9,500 + 6,500] 16,000
a. 顿
19,000
Share capital [Pogo only] 9,000
Retained earnings (W3) 6,000
cc 高
Liabilities [2,500 + 1,500]
15,000
4,000
19,000
Answer
n
od 经
.c
1 Group structure
ga 财
Pogo
un
a. 顿
1.2X0 100%
Pre-acquisition ret’d earnings $2m

Stick
cc 高
Answer
n
od 经
.c
2 Goodwill
$'000 $'000
ga 财
Consideration 8,000
un
Non-controlling interest 0
Net assets at acquisition represented by:
a. 顿
Share capital 3,000
cc 高 (5,000)
Goodwill arising on acquisition 3,000
Answer
n
od 经
.c
3 Retained earnings
Pogo Stick
ga 财
$'000 $'000
un
Per question 6,000 2,000
Pre-acquisition retained earnings (2,000)
a. 顿
0
Group share of post acquisition earnings:
Stick (0 × 100%) cc 高 0
6,000
Non-controlling interest
n
od 经
.c
P
The parent The parent
controls a does not own
ga 财
un
subsidiary 80% all of the
because it has > subsidiary
a. 顿
50% of the
voting power S
cc 高
The non-controlling interest is the 'equity in a subsidiary not attributable,
directly or indirectly, to a parent', i.e. the non-group shareholders' interest
in the net assets of the subsidiary.
Measurement of NCI at acquisition
n
For the purposes of the exam, non-controlling interest at the acquisition date is to be
od 经
.c
measured at fair value (i.e. how much it would cost of the acquirer to acquire the
remaining
shares).
ga 财
un
If not given in a question, the fair value of non-controlling interest (NCI) can be
calculated as the number of shares belonging to NCI multiplied by the share price.
a. 顿
The fair value of non-controlling interest (NCI) at acquisition is effectively the NCI
share of the subsidiary’s net assets and goodwill at the acquisition date.
cc 高 Consideration(80%)
NCI（20%）
70
20
Less : fair value net assets (50)
Goodwill at acquisition date 40
70 20
(50x80%) (50x20%)
30 10
Measurement of non-controlling interest at the year end
n
od 经
The subsidiary’s net assets (or equity) will increase as the subsidiary’s
.c
reserves increase.
Therefore, to update NCI to its year end value, the NCI share of post
ga 财
un
acquisition reserves needs to be added to the NCI at acquisition.
a. 顿
NCI at acquisition [at fair value] (from goodwill working) X
NCI share of post acquisition reserves
[(year end reserves – pre-acquisition reserves]* × NCI %) X
cc 高
NCI at year end (i.e. NCI share of year end net assets & goodwill) X
n
od 经
Complete the consolidated retained earnings calculation:
.c
Parent Subsidiary
Per question X X
ga 财
Provision for unrealised profit (seller’s column) (X) (X)
un
Pre-acquisition retained earnings (X)
A
a. 顿
Group share of post acq'n ret'd earnings:
Subsidiary (A × %) X
X
cc 高
Note: Other reserves are treated in a similar way.
NCI at acquisition [at fair value] (from goodwill working) X

NCI share of post acquisition resrerves
[(year end reserves – pre-acquisition reserves]* × NCI%) X
NCI at year end (i.e NCI share of year end net assets & goodwill) X
n
od 经
Group A
.c
Asset
Liability
ga 财
un
Equity
- share capital Parent
a. 顿
- share premium Parent
- retained earning Parent
cc 高
profit share profit from S
- revaluation surplus Parent

- NCI profit share profit from S
Lecture example
n
Pop acquired 75% of the issued share capital of Snap on 1 January 20X8 when
od 经
.c
Snap had a retained earnings balance of $1m. The fair value of the non-
controlling interest at that date was $1.5m. One year later the two companies
had the following statements of financial position.
ga 财
un
Pop Snap
$'000 $'000
Investment in Snap 6,000 –
a. 顿
Other assets 10,500 9,200
16,500 9,200
Share capital 10,000 4,000
Retained earnings cc 高 1,500
11,500 6,200
2,200
Liabilities 5,000 3,000

16,500 9,200
Required
Produce the consolidated statement of financial position of Pop and its
subsidiary as at 31 December 20X8.
Answer
n
od 经
Pop Group – Consolidated statement of financial position as at 31
.c
December 20X8
$'000
ga 财
un
Goodwill (W2) 2,500
Other assets [10,500 + 9,200] 19,700
22,200
a. 顿
Share capital [P only] 10,000
Retained earnings (W3) 2,400
cc 高
Non-controlling interest (W4)
12,400
1,800
14,200
Liabilities [5,000 + 3,000] 8,000
22,200
Answer
n
od 经
Working
.c
1 Group structure
ga 财
Pop
un
1.1X8 75%
a. 顿
Pre-acquisition ret’d earnings $1m
Snap cc 高
Answer
n
od 经
.c
2 Goodwill
$'000 $'000
ga 财
Consideration 6,000
un
Non-controlling interest 1,500
Net assets at acquisition represented by:
a. 顿
Share capital 4,000
cc 高
Goodwill arising on acquisition
(5,000)
2,500
Answer
n
od 经
.c
3 Retained earnings
Pop Snap
ga 财
$'000 $'000
un
Pre-acquisition retained earnings (1,000)
a. 顿
1,200
Group share of post acquisition earnings:
Snap (1,200 × 75%)
cc 高 900
2,400
Answer
n
od 经
.c
4 Non-controlling interest
$'000
ga 财
un
NCI at acquisition (W2) 1,500
NCI share of post acquisition earnings ((W3) 1,200 × 25%) 300
a. 顿
1,800
cc 高
Fair value
n
od 经
Fair value of net assets acquired
.c
Assets and liabilities in an entity's own financial statements are often not stated
ga 财
at their fair value, e.g. where the entity's accounting policy is to use the cost
un
model for assets. If the subsidiary's financial statements are not adjusted to their
fair values, where, for example, an asset's value has risen since purchase, goodwill
a. 顿
would be overstated (as it would include the increase in value of the asset).
Under IFRS 3 the net assets acquired are therefore required to be brought into the
cc 高
consolidated financial statements at their fair value rather than their book value.
The difference between fair values and book values is a consolidation adjustment
made only for the purposes of the consolidated financial statements.
Fair value
n
od 经
.c
Fair value of consideration
The consideration transferred (which is the same as the figure recorded as
ga 财
un
the cost of the investment in the parent's separate financial statements) is
also measured at fair value.
a. 顿
For the purposes of the exam, the consideration could consist of cash or
shares. The fair value of cash is simply the amount of cash paid. The fair
cc 高
value of shares is the quoted share price at the acquisition date.
Lecture example
n
od 经
X acquired 300,000 of Y’s 400,000 $1 ordinary shares on 1 January 20X5 when Y’s
.c
retained earnings were $500,000. The fair value of the non-controlling interest in Y
at that date was
ga 财
un
$280,000.
The purchase consideration comprised:
• $250,000 in cash payable at acquisition
a. 顿
• New shares issued in X on a 1 for 3 basis.
The quoted price of X’s shares on the acquisition date was $7.35.
cc 高
The fair value of Y’s land and buildings at 1 January 20X5 was $160,000 but the
book value was only $100,000. All other net assets had a fair value equivalent to
their book value.
Required:
Calculate the goodwill arising on acquisition of Y.
Answer
n
od 经
Goodwill
.c
$ $
Fair value of consideration:
ga 财
un
Cash 250,000
Shares [(1/3 × 300,000) × $7.35] 735,000
985,000
a. 顿
Fair value of non-controlling interest 280,000
Less: Fair value of net assets at acquisition
Share capital
Retained earnings
cc 高 400,000
500,000
Fair value adjustment (160,000 – 100,000) 60,000
(960,000)
Goodwill at acquisition 305,000
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
od 经
Task 20.3
.c
Consolidated financial statements
ga 财
un
a. 顿
cc 高
n
od 经
.c
Inter- company trading
ga 财
un
a. 顿
cc 高
Inter-company balances
n
od 经
Trading transactions will normally be recorded via a current
.c
account between the trading companies, which would also keep a
track of amounts received and/or paid.
ga 财
un
The current account receivable in one company's books should
equal the current account payable in the other. These two
a. 顿
balances should be cancelled on consolidation as intercompany
receivables and payables should not be shown.
cc 高
The double entry required is:
DR (↓) Inter-company payable
CR (↓) Inter-company receivable
Unrealised profit
n
od 经
.c
There are 2 issues here:
• In the consolidated accounts, we treat the group as a single
ga 财
entity. In substance, P has made profit from selling goods to
un
itself (as the goods are still in inventory at the year end).
This unrealised profit must be eliminated
a. 顿
• Inventories should be valued at the lower of cost and NRV
to the group. Inventories are currently in S’s books at $120
but they cost the group (to buy from the 3rd party supplier)
cc 高 $100. So inventories are overvalued by $20.
Adjustment for unrealised profit
n
od 经
When preparing a consolidated SOFP, the debit to cost of sales must
.c
feed through to retained earnings. Therefore, the adjustment required to
eliminate the unrealised profit in the consolidated SOFP is:
ga 财
un
DR (↓) Retained earnings of the seller
a. 顿
CR (↓) Consolidated inventories
cc 高
Lecture example
n
Poach acquired 60% of the share capital of Steal on its incorporation. The statements of
od 经
financial position of the two companies as at 31 December 20X8 are as follows.
.c
Poach Steal
$'000 $'000
Non-current assets
ga 财
Property, plant and equipment 200 50
un
Investment in Steal 6
206 50
Current assets
a. 顿
Inventories 22 18
Receivables – from Poach – 30
– other 96 29
Cash 4 15
Equity
cc 高 122
328
92
142
Share capital 100 10

Retained earnings 147 73
247 83
Current liabilities
Trade payables – to Steal 30 –
– other 51 59
81 59
328 142
Lecture example
n
od 经
Notes
.c
I. The fair value of the non-controlling interest in Steal at acquisition
was $4,000.
ga 财
un
II. Steal sells goods to Poach at a profit margin of 25% on selling
price. At the year end, $12,000 of the goods that Poach had
a. 顿
purchased from Steal remained in inventories.
Required
cc 高
Prepare a consolidated statement of financial position as at 31
December 20X8.
Answer
n
Poach Group – Consolidated statement of financial position as at 31 December 20X8
od 经
$’000
.c
Non-current assets
Property, plant and equipment (200 + 50) 250
Current assets
ga 财
Inventories (22 + 18 – (W4) 3)
un
37
Receivables – from Poach (30 – 30) –
– other (96 + 29) 125
a. 顿
Cash (4 + 15) 19
181
431
Equity attributable to the owners of the parent
Share capital
Retained earnings (W2)
cc 高 100
189
289
Non-controlling interest (W3) 32
321
Current liabilities
Trade payables – to Steal (30 – 30) –
– other (51 + 59) 110
431
Answer
n
od 经
Workings
.c
1 Group structure
ga 财
un
Poach
On incorporation 60% ∴non-controlling interest 40%
a. 顿
(∴no goodwill)
Pre-acquisition ret'd earnings $0
Steal
cc 高
Answer
n
od 经
2 Consolidated retained earnings
.c
Poach Steal
$’000 $’000
ga 财
un
Per question 147 73
Provision for unrealised profit (PUP) (W4) (3)
Pre-acquisition retained earnings (0)
a. 顿
70
Group share of post acquisition retained earnings:
Steal (70 × 60%) cc 高 42
189
Answer
n
od 经
.c
$000
ga 财
NCI at acquisition 4
un
NCI share of post acquisition retained earnings ((W2) 70 × 40%) 28
32
a. 顿
cc 高
Answer
n
od 经
.c
4 Provision for unrealised profit
On consolidation:
Profit element in inventories:
ga 财
un
$12,000 × 25% = $3,000
∴ DR Steal's retained earnings $3,000
a. 顿
CR Group inventories $3,000
cc 高
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 21
od 经
.c
Consolidated statement of profit or loss
ga 财
un
and other comprehensive income
a. 顿
cc 高
n
od 经
.c
Consolidated statement of P/L and OCI
ga 财
un
a. 顿
cc 高
Method
n
od 经
Revenue
.c
Profit for the year (PFY) Add 100% P + 100% S as represents what is
ga 财
un
controlled
Other comprehensive
a. 顿
income
Profit attributable to:
Owners of parent β – balancing figure
cc 高
NCI S's PFY × NCI%
Total comprehensive income attributable to: Ownership reconciliation
Owners of parent β – balancing figure
NCI S's TCI × NCI%
Lecture example
n
On 1 July 20X4 Patois acquired 90% of Slang at a cost of $55,000. The balance
od 经
on Slang's reserves was $15,000 at that date. Patois has ordinary share capital of
.c
$100,000 and Slang $20,000 ($1 ordinary shares).
Statements of profit or loss and other comprehensive income for both companies
ga 财
for the year ended 30 June 20X9:
un
Patois Slang
$'000 $'000
a. 顿
Revenue 100 90
Cost of sales (75) (55)
Gross profit 25 35
Distribution costs
Administrative expenses
Dividend from subsidiary
cc 高 (5)
(8)
4.5
(6)
(10)
–
Profit before tax 16.5 19
Income tax expense (4) (6)
PROFIT FOR THE YEAR 12.5 13
Other comprehensive income for the year, net of tax 20 10
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 32.5 23
Lecture example
n
od 经
.c
Required
ga 财
Prepare the consolidated statement of profit or loss and other
un
comprehensive income for the Patois group for the year
a. 顿
ended 30 June 20X9.
cc 高
Answer
n
Patois Group
od 经
Consolidated statement of profit or loss and other comprehensive income for the year
.c
ended 30 June 20X9
$'000
Revenue (100 + 90) 190
ga 财
Cost of sales (75 + 55) (130)
un
Gross profit 60
Distribution costs (5 + 6) (11)
Administrative expenses (8 + 10) (18)
a. 顿
Profit before tax 31
Income tax expense (4 + 6) (10)
PROFIT FOR THE YEAR 21
Other comprehensive income for the year net of tax (20 + 10) 30
Profit attributable to:

cc 高
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Owners of the parent (21 – 1.3)

51
19.7
Non-controlling interest (13 × 10%) 1.3
21.0
Total comprehensive income attributable to:
Owners of the parent (51 – 2.3) 48.7
Non-controlling interest (23 × 10%) 2.3
51.0
Answer
n
od 经
Working
.c
1 Group structure
ga 财
un
Patois
1.7.X4 90% ∴non-controlling interest 10%
a. 顿
Pre-acquisition ret'd earnings $15,000
Slang cc 高
Inter-company trading
n
There are two potential adjustments needed when group companies trade with each other:
od 经
.c
(a) Eliminate inter-company transactions from the revenue and cost of sales figures:
DR (↓) Group revenue X
CR (↓) Group cost of sales X
ga 财
un
with the total amount of the inter-company sales between the companies. This
adjustment is needed regardless of whether any of the goods are still in
inventories at the year end or not.
a. 顿
(b) Eliminate unrealised profit on goods still in inventories at the year end:
DR (↑) Cost of sales (P/L) X (PUP) (& Dr (↓) Seller’s retained earnings (SOFP))
cc 高
CR (↓) Inventories (SOFP) X (PUP)
in the books of the company making the sale. If the subsidiary is the seller, need to
adjust non-controlling interest in PFY and TCI.
Lecture example
n
Pouch acquired 75% of the issued share capital of Sack on 1 January 20X2.
od 经
Sack had sold goods to Pouch during the year for $8,000,000 at a mark up of 25%. At
.c
the year end, three quarters of these goods had been sold on to third parties.
Statements of profit or loss and other comprehensive income for the year ended
ga 财
31 December 20X2 Pouch Sack
un
$'000 $'000
Revenue 24,500 15,600
a. 顿
Cost of sales and expenses (14,000) (10,000)
Dividend from subsidiary 1,500 –
Profit before tax 12,000 5,600
Income tax expense
PROFIT FOR THE YEAR
cc 高
Other comprehensive income for the year, net of tax
(5,000) (1,600)
7,000
2,000
4,000
1,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 9,000 5,000
Required
Prepare the consolidated statement of profit or loss and other comprehensive income
for the Pouch group for the year ended 31 December 20X2.
Answer
n
Pouch Group
od 经
Consolidated statement of profit or loss and other comprehensive income for the year ended
.c
31 December 20X2
$'000
ga 财
Revenue (24,500 + 15,600 – 8,000) 32,100
un
Cost of sales and expenses (14,000 + 10,000 – 8,000 + 400 (W3)) (16,400)
Income tax expense (5,000 + 1,600) (6,600)
a. 顿
PROFIT FOR THE YEAR 9,100
Other comprehensive income for the year, net of tax (2,000 + 1,000) 3,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 12,100
Profit attributable to: cc 高
Owners of the parent (9,100 – 900)
Non-controlling interest (W2)
8,200
900
9,100
Total comprehensive income attributable to:
Owners of the parent (12,100 – 1,150) 10,950
Non-controlling interest (W2) 1,150
12,100
Answer
n
Working
od 经
1 Group structure
.c
Pouch
1.1.X2 75% ∴non-controlling interest 25%
ga 财
un
Sack
a. 顿
PFY TCI)
$000 $000
cc 高
PUP on sales made by Sack (W3) (400)
3,600
(400)
4,600
× 25% 900 1,150
3 Unrealised profit
Sack → Pouch
PUP = $8m × 25/125 × ¼ in inventories = $400,000
Add $400,000 to cost of sales and as the subsidiary is the seller, adjust NCI.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 22
od 经
.c
Interpretation of financial
ga 财
un
statements
a. 顿
cc 高
n
od 经
.c
Profitability
ga 财
un
Liquidity
a. 顿
Efficiency
cc 高
Position
Importance and purpose of interpretation of financial statements
n
od 经
The financial statements of a company are designed to provide users with
.c
information about its performance and financial position. The figures by
themselves, however, are not particularly useful and it is only through
ga 财
un
comparisons (usually with ratios) that their significance can be
established. This will then enable the end user to make an informed
decision.
a. 顿
Comparisons may be made with:
cc 高
• Previous financial periods
• Similar businesses
• Industry averages.
Users of financial statements
n
od 经
.c
There are a number of users of a company’s financial statements.
Each user has differing needs. In the exam, you may need to
ga 财
un
interpret financial statements or ratios for a particular user so it is
important to understand the key concerns each type of user will have.
a. 顿
cc 高
Users of financial statements
n
od 经
a) Shareholders and potential investors will use ratios to help them
.c
come to a decision on buying or selling the shares of the company.
b) Banks and other providers of loan capital will assess whether
ga 财
un
further loans should be made to the company.
c) Employees may use them as a basis for wage negotiation.
a. 顿
d) Management will use ratios to highlight weak performing areas in
order to focus their attention on these areas.
f)
cc 高
e) Suppliers may use ratios to assess creditworthiness.
Governments may use them for statistics or for assessing the
worthiness of a government grant.
Ratio analysis
n
Accounting ratios help to summarise and present financial information
od 经
.c
in a more understandable form. Once calculated, they can then be
interpreted to give an indication of the company's performance and
ga 财
position. The ratios can be split into the following categories:
un
I. Profitability
II. Liquidity
a. 顿
III. Efficiency
IV. Position
cc 高
Ratios do not give us much information when taken in isolation. In
order for them to be useful, we need to have something to compare
them to such as previous periods, similar businesses or industry
averages.
Profitability ratios
n
od 经
.c
Profitability ratios measure the company’s use of its
assets and control of its expenses to generate an
ga 财
un
acceptable rate of return.
a. 顿
cc 高
n
Gross profit margin
od 经
.c
Gross profit
Gross profit margin = × 100%
Revenue
ga 财
un
The gross profit margin measures how well a company is running its
core operations. The gross profit percentage should be similar from
a. 顿
year to year for the same company.
A significant change may be due to:

cc 高
• A change is sales price
• A change in product mix
• An incorrect inventory valuation (will affect 2 years)
• A change in cost of sales due to efficiency or price movements.
n
Operating profit margin
od 经
.c
Profit before interest and taxation
Operating profit margin = × 100%
Revenue
ga 财
un
Profit before interest and taxation (PBIT) is used because it avoids distortion when
comparisons are made between two different companies where one is heavily
a. 顿
financed by means of loans, and the other is financed entirely by ordinary share
capital.
The extra consideration for the operating margin over the gross margin is how well
cc 高
the company is controlling its overheads.
A significant change (especially a fall) may be due to:

• The reasons for the movement in the gross profit margin as stated above
• Changes in control over administration and distribution costs
• One off expenses e.g. advertising.
n
od 经
Return on capital employed
.c
Return on capital employed = × 100%
ga 财
Total equity + non- current liabilities
un
* or total assets less current liabilities
a. 顿
Reasons why profits may change have been discussed above.
Other reasons for a significant change may include:
• New assets acquired during the year which are not yet running at
cc 高
capacity
• Assets aging
• Revaluations.
n
od 经
.c
Return on equity
ga 财
un
Profit after tax and preference dividend
Return on equity = × 100%
a. 顿
Total equity
cc 高
Liquidity ratios
n
od 经
Current ratio (working capital ratio)
.c
Current assets
Current ratio (working capital ratio) =
ga 财
Current liabilities
un
This ratio measures a company’s ability to pay its current liabilities
a. 顿
out of its current assets.
Working capital (current assets – current liabilities) is needed by all
companies in order to finance day-to-day trading activities.
cc 高
Sufficient working capital enables a company to:
• Hold adequate inventories,

• Allow a measure of credit to its customers
• Pay its suppliers on the due date.
Liquidity ratios
n
od 经
Quick ratio
.c
Current assets - inventories
Quick ratio (liquid capital ratio or acid test) =
ga 财
Current liabilities
un
This is similar to the current ratio except that it omits the inventories
a. 顿
figure from current assets. This is because inventories are the least
liquid current asset that a company has, as it has to be sold, turned
into receivables and then the cash has to be collected.
cc 高
A ratio of less than 1:1 could indicate that the company would have
difficulty paying its debts as they fall due.
Efficiency ratios
n
od 经
.c
Efficiency measures how well the company uses
ga 财
its assets to generate profit, revenue and cash.
un
a. 顿
cc 高
Inventory turnover period
n
od 经
Inventory turnover period (days)
.c
Inventories
Inventory turnover period (days) = × 365 days
Cost of sales
ga 财
This ratio measures the number of days inventories are held by a company on
un
average.
This figure will depend on the type of goods sold by the company.
a. 顿
A company selling fresh fruit and vegetables should have a low inventory
holding periods as these goods will quickly become inedible.
A manufacturer of aged wine will by default have very long inventory holding
cc 高
periods. It is important for a company to keep its inventory days as low as
possible, subject of course to being able to meet its customers' demands.

• A change in type of inventory held
• Improved or worsened inventory controls
• Changes in the popularity of certain inventory items.
Receivables collection period
n
od 经
Receivables collection period (days)
.c
Trade receivables
Receivables collection period (days) = × 365 days
Revenue
ga 财
un
This ratio shows, on average how long it takes for the trade receivables to settle
their account with the company. The average credit term granted to customers
should be taken into account as well as the efficiency of the credit control function
a. 顿
within the company.

cc 高
• Increased/ decreased credit terms offered to customers
• Change in the mix between cash and credit transactions
• Better/ worse credit control.
Payables payment period
n
Payables payment period (days)
od 经
.c
Trade payables
Payables payment period (days) = × 365 days
Cost of sales
ga 财
un
This ratio is measuring the time it takes the company to settle its trade
payable balances.
Trade payables provide the company with a valuable source of short term
a. 顿
finance, but delaying payment for too long a period of time can cause
operational problems as suppliers may stop providing goods and services
until payment is received.
cc 高
• Increased/ decreased credit terms from suppliers
• Increase/ decrease in cash
• Better/ worse management of the payables ledger.
Working capital cycle
n
od 经
.c
Inventory days + receivable days – payable days
ga 财
un
a. 顿
cc 高
Asset turnover ratio
n
od 经
.c
Revenue
ga 财
Asset turnover ratio =
un
Total assets – current liabilities
a. 顿
cc 高
Position ratios
n
od 经
.c
Position ratios consider the company’s long term
ga 财
solvency and its capital structure.
un
a. 顿
cc 高
Interest cover
n
od 经
.c
Interest cover = = X times
Finance costs
ga 财
un
The interest cover ratio considers the number of times a
a. 顿
company could pay its interest payments using its profit from
operations. The main concern is that a company does not have so
cc 高
much debt finance that it risks not being able to settle the debt as
it falls due.
Gearing
n
od 经
.c
Gearing = Non – current liabilities
Total equity + Non – current liabilities
ga 财
un
Gearing is concerned with the long-term financial stability of the
a. 顿
company. It is looking at how much the company is financed by debt.
Debt is cheaper than equity as interest is tax deductible but the higher
cc 高
the gearing ratio, the less secure the financing of the company will be
and possibly the company’s future.
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
od 经
Task 23
.c
Introduction to accounting
ga 财
un
a. 顿
cc 高
n
od 经
.c
Types of business entity
ga 财
un
Governance
a. 顿
cc 高
Accounting
n
od 经
.c
Accounting is a way of recording, analysing and summarising
ga 财
transactions of a business
un
a. 顿
cc 高
Users of financial information
n
od 经
.c
(a) Investors
– Profitability
ga 财
– Future prospects
un
– Likely risk and return
– Chance of capital growth
a. 顿
– Ability to pay dividends
(b) Employees
– Profitability
– Long-term growth
– Security of their job
– Likelihood of bonus
cc 高
– Number of employees
– Ability to pay retirement benefits
n
od 经
.c
(c) Lenders
– Whether return on finance will continue to be met
– Other providers and security of their debt
ga 财
– Likelihood of repayment of capital amount
un
(d) Suppliers
– Likelihood of payment on time
a. 顿
– Likelihood of payment at all
– Whether they should continue to supply
(e) Customers
cc 高
– Ability of entity to continue supplying
– Profitability as a measure of value for money of goods bought
n
od 经
.c
(f) Government and their agencies
– Statistics
– Size of company
ga 财
– Growth rates
un
– Average payment periods
– Foreign trade
a. 顿
– Profits made
– Corporate income tax liability
– Sales tax liability
(g) Public cc 高
– Contribution to local economy
– Information about trends in the prosperity of the entity
– Range of products and services provided
Types of business entities
n
od 经
.c
(a) Sole trader
ga 财
(b) Partnership
un
(c) Limited liability company
a. 顿
cc 高
Governance
n
od 经
.c
The separation of ownership and control means that
there is a risk that the directors may choose to act in
ga 财
un
their own personal interests, rather than in the best
interests of the shareholders.
a. 顿
cc 高
Duties and responsibilities of directors for the financial statements
n
The directors’ responsibilities in relation to the financial statements
od 经
.c
include:
a) Keeping proper accounting records
ga 财
b) Preparing financial statements for each financial year, in
un
accordance with the applicable financial reporting framework,
which present fairly the activities of the business
a. 顿
c) Establishing a system of internal controls which will ensure the
financial statements are free from material error
d) The prevention and detection of fraud and error
cc 高
e) Filing the business’ financial statements and other returns with
the relevant authority on a timely basis
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
od 经
Task 24
.c
The regulatory framework
ga 财
un
a. 顿
cc 高
n
od 经
.c
IFRSF
ga 财
un
IASB
a. 顿
IFRS AC
cc 高
IFRS IC
Regulatory system
cc 高
a. 顿
ga 财
od 经
un
.c
n
International Financial Reporting Standards Foundation (IFRSF)
n
od 经
.c
The IFRSF is a not-for-profit private organisation working in
the public interest.
ga 财
un
Its Trustees appoint members to the IASB, IFRS IC and
IFRS AC. They also oversee the regulatory system and
a. 顿
raise the finance necessary to support it.
It has no involvement in the standard setting process.
cc 高
International Accounting Standards Board (IASB)
n
od 经
.c
The IASB's principal aim is to develop a single set of high quality
accounting standards:
ga 财
un
International Financial Reporting Standards (IFRS).
a. 顿
It also liaises with national accounting standard setters (for example
the UK's ASB) to achieve convergence in accounting standards
around the world. cc 高
International Financial Reporting Standards Interpretations
Committee (IFRS IC)
n
od 经
.c
The IFRS IC issues guidance on both how to apply existing
ga 财
IFRSs in company financial statements and how to account for
un
new financial reporting issues where no IFRS exists.
a. 顿
It reports to the IASB.
cc 高
International Financial Reporting Standards Advisory
Council (IFRS AC)
n
od 经
.c
The IFRS AC's principal role is to advise the IASB on a range
of issues which include:
ga 财
un
• The IASB's agenda and timetable for developing IFRSs
• Advising the IASB of areas that may need to be considered
a. 顿
by IFRS IC.
cc 高
Lecture example
n
od 经
.c
What is the role of the International Financial Reporting
Standards Foundation?
ga 财
un
A. To appoint members of the IASB
B. To advise the IASB on new accounting standards they should consider
a. 顿
issuing
C. To give guidance to businesses regarding to how to apply accounting
standards in their financial statements
cc 高
D. To issue International Financial Reporting Standards
Answer A
Lecture example
n
od 经
.c
Which of the following bodies is involved is trying to achieve
convergence of global accounting standards?
ga 财
un
A. The IASB
B. The IFRS IC
a. 顿
C. The IFRSF
D. The IFRS AC
cc 高
Answer A
n
od 经
.c
ga 财
un
a. 顿
cc 高
n
Task 25
od 经
.c
Qualitative characteristics of
ga 财
un
financial information
a. 顿
cc 高
n
od 经
.c
Qualitative characteristics
ga 财
un
a. 顿
cc 高
The objective of general purpose financial reporting
n
od 经
.c
To provide information about the reporting entity that is useful to
ga 财
existing and potential investors, lenders and other creditors in
un
making decisions about providing resources to the entity. Those
decisions involve buying, selling or holding equity and debt
a. 顿
instruments, and providing or settling loans and other forms of
credit.
cc 高
Accrual accounting
n
od 经
.c
Accrual accounting depicts the effects of transactions and other
events and circumstances on a reporting entity’s economic
ga 财
un
resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in a
a. 顿
different period.
cc 高
Underlying assumption
n
od 经
.c
Going concern
The financial statements are normally prepared on the assumption
ga 财
that an entity is a going concern and will continue in operation for
un
the foreseeable future.
a. 顿
If this is not appropriate, then additional disclosure about the basis
of preparation must be made in the financial statements.
cc 高
Lecture example
n
od 经
Which of the following statements best describes the
.c
primary purpose of the statement of profit or loss?
ga 财
un
A. To report on the financial position of an entity at the year end
B. To record the cash inflows and outflows in the year
a. 顿
C. To list the entity’s assets, liabilities and equity at the year end
D. To record the entity’s financial performance for the year
cc 高
Answer D
Qualitative characteristics of financial information
n
od 经
.c
Fundamental qualitative characteristics
•
ga 财
Relevance: predictive value, confirmatory value and materiality
un
• Faithful representation: financial information should be
complete, neutral and free from error
a. 顿
cc 高
n
od 经
Enhancing qualitative characteristics
.c
• Comparability: enables users to understand similarities in and differences
ga 财
among items. Consistency helps achieve comparability
un
• Verifiability: helps assure users that information faithfully represent the
economic phenomena it purports to represent
a. 顿
• Timeliness: having information available to decision-makers in time to be
capable of influencing their decisions
•
cc 高
Understandability: classifying, characterising and presenting information
clearly and concisely. Inherently complex phenomena should not however
be excluded as the reports would be incomplete and potentially misleading.
n
od 经
.c
The cost constraint on useful financial reporting
ga 财
• The benefits of reporting information should justify the costs to provide
un
and use that information.
a. 顿
cc 高
The elements of financial statements
n
od 经
Asset
.c
A resource controlled by an entity as a result of past events and from which
ga 财
future economic benefits are expected to flow to the entity.
un
Liability
a. 顿
A present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow of economic benefits.
Equity
cc 高
The residual interest in the assets of an entity after deducting all its
liabilities, so EQUITY = NET ASSETS = SHARE CAPITAL + RESERVES
The elements of financial statements
n
od 经
Income
.c
Increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in
ga 财
un
increases in equity, other than those relating to contributions from equity
participants.
a. 顿
Expenses
Decreases in economic benefits during the accounting period in the form of
cc 高
outflows or depletions of assets or increases of liabilities that result in
decreases in equity, other than those relating to distributions to equity
participants.
Other accounting concepts
n
Materiality
od 经
.c
Information is material if omitting it or misstating it could influence users’
decisions. It is an entity-specific aspect of relevance based on the nature or
ga 财
un
magnitude, or both, of the items to which information relates in the context
of the entity’s financial report.
a. 顿
Substance over form
Transactions and events should be accounted for and presented in accordance
cc 高
with their economic reality (substance) and not merely their legal form.
For example, if an entity sells an asset and the documentation transfers legal
title but an agreement allows the selling entity to continue to use the asset, in
substance, a sale has not taken place.
Lecture example
n
The IASB’s Conceptual Framework for Financial Reporting identifies characteristics
od 经
.c
which make financial information faithfully represent what it purports to represent.
ga 财
Which of the following are examples of those characteristics?
un
(1) Neutrality
(2) Accruals
a. 顿
(3) Freedom from error
(4) Going concern
A 1 and 2
B 1 and 3
cc 高
C 2 and 3
D 2 and 4
Answer B
n
od 经
.c
ga 财
un
a. 顿
cc 高

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Task1 Financial position approach

cc 高 Other comprehensive income

Post transactions (1) to (8) to the relevant ledger accounts.

Draw up a statement of profit or loss for the period and a statement

Profit for the year 1,150

The sales tax payable to tax authorities will be:

What is his depreciation expense to the nearest $ for the year?

 Work in progress being produced

Less closing inventory

Costs of conversion Relating to productions:

Closing inventory value

100 at $2.12 212

100 at $2.40 240

value 200 440 2.20 440

25 November 400 15.000 6,000

Expensed $20 RV = 90-90/9 = 80 …

PLANT AND MACHINERY DISPOSALS

Dr Non-current asset cost account

The following are examples of intangible assets:

The choices are: cc 高

Amortisation should begin when the asset is ready for use.

Cash paid: 1.2.X7 375

What amount of rental income should appear in the company’s statement

Trade receivables 50,000

(b) Remove allowance

Other components income

Share premium account

A contra entry is always recorded as:

(4) The supplier refunds the business:

Again, the memorandum ledgers must also be updated.

Sales tax at 15%

Dr Prepayments ($180 × 6/12) (SOFP)

Cr Electricity expense (SPL) 90

Statement of profit or loss and other comprehensive income

The following information is relevant:

Accounting treatment: Accounting treatment:

Net cash used in investing activities (146)

• Selecting, acquiring, disposing of liabilities on liquidation

Trade investments are simply shown as investments under non-current

Equity A 110 Equity B 50 Equity A 110 Equity B 50

Equity A 110 Equity B 50 Equity B 50

Pre-acquisition ret’d earnings $2m

NCI at acquisition [at fair value] (from goodwill working) X

- revaluation surplus Parent

Liabilities 5,000 3,000

Share capital 100 10

Profit attributable to:

Owners of the parent (21 – 1.3)

1.7.X4 90% ∴non-controlling interest 10%

A significant change may be due to:

A significant change (especially a fall) may be due to:

• Hold adequate inventories,

A significant change may be due to:

A significant change may be due to:

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