6 - Handouts (Chp 14 - 19).pdf - Accounting \u2013 Level 3 Hong Kong School of Commerce CHAPTER 14 IAS 1 \u2013 Presentation of Financial Statements Learning

6 - Handouts (Chp 14 - 19).pdf - Accounting – Level 3...

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Unformatted text preview: Accounting – Level 3 Hong Kong School of Commerce CHAPTER 14 IAS 1 – Presentation of Financial Statements Learning objectives At the end this chapter, you should be able to: • Demonstrate a basic understanding of the format of published financial statements of a limited company in accordance with IAS 1. • Prepare a simple set of financial statements in a form suitable for publication and which complies with IAS 1. 14.1 Introduction The stated purpose of IAS 1 Presentation of Financial Statements is to prescribe the basis for presentation of general-purpose financial statements, in order to ensure comparability. The standard itself is in two parts. The first part, entitled ‘Overall Considerations’, and dealing with basic accounting concepts. The second part ‘Structure and Content’ contains a large number of disclosure requirements for financial statements. 14.2 Requirements of IAS 1 14.2.1 Identification of financial statements ⚫ Financial statements should be clearly identified and distinguished from other information in the same published document. ⚫ Each component of the financial statements should be clearly identified. In addition, the following information should be prominently displayed, and repeated when it is necessary for a proper understanding of the information presented: - the name of the reporting enterprise or other means of identification - whether the financial statements cover the individual enterprise or a group of enterprises - the reporting date or the period covered by the financial statements, whichever is appropriate to the related component of the financial statements - the reporting currency - the level of precision used in the presentation of figures in the financial statements. 14.2.2 Components of financial statements A complete set of financial statements includes the following components: ⚫ statement of financial position 財務狀況表 (formerly “balance sheet”) ⚫ statement of profit or loss 損益表 ⚫ statement of changes in equity 權益變動表 ⚫ statement of cash flows 現金流量表 (Covered in IAS 7) ⚫ accounting policies and explanatory notes. Page 193 Accounting – Level 3 Hong Kong School of Commerce 14.3 Statement of financial position ⚫ The current / non-current distinction In most countries, non-current and current assets are presented as separate headings in the statement of financial position, and the formats in IAS 1 follow this practice. IAS also gives guidance on the classification of assets and liabilities as non-current or current, as explained below. ⚫ Classification of assets as current An asset should be classified as a current asset when it: (i) is expected to be realised in, or is held for sale or consumption in, the normal course of the enterprise’s operating cycle; or (ii) is held primarily for trading purposes or for the short-term and expected to be realised within twelve months of the reporting date; or (iii) is cash or a cash equivalent asset which is not restricted in its use. All other assets should be classified as non-current assets. IAS 1 uses the term ‘non-current’ to include tangible, intangible, operating and financial assets of a long-term nature. ⚫ Classification of liabilities as current A liability should be classified as a current liability when it: (i) is expected to be settled in the normal course of the enterprise’s operating cycle; or (ii) is due to be settled within twelve months of the reporting date. All other liabilities should be classified as non-current liabilities. ⚫ Information to be presented on the face of the statement of financial position As a minimum, the face of the statement of financial position should include line items which present the following amounts: (i) property, plant and equipment (ii) intangible assets (iii) investments (iv) inventories (v) trade and other receivables (vi) cash and cash equivalents (vii) trade and other payables (viii)tax payable or recoverable (ix) provisions (x) non-current liabilities (xi) issued capital and reserves. Additional line items, headings and sub-totals should be presented on the face of the statement of financial position when an International Accounting Standard requires it, or when such presentation is necessary to present fairly the enterprise’s financial position. Page 194 Accounting – Level 3 Hong Kong School of Commerce Sample of a Statement of Financial Position: XYZ Group – Statement of Financial Position as at 31 December 20-2 ASSETS Non-current assets Property, plant and equipment Goodwill Current assets Inventories Trade and other receivables Prepayments Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Reserves Retained earnings / (Accumulated loss) 20-2 $ 20-2 $ 20-1 $ 20-1 $ X X X X X X X X X X X X X Non-controlling interest Equity Non-current liabilities Redeemable preferred share capital (Note 2) Bank loan X X X X X X X X X X X X X X X X X X X X X X X X X Total equity and liabilities X X X X Current liabilities Trade and other payables Short-term borrowings Current portion of bank loan X X X X Note 1: Dividends declared by the directors after the end of the year are not adjusted for in the accounts but are disclosed in the notes to the financial statements. Note 2: Preference share capital is described as preferred share capital and redeemable preferred share capital is shown as a Non-current liability in Statement of Financial Position. Irredeemable preferred share capital is shown as part of shareholder’s equity. Page 195 Accounting – Level 3 Hong Kong School of Commerce 14.4 Statement of profit or loss 14.4.1 Information to be presented on the face of the statement of profit or loss As a minimum, the face of the statement of profit or loss should include line items which present the following amounts: (i) revenue (ii) the results of operating activities (iii) finance costs (iv) tax expense (v) Profit / (Loss) for the period. Sample of a Statement of profit or loss – classification of expenses by function: XYZ group – Statement of profit or loss for the year ended 31 December 20-2 20-2 $ X (X) X X (X) (X) (X) X (X) X (X) X Revenue (Note) Cost of sales Gross profit Other operating income Distribution costs Administrative expenses Other operating expenses Profit from operations Finance cost Profit before tax Income tax expenses Profit for the period / year 20-1 $ X (X) X X (X) (X) (X) X (X) X (X) X Note: Revenue is reported at the amount receivable. Hence, allowance for discounts given to customers for prompt payment should be deducted from revenue. 14.5 Notes to the Financial Statements The notes to the financial statements of an entity should: ⚫ ⚫ ⚫ present information about the basis of preparation of the financial statements and the specific accounting policies selected and applied for significant transactions and events; disclose the information required by International Accounting Standards that is not presented elsewhere in the financial statements; and provide additional information which is not presented on the face of the financial statements but that is necessary for a fair presentation. Notes to the financial statements should be presented in a systematic manner. Each item on the face of the statement of financial position, statement of profit or loss and statement of cash flows should be cross-referenced to any related information in the notes. Page 196 Accounting – Level 3 Hong Kong School of Commerce 14.6 Presentation of Accounting Policies The accounting policies section of the notes to the financial statements should describe the following: ⚫ ⚫ the measurement basis (or bases) used in preparing the financial statements; and each specific accounting policy that is necessary for a proper understanding of the financial statements. In deciding whether a specific accounting policy should be disclosed, management considers whether disclosure would assist users in understanding the way in which transactions and events are reflected in the reported performance and financial position. The accounting policies that an enterprise might consider presenting include, but are not restricted to, the following: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) revenue recognition; consolidation principles, including subsidiaries; business combinations (業務合併); recognition and depreciation / amortisation of tangible and intangible assets; investment properties; research and development costs; inventories; taxation; provisions; employee benefit costs; definition of business and geographical segments and the basis for allocation of costs between segments; definition of cash and cash equivalents; Other International Accounting Standards specifically require disclosure of accounting policies in many of these areas. In addition, the following notes should be disclosed: (a) (b) (c) Contingent liabilities Capital and lease commitments Events after the reporting period. Page 197 Accounting – Level 3 Hong Kong School of Commerce 14.7 Statement of Changes in Equity The statement of Changes in Equity reflects information about the increase or decrease in net assets or wealth of equity shareholders. The information that is likely to appear in the Statement of Changes in Equity includes: ⚫ ⚫ ⚫ Profit or loss for the period Additional shares issued during the period Dividends paid during the year Sample of a Statement of Changes in Equity A typical Statement of Changes in Equity might be presented as follows: Peter Pope Statement of Changes in Equity for the year ended 31 December 20X0 Share Capital $ xxx Retained earnings $ xxx Total equity $ xxx Changes in equity for 20X0: Issue of share capital Profit for the year Dividends paid xxx - xxx (xxx) xxx xxx (xxx) Balance at 31 December 20X0 xxx xxx xxx Balance at 1 January 20X0 Page 198 Accounting – Level 3 Hong Kong School of Commerce Example 1 Stationers Ltd extracted the following Trial Balance at 31 March 2020: Purchases/Sales Returns inwards/Returns outwards Discounts allowed/Discounts received Carriage inwards Office equipment, furniture and fittings at cost Land and buildings at cost Vehicles at cost Trade Receivables / Trade Payables Inventory at 1 April 2019 Bank overdraft Ordinary share capital (shares $0.50) Retained earnings Allowance for doubtful debts General administration expenses General selling expenses Proceeds from sale of office equipment Accumulated depreciation at 1 April 2019: - on office equipment, furniture and fittings - on vehicles $000 1,435 143 45 136 590 1,500 205 200 100 $000 2,768 108 32 123 177 1,300 758 6 958 384 79 5,696 300 45 5,696 Stationers Ltd was also able to supply the following information: (1) The inventory at 31 March 2020 had cost $127,000. (2) Office equipment, furniture and fittings are depreciated at 20% per annum on cost. (3) Vehicles are used for delivering goods to customers. It is depreciated at 25% per annum using the reducing balance method. (4) The allowance for doubtful debts should be 5% of closing trade receivables. (5) The item ‘proceeds from sale of office equipment’ is the credit entry relating to office equipment sold for that figure. The debit entry was correctly made in the bank account. It represents a machine which cost $200,000 and had been depreciated for three years. No other entry had been made for this transaction. Required (a) Prepare a Statement of profit or loss for the year ended 31 March 2020. (b) Prepare a Statement of Changes in Equity for the year ended 31 March 2020. (c) Prepare a Statement of Financial Position as at 31 March 2020. (d) Give two possible reasons why the payment of a dividend has not been proposed. Page 199 Accounting – Level 3 Hong Kong School of Commerce Solution: (a) Stationers Ltd Statement of profit or loss for year ended 31 March 2020 $000 Revenue (2,768 – 143) 2,625 Cost of sales (W1) (1,436) Gross profit 1,189 Other operating income 32 Distribution costs [384 + {(205 – 45) x 25%}] + 45 (469) Administrative expenses [958 +{(200 x 5%) – 6} + {200 x 40%) – 79} + {590 – 200 x 0.2}] (1,041) Loss for the year (289) Workings: (W1) Cost of sales Opening Inventory Purchases (1,435 – 108 + 136) $000 100 1,463 1,563 127 1,436 Less: Closing Inventory Cost of sales (b) Stationers Ltd Statement of Changes in Equity for the year ended 31 March 2020 Share Retained capital earnings $000 $000 Balance at 1 April 2019 1,300 758 Changes in equity for the year: Loss for the year (289) Balance at 31 March 2020 1,300 469 Page 200 Total equity $000 2,058 (289) 1,769 Accounting – Level 3 Hong Kong School of Commerce Solution (Continued): (c) Stationers Ltd Statement of Financial Position at 31 March 2020 $000 Assets Non-current assets Property, plant and equipment (W2) $000 1,752 Current assets Inventory at cost Trade receivables less allowance for doubtful debts Total assets 127 190 (200 – 10) Equity and liabilities Capital and reserves 2,600,000 Ordinary Shares of $0.50 Retained earnings Equity 317 2,069 1,300 469 1,769 Current liabilities Trade payables Cash and cash equivalents Total equity and liabilities 123 177 300 2,069 Workings * 300 – 120 + 78 (d) – Substantial loss – Poor liquidity (W2) Property, plant and equipment Cost $000 1,500 390 205 2,095 Land and buildings Office equipment (590 – 200) Vehicles Page 201 Acc Depn $000 258* 85 343 Net $000 1,500 132 120 1,752 Accounting – Level 3 Hong Kong School of Commerce Review Questions 1. The following is the Trial Balance of Newlets, a public company, at 31 March 2020: Purchases / Sales Trade receivables / Trade payables Land and buildings (Land $450,000) at cost Plant and machinery at cost Administrative expenses Selling expenses Accumulated depreciation on the buildings Accumulated depreciation on plant and machinery 10% Redeemable preferred shares $1 Ordinary shares $0.50 12% Debentures (redeemable 2025) Inventory at 1 April 2019 Interim dividend paid on: Preferred shares Ordinary shares Retained earnings Bank overdraft $000 5,650 780 1,200 4,250 1,990 675 $000 9,120 485 80 1,449 800 2,000 400 350 30 45 14,970 425 211 14,970 Notes: (1) (2) (3) (4) (5) (6) The inventory at 31 March 2020 cost $415,000. The building is occupied by the company as its administrative office Buildings are depreciated at 2% on cost and machinery is depreciated at 25% using the reducing balance method. During the year a machine which had cost $16,000 and been depreciated for 2 years had to be written off completely. This event has yet to be recorded. Administrative expenses include a prepayment of $42,000. Accruals are to be made for debenture interest, the final preferred dividend and for a final ordinary dividend of $0.06 per share. REQUIRED Prepare for Newlets plc, in accordance with IAS 1 “Presentation of Financial Statements”, the following financial statements for external reporting purpose. (a) a Statement of profit or loss of Newlets for the year ended 31 March 2020. (b) the Statement of Changes in Equity for the year ended 31 March 2020. (c) the Statement of Financial Position of Newlets at 31 March 2020. Page 202 Accounting – Level 3 Hong Kong School of Commerce Review Questions 2. You are presented with the following trial balance of Malright, a limited liability company, at 31 October 2020: $000 $000 Buildings at cost 740 Buildings, accumulated depreciation, 1 November 2019 60 Plant at cost 220 Plant, accumulated depreciation, 1 November 2019 110 Freehold land at cost 235 Bank balance 50 Sales 1,800 Purchases 1,105 Discounts received 90 Returns inwards 35 Wages 180 Electricity expenses 105 Inventory, at 1 November 2019 160 Trade payables 250 Trade receivables 320 Administrative expenses 80 Allowance for doubtful debts, at 1 November 2019 10 Director’s remuneration 70 Retained earnings, at 1 November 2019 130 10% Loan notes 50 Dividend paid 30 $1 Ordinary shares 650 Share premium account 80 3,280 3,280 Additional information as at 31 October 2020: (i) Closing inventory has been counted and is valued at $75,000. (ii) The items listed below should be apportioned as indicated: Cost of Distribution Sales Costs Discounts received – – Electricity expenses 40% 20% Wages 40% 25% Director’s remuneration – – Administrative Expenses 100% 40% 35% 100% (iii) An invoice of $15,000 for electricity expenses for October 2020 has not been received. (iv) Loan note interest has not been paid for the year. (v) The allowance for receivables is to be increased to 5% of trade receivables. (vi) Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to be allocated to cost of sales. (vii) Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost of sales, 30% to distribution costs and 40% to administrative expenses. (viii) Tax has been calculated as $45,000 for the year. Page 203 Accounting – Level 3 Hong Kong School of Commerce Review Questions 2. (Continued) REQUIRED Prepare the following financial statements for Malright in accordance with IAS 1 “Presentation of Financial Statements”: (a) the statement of profit or loss for the year ended 31 October 2020; (b) the statement of changes in equity for the year ended 31 October 2020; and (c) the statement of financial position as at 31 October 2020. Note: Notes to the financial statements are NOT required. Round all figures to the nearest thousand dollars. Page 204 Accounting – Level 3 Hong Kong School of Commerce Review Questions 3. Shopton Ltd provided the following information for the year ended 30 June 2020. At 1 July 2019 $ Land and buildings Cost Accumulated depreciation Motor vehicles Cost Accumulated depreciation Retained earnings General reserve At 30 June 2020 15% bank loan (2024) Allowance for doubtful debts Cash and cash equivalents Closing inventory Dividend paid Profit for the year Share capital (ordinary shares at $1 each) Share premium Trade and other payables Trade and other receivables 450,000 50,000 375,000 209,880 121,651 26,000 50,000 12,500 12,325 45,000 25,000 44,920 350,000 75,000 50,000 92,500 Depreciation for the year ended 30 June 2020 was charged as follows: Page 205 Accounting – Level 3 Hong Kong School of Commerce Review Questions 3. (Continued) • $15,000 was transferred to the general reserve. • Profit for the year ended 30 June 2020 did not account for the following: • damaged goods, included in the inventory, costing $5,000, which could be sold for $4,500 after repairs at a cost of $350 • three months’ interest on the 15% bank loan owing • profit or loss on disposal of motor vehicle. REQUIRED (a) Calculate the adjusted profit for the year ended 30 June 2020. (b) Prepare the statement of financial position at 30 June 2020. Page 206 Accounting – Level 3 Hong Kong School of Commerce Review Questions 4. The directors of Southern Products Ltd have provided the following extracts from the general ledger balances at 31 December 2020. $ 20,000 25,800 4,300 1,000 10% bank loan Administrative expenses Allowance for doubtful debts Bank interest Delivery vans – accumulated depreciation 74,800 Delivery vans – cost 124,000 Directors fees 40,800 Discount received 4,670 Distribution costs 20,400 Inventory at 1 January 2020 Irrecoverable debts Office equipment – accumulated depreciation Office equipment – cost Purchases Revenue Trade payables Trade receivables Wages and salaries $ 22,700 5,100 53,600 84,000 420,000 674,000 58,000 90,000 35,490 Additional information On 30 August 2020 a delivery van, cost $20 000, was written off due to an accident. This had been depreciated by $14 000. On 15 December 2020 the insurance company agreed to pay the claim of $5 000 and a new delivery van was purchased costing $35,000. These transactions have not yet been accounted for. The depreciation is charged as follows: Office equipment Delivery vans 25% per annum using the reducing (diminishing) balance method 20% per annum using the reducing (diminishing) balance method The depreciation policy is to charge a full year’s depreciation in the year of acquisition and none in the year of disposal. On...
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  • Fall '19
  • Balance Sheet, Generally Accepted Accounting Principles, Financial Position, Hong Kong School of Commerce

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