15/10/2024

Financial Accounting – F3.1

Lecturer: Tran Thi Phuong Thao (PhD)
Email: thaottp@[Link] Tel: 0936447452

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Syllabus

A The context and purpose of financial reporting

B The qualitative characteristics of financial
information
C The use of double entry and accounting systems
D Recording transactions and events
E Preparing a trial balance
F Preparing basic financial statements
G Preparing simple consolidated financial statements
H Interpretation of financial statements

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Contents
 Chapter 1: Introduction to accounting
 Chapter 2: The regulation framework
 Chapter 3: The qualitative characteristics of financial information
 Chapter 4: Financial transactions and accounting systems
 Chapter 5: Ledger accounts and double entry
 Chapter 6: From trial balance to financial statements
 Chapter 7: Inventory
 Chapter 8: Tangible non-current assets
 Chapter 9: Intangible non-current assets
 Chapter 10: Accruals and prepayments
 Chapter 11: Provisions and contingencies
 Chapter 12: Irrecoverable debts and allowances
 Chapter 13: Sales tax
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 Chapter 18: Preparation of financial statements for sole traders

Chapter 1: Introduction to
accounting

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Nature, principles and scope of financial reporting

 Financial reporting is a way of recording, analysing and summarising

transactions of a business.
=> Financial accounting is mainly a method of reporting the
financial performance and financial position of a business
=> satisfy the information needs of persons not involved in
running the business
=> provide historical information
 Management (or cost) accounting is a management information
system which analyses data to provide information as a basis for
managerial action.

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Financial Statements
 Statement of Profit or Loss and Other Comprehensive Income
 Statement of Financial Position
 Statement of Cash Flows
 Statement of Changes in Equity

 Non-financial statements: May be included in annual report (e.g.

Chairman’s/directors’ statements, environmental reports)

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Statement of Profit or Loss and Other Comprehensive Income

The statement of profit or loss and other comprehensive income

(SPL&OCI) can be prepared either as a single statement or as two
separate statements:

 Single statement of comprehensive income

 Two statements
—A Statement of Profit or Loss
—A Statement of Other Comprehensive Income (which begins with
profit or loss for the period)

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Statement of Profit or Loss and Other Comprehensive Income

Statement of profit or loss is a record of income generated and

expenditure Incurred over a given period. The statement shows
whether the business has had more revenue (sales) than expenditure
(resulting in a profit) or vice versa (resulting in a loss).

Revenue is the income generated by the operations of a business for a

period.

Expenses are the costs of running the business for the same period.

Other comprehensive income consists of items of income and

expense which are not recognised in profit or loss. For example, a
surplus arising on revaluation of a property which is not recognised in
profit or loss (because it is not realised as cash).

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Example 1 Sales X
Less: Sales Returns (X)
X
Cost of Goods Sold
Opening Inventory X
Purchases X
Glara’s Less: Purchase Returns (X)
Statement of X
Profit or Less: Closing Inventory (X)
Loss X
for the year Gross Profit: X
ended 31 Other Income X
December Expenses X
20X2
Electricity X
Rental X
Repairs X
Sundry Expenses X
Discounts Allowed X
Loan Interest X © ACCA 10

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Example 1
Glara’s Statement of Profit or Loss
for the year ended 31 December 20X2
$ $
Net Profit:

Other Comprehensive Income

Gains on Property Revaluation X

Total Comprehensive Income

X
for the year:

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Activity 1
In the following activity, arrange the items in the order they must appear
in the statement of profit or loss, reading from top to bottom.

Line Item Order

Number
Loan Interest
Cost of Goods Sold
Property revaluation loss
Other Income
Net Profit
Gross Profit
Sales Revenue

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Statement of Financial Position

The Statement of Financial Position (SFP) is a primary statement

that shows the financial position of a business at a point in time. This
includes the assets owned, liabilities owed and the capital/equity
balance.

The SOFP shows the book value or carrying amount of the entity at
a particular date for:

 Assets (resources controlled)

 Liabilities (obligations owed)
 owners' Capital or Equity (how to business is financed)

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Example 2
Capital
Capital brought forward X
Glara’s Statement of Financial Position
Profit for the year X
as at 31 December 2014
Capital introduced X
$ $
Less: (Drawings) (X)
Non-Current Assets
Property X
Total Capital: X
Equipment X
Motor Vehicle X
Non-Current Liabilities
X
Bank Loan X
Current Assets
Current Liabilities
Inventory X
Trade Payables X
Trade Receivables X
Accruals X
Prepayments X
Overdraft X
Cash at Bank and in hand X
X
X
TOTAL CAPITAL AND X
TOTAL ASSETS: X
LIABILITIES:

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Activity 2
State whether the following statements are true or false.

1. Prepayments are a current liability.

2. The company’s bank account balance is always a current asset.

3. A current liability is due to be settled within six months of the

reporting date.

4. Drawings are added to capital in a sole trader’s statement of financial

position.

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Statement of Cash Flows

The statement of cash flows classifies the movement of cash into three
categories:

 Operating Activities
 Investing Activities
 Financing Activities

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Example 3 Cash Flows from Operating Activities

Cash generated from operations X
Interest paid X
Income taxes paid X
Net cash from operating activities: X
Cash Flows from Investing Activities
Kenravi Co Purchase of property, plant and equipment X
Statement Proceeds of sale of equipment X
of Cash Interest received X
Flows
Dividends received X
for the year
Net cash used in investing activities: X
ended 30
Cash Flows from Financing Activities
April 20X5
Proceeds of issue of shares X
Repayment of loans X
Dividends paid X
Net cash used in financing activities: X
Net increase in cash and cash equivalents X
Cash and cash equivalents at beginning of period X
Cash and cash equivalents at end of period X
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Activity 3
For each statement of cash flow example, state whether they belong to the
operating, investing or financing activities.

1. Purchase of buildings

2. Income taxes paid

3. Profit on sale of motor vehicle

4. Dividends paid

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Statement of Changes in Equity

The purpose of the statement of changes in equity is to state the

changes in equity that have occurred in the financial year. The
statement reconciles the equity account balances at the start and end of
the year.

Equity of a business includes share capital, share premium, revaluation

surplus and retained earnings. Each element will have its column in the
Statement of Changes in Equity.

In this pro forma layout, the columns represent capital components, and
the rows represent the changes in the period. A whole year's
comparative information also would be shown.

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Statement of Changes in Equity

Share Share Revaluation Retained Total

capital premium surplus earnings
$ $ $ $ $
Balance at 31 December 20X5 x x x x x
Changes in accounting policy x/(x) x/(x)

Restated balance x x x x x

Changes in equity for 20X6

Issuance of share capital x x x
Dividends (paid and declared) (x) (x)
Total comprehensive income for the year x/(x) x/(x) x/(x)
Transfer to retained earnings (x) x

Balance at 31 December 20X6 x x x x x

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Users of Financial Statements

Stakeholders

A stakeholder is anyone who can affect the business or is affected by

the business. They are users of the prepared financial statements.

Since the financial statements are an important record of the

performance of the business in the year, stakeholders are naturally
interested in them. As there are different types of stakeholders, they will
be interested in various areas in the financial statements. This means
that the financial statements need to include enough detail to satisfy the
information requirements of different stakeholders.

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Stakeholders
Internal Stakeholders

 Business Owners
 Employees of the company
 Customers
 Suppliers

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Stakeholders
External Stakeholders

 Government and Local Authorities

 Shareholders
 External Lenders
 Auditors
 The Public

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Stakeholders
The below table is a summary of the information needs of internal users
of financial information:

Users/ Stakeholders Information Needs

Investors (owners) and their • Providers of capital are concerned with the risk
advisers and return of their investment. They need the
following information:
– for decision-making (to buy, hold or sell)
– to assess the entity's ability to pay interest
or dividends.

Management (interested in • To plan, make decisions and control

management accounts rather operational activities.
than published financial • Financial analysis of the financial statements
information) may form part of a "management review".
Employees • Stability and profitability of employers.
– Ability to provide remuneration,
retirement benefits and employment
opportunities.
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Stakeholders
The below table is a summary of the information needs of external users
of financial information:

Users Information Needs

Prospective investors
• Risks and returns (profitability and
future growth) of investing may be
assessed (by a financial analyst) based
on published financial information.
Financial institutions (e.g. • Information used:
banks and other lending – to decide whether to provide/extend
companies) loan facilities
– to determine whether repayments
(principal and interest) can be settled
when due.

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Stakeholders
Users Information Needs
Suppliers (may have • Information used to determine:
greater interest if – whether amounts owed will be paid
dependent on an entity when due
as a major customer)
– what prior claims the finance providers
have on the entity's assets.
Customers • Continuance of supply of goods/services is
essential for long-term involvement with, or
dependence on, the entity.
Government entities and • Allocation of resources and, therefore,
their agencies (e.g. tax activities of the entity.
authorities) • Information used to regulate activities,
determine taxation policies and as the basis
for national income and similar statistics.

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Stakeholders
Users Information Needs
General public and media • Information used to measure the
following:
– contribution to the local economy (e.g.
number of employees and patronage of
local suppliers)
– trends and recent developments in
prosperity and range of activities.
Environmental groups
• How the entity works to keep the
environment "green" is increasingly
reported in annual reports.

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Activity 6
State whether the following statements are True or False.
1. Shareholders will be the most interested stakeholders in a partnership's
financial statements.
2. Auditors are particularly interested in the reliability of the figures shown
in the financial statements.
3. Employees will likely want to use the financial statements to assess how
well the business will do in the future.
4. Loan finance providers are likely to be interested in how much the
business pays out to its owners each year.
5. Management's primary source of daily financial information is the
annual financial statements.
6. Tax authorities are interested in the financial statements of
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Types of Business Entities – 3 main types

A sole trader is an individual who owns, controls, and manages

a business alone.
Freelancers: Independent professionals who offer their services,
such as writers, graphic designers, consultants, or
photographers, as self-employed individuals are often sole
traders. They operate their businesses independently, serving
clients and managing their finances.

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Sole Traders
Advantages of Sole Traders

 Control – A sole trader has complete control over their business.

 Business Formalities – It is easy for a sole trader to set up and
operate a business.

 Flexibility – A sole trader can choose how to operate and is not

bound by any workload requirements.

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Sole Traders
Disadvantages of Sole Traders

 Liability – A sole trader is fully liable for all the business’s debts.
 Raising Finance – A sole trader may not be able to raise the money
needed to develop the business in the longer term.

 Business Continuity – The business will cease if the sole trader dies
or retires unless arrangements have been made for it to be sold or
transferred to someone else.

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Activity 1
1. Which one of the following is MOST likely to be interested in a
sole trader's financial statements?

a) Shareholders

b) The financial press

c) Loan note holders

d) The tax authorities

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Activity 1
2. Which of the following statements about sole traders are true?

i) A sole trader may be able to obtain a bank overdraft.

ii) If a sole trader owes money, the person who is owed the money will only
be able to claim against the assets of the sole trader's business.

iii)A sole trader's business may suffer if the owner becomes ill.

a) i) and ii)
b) i) and iii)
c) ii) and iii)
d) i) only
e) All of them
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Partnerships
A partnership is where two or more people own and run a
business together to make profits.

Law Firms: Partnerships are commonly found in the legal

profession. Lawyers form partnerships to collaborate and
share resources while practising law together. Each partner
contributes their legal expertise and shares the firm's profits
and losses.

Accounting Firms: Many accounting firms operate as

partnerships. Accountants come together to provide
accounting, auditing, and tax services. Partners contribute
their financial expertise and jointly manage the firm's
operations.
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Partnerships
Advantages of Partnerships

 Defined Roles – A partnership will have a partnership agreement

 Raising Finance – If the existing partners bring another partner into
the business, the new partner will be required to contribute
financially.

 Paperwork – A partnership does not have to publish its financial

statements.

 Skills and Knowledge – Different partners have different business

skills and knowledge.

 Risks – Having more partners in a partnership will spread the

business risk to more people.
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Partnerships
Disadvantages of Partnerships

 Costs - Drawing up a legally binding partnership agreement will cost

money.

 Decision Making – The time taken to make decisions may be slow in a

partnership if the partners disagree.

 Profit Sharing – Profits and losses are shared among the partners
 Business Continuity – A partnership may need to be dissolved if one of
the partners cannot continue working

 Liability – Each partner’s personal assets are at risk if the business fails.
Personal bankruptcy can occur.

 Disagreements and Disputes – can result in partnership breaking up

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Limited Liability Companies

A limited liability company is where investors invest in the company

by buying shares and becoming shareholders. Shareholders require
profits on their investments in the form of dividend payments or
share value appreciation. Directors are hired to run the company on
behalf of the shareholders. Shareholders are only liable for their
investment.

A limited liability company may be a private or public limited

company

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Limited Liability Companies

Advantages of Limited Liability Companies

 Liability – Limited liability can protect directors and shareholders

(owners) from legal actions brought against them.

 Raising Finance – Limited liability companies may have easier

access to finance and may attract a wider pool of industry experts

 Business Continuation – A limited liability company can be

transferred from one owner to another.

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Limited Liability Companies

Disadvantages of Limited Liability Companies

 Costs – Setting up a limited liability company requires a substantive

initial investment.

 Taxation – The profits of a limited liability company are taxed.

 Public Eye – A company cannot keep its business affairs private as it
relies on the public to invest money into the business (by purchasing
shares).

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Activity – match each statement to the appropriate business arrangement:

Statement
1. The business is taxed as a distinct entity from those who own it. The
business may be subject to different tax rates from its owners.
2. The owner’s savings are likely to be an essential business finance source.

3. Isabella wishes to open a small shop three days a week and wants to spend
as little time as possible on business paperwork and formalities.
4. The business will continue even though one of its shareholders dies.
5. There is a distinction between the business and its owners.
6. Oliver wishes to own his own business in a country where limited liability
companies must have a minimum of two shareholders.
7. Riley wishes to operate by himself as a builder but is concerned that he will
be personally liable for legal claims by his customers.
8. Lee has been running an accountancy practice by herself but is concerned
that she does not have the expertise to meet all her client’s needs.

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Business entity concept

 For accounting purposes, all three entities are treated as

separate from their owners. This is called the business entity
concept.
 A business is considered to be a separate entity from its owner
 => the personal transactions of the owner should never be
mixed with the business transactions.

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Governance

 Corporate governance Is the system by which companies and other

entitles are directed and controlled.
 Good corporate governance is important because the owners of a
company and the people who manage the company are not always
the same, which can lead to conflicts of Interest.
 Directors are responsible for the preparation of the financial
ltatemenu of the company.

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Illustration

 Gilda starts a business selling shoes. She invested $5,000 into the
business.
 During the first accounting period she buys 100 pairs from suppliers for
$30 each and sells 20 pairs for $62 each.
 Calculate Gross profit?

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Question 1 – Jan Bartok

 The following information is avaiable for Jan Bartok’s

business for the year ended 31 December:
$

 Bank overdraft 1,200

 Trade receivables 5,000
 Opening inventory 1,500
 Motor vehicles 2,800
 Sales revenue 25,000
 Drawings 2,000
 Opening capital 5,000

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 Purchases 20,000
 Trade payables 2,000
 Closing inventory 3,000
 Cash in hand 100
 Administration expenses 1,000
 Wages expenses 800
Required: Prepare a statement of profit or loss for the
year ended 31 Demember and a statement of financial
position at that date

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Question 2 – Tomas Maxim

 The following information is avaiable for Tomas Maxim’s

business for the year ended 31 December
$

 Trade payables 6,400

 Trade receivables 5,060
 Purchases 16,100
 Sale revenue 28,400
 Motor van 1,700
 Drawings 5,100
 Insurance expenses 174

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Question 2

$
 General expenses 1,596
 Rent expenses 2,130
 Salaries expenses 4,162
 Inventory at 31 December 2,050
 Sale returns 200
 Cash at bank 2,626
 Cash in hand 50
 Capital introduced 4,100

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