Preparing Financial Statements for Companies IAS 1

Preparing Financial Statements for Companies IAS 1

Preparing Financial Statements for Companies We will focus today on the preparation of financial statements of a limited company.

IAS 1 Presentation of Financial Statements, Per IAS 1 Presentation of Financial Statements, a complete set of financial statements comprises of the following;- Statement of Financial Position for yr Statement of Profit or Loss and Other Comprehensive Income for yr Statement of Changes in Equity for yr Statement of Cash Flow for the year and Notes summarise the key accounting policies used by the business in preparing the financial statements as well as other explanatory info

Format of Limited Company Financial Statements Format of Statement of Financial Position VERY IMPORTANT FORMAT MUST BE USED. CANNOT BE DEVIATED FROM. By having a standardised format it is hoped that comparison between companies & comparison within the same company over a period of time will be easier for the users of the financial statements.

Format of Limited Company Financial Statements - Current Assets: Expected to be realised in the entity s normal operating cycle/expected to be realised within 12 months after the reporting date. All other assets should be classified as non current assets - Current Liabilities: Expected to be settled in the entitys normal operating cycle/due to be settled within 12 months of the reporting cycle

Format of Limited Company Financial Statements - Format of Statement of Profit or Loss and Other Comprehensive Income Note: At F3/FFA level, the only items of Other Comprehensive Income are gains on revaluations of property, plant & equipment

Notes to the financial statements As can be seen from the formats of the SOCI and SOFP, a great amount of detail has been lost due to the aggregation of figures This short-coming is addressed by having notes which give a breakdown to the figures presented in the financial statements. Thus the notes, are a key element of a set of financial statements. The notes (disclosure requirements) that accompany the financial statements are examined in later slides. 7

Statement of Comprehensive Income (SOCI) 8

SOCI purpose To provide information to users about the financial performance of the company The SOCI gives important information to users about the profitability of a company, which is a key measure of a company s performance. Profitability helps users to assess the company s ability to generate cash and remain in business. 9

Terms in SOCI explained;- Revenue another name for Sales. Cost of Sales calculated using same formula as seen in FA 2. Don t show calculation on face of SOCI, just final COS figure. Other operating income could include profit on the sale of a non-current asset, royalty income etc.. Distribution Costs costs associated with marketing & selling of product, delivery of product. See next slide for examples 10

Preparing Financial Statements for Companies Distribution Costs examples Salary costs of the Sales, Marketing & Distribution Departments Advertising costs Travel & entertainment costs Transport costs of finished goods Sales commission costs 11

Preparing Financial Statements for Companies Administration Costs examples include;- Salaries of Admin Staff Maintaining office buildings Bad debts Professional fees legal & accounting fees 12

Preparing Financial Statements for Companies Other operating expenses caption is rarely used in exam questions. Finance Costs includes interest on bank overdrafts/interest on debentures/preference dividends payable/paid Investment Income includes deposit interest earned Income tax expense Corporation Tax 13

Statement of Financial Position (SOFP) 14

SOFP purpose Is a list of the company s assets and liabilities -provides an indication therefore of the company s financial position Provides very useful information in terms of how an entity is financed proportion of debt to equity in the business (gearing of company) SOFP provides information on the financial stability of an entity, example if an entity has excessive levels of debt, this could undermine the ability of the entity to remain in business. 15

Terms in SOFP explained;- Non current assets the sum of the NBV of all tangible assets (eg land and buildings, plant & machinery, fixtures & fittings, motor vehicles etc..). Note must be prepared to calculate this figure Intangible Assets (1) identifiable asset without a physical substance that is (2) controlled by the entity as a result of a past event & from which (3) future economic benefits are expected to flow to the entity. Eg s expertise of employees & supplier relationships ; quotas, licence.. 16

Terms in SOFP explained;- Other Financial Assets includes longterm investments owned by company Inventories closing inventory Trade and other receivables trade debtors Cash and Cash equivalents includes all money held by company in bank/on hand. Includes short-term investments Equity refers to anything that is ultimately owed to the ordinary shareholders of a company and includes;- 17

Terms in SOFP explained;- Equity (cont d) (i) Issued Capital the par value of shares bought by ordinary shareholders in company. (ii) Share premium represents the excess over the par value paid by ordinary shareholders for shares in the company. Reserves money owned by ordinary shareholders, example, other reserves, revaluation reserve 18

Terms in SOFP explained;- Equity (cont d) (iv) Retained Earnings shows the profits/losses the company has earned over its life. These are ultimately owed to the shareholders. 19

Preparing Financial Statements for Companies Non-current liabilities debentures owed by company, repayment of which is due over a period greater than one year Trade and other payables includes trade payables, accruals. Accruals never shown separately on face of SOFP. Instead breakdown of total for Trade & Other Payables is given in a note to the accounts. Short-term borrowings includes bank overdrafts and the portion of debentures due for repayment in the following year. 20

Terms in SOFP explained;- Debentures Another name for a loan. Is a non-current liability Has a fixed rate of interest. This interest will be recorded;- In SOCI as Finance Cost and In SOFP as Current Liability 21

SUMMARY NEW TERMS In summary, Financial Statements of a limited company will contain items not present in a sole trader accounts. Such elements include;- (i) Corporation Tax (ii) Other Comprehensive income (iii) Capital Structure of Limited Co s (iv) Debentures (v) Equity Reserves 22

IAS 1 DISCLOSURE REQUIREMENTS 23

Statement of Comprehensive Income Notes Considerable notes must be prepared to accompany the financial statements because of the loss of information through the aggregation of figures in the financial statements. Some of these include the following;- 24

Statement of Financial Position Notes (i) Tangible Non-Current Asset note (i) Intangible Non-Current Asset note (ii)other Miscellaneous Notes 25

STATEMENT OF CHANGES IN EQUITY 26

FUNCTION OF STATEMENT OF CHANGES IN EQUITY Must be prepared in accordance with IAS 1. Function To show the movement in;- 1. Share capital account 2. Share premium account 3. Revaluation Reserve 4. Retained Earnings From last year to this year. 27

Why is the STATEMENT OF CHANGES IN EQUITY needed? In some instances, a practice had developed of businesses recording transactions straight to reserves, instead of bring them through the SOCI. The effect was that the transaction was not as obvious to shareholders as it could be. The purpose of bringing a transaction straight to reserves was in many cases to hide the nature/effect of the transaction from shareholders. The Statement of Changes in Equity avoids this. 28

IAS 18 Revenue IAS 18 Revenue: Revenue is generally recognised as earned at the point of sale. This is generally the when the significant risks and rewards of ownership have been passed to the purchaser and when the revenue can be measured reliably. 29

SOCI Procedure 1. Set Out Pro Forma 2. Scan Trial Balance for Figures to Be Inserted into Standard Headings 30 (Open Workings As Required & Tick Off Each Figure As you Go) 3. Produce Journals for Additional Information 4. Produce Statement of Profit or Loss and Other Comprehensive Income

SOFP Procedure 1. Set Out Pro Forma 31 2. Scan Trial Balance for Figures to Be Inserted (Open Workings Where Required & Tick Off Each Figure As you Go) 3. Produce Journals for Additional Information 4. Produce the SOFP