Chapter 3 - Preparation and interpreting financial statements and reports Flashcards Preview

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Flashcards in Chapter 3 - Preparation and interpreting financial statements and reports Deck (11)
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1
Q

What is the primary purpose of the statement of cash flows?

A

The primary purpose of the statement of cash flows is to provide information about a company’s gross receipts and gross payments for a specified period of time. As per IAS 7, cash flows are classified under operating, investing and financing activities. The statement of cash flows shows movement of money into or out of a business. It highlights the activities that directly and indirectly affect a company’s overall cash balance.

2
Q

What is IAS 1 and what is its purpose?

A
IAS 1 (Presentation of Financial Statements) sets out the overall requirements for the presentation of FS
and prescribes the structure and minimum requirement for the content of FS. It requires a complete set of FS to be provided on at least an annual basis.

The objective of IAS 1 is to ensure comparability of FS.

3
Q

What does IAS 1 require a set of FS to comprise?

A
A statement of financial position
A statement of profit or loss and other comprehensive income
A statement of changes in equity
A statement of cashflows
Notes to the FS
4
Q

What are the overriding concepts of FS?

A
  1. Going Concern - assumption that they will continue for the foreseeable future unless management have significant concerns. Break up basis if not a GC.
  2. Accruals Basis of Accounting - transactions to be accounted for in the period when income or expenses is earned or expenses are incurred, not when they are received/paid in cash.
  3. Materiality and Aggression - IAS 1 states each material class of similar items should be presented separately and items that are dissimilar in terms of nature or function should be presented separately unless they are immaterial. Materiality depends on size/nature of the item and whether non-disclosure could influence decisions of the users. Inclusion of an item requires judgement.
  4. Reporting Period - should be prepared at least annually. If different, must disclose why and that comparative figures given are not entirely comparable.
  5. Offsetting - Assets and liabilities and income and expenses shall not be offset unless required or permitted by a standard or an interpretation. Netting off can disguise transactions and will not represent a true picture of
    the financial position.
5
Q

SOFP - Line Items

A

Assets

  1. property, plant and equipment
  2. investment property
  3. intangible assets
  4. financial assets (excluding amounts shown under (5), (8), and (9))
  5. investments accounted for using the equity method
  6. biological assets
  7. inventories
  8. trade and other receivables
  9. cash and cash equivalents
  10. assets held for sale.

Liabilities

  1. trade and other payables
  2. provisions
  3. financial liabilities (excluding amounts shown under (1) and (2))
  4. current tax liabilities and current tax assets
  5. deferred tax liabilities and deferred tax assets
  6. liabilities included in disposal groups

Equity

  1. non-controlling interests (NCI) presented within equity
  2. issued capital and reserves attributable to owners of the parent
6
Q

Statement of Profit or Loss and Other Comprehensive Income - Line Items

A

IAS 1 states that it can be shown as 1 statement in 2 sections or 2 separate statements.

Profit or Loss:

  1. revenue
  2. finance costs
  3. share of profits and losses of associates and joint ventures accounted for using the equity method (see chapter 7)
  4. a single amount for the total of discontinued operations
  5. tax expense
  6. a total for profit and loss
  7. gains and losses from the de-recognition of financial assets measured at amortised cost.

Other comprehensive income:

  1. changes in the revaluation surplus on long-term assets
  2. actuarial gains and losses on re-measurement of defined benefit plans
  3. exchange differences (gains and losses) arising from the translation of the financial statements of a foreign operation
  4. certain gains and losses relating to financial instruments, including on certain instruments used for hedging
  5. correction of prior period errors and the effect of changes in accounting policies.

Other Requirements:
- write down of inventories to net realisable value (NRV)
- write down of property, plant and equipment to recoverable amount, as
well as its reversal
- provisions for the costs of restructuring ‹‹
- reversals of write downs and provisions
- gains/losses on disposal of non-current assets
- gains/losses on disposal investments
- discontinued operations
- litigation settlements

7
Q

What are the 2 conditions that discontinued operations must meet under IFRS?

A

1) The asset or component must be disposed of or reported as being held for sale; and
2) The component must be a distinguishable separate area of business intentionally being removed from operation or a subsidiary of a component being held with the intention of selling.

8
Q

SOCE - Line Items

A

Movement in shareholders’ equity over the period includes the following elements:
- Dividends
- Capital injections by the shareholders: shown as issue and redemption of shares.
- Prior period adjustment: any material prior period mistakes/errors, the effects of any retrospective application of accounting policies or restatements are made in accordance with
IAS8 (Accounting policies, changes in accounting estimates and errors)
- Profit or loss attributable to shareholders: as reported in the income statement
- Revaluation gains and losses (to the extent that they are recognised outside of the income
statement)
- Any other gains and losses: not recognised in the income statement such as actuarial gains and
losses from the application of IAS 19 (Employee benefit)
- Transfer between reserves e.g. when an asset held for sale is disposed of, any gain held in revaluation reserve will be transferred within the equity by a minus in one column and a plus in
another.

9
Q

What standard is the Statement of Cash Flows governed by? And what does it help with/consist of?

A

IAS 7 governs the prep and presentation of cash flow statements and shows cash and cash equivalents over the period.

The cash flow statement helps to assess the viability of a business in terms of
liquidity, solvency and financial adaptability. Cash and cash equivalents generally consist of:
- Cash in hand/at bank
- Short-term investments that are highly liquid and involve very low risk of change in value (usually
excludes investments in equity instruments)
- Bank overdrafts

10
Q

What are the 3 sections of the Statement of Cash Flows?

A
  1. Cash flows from operating activities - principal revenue-producing activities plus other activities that are not investing or financing.
  2. Cash flows from investing activities - Shows the extent of new investment in assets which will generate future profit and cash flows.
  3. Cash flows from financing activities - includes raising capital, repaying investors, adding or changing loans or issuing more stock. This section is an indicator of likely future interest and dividend payments.
11
Q

Statement of Cash Flows - Line Items

A
  1. Cash flows from operating activities:
    - Cash receipts from the sale of goods and services
    - Cash receipts from royalties, fees, commissions and other revenue
    - Cash receipts from supplier refunds
    - Cash receipts from the settlement of lawsuit and insurance claims
    - Cash payments to suppliers for goods and services
    - Cash payments to and on behalf of employees
    - Cash payments or refunds of income taxes unless they can be specifically identified within
    financing and investing activities
    - Cash receipts and payments from contracts held for dealing or trading and interest paid on
    borrowings
  2. Cash flows from investing activities:
    - Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those relating to capitalised development costs and self-constructed property,
    plant and equipment
    - Cash receipts from sales of property, plant and equipment, intangibles and other non-current
    assets
    - Cash acquisitions and disposals of shares or debentures of other entities
    - Cash advances and loans made to other parties and repayments of such loans
  3. Cash flows from financing activities:
    - Cash proceeds from issuing shares
    - Cash payments to owners to acquire or redeem the entity’s shares
    - Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or
    long-term borrowings
    - Principal repayments of amounts borrowed under leases. The interest paid will be shown under
    operating activities.
    - Dividends paid to equity holders are generally financing activities.