CHAPTER 4: PREPARING THE FINANCIAL STATEMENTS
Financial statements – structured representation of the financial position and financial performance of an entity
Accounting policies – the specific principles, bases, conventions, rules and practices applied by an entity in preparing financial
statements
STATEMENT OF FINANCIAL POSITION
-
the financial position of an enterprise as of a given date
economic resources that an enterprise controls, its financial structure, its liquidity and solvency and its capacity to adapt to
changes in the environment in which it operates (financial flexibility)
Assets = Liabilities + Equity
o Equity includes the cumulative (ending) balance of OCI
Current and noncurrent classification
o Unless presentation based on liquidity provides information that is more relevant to the users
o Ability of the enterprise to meet its current obligations
o Net assets – working capital and long-term operations
o Expected dates of realization of assets and settlement of liabilities
Current Assets:
1.
2.
3.
4.
Cash and Cash Equivalents
Expected to be realized/collected within the normal operating cycle
a. Trade receivables
b. Prepaid expenses
c. Normal operating cycle – the time between the acquisition of assets for processing and their realization in cash
and cash equivalents
Expected to be realized/collected within 12 months after the reporting period
a. Current portion of long-term receivables or noncurrent financial assets
Held for trading
a. Inventories
b. Financial assets at fair value through profit or loss
c. NCAHS
Noncurrent Assets:
1.
2.
3.
4.
Property, plant and equipment
Intangible assets
Investment property
Financial assets that are not expected to be realized in cash in the entity’s normal operating cycle or within 12 months
after the reporting period
Current Liabilities:
1.
2.
3.
4.
Held for trading
a. Bonds payable at fair value through profit or loss
Expected to be settled within the normal operating cycle
a. Trade/ Accounts payable
b. Accrued expense
c. Income tax payable
Expected to be settled within 12 months after the reporting period
a. Dividends payable
The entity does not have an unconditional right to defer the settlement of obligation for at least 12 months after the
reporting period
PFRS 5: NON-CURRENT ASSETS HELD FOR SALE (NCAHS)
Non-current Asset – an asset that does not meet the definition of a current asset
Disposal group – a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities
directly associated with those assets that will be transferred in the transaction
Conditions:
1.
2.
3.
Realized through sale
The management is committed to a plan to sell the asset
a. Actively looking for a buyer
b. Activities to locate a buyer
c. Reasonable quotation price
The sale is highly probable
a. Expected to occur within one year from the change of use
Measurement:
1.
2.
3.
At the lower of carrying amount or fair value less cost of disposal (cost to sell)
a. Impairment loss is recognized if fair value less cost to sell < current (carrying) value
Not subjected to depreciation and amortization
Gain  not recognized at initial recognition
a. If fair value less cost to sell > carrying amount, the difference is not recognized
b. Subsequent to initial recognition (recognized) – maximum amount of recovery = cumulative impairment loss
Presentation:
1.
2.
3.
Noncurrent assets will not be reclassified as current assets until they meet the criteria to be classified as held for sale
Held for sale = current assets
If the noncurrent asset is a disposal group – assets and liabilities shall be presented separately (cannot be offset)
DISCONTINUED OPERATION


Retroactive classification – prohibited as a discontinued operation when the criteria are met after the end of the reporting
period
Profit or loss
1. NCAHS – impairment loss
2. Disposal of geographical area/ location, major line segment, cash generating unit, or part of operation
3. Purchase of subsidiary with a view of resale
Components:
1.
2.
Actual disposal of the operation
Operation that met the criteria to be classified as held for sale
Presentation:

Income statement - single amount
a. Total of post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognized on the
measurement to fair value less cost to sell or on the disposal of the assets or disposal group constituting the
discontinued operation
PAS 10: EVENTS AFTER THE REPORTING PERIOD
Events after the reporting period (subsequent events) – events, whether favorable or unfavorable, that occur between the end of
reporting period and the date on which the financial statements are authorized for issue
1.
2.
Type I (Adjusting events)
 Provide evidence of conditions that exist at the end of the reporting period
 Adjusted and disclosed
Type II (non-adjusting events)
 Indicative of conditions that arise after the end of reporting period
 Disclosed
PAS 33: EARNINGS PER SHARE
Earnings per share – the amount attributable to every ordinary shares outstanding during the period
Ordinary share – an equity instrument that is subordinate to all other classes of equity instruments
Presentation:


Required for public entities
Face of the income statement (continuing operations)
Basic Earnings per Share:
Earnings Value per Share =
(Net Income) Profit attributable to Ordinary Shares
Weighted Average Number of Outstanding Ordinary Shares
Net Profit
xxx
Less: Dividends on preference shares
(Total par value of preference shares * dividend
rate)
xxx
Profit attributable to Ordinary Shares
xxx


Cumulative preference share – current year dividend is deducted, whether declared or not
Noncumulative preference share – current year dividend is deducted, only if there is a declaration
PAS 7: STATEMENT OF CASH FLOWS
Statement of Cash Flows – a component of financial statements summarizing the operating, investing and financing activities of an
entity


Purpose: to provide relevant information about cash receipts and cash payments of an entity during a period
a. Inflows (receipts)
b. Outflows (distributions; payments)
Except for Cash Equivalent transactions (purchases)
Operating Activities – cash flows derived primarily from the principal revenue producing activities of the entity
a.
Working capital (current assets – current liabilities)
Normal operations of the business
Profit or loss
Collections from customers
1. Cash sales
2. Collection of accounts receivable
3. Recovery of accounts receivable
b.
c.
d.
e.
Payment to suppliers
1. Inventories
2. Accounts payable
Payment to employees for wages and salaries
Payment to government for taxes
Payment to lenders for interest
NOTE:
Current assets – Operating
Non-current assets – Investing
Current liabilities – Operating
Non-current liabilities – Financing
Equity – Financing
Methods:
a. Direct method – enumerates the major classes of gross operating cash receipts and payments
- Based on income statement accounts and changes in account balances in the statement of financial position
- Sales revenue (on account, if silent)
b. Indirect method – reconciliation of profit or loss before income tax to operating cash flows
- Non-cash operating income and expenses
Net Income before Tax
P xx
Non-cash expenses:
Depreciation expenses (PPE)
xx
Amortization expenses (Intangible assets)
xx
Bad Debts expense
xx
*AR gross @ working capital
Amortization on Discount on Bonds/ Notes payable
xx
Amortization on Premium on Bonds/ Notes payable
(xx)
Non-cash income:
Gain on sale of equipment
(xx)
Unrealized gain – Profit or loss
(xx)
Increase in AR (gross)
(xx)
Decrease in Interest receivable
xx
Decrease in AP
(xx)
Increase in Salaries Payable
xx
Net Cash Provided (Used) in Operating Activities
P xx
- Current assets – inverse
- Current liabilities – direct
Investing Activities – cash flows derived from the acquisition and disposal of long-term assets and other investments not included in
cash equivalent
Proceeds from Sale of equipment
Purchase of Patent
Purchase of FVTOCI
Sale of FVTOCI
Purchase of Investment in Associate
Net Cash Provided (Used) in Investing Activities
P xx
(xx)
(xx)
Xx
(xx)
P xx
Financing Activities – cash flows derived from the equity capital and borrowings of the entity
Proceeds from issuance of bonds/ long term notes/ mortgage payable
Proceeds from issuance of shares
Proceeds from sale of treasury shares
Purchase of treasury shares
Retirement of bonds
Payment of bank loans
Net Cash Provided (Used) in Financing Activities
P xx
xx
xx
(xx)
(xx)
(xx)
P xx
Net Change in Cash
Beginning cash balance
Ending cash balance
P xx
xx
P xx