THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI
LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201
PRINCIPLES OF FINANCIAL AND COST ACCOUNTING
Nadeeshani Dissanayake
B.Sc. Accounting (Sp), First Class, ACA, ACMA, CPA (Aust)

At the end of this session the students should be able to:
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Understand the need for conceptual framework for financial reporting
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Understand the objective of financial reporting
Understand the fundamental assumptions in FR
Describe the qualitative characteristics of financial information
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Define the elements of financial statements
Understand the components of financial statements

WHAT IS A CONCEPTUAL FRAMEWORK?
“A conceptual framework is a coherent system of inter-related objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, limits of financial accounting and financial statements.”
(FASB Definition)
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1.
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3.
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7.
To assist in the development of A/Ss and review of existing standards.
To assist in promoting harmonization of regulation,
Accounting Standards and procedures relating to
Financial Reporting
To assist preparers of Financial Statements in applying accounting standards
To assist auditors in forming an opinion
To solve new practical accounting problems quickly.
To increase financial statements users’ understanding and confidence in financial reporting.
To enhance, comparability among companies’ Financial
Statements.
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THE MATTERS DEALT WITHIN THE
FRAMEWORK
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The objectives of financial statements
Underlying assumptions
Qualitative characteristics of F/Ss
The elements of F/Ss
The definition and recognition of the elements of F/Ss
Measurement of the elements of the F/Ss
Concepts of capital and capital maintenance
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“ Provide financial information about the reporting entity that is useful to existing and potential investors and other creditors in making decisions about providing resources to the entity”.
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Financial statements prepared for this purpose meet the common needs of most users who don’t have the right to demand information and who have a reasonable knowledge of business and economic activities
Financial statements also show the results of the stewardship of management or the accountability of management.
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FINANCIAL REPORTS AND USERS
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Underlying Assumptions
Accrual Basis –
In order to meet the objectives, financial statements are prepared on the accrual basis of accounting . What is accrual basis of accounting? What is cash basis?
Effects of transactions and other events are recognised when they occur ( not when cash or cash equivalents received or paid)
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Underlying Assumptions
Going Concern –
The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future.
Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
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QUALITATIVE CHARACTERISTICS
Primary Qualitative Characteristics of Accounting
Information
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Relevance
:
Capable of making a difference in users’ decision
Information should have the predictive value (predictive role), Feedback value (Confirmatory role).
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Faithfully represent /Reliability
:
Financial reports represent economic phenomena in words and numbers.
To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete ,
 neutral and free from error .
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Completeness
Neutrality (unbiased)
Free from errors
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QUALITATIVE CHARACTERISTICS
Enhancing Qualitative Characteristics
Comparability: information should be presented in a manner that can be compared the other competitive organizations, information with the industry average figures.
Verifiability knowledgeable and independent observers could reach consensus
Materiality
Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.
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Understandability : i nformation should be presented in a manner that can be easily understood by an average man who is having a general idea about business
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Timeliness
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is.
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There are five elements in the Financial
Statements.
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Assets
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Liabilities
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Equity
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Income
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Expenses
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ELEMENTS OF FINANCIAL STATEMENTS
ASSETS.
A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Main features
• Controlled by the enterprise
• Past Events
• Future economic benefits
Group Work : A Printing Machine, Office Building, employees, elephant, Cash, stationery – pens/clips/pins, teak trees, bees
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ELEMENTS OF FINANCIAL STATEMENTS
LIABILITIES.
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Main features
•Present obligations
•Transfer economic benefits
•Past Transactions or Events
Group Work - annual reports
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Elements of Financial Statements
INCOME. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
EXPENSES. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Group Work - annual reports
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ELEMENTS OF FINANCIAL STATEMENTS
EQUITY.
The residual interest in the assets of the enterprise after deducting all its liabilities.
Group Work - annual reports
Basic Accounting equation and double entry system
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COMPONENTS OF FINANCIAL STATEMENTS
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Statement of Financial Position
Income Statement
Statement of Comprehensive Income (including other Comprehensive Income)
Statement of Changes in Equity
Statement of Cash flows
Notes
Group Work - annual reports
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XYZ Group – Statement of Financial position as at 31 December 2011
31 Dec 2011 31 Dec 2010
ASSETS
Non-current assets
Property, Plant and equipment
Goodwill
Other intangible assets
Investments in associates
Financial assets
Total non-current assets
Current Assets
Inventories
Trade receivables
Other current assets
Cash and cash equivalents
Total current assets
Total assets x xx x x x x x x x x x x x x x x x x x xx x x x x
Continued……
….
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STATEMENT OF FINANCIAL POSITION
31 Dec 2011 31 Dec 2010
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Stated capital
Retained earnings
Other components of equity x x x x x x x
X x x x x
Non-controlling interest
Total equity
Non –current liabilities
Long –term borrowings
Deferred tax
Long –term provision s
Total non-current liabilities x x x x x x x x
Continued……
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….

STATEMENT OF FINANCIAL POSITION
Current liability
Trade and other payables
Short-term borrowings
Current portion of long – term borrowing
Current tax payable
Short-term provisions
Total current liabilities
Total liabilities
Total equity and liabilities x x xx x x x x x x x xx x x x x x
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STATEMENT OF COMPREHENSIVE INCOME
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Finance costs
Share of profit of associates
Profit before tax
Income tax expense
Profit for the year from continuing operations
Loss for the year from discontinued operations
PROFIT FOR THE YEAR
2011 x
(x) x x x x x
(x) x x x x x
-
2010 x
(x) x x x x x
(x) x x x x
(x) x
….

STATEMENT OF COMPREHENSIVE INCOME
2011 2010
PROFIT FOR THE YEAR x x
Other comprehensive income:
Exchange differences on translating foreign operations
Investments in equity instruments
Cash flow hedges
Gains on property revaluation
Actuarial gains (losses) on defined benefit pension plans
Share of other comprehensive income of associates
Income tax relating to components of other comprehensive income
Other comprehensive income for the year, net of tax
TOTLA COMPREHENSIVE INCOME FOR
THE YEAR x x x x
(x) x
(x)
(x) x x
(x)
(x) x x x
(x) x x
Continued……
….
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STATEMENT OF COMPREHANSIVE INCOME
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR
Profit attributable to
Owners of the parent
Non-controlling interest
2011 x x x x
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interest x x x
Earnings per share (in currency units)
Basic EPS
Diluted EPS x x
2012 x x x x x x x x x
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XYZ Group – Statement of changes in equity for the year ended 31 December 2011
Balance at 1 Jan 2010
Changes in accounting policy
S.c
api tal
x
Retai ned earni ngs x
(x)
Transla tion of foreign operati ons x
Inve. in equity instru.
x
Cash flow hedge s x x x x x x Restated balance
Changes in equity for 2010
Dividends
Total Comprehensive Income for the year
Balance at 31 Dec 2010
Changes in equity for 2011
Issues of share capital
Dividend
Total comprehensive income for the year
Transfer to retained earnings x x x x x x x x x
Balance at 31 Dec 2011 x x x x x
Reval uation surplu s x x x x x
Total NC
I
Tota l
Equ ity x x x x x x x x x x x x x x x
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