AC100 Elements of Accounting and Finance - Financial Accounting Notes

Table of Contents

Section 1: Statement of Financial Positions (elements and template) 3

Section 2: Income Statement (elements and templates) 4

Section 3: Double-entries for Adjusted Accounts 5

Accrued expense 5

Bad debts written off 5

Bonus shares 5

Cost of goods sold 5

Depreciation 5

Disposal 5

Dividends 6

Goodwill 6

Impairment loss 6

Interest 7

Inventory write-downs (when NRV < initial cost) 7

Long-term borrowings 7

Prepayments 7

Provision for doubtful debt 7

Follow-up of provision for doubtful debt 7

Release of provision for doubtful debt 8

Retained earning 8

Revaluations 8

Shares 8

Tax expense 8

VAT (primarily borne by the ultimate consumer) 8

Section 4: Cash Flow Statement 10

Section 5: Consolidated Balance Sheet 11

Section 6: Financial Ratios calculations 14

Section 7: Theory Notes - Financial Accounting 17

Differences between financial accounting and management accounting 17

Different entities 17

Advantages and Disadvantages of limited liability 17

Sources of accounting rules 18

Usefulness of accounting information 18

Enhancing qualitative characterises 18

Accounting conventions 18

From inventory to cost of sales 18

Regular expenses v.s. provisions 18

Intangible non-current assets 19

Depreciation, amortisation and impairment 19

Valuation of inventory 19

Types of shares 19

Types of reserves 19

Bonus shares 19

Long-term borrowings 19

Importance of financial gearing 20

Cash flow and lifecycle of a business 20

Cash flow analysis 20

Identifying the growing firm 21

Section 1: Statement of Financial Positions (elements and template)

Title: Statement of Financial Position as at (Date)

Non-current assets

	Cost	Less: Acc.Dep/allowances for depreciation	NBV
Land/PPE/Vehicles

Current assets

Cash and equivalents

Trade and other receivables (accounts receivable)

Less: Provision for doubtful debt

Less: other provisions

Inventory

Prepayments

Non-current liabilities

Debentures

Notes payables (loan)

Current-liabilities

Trade and other payables (accounts payables)

Accrued expense

Net assets (total assets – total liabilities)

Equity

Share capital

Share premium

Retained earnings

Revaluation reserves

Capital Account

	Partner 1	Partner 2	Partner 3	Total
Opening capital
Profit share				Net income
Drawings
Closing capital				Total equity

!!! Check: Total equity = net assets

Section 2: Income Statement (elements and templates)

Sales (Less: return inwards)

Less: Cost of goods sold

Opening inventory

+ Purchases

+ purchase returns inwards

- return outwards

- Closing inventory

= Cost of goods sold

Gross profit (sales – cost of goods sold)

Less: operating expense

Depreciation expenses

Bad debts written off

Doubtful debt expense

(Provision on doubtful debt release)

Rent, insurance, heat and light, electricity, etc.

Wages

SG&A (Selling, General and Administration Costs)

Operating profit

Less: Interest, gains and loses

Interests

Gain/Loss on disposal

Profit before tax

Less: Tax

Income tax

Profit after tax

Less: dividend

Preference dividend

Net income

Section 3: Double-entries for Adjusted Accounts

Accrued expense

New accrued expense

Dr Expense (I/S)

Cr Accrued expense (SOFP)

Reversal of old

Dr Accrued expense (SOFP)

Cr Expense (I/S)

Bad debts written off

Dr Bad debt written off (I/S)

Cr Trade receivables (SOFP)

Bonus shares

Dr Reserve

Cr Share capital

Cost of goods sold

Dr Cash (SOFP)

Cr Sales revenue

Dr Cost of sales

Cr Inventory (SOFP)

Depreciation

Dr Depreciation (I/S)

Cr Accumulated depreciation (SOFP)

• Straight-line method:

$$Depreciation\ charge = \frac{Depreciation\ amount}{Useful\ economic\ life} = \frac{Initial\ cost - Residual\ value}{Useful\ economic\ life}$$

• Reducing balance:

$$Depreciation\ rate = 1 - \frac{\sqrt[{useful\ life\ of\ the\ asset}]{Residual\ value\ of\ the\ asset}}{Cost\ or\ Fair\ value\ of\ the\ asset}$$

$$D = 1 - \frac{\sqrt[n]{R}}{C}$$

Disposal

Gainorlossondisposal=Cashreceived(proceedsfromsale)NBVofPPE=Proceedsfromsale(CostofPPEAccumulateddepreciation)

Simplified method:

• Calculate accumulated depreciation of disposed asset

• Less cost of disposed PPE (SOFP)

  • Initial asset – disposed asset

• Less accumulated depreciation of disposed PPE (SOFP)

  • Initial accumulated depreciation – accumulated depreciation of disposed

• Add proceeds from sale to cash (SOFP)

• Add gain/loss on disposal (I/S)

  • Proceeds from sale – (Disposed at cost – accumulated depreciation of disposed)

• Calculate deprecation for remaining asset

  • Calculate the value of remaining asset

Dr Depreciation (I/S)

Cr Accumulated depreciation (SOFP)

Double entry method:

1. Write-off the cost of disposed PPE

Dr Disposal account (I/S)

Cr Non-current asset (SOFP)

2. Write-off the accumulated depreciation

Dr Accumulated depreciation (SOFP)

Cr Disposal account (I/S)

3. Proceeds from sale

Dr Cash (SOFP)

Cr Disposal account (I/S)

4. Move from disposal account to gain/loss on disposal

Dr Disposal account (I/S)

Cr Gain/loss on disposal (I/S)

Notes on gain/loss on disposal:

• Initial cost = accumulated depreciation + proceeds from sale + loss on disposal

Dividends

Dr Dividends paid --> Retained earnings (SOFP)

Cr Cash (Current Assets, SOFP) / Dividends payable (Current Liabilities, SOFP)

Goodwill

Dr Net asset acquired (SOFP)

Dr Goodwill Account (SOFP) (recognised as an asset only after an acquisition)

Cr Cash paid/shares issued (SOFP)

Impairment loss

Dr Impairment loss (I/S) = Recoverable amount – carrying amount (if recoverable amount < carrying amount)

Cr Asset (SOFP)

Interest

Dr Interest expense (I/S)

Cr Cash/interest payable (SOFP)

Inventory write-downs (when NRV < initial cost)

Dr Write down of inventory (Cost of sales or separate expense if it is exceptional) (I/S)

Cr Inventory (SOFP)

Long-term borrowings

Issue of loans

Dr Cash (SOFP)

Cr Loans (SOFP)

Repayment of loans and interests

Dr Interest...

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