module 3
STATEMENT OF FINANCIAL POSITION
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
STATEMENT OF CHANGES IN EQUITY
OTHER MATTERS
IAS 7 STATEMENT OF CASH FLOWS
PREPARING A STATEMENT OF CASH FLOWS
USEFULNESS OF CASH FLOW ACCOUNTING
INTERNAL CONTROL, AND THE ROLE OF
INTERNAL AND EXTERNAL AUDITORS
This Module covers the preparation of four key financial
statements for a limited liability company: the
statement of financial position, the statement of profit
or loss and other comprehensive income, the statement
of changes in equity and the statement of cash flows.
It also explains how to prepare a statement of cash
flows and why it provides useful information. Profit
does not always give a complete picture of an entity's
operations, as a business can be profitable but cannot
survive without cash.
The Module ends with a brief look at internal control
and the roles of the internal and external auditors.
FINANCIAL
STATEMENTS
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STATEMENT OF FINANCIAL POSITION
Context
IAS 1 Presentation of Financial Statements provides the suggested format for the statement of
financial position.
Learning example 3.1
Where in the statement of financial position would the following items be recognised?
(a) Goodwill
(b) Redeemable preference shares
(c) Loan to be repaid in three years' time
Solution 3.1
3: Financial statements 79
STATEMENT OF PROFIT OR LOSS AND OTHER
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COMPREHENSIVE INCOME
Context
The statement of profit or loss and other comprehensive income shows total comprehensive income
for the period. This consists of the reported profit for the period as well as other comprehensive
income – income and expenses that are not recognised through profit or loss.
Learning example 3.2
Dasha Co has made a profit for the year of $10m. During the year land with a cost of $5m was
revalued to $8m with the gain recorded in the revaluation surplus.
Required:
Calculate the total comprehensive income for the year.
Solution 3.2
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STATEMENT OF CHANGES IN EQUITY
Context
The statement of changes in equity (SOCIE) shows the movements on the equity and reserves
balances – share capital, retained earnings and revaluation surplus.
Learning example 3.3
The balances on Ed Co's share capital and reserves at the beginning of the year were as follows:
$m
Share capital 75
Revaluation surplus 5
Retained earnings 105
During the year ended 31 December 20X8, Ed Co reported total comprehensive income of $86m of
which $16m related to the revaluation of land and buildings.
Dividends of $40m were paid.
Required:
Prepare the statement of changes in equity for the year ended 31 December 20X8.
Solution 3.3
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84
OTHER MATTERS
Context
IAS 1 details the classification of items within the format of the statement of financial position.
3: Financial statements 85
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IAS 7 STATEMENT OF CASH FLOWS
Context
IAS 7 Statement of Cash Flows sets out the format of the statement of cash flows.
Learning example 3.4
Nero Co has a profit before tax of $140m after charging depreciation of $16m and finance expense
of $8m for the year ended 31 December 20X8. The tax expense was $32m. Working capital
balances are as follows:
20X8 20X7
$m $m
Inventories 62 58
Receivables 112 125
Payables 130 85
Tax payable 32 28
Required:
Calculate the net cash from operating activities, using the indirect method.
Solution 3.4
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IAS 7 STATEMENT OF CASH FLOWS
Context
IAS 7 allows two methods of arriving at net cash from operating activities – the direct and indirect
methods. The Standard also requires disclosure of information about cash and cash equivalents.
Learning example 3.5
Nero Co made sales of $350m for the year ended 31 December 20X8. Total expenses for the year
(cost of sales and operating expenses) were $202m, after charging depreciation of $16m. The
interest expense for the year was $8m. The tax expense was $32m. Working capital balances are
as follows:
20X8 20X7
$m $m
Inventories 62 58
Trade receivables 112 125
Trade payables 130 85
Tax payable 32 28
Required:
Calculate the net cash from operating activities, using the direct method.
Solution 3.5
Learning example 3.6
See Module Learning Examples.
Solution 3.6
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PREPARING A STATEMENT OF CASH FLOWS
Context
For the exam, candidates need to learn the format, and be able to calculate some of the figures in
the statement of cash flows. They also need to know whether a particular cash flow is included
under operating activities, investing activities, or financing activities.
Learning example 3.7
Bride Co has property, plant and equipment with a carrying amount of $460m at 1 January 20X8.
During the year depreciation of $48m has been charged, an asset with a cost of $80m was sold for
$70m making a profit on disposal of $12m and land was revalued from $50m to $90m. The closing
carrying amount of property, plant and equipment was $620m.
Required:
Calculate the cash spent on the purchase of property, plant and equipment.
Solution 3.7
Learning example 3.8
See Module Learning Examples.
Solution 3.8
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USEFULNESS OF CASH FLOW ACCOUNTING
Context
The statement of cash flows provides information that is not found in the other primary statements.
3: Financial statements 93
INTERNAL CONTROL, AND THE ROLE OF
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INTERNAL AND EXTERNAL AUDITORS
Context
Internal control within an entity is key to the integrity of the financial statements. Control activities
must be in place and will range from complex control account reconciliations to the use of
passwords to protect data. Senior management will also use high level analytical procedures to
provide a sense check on the financial statements.
In larger organisations, internal auditors will have a key role in ensuring that internal control
procedures are working. In contrast, the external auditor’s role is different – it serves to provide an
independent opinion on an entity’s financial statements and makes an assessment as to whether
those financial statements are true and fair. This is very useful for shareholders and other
stakeholders who may not be involved in the day to day running of the entity.
3: Financial statements 95
Reinforcement
Study Guide Module 3
Read through Module 3, paying attention to the items that are required to be
classified and disclosed by IAS 1.
Attempt the Quick Revision Questions within the Module and the Revision
Questions at the end of the Study Guide.
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