CMA

PART1 , UNIT 1

Handouts
FIRST EDITION

CMA

Mohamed Samir Rashed CMA , IFRS

APRIL2023 Mohamed Samir
 UNIT

Mohamed Samir Rashed CMA , IFRS

Mohamed Samir
1-Limitations of the Balance Sheet

- The balance sheet shows a company’s

financial position at a single point in time;
accounts may vary significantly a few days
before or after the publication of the balance
sheet.
-Many balance sheet items, such as fixed assets,
are recorded at historical costs, which may not
equal their fair value.
-The preparation of the balance sheet requires
estimates and management judgment.
-The balance sheet omits many items that
cannot be recorded objectively but have
financial value to the company.

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 2- Examples of off-balance- sheet
financing include

1. Operating leases. The asset itself is kept on the

lessor’s balance sheet and the lessee reports
only the required rental expense for use of the
asset.

1. Factoring receivables with recourse. The firm

remains contingently liable to the finance
company in the case of debtor default and the
contingent liability does not have to be
reported on the company’s balance sheet.

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 NOTE

Special purpose entities. A firm may

create another firm for the sole purpose of
keeping the liabilities associated with a
specific project off the parent firm’s books.

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 NOTE

Joint venture. Generally accounted for on

the equity basis; hence, the joint venture’s
debts are not reflected as debt of the
members of the joint venture.

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 Limitations of the Income Statement

The income statement does not always show all

items of income and expense. Some of the
items are reported on a statement of other
comprehensive income and not included in the
calculation of net income.

The financial statements report accrual-basis

results for the period. The company may
recognize revenue and report net income
before any cash was actually received.

For example, the data from the income statement

itself is not sufficient enough for assessing liquidity.
This statement must be viewed in conjunction with
other financial statements, such as the balance
sheet and statement of cash flows.

The preparation of the income statement

requires estimates and management judgment.
Mohamed Samir Rashed CMA , IFRS
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 the major items included in other
comprehensive income

The effective portion of a gain or loss on a

hedging instrument in a cash flow hedge

Unrealized holding gains and losses due to

changes in the fair value of available-for-sale
debt securities

Translation gains and losses for financial

statements of foreign operations

Certain amounts associated with accounting

for defined benefit postretirement plans

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The accounting for stock dividends
depends on the percentage of new shares
to be issued. Mohamed Samir Rashed CMA , IFRS
Mohamed Samir

An issuance of shares less than 20% to 25% of

the previously outstanding common shares
should be recognized as a stock dividend.

An issuance of more than 20% to 25% of the

previously outstanding common shares should be
recognized as a stock split in the form of a
dividend.

In accounting for a stock dividend, the fair value

of the additional shares issued is reclassified
from retained earnings to common stock (at par
value) and the difference to additional paid-in
capital

For a stock dividend that is accounted for as a

stock split in the form of a dividend, the par value
of the additional shares issued is reclassified
from retained earnings to common stock.
 Limitations of the Statement of Changes
in Equity

The financial statements report accrual-basis

results for the period. The company may
recognize revenue and/or expense and report
net income before any cash was actually received
and/or paid.

Hence, the data for retained earnings is not

sufficient for assessing the amount actually
available to be reinvested in the company or to
pay debt.

The statement of changes in equity illustrates a

company’s equity based on a specific time period;
equity may vary significantly a few days before
or after publication of the statement.

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 Limitations of the Statement of Cash Flows

A cash flow statement is not sufficient for

forecasting the profitability of a firm as non-cash
items are not included in the calculation of cash
flow from operating activities.

A cash flow statement may not represent the true

liquid position of an entity.
Hence, decisions regarding large expenditures
could be based on misconceived information when
decisions are based only on the statement of cash
flows.

This statement must be viewed in conjunction with

other financial statements, such as the balance
sheet and the income statement.

Information can be manipulated in the statement

of cash flows. For instance, management can
schedule vendor payments to occur after year end
to increase net cash flows reported on the
statement of cash flows.
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 NOTE

Direct method.

The presentation of the major classes

of operating cash receipts (such as
receipts from customers)
minus the major classes of operating
cash disbursements (such as cash paid
for merchandise) is best described as
the
Mohamed Samir Rashed CMA , IFRS
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 the five-step model for recognizing
revenue from contracts with customers.

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in

the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the

performance obligations in the contract.

Step 5: Recognize revenue when (or as) a

performance obligation is satisfied.

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 Revenue is recognized for a contract with
a customer if all of the following criteria
are met:

1. The contract was approved by the parties.

2. The contract has commercial substance.
3. Each party’s rights regarding (a) goods or
services to be transferred and (b) the payment
terms can be identified.
4. It is probable that the entity will collect
substantially all of the consideration to which it
is entitled according to the contract

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 It is accounted for as a separate contract
if the following conditions are met:

The scope of the contract increases

because of the addition of promised
goods or services that are distinct, and

The price of the contract increases by a

consideration amount that reflects the
entity’s standalone selling prices of the
additional promised goods or services.

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 factors should be considered in assessing
whether a contract includes a significant
financing component:

The difference between

1. the cash selling price of the promised
goods or services and
2. the amount of consideration to be
received

The combined effect of

1. the expected time between the payment

and the delivery of the promised goods
or services and
2. market interest rates

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The transaction price should not be
adjusted for the effect of the time value
of money if

1-The time between the payment and the

delivery of the promised goods or services to
the customer is 1 year or less
2-The customer paid in advance and the
transfer of goods or services is at the
discretion of the customer
a-An example is a bill-and-hold contract in
which the seller provides storage services for
goods it sold to the buyer.
3-A substantial amount of the consideration
promised is variable and its amount or timing
varies with future circumstances that are not
within the control of the entity or the
customer
a-An example is consideration in the form of a
sales-based royalty. Mohamed Samir Rashed CMA , IFRS
Mohamed Samir
the contract price may vary because of
the following:

a) Refunds due to a right of return provided to

customers
b) Sales incentives
c) Prompt payment discounts
d) Volume discounts
e) Other uncertainties in contract price based
on the occurrence or nonoccurrence of some
future event

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Variable consideration is estimated using
one of the following methods:

a) The expected value is the sum of

probability-weighted amounts in the range of
possible consideration amounts. This method
may provide an appropriate estimate if an
entity has many contracts with similar
characteristics.

b) The most likely amount is the single most

likely amount in a range of possible
consideration amounts. This method may
provide an appropriate estimate if the
contract has only two possible outcomes; e.g.,
a construction entity either will receive a
performance bonus for finishing construction
on time or will not.
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 NOTE

The volume discount may be applied

(a) prospectively on additional goods

purchased in the future or

(b) retrospectively on all goods

purchased to date.

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If the standalone price is not directly
observable, it must be estimated. The
following are suitable approaches:

1) Adjusted market assessment. An entity

evaluates the market in which it sells goods or
services and estimates the price that a
customer in that market would be willing to pay
for them.
a) For example, the prices of competitors for
similar goods or services adjusted for the
entity’s costs and margins are estimates of
standalone selling prices.
2) Expected cost plus an appropriate margin. An
entity forecasts its expected costs of
satisfying a performance obligation and adds
an appropriate margin for that cost.
 3) Residual. An entity estimates the standalone
selling price by reference to the total transaction
price minus the sum of the observable standalone
selling prices of other goods or services promised
in the contract.

a) The residual approach may be used only in

limited circumstances.

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 NOTE
Control of an asset is transferred
when the customer

1) Has the ability to direct the use of the

asset and
2) Obtains substantially all of the
remaining benefits (potential cash
flows) from the asset

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 indicators of the transfer of control should
be considered:

i) The entity has a present right to payment for

the asset.
ii) The customer has legal title to the asset.
iii) The entity has transferred physical
possession of the asset.
iv) The customer has the significant risks
and rewards of ownership of the asset.
v) The customer has accepted the asset.

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 EXAMPLE

Examples of output methods include

(1)appraisals of results achieved,

(2) milestones reached,
(3)units produced, and
(4)units delivered

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 NOTES

Notes about Statement of cash-flows NOTES

a. Interest paid and received to be reported in operating activity.

b. Dividends paid to shareholders to be reported in financing
activity.
c. Purchase of equipment to be reported in investing activity.
d. Under equity method, increasing investment in the investee,
will result in increasing non cash income which should be adjusted
in the SCF.
e. To evaluate the corporation’s solvency, the most important
item is the cash flows from operating activity.
f- Most entities apply the indirect method because the
reconciliation must be prepared regardless of the method
chosen.
g-The statement of cash flows is not designed to provide
information with respect to the efficient and
profitable use of the firm’s resources.
H-Cash receivable from the issue of common stock‫دي هتالقيها في‬
‫ في اسئلة الكاش فلو ( هنا الفلوس لم يتم استالمها‬39 ‫) سؤال رقم‬

Mohamed Samir Rashed CMA , IFRS

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 NOTES

Stockholder’s Equity NOTES

a. Treasury stock is a contra account recorded at Par value.

b. Stock split reduces the par value of each stock and increases
the number of the shares.
c. When small stock dividends are declared (10 – 20%) RE is
debited by the FMV of the stock.
d. Stock dividends are considered reclassification of different
equity account
e. Property dividends is measured at the market value on the
declaration date.
f. At the date of declaration of cash / property dividends, RE
account is decreased.
g. At the time of payment of dividends, no effect on SHE
accounts.
h. Changing of inventory valuation is change in accounting
principal and hence to be reported retrospectively in the FS.

Mohamed Samir Rashed CMA , IFRS

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 NOTES

Balance Sheet NOTES

a. Operating leases is a part of off-balance sheet financing.

b. Noncurrent debt should be classified as current if it matures
within one year and will be retied through use of current assets.
c. A/R classified as current if expected to be collected within one
year or operating cycle whichever is longer.
d. Off-balance sheet debt includes any type of liability for which
company is responsible but doesn’t appear on the balance sheet.
Such as the amount due in the future years on operating lease.
e. Prepaid expenses are reported in the balance sheet by the cost
(minus) expired portion.
 NOTES

Income statement NOTES

a. GOGS = COGM+B.Inv -E.Inv

b. GOS = BInv+DM+DL+MOH-EInv.
c. GOGM = DM+DL+MOH+B.WIP-E.WIP
d. Revenue that results from changes in
estimates, shall be reported in the other
revenues and gain section in the current period
income statement

Mohamed Samir Rashed CMA , IFRS

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 NOTES

Revenue recognition NOTES PART 1

a.Under using % of completion (input method), when the
cost cannot be reasonably estimated, and the cost could be
recovered, then the revenue could be recognized to the
extent to the cost incurred.
b.The transaction price should be adjusted for the effect
of the time value of money when the contract
includes a significant financing component. The interest
income or expense is recognized using the
effective interest method. Interest income or expense
must be presented in the income statement
separately from revenue from contracts with customers
c-The standalone selling price is the price at which an
entity would sell a promised good or service
separately to a customer. The best evidence of a
standalone selling price is the observable price of a
good or service when it is sold separately in similar
circumstances and to similar customers
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 NOTES

Revenue recognition NOTES PART2

b. In the input method, revenue recognized in the last year

of the contract is the total amount of the contract amount
minus the previous % of the revenue recognized the
previous years.
c. Short-term debt which is refinanced by long-term debt
should be reclassified as long-term liability.
d. When the outcome of the contract cannot be reasonably
measured but the cost incurred satisfying the
performance obligation are expected to be recovered,
revenue is recognized to the extend to the cost incurred
based on a zero-profit margin.
e. An entity is recognizing revenue when it satisfies a
performance obligation by transferring a promised good
or service to a customer.

Mohamed Samir Rashed CMA , IFRS

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 NOTES

Comprehensive income (OCI) NOTES

a. There are two formats of statement of comprehensive

income:
i. In a continuous financial statement
ii. Two separate but consecutive financial statements
b. Comprehensive include all changes in equity excluding
investment by owners (distribution to owns and from
owners)

Mohamed Samir Rashed CMA , IFRS

Mohamed Samir
BY / MOHAMED SAMIR
 Mohamed Samir Rashed
CMA , IFRS

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