Professional Documents
Culture Documents
Introduction
Over the years, the majority of Financial Accounting 2 examination candidates have made
common mistakes in answering examination questions. Some candidates do so because they had
simply not prepared for the examinations. For others, despite their preparations, they do not
know they are doing the wrong thing. Consequently, sitting after sitting, unsuccessful candidates
repeat the same mistakes.
The purpose of this circular is to use areas covered by the April 2014 examination paper to:
a) give candidates an appreciation of the focus of Financial Accounting 2
b) provide specific guidance to candidates on presentation and disclosure of financial
information on the face of financial statements and in notes to financial statements
c) draw candidates’ attention to specific problems in accounting procedures that under-pin
the preparation of certain financial statements
d) initiate some dialog on areas where candidates have no clue where they are going wrong.
Subsequent Financial accounting courses such as Financial Accounting 2 may deal with some
accounting procedures, but the main focus is financial reporting. Presentation and disclosure of
financial information in financial statements and related accounting treatment are prescribed by
accounting standards.
The Conceptual Framework and IAS 1: Presentation of Financial statements constitute the
foundation for financial reporting. The objective of IAS 1: Presentation of financial statements is
stated as follows:
“Objective
1. This Standard prescribes the basis for presentation of general purpose financial
statements to ensure comparability both [Refer: Conceptual Framework paragraphs
QC20-QC25] with the entity’s financial statements of previous periods and with the
financial statements of other entities. It sets out overall requirements for the presentation
of financial statements, guidelines for their structure and minimum requirements for their
content.
As a result of the prescribed structures and contents of financial statements if you access
financial statements of listed companies on their websites, you will be struck by their similarities.
There are, however no such similarities in answers submitted to Financial accounting 2
examinations.
The April 2014 and previous examination papers required candidates to prepare financial
statements for
a) Sole proprietorship,
b) Partnerships, and
c) Companies
b) a statement of profit or loss and other comprehensive income for the period;
[Refer: paragraphs 81-105]
“51 An entity shall clearly identify each financial statement and the notes. In addition, an
entity shall display the following information prominently, and repeat it when
necessary for the information presented to be understandable:
(a) the name of the reporting entity or the other means of identification, and any change in
that information from the end of the preceding reporting period;
(b) whether the financial statements are of an individual entity or group of entities;
(c) the date of the end of the reporting period or the period by the set of financial
statements or notes;
(e) the level of rounding [Refer: paragraph 53] used in presenting amounts in the financial
statements.
Statement of profit or loss and other comprehensive income for the period
The following is a complete template for the structure and contents of a statement of Profit or
loss and other comprehensive Income
ABC Limited
Statement of profit or loss and other comprehensive income for the year ended 31
December 20x2
20x2 20x1
R’000 R’000
Revenue 000 000
Cost of sales (000) (000)
Gross profit 000 000
Other income 000 000
Distribution costs (000) (000)
Administrative expenses (000) (000)
Other expenses (000) (000)
Finance costs (000) (000)
Share of profit of associates 000 000
Profit before tax 000 000
Income tax expense (000) (000)
Profit for the year 000 000
Other comprehensive income:
Items that will not be reclassified to profit or loss 000 000
Gains on property revaluation 000 000
Remeasurements on defined benefit plans
Gains/ (losses) on financial assets at fair value through other 000 000
comprehensive income
Credit risk component of designated financial liabilities (000) 000
Share of gain on property revaluation of associates
Income tax relating to items that will not be reclassified
Please Note
Workings for items appearing on the face of the financial statements should be clearly identified
as workings and should in no circumstances be confused with the prescribed presentation of
financial statements
Statement of changes in Equity
(a) total comprehensive income for the period, showing separately the total amounts
attributed to owners of the parent and to non-controlling interests;
(b) for each component of equity, the effects of retrospective application [Refer: IAS 8
paragraphs 14-27 and 50-53] or retrospective restatement [Refer IAS 8 paragraphs 41-
48 and 50-53] recognised in accordance with IAS 8; [Refer: Basis for Conclusions
paragraph BC74] and
(d) for the component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting from:
i) profit and loss;
ii) other comprehensive income; and
iii) transactions with owners in their capacity as owners, showing separately
contributions too owners and changes in ownership interests in subsidiaries that do
not result in a loss of control.
[Refer also: IFRs 10 paragraphs B97-B99]
ABC Limited
Statement of changes in equity for the year ended 31 December 20x2
The following are the most common problems with the Statement of changes in Equity.
i) A surprising number of candidates present a Statement of Financial Position where a
statement changes in Equity is required
ii) A large number of candidates include debt (debentures or loans) in the statement of
changes in Equity. Debt is not equity.
iii) Yet other candidates exclude equity items (e.g. General Reserve).
“An entity shall present current and non-current assets and current and non-current liabilities as
separate classifications in its statement of financial position in accordance with paragraphs 66-76
except when a presentation based on liquidity provides information that is reliable and more
relevant. When that exception applies an entity shall present all assets and liabilities in order of
liquidity.
(The exception referred to above applies to financial institutions like banks. Ordinarily the
financial statements you encounter in Financial accounting 2 examinations are not for financial
institutions.
The following is a pro-forma statement of Financial Position presented in conformity to IAS1:
Presentation of Financial Statements.
ABC Limited
Statement of Financial Position
Notes 20x2 20x1
R’000 R’000
Assets
Non-current assets 000 000
Property, plant and equipment 000 000
Goodwill
Other intangible assets 000 000
Investments in associates
Financial assets at fair value through other comprehensive income 000 000
The terminology used in IAS 1 apply particularly to companies. The scope paragraphs 2-6 of
IAS 1: Presentation of financial Statements indicate that reporting entities:
‘May need to amend the descriptions used for particular line items in the financial
statements and for the financial statements themselves.’
The equity section of a sole proprietorship and partnership statement of Financial Position should
reflect the types of equity that apply to these types of businesses. However, they should not
repeat the detailed reconciliations/ movements in the Statement of Changes in Equity.
The Statement of Changes in Equity of a partnership poses one of the greatest challenges to
Financial Accounting 2 candidates. For completeness however, we will present pro-forma
statements for both a sole proprietorship and a partnership.
The following are pro-forma Statements of Changes in Equity for a sole proprietorship and a
company:
P.Soko
Statement of changes in Equity for the year ended 31 December 20x5
Capital
$
Balance beginning of the year Xx
Additional investment Xx
Profit for the year Xx
Drawings (Xx)
Balance end of year Xx
JXY Partnership
Statement of Changes in equity for the year ended 31 December 20x6
Capital General Reserve Current Profit or loss Total
Accounts Accounts App. A/c
R R R R R R R
Balances at 1 January 20x6 xx xx (xx) xx xx -- xx
Total comprehensive loss for the year (xx) (xx)
Salaries to partners xx xx (xx)
Interest on capital xx xx (xx)
Interest on current accounts (xx) xx (xx)
Interest on drawings (xx) (xx) xx
Partners’ share of total
Comprehensive loss (1) (xx) (xx) xx
Drawings (xx) (xx) -- (xx)
Balances at 1 December 20x6 xx xx (xx) (xx) xx -- xx
The most common problems with the Statement of Changes in Equity of a partnership are the
following:
i) Many candidates have no clue about the structure and contents of the statement
ii) Some candidates treat drawings as an appropriation of profits.
iii) Some candidates adjust partners’ capital accounts with Interest on capital accounts.
Partners’ salaries interest on capital accounts, interest on partners’ current accounts,
interest on drawings and partners’ share of residual profits are Profit and Loss
Appropriation Account items that affect Partners’ Current accounts and not the Partners’
Capital Accounts.
Xx
Cash generated by operations Xx
Interest received Xx
Interest paid (Xx)
Dividends received Xx
Dividends paid (Xx)
Normal tax paid (Xx)
Net cash inflow from operating activities Xx
R’000
Cash flows from operating activities
Cash receipts from customers Xx
Cash paid to suppliers and employees Xx
Cash generated by operations Xx
Interest received Xx
Interest paid (Xx)
Dividends received Xx
Dividends paid (Xx)
Normal tax paid (Xx)
Net cash inflow from operating activities Xx
Xx
The following are the most common problems with the statement of Cash Flows;
i) Under Cash Flows from operating activities most candidates confuse the direct method.
However, well a candidate presents the indirect method if the direct method is required,
the candidate gets no credit for the misdirected effort.
ii) Many candidates are confused about the contents of,
‘ Cash Flows from Investing Activities’ and
‘Cash Flows from Financing Activities’.
Many candidates go straight to consolidating on a line-by-line basis the parent and subsidiary
company items without first eliminating common items. A candidate who does not eliminate
common items in the consolidation process is not likely to get more than a third of the marks on
a consolidation question. Such a candidate is ordinarily not prepared for the examination.
The April 2014 examination provided candidates with a template for efficiently analysis and
interpreting financial statements. In their wisdom some candidate decided to abandon the
template, and in the process omit to provide some of the information that was required.
Other topics
Beside the topics that have discussed above the April 2014 examination paper had questions on
other topics. It is possible to go into an examination room on a subject like IOBZ Financial
Accounting 2 with in depth mastery of every topic. Know something about every topic. On the
topics you know the most about, you should be able to get a distinction. On the topic you know
the least about you should be able to score at least 50%. This way you are guaranteed of a pass.
This circular is not a substitute for acquiring the required materials for your studies.
Consequently, it is different to imagine a candidate passing a question on IAS 1: Presentation of
Financial Statements without knowledge of the contents of the standard (In other words, get a
copy of the standard). It is difficult to imagine a candidate passing a question on IAS 7:
Statement of Cash Flows without knowledge of the contents of the standard. For most
accounting standards, a student needs literature that paraphrases and illustrates the application of
the standards. It is not a quick fix for those who are not able to prepare for the examination. It is
an attempt at answering the following questions from frustrated hard working candidates who are
wondering
Where am I really getting it wrong?
Ndiri kumborasika papi chaizvo?
Kanti ngilahleka ngaphi?
You may still have these questions after reading through the circular, write back and we will try
to assist.
ABC Ltd
Statement of cash flows for the year ended 31 December 20x5
Cash flows from operating activities Notes R’000
Notes R’000
Cash flows from financing activities
Proceeds from rights issue Xx
Proceeds from long-term borrowings Xx
Proceeds from short-term borrowings Xx
Repayment of long-term borrowings (Xx)
Net cash inflow from financing activities xx
Notes
20x5 20x4
R’000 R’000
1. Components of cash and cash equivalents
Current account Xx Xx
Call account Xx Xx
Cash and cash equivalents per statement of financial position Xx Xx