Edway - ACCA - FA - Chapter 1 - Introduction To Accounting

ACCA
Financial Accounting (F3)

(Chapter 1: Introduction to accounting)
Edway Academy
Đào Trường Đăng, ACCA, CPA
0982 762 707
For exams in September 2023, December 2023, March 2024 and June 2024
01.
Introduction to accounting
1
Chapter Overview
Introduction to
accounting
Nature, principles
Users of financial Types of business Corporate
and scope of Financial statements
statements entities governance
financial reporting
 Financial  Statements of
accounting; profit or loss;
 Management  Statement of
accounting financial position;
 Statement of
comprehensive
income;
 Statement of
changes in equity;
 Statement of cash
flows;
 Notes to financial
statements.
Edway.edu.vn Financial Accounting (F3) Introduction to accounting 3
Nature, principles and scope of financial reporting
What is financial
reporting? Decision Users of
making FSs
Business Financial
Recorded Analyzed Summarized
transactions statements
Key term
Financial Financial reporting is a way of recording, analysing and summarizing

reporting: transactions of a business.
2
Nature, principles and scope of financial reporting
What kind of
Historical
information information is provided
by financial reporting?
Financial Financial
performance position
“Financial accounting is mainly a method of reporting the financial performance and financial
position of a business. It is not primarily concerned with providing information towards the more
efficient running of the business. Although financial accounts are of interest to management, their
principal function is to satisfy the information needs of persons not involved in running the business.
They provide historical information.”
Under the form of statements in the

Financial statements
Statement of Statement of Statement of Notes to

Statement of Statement of
financial comprehensive changes in financial
profit or loss cash flows
position income equity statements
3
Financial statements - Statement of profit or loss (SoPL)
Notes 2022 2021
$000 $000
Revenue from contracts with customers 4 179,058 159,088

Cost of sales (136,549) (128,386)
Gross profit 42,509 30,702
Other operating income 13.1 2,435 2,548
Selling and distribution expenses (14,001) (12,964)
Administrative expenses 13.9 (18,290) (12,011)
Other operating expenses 13.2 (2,554) (353)
Operating profit 10,099 7,922
Finance costs 13.3 (1,366) (1,268)
Finance income 13.4 202 145
Profit before tax 8,935 6,799
Income tax expenses 15 (1,598) (1,233)
Profit for the year 7,337 5,566
Financial statements - Statement of profit or loss (SoPL)

Key term
Statement of A statement of profit or loss is a record of income generated and expenditure

profit or incurred over a given period. The statement shows whether the business has
loss: had more revenue (sales) than expenditure (profit) or vice versa (loss).
Revenue: Revenue is the income generated by the operations of a business for a period.
Expenses: Expenses are the costs of running the business for the same period.
Key term
Income: “Income is increases in assets or decreases in liabilities that result in increases

in equity, other than those relating to contributions from holders of equity
claims” (Conceptual Framework for Financial Reporting 2018, para. 4.68).
Expenses: “Expenses are decreases in assets or increases in liabilities that result in

decreases in equity, other than those relating to distribution to holders of equity
claims” (Conceptual Framework for Financial Reporting 2018, para. 4.69).
4
Financial statements - Statement of financial position (SoFP)
Note 31 Dec 2022 31 Dec 2021
$000 $000
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 17 32,979 24,329
CURRENT ASSETS
Inventories 22 26,027 23,830
Trade receivables 23 25,672 22,290
Cash and cash equivalents 24 17,528 14,916
TOTAL ASSETS 102,206 85,365
EQUITY AND LIABILITIES
EQUITY
Issued capital 25 21,888 19,388
Undistributed earnings 25 31,636 25,929
NON-CURRENT LIABILITIES
Loans and lease liabilities 26 22,147 23,313
CURRENT LIABILITIES
Loans and lease liabilities 27 2,832 3,142
Trade payables 28 23,703 13,593
TOTAL EQUITY AND LIABILITIES 102,206 85,365

Key term
Statement of The statement of financial position is simply a list of all the assets owned and
financial all the liabilities owed by a business as at a particular date.
position:
Statement of financial position
Total assets Liabilities Capital/ Equity
5
Key term
Assets: “An asset is a present economic resource controlled by the entity as a result of
past events. An economic resource is a right that has the potential to produce
economic benefits.”
(Conceptual Framework for Financial Reporting 2018, paras. 4.3 and 4.4)
Examples
of assets:
Buildings Factories Warehouse
Machineries Means of Inventories

transportation

Key term
Liabilities: “A liability is a present obligation of the entity to transfer economic resource as

a result of past events. An obligation is a duty of responsibility that the entity
has no practical ability to avoid.”
(Conceptual Framework for Financial Reporting 2018, paras. 4.26 and 4.29)
Examples
of
liabilities:
Trade payables Loans Bank overdraft
Statutory Salary for Lease

payables employee liabilities
6
Key term
Equity: “Equity is the residual interest in the assets of the entity after deducting all its
liabilities”
(Conceptual Framework for Financial Reporting 2018, para. 4.63)
Examples
of equity:
Issued capital Undistributed Capital reserve

earnings
Financial statements – Relationship between SoFP and SoPL
Statement of financial Statement of financial

position as at position as at
31 December 2021 31 December 2022
Statement of profit or loss for the year ended 31 December 2022
7
Financial reporting and Management reporting
Key term
How about Management Management accounting is a management information

Management reporting: system which analyses data to provide information as a basis
reporting? for managerial action.
The concern of a management accountant is to present
accounting information in the form most helpful to
management.
What are differences between

Financial reporting and
Management reporting?
Financial reporting and Management reporting

Financial accounts Management accounts
 Financial accounts detail the performance of an • Management accounts are used to aid management
organization over a defined period and the state of affairs record, plan and control the organization’s activities and to
at the end of that period. help the decision-making process.
 Limited liability companies must, by law, prepare financial • There is no legal requirement to prepare management
accounts. accounts.
 The format of published financial accounts is determined • The format of management accounts is entirely at
by local law, by International Accounting Standards and management discretion: no strict rules govern the way
International Financial Reporting Standards. In principle the they are prepared or presented. Each organization can
accounts of different organizations can therefore be easily devise its own management accounting system and
compared. format of reports.
 Financial accounts concentrate on the business as a • Management accounts can focus on specific areas of an
whole, aggregating revenues and costs from different organization’s activities. Information may be produced to aid
operations, and are on end in themselves. a decision rather than to be an end product of a decision.
 Most financial accounting information is of a monetary • Management accounts incorporate non-monetary

nature. measures. Management may need to know, for example,
number of items produced, etc.
 Financial accounts present an essentially historical picture • Management accounts are both an historical record and a
of past operations. future planning tool.
8
Users of financial information
Users of financial
information
Government
Public and
Investors Employees Lenders Suppliers Customers and their
others
agencies
 Profitability;  Profitability;  Whether return  Likelihood of  Ability of entity  Statistics;  Contribution to

 Future  Long-term on finance will payment on to continue  Size of local economy;
prospects; growth; continue to be time; supplying; company;  Information
 Likely risk and  Security of met;  Likelihood of  Profitability as  Growth rates; about trends in
return; their job;  Other payment at all; a measure of  Average the prosperity
 Chance of  Likelihood of providers and  Whether they value for payment of the entity;
capital growth; bonus; security of their should money of periods;  Range of
 Ability to pay  Number of debt; continue to goods bought  Foreign trade; products and
dividends. employees;  Likelihood of supply;  Profits made; services
 Ability to pay repayment of  Corporate provided.
retirement capital amount. income tax
benefits liability;
 Sales tax
liability
Types of business entities

3 main types of business
Sole trader Partnership Limited liability company
 A sole trader is a business  These are arrangements  Limited liability status means
owned and run by one between individuals to carry that the business’s debts and
individual, perhaps on business in common with the personal debts of the
employing one or two a view to profit. A partnership, business’s owners
assistants and controlling their however, involves obligations (shareholders) are legally
work. The individual’s to others, and so a partnership separate. The shareholders
business and personal affairs is usually governed by a cannot be used for the debts
are, for legal and tax partnership agreement. of the business unless they
purposes, identical. Unless it is a limited liability have given some personal
partnership (LLP), partners will guarantee.
be fully liable for debts and
liabilities.
9
Business types Advantages Disadvantages
 Limited paperwork and therefore cost in  Owner is personally liable for all debts
establishing this type of structure; (unlimited liability);
 Owner has complete control over the business;  Personal property may be vulnerable for
 Owner is entitled to profits and the ownership of debts and other business liabilities;
assets;  Large sums of capital are less likely to be
 Less stringent reporting obligations compared available to be a sole trader, leading to reliance
with other business structures – no requirement to on overdrafts and personal savings;
Sole Trader make financial accounts publicly available, no audit  May lead to long working hours without the
requirement; normal employee recreation leave and other
 Can be highly flexible. benefits;
 May be issues of continuity of business in
the event of death or illness of the owner.

 Less stringent reporting obligations – no  Partners are jointly personally liable for all
requirement to make financial accounts publicly debts (unlimited liability) unless they have
available, no audit requirement, unless the formed an LLP;
partnership has LLP status;  There are costs associated with setting up
 Additional capital can be raised because more partnership agreements;
people are investing in the business;  There may be issues of continuity of
 Division of roles and responsibilities and an business in the event of death or illness of the
increased skill set; partners;
Partnership
 Sharing of risk and losses between more people;  Slower decision making due to the need for
 No company tax on the business (profits are consensus between partners;
distributed to partners and then subject to personal  Unless a clause is written into the original
tax) agreement, when one partner leaves, the
partnership is automatically dissolved and
another agreement is required between
existing partners.
10
 Limited liability makes investment less risky than  LLCs have to publish annual financial
being a sole trader or investing in a partnership. statements. This means that anyone (including
However, lenders to small company may ask for a competitors) can see how well (or badly) they
shareholder’s personal guarantee to secure any are doing. In contrast, sole traders and
loans; partnerships do not have to publish their FSs;
 Limited liability makes raising finance easier (eg  LLC FSs have to comply with legal and
through the sale of shares) and there is no limit on accounting requirements. In particular, the
the number of shareholders; FSs have to comply with accounting standards.
 A LLC has a separate legal identity from its Sole traders and partnerships may comply with
Limited liability shareholders. So, a company continues to exist accounting standards, eg for tax purposes.
company (LLC) regardless of the identity of its owners;  The FSs of larger liability companies have to
 There are tax advantages to being a LLC. The be audited. This means that the statements are
company is taxed as a separate entity from its subject to an independent review to ensure that
owners and the tax rate on companies may be lower they comply with legal requirements and
than the tax rate for individuals; accounting standards. This can be
 It is relatively easy to transfer shares from one inconvenient, time consuming and
owner to another. In contrast, it may be difficult to expensive;
find someone to buy a sole trader’s business or to by  Share issues are regulated by law (eg, it’s
a share in a partnership. difficult to reduce share capital).
The concept of business entity (separate entity)
A separate entity from its

owners
How to understand
about the concept of
business entity?
Personal transactions of
owners should never be mixed
with the business transactions
11
Shareholders: Shareholders are the owners, but have limited rights as
shareholders over the day-to-day running of the company. They
What are differences provide capital and receive a return (dividend).
between
shareholders and
directors of limited
companies?
The board of The BOD are appointed to run the company on behalf of
directors: shareholders. In practice, they have a great deal of autonomy.
Directors are often shareholders.
Shareholders To invest money in

(Principal) the business
Employs, appoints
Accountable
Board of Directors To direct and control

Agency (Agent) the business
Theory
Employs, appoints, direct and control
Management team To run the business

(E.g. CEO, Managers, …) operation
Corporate governance
Key term
Governance: Those charged with governance of a company are responsible for the
preparation of the financial statements.
Corporate The system by which companies and other entities are directed and
governance: controlled.
Good corporate governance is important because the owners of a company
and the people who manage the company are not always the same, which
can lead to conflicts of interest.
Board of The board of directors of a company are usually the top management and
Directors: are those who are charged with governance of that company. The
responsibilities and duties of directors are usually laid down in law and are
wide ranging.
12
To create wealth for the shareholders
What are directors’

responsibilities/
aims? A duty care to show reasonable competence.
To indemnify the company against loss

caused by their negligence
To be a fiduciary position in relation to the

company (for the best interest of the company
and in good faith)
To follow long-termism and regard for all

stakeholders’ interests.
The consequences of decisions in the long
term.
What should directors
consider to follow long-
The interests of their employees
termism and regard
for all stakeholders’
interests?
The need to develop good relationships with
customers and suppliers
The impact of the company on the local

community and the environment
The desirability of maintaining high standards of

business conduct and a good reputation
The need to act fairly as among all members

of the company
13
Who is responsible for

the preparation of the
financial statements
of the company? Those charged with governance of a company
(Directors)
With regard to FSs, directors are responsible for:
 The preparation of the FSs of the company in accordance with the

applicable financial reporting framework (eg IFRSs).
 The internal controls necessary to enable the preparation of FSs that are
free from material misstatement, whether due to error or fraud.
 The prevention and detection of fraud.
Chapter Round-up
Introduction to
accounting
Nature, principles
Users of financial Types of business Corporate
and scope of Financial statements
statements entities governance
financial reporting
 To distinguish the To understand the  Management; To distinguish the  Corporate

financial following terms:  Government; following 3 types of governance is the
accounting and  Statements of  Public; business: system by which
management profit or loss;  Lenders;  Sole trader; companies and
accounting.  Revenue;  Analysts and  Partnership; other entities are
 Expenses; advisers;  Limited liability directed and
 Statement of  Third parties; company. controlled.
financial position;  Employees;
 An asset;  Shareholders
 A liability;
 Equity;
14
Practice
Question 1: Which of the following is an asset according to the definition in the Conceptual
Framework?
o Bank overdraft
o Factory buildings
o Payables
o Amounts owed to tax authorities
Question 2: Which of the following is an example of a liability?
Let’s practice!
o Inventory
o Receivables
o Plant and machinery
o Loan
Practice
Question 3: Which of the following statements correctly describes the contents of the statement of
financial position?
o A list of ledger balances shown in debit and credit columns
o A list of all the assets owned and all the liabilities owed by a business
o A record of income generated and expenditure incurred over a given period
o A record of the amount of cash generated and used by a company in a given period
Question 4: Which of the following statements correctly describes the contents of the statement of
Let’s practice!
profit or loss?
o A list of ledger balances shown in debit and credit columns
o A list of all the assets owned and all the liabilities owed by a business
o A record of income generated and expenditure incurred over a given period
o A record of the amount of cash generated and used by a company in a given period
15
Practice
Question 5: Which of the following sources of information would be most useful for managers to use
when making decisions for the year ahead?
o Financial statements for the last financial year
o Tax records for the past five years
o Budgets for the coming financial year
o Bank statements for the past year
Question 6: Mark the following statements as true or false.

Shareholders receive annual accounts, prepared in accordance with legal
Let’s practice!
and professional requirements.
The accounts of limited liability companies are sometimes filed with the
Registrar of Companies.
Employees always receive the company’s accounts and an employee
report.
The tax authorities receive as much supplementary detail as they need to
assess the tax payable on profits
Banks frequently require more information than is supplied in the published
accounts when considering applications for loans and overdraft facilities
Practice
Question 7: Which groups of people are most likely to be interested in the financial statements of a
sole trader?
1. Shareholders of the entity
2. The business’s bank manager
3. The tax authorities
4. Financial analysts
o 1 and 2 only
o 2 and 3 only
o 2, 3 and 4 only
Let’s practice!
o 1, 2 and 3 only
Question 8: Identify, by indicating the relevant box in the table below, whether each of the following
statements is correct or incorrect.
A supplier of goods on credit is interested only in the statement of
True False
financial position, ie an indication of the current state of affairs.
The objective of financial statements is to provide information about
the financial position, performance and changes in financial position
True False
of an entity that is useful to a wide range of users in making
economic decisions.
16
Practice
Question 9: Which of the following are advantages of trading as a limited liability company?
1. Operating as a limited liability company makes raising finance easier because
additional shares can be issued to raise additional cash.
2. Operating as a limited liability company is more risky than operating as a sole
trader because the shareholders of a business are liable for all the debts of the
business whereas the sole trader is only liable for the debts up to the amount he
has invested.
o 1 only
o 2 only
o Both 1 and 2
Let’s practice!
o Neither 1 nor 2
Practice
Question 10: Which of the following best describes corporate governance?
o Corporate governance is the system of rules and regulations surrounding financial
reporting.
o Corporate governance is the system by which companies and other entities are
directed and controlled.
o Corporate governance is carried out by the finance department in preparing the
financial statements.
o Corporate governance is the system by which an entity monitors its impact on the
natural environment.
Let’s practice!
17
Practice
Question 11: Identify which of the following statements are true.
1. The directors of a company are ultimately responsible for the preparation of
financial statements, even if the majority of the work on them is performed by the
finance department.
2. If financial statements are audited, then the responsibility for those financial
statements instead falls on the auditors instead of the directors.
3. There are generally no laws surrounding the duties of directors in managing the
affairs of a company.
o 1 only
Let’s practice!
o 2 only
o 2 and 3 only
o 1 and 3 only
Practice
Question 12: Which of the following are true of partnerships?
1. The partners’ individual exposure to debt is limited.
2. Financial statements for the partnership by law must be produced and made public.
3. A partnership is not a separate legal entity from the partners themselves.
o 1 and 2 only
o 2 only
o 3 only
o 1 and 3 only
Let’s practice!
18
Practice
Question 13: Which of the following statements is/are true?
1. Directors of companies have a duty of care to show reasonable competence in their
management of the affairs of a company.
2. Directors of companies must act honestly in what they consider to be the best
interest of the company.
3. A director’s main aim should be to create wealth for the shareholders of the
company.
o 1 and 2 only
o 2 only
Let’s practice!
o 1, 2 and 3
o 1 and 3 only
Thank You
38
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ACCA

Financial Accounting (F3)

0982 762 707

Nature, principles and scope of financial reporting

Financial Financial reporting is a way of recording, analysing and summarizing

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 4

Under the form of statements in the

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 5

Statement of Statement of Statement of Notes to

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 6

Revenue from contracts with customers 4 179,058 159,088

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 7

Financial statements - Statement of profit or loss (SoPL)

Statement of A statement of profit or loss is a record of income generated and expenditure

Income: “Income is increases in assets or decreases in liabilities that result in increases

Expenses: “Expenses are decreases in assets or increases in liabilities that result in

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 8

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 9

Financial statements - Statement of financial position (SoFP)

Statement of financial position

Total assets Liabilities Capital/ Equity

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 10

Buildings Factories Warehouse

Machineries Means of Inventories

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 11

Financial statements - Statement of financial position (SoFP)

Liabilities: “A liability is a present obligation of the entity to transfer economic resource as

Statutory Salary for Lease

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 12

Issued capital Undistributed Capital reserve

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 13

Financial statements – Relationship between SoFP and SoPL

Statement of financial Statement of financial

Statement of profit or loss for the year ended 31 December 2022

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 14

How about Management Management accounting is a management information

What are differences between

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 15

Financial reporting and Management reporting

 Most financial accounting information is of a monetary • Management accounts incorporate non-monetary

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 16

 Profitability;  Profitability;  Whether return  Likelihood of  Ability of entity  Statistics;  Contribution to

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 17

Types of business entities

Sole trader Partnership Limited liability company

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 18

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 19

Types of business entities

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 20

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 21

The concept of business entity (separate entity)

A separate entity from its

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 22

Shareholders To invest money in

Board of Directors To direct and control

Management team To run the business

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 23

Edway.edu.vn Financial Accounting (F3) Introduction to accounting 24

To create wealth for the shareholders

What are directors’

To indemnify the company against loss

To be a fiduciary position in relation to the

To follow long-termism and regard for all