b5d212b44f03d2b42307

CMA Part 1 – Section A.
1
Financial Statements
London International
Introduction to the Course
• Passing criteria
• Exam structure
• What we will cover during the lectures
• What you need to do from your end

Structure of the Course
• Section A – External Financial Reporting Decisions (15%)
• Section B – Planning, Budgeting, and Forecasting (20%)
• Section C – Performance Management (20%)
• Section D – Cost Management (15%)
• Section E – Internal Controls (15%)
• Section F – Technology and Analytics (15%)

Outline of Section A
• Financial Statements
• Recognition, Measurement, Valuation and Disclosure

Outline of A.1
• Objectives Of General Purpose Financial Reporting
• Income Statement
• Balance Sheet
• Statement of Cash Flows
• Statement of Changes in Stockholders Equity
• Notes to F/S
• Integrated Reporting
Four Basic Financial Statements
• What are financial statements? Financial statements are written records that
convey the business activities and the financial performance of a company.
• Income Statement
• Balance Sheet
• Cash Flows
• Statement of Comprehensive Income

The Income Statement
Income Statement Net Sales (Revenue)
-Cost of Goods Sold (COGS)
Gross Profit/Margin/Income
-Selling, General and Administrative Expenses (SG&A)
• The income statement measures the financial Operating Income (EBIT)
performance of the company/entity over a
+/-Non-Operating Income/Expense
period of time. (Statement of earnings)
Income from Continuing Operations Before Tax
-Tax
• Top line vs Bottom line
Income from Continuing Operations After Tax
+Discontinued Operations
+/- Extraordinary gains and losses
Income Statement
Net Income
+Other Comprehensive Income (OCI)
Comprehensive Income
Statement
Income Statement and Comprehensive
Income Statement
• Net Income Last line of Income Statement
• First line of Comprehensive Income Statement
• Comprehensive Income statement can either be presented jointly

with income statement or separately.
1) Sales (Revenue)
• Revenue is recognized when it is earned, and you have either
collected cash or there is certainty of collecting cash.
Gross Sales Net Sales

Sum of all sales Gross Sales – Discounts –
Returns/Allowances
2) Cost of Goods Sold (COGS)
• COGS refers to the product cost and consists of the following:
Beginning Inventory
+Purchases
+Cost of Freight In
+Direct Manufacturing Costs
Cost of Goods Available for Sale (COGAS)
-Ending Inventory
Cost of Goods Sold (COGS)
• COGS = COGAS when all goods available are sold.

3) Selling, General and Administrative
Expenses (SG&A)
• Factory workers, factory supervisors, salesmen, marketing personnel
• Rent for instance depending on weather it is for the warehouse or manufacturing

plant maybe categorized as COGS or SG&A.
• Similarly, Salary based on if it is for direct labour or supervision can be COGS or SG&A.
• Depreciation on factory equipment COGS, depreciation on delivery Van would fall
under SG&A.
• This method of classification is called functional classification (based on functionality).

• As opposed to natural classification where we categorize all rent, salary depreciation
together.
Product Costs vs Period Costs
• For example Pen reseller has 0 beginning inventory
• Purchases 1000 pens for $1 each. = $1000
• During the year, 700 pens for $2 each were sold. Rent for warehouse
=$200 Beginning Inventory = 0
+Purchases =1000
+Cost of Freight In = 0
+Direct Manufacturing Costs = 0
Cost of Goods Available for Sale (COGAS) = 1000
-Ending Inventory = -300
Cost of Goods Sold (COGS) = 700
Net Sales (Revenue) = 1400
-Cost of Goods Sold (COGS) = 700
• Now we have computed
Gross Profit/Margin/Income = 700
COGS. Warehouse rent of -Selling, General and Administrative Expenses (SG&A) = 200
$200 should that be Operating Income (EBIT) = 500
allocated for 1000 pens or +/-Non-Operating Income/Expense
as is for 700? Income from Continuing Operations Before Tax
-Tax
Income from Continuing Operations After Tax
• Since it is not a product +Discontinued Operations
cost, it is accounted as is, as +/- Extraordinary gains and losses
$200 and not as Net Income
200*(700/1000).
• Therefore we find that COGS is matched to Product
• Whereas, SG&A is matched to Period.
• Note: Freight- in = COGS

• Freight –out = SG&A
4) Non-operating Income/Expense
• 1)Interest income (bonds) / expense (loans/funds borrowed)
• 2)Dividend Income (from equity securities held)
• Dividend expense does not fall under non-operating income. In fact we

don’t call it dividend expense at all.
• 3)Gains or Losses (Example business car sold). Not part of primary

operations, therefore falls under non-operational income. (Anything unusual
or infrequent)
5) Taxes (Brief)
• Current and Deferred.
• GAAP (Generally Accepted Accounting Principles) vs IRS (Internal

Revenue Service)
• Temporary differences between Current as in GAAP and that of IRS, is

captured using deferred taxes.
• This gives us Income from Continuing Operations after Tax.

6) Discontinued Operations
• Continued operations refers to operations that are currently ongoing
and that which we intend to continue going into the future.
• Whereas, discontinued operations are those components that are

discontinued in the year or those which we plan to discontinue in the
upcoming year.
• Discussed in detail later

7) Exrtaordinary Gains and Losses
• Unusual in nature and infrequent.
• It has now been eliminated and is included as a part of Non-operating

income.
• Reason being IFRS and GAAP are trying to harmonize.

8) Other Comprehensive Income (OCI)
• PACE (Covered in detail later)
• P – Pension adjustment
• A – Available for sale securities, unrealized gains
• C – Currency translation
• E – Effective portion of cash flow hedges
• Note realized gains fall under non-operating income whereas,

unrealized gains are a part of OCI
9) Comprehensive Income
• Income from discontinued operations is net of tax.
• OCI = Net of tax as well
• What we have done so far is multi-step income statement, whereas

some companies may prefer single-step income statement to provide
less detail.
Quick Recap
6) Criteria for Discontinued Operations
• #1 Components of the entity are discontinued in the year or those which we
plan to discontinue in the upcoming year. (Held for sale)
• For example a pen reselling business unit, decides to discontinue its

operations of selling dusters. All expenses and losses from that component
of the entity are placed under gains/losses from discontinued operations.
• #2Component criteria
• That is, discontinuation/plan to discontinue and component.

• Component criteria – PAC (3,2,1)
• Plan – Committed to a plan of disposal
• Program – active program to locate a buyer
• Probable – Sale is probable within next year
• Available – Asset is available for sale
• Actively Marketed – Asset is actively marketed
• Change is unlikely – Disposal plan for sale of duster is unlikely to change

• For instance if a company attempts to dispose an asset in 2011, and does not do so successfully
by Dec 31 of the year. The asset is then categorized as ‘Held for Sale’.
• For the year 2011, discontinued operations would include actual gains/losses (those realized).
That is, termination of employee contracts, and other expenses such as leases for example.
• Expected gains or losses, are reported next year. That which is not liquidated yet. Unless, we
think that the machinery for dusters are impaired. That is carrying value (CV) > net realizable
value (NRV), i.e. Fair value – Cost to Sell. This we recognize immediately.
• 2012 would have actual gains and losses for 2012 income statement. In case there is
impairment, that is CV > NRV and we fail to sell it in 2012. There maybe a reversal of NRV in
2013. We can reverse impairment loss to the extent that it was present in 2012.
Rule to Remember
• Reversal of Impairment Losses
• U.S. GAAP (Generally Accepted Accounting Principles) does not

usually allow for reversal of impairment losses except for “Held for
Sale” assets.
• IFRS (International Financial Reporting Standards) always allows for

reversal of impairment losses.
2011 vs 2012 Financials
O – Operating income 2011 2012
N – Non Operating Income X
T - Tax
I – Income from Continuing
Operations
D – Discontinued operations X X
N – Net Income
O – Other Comprehensive Income
C – Comprehensive Income
For the purpose of comparative financial statement reporting we bring down X from non-operating income to
that of discontinued operations for 2010. This happens only for presentation/comparison purposes.
Diagramatic Representation
“Held for sale”

Balance Sheet
• Assets – Comprised of Liability and Equities
• Equities consist of commonshares (C/S) and additional Owner transactions

paid-in capital (AP/C)
• Retained Earnings (R/E) = Net Income – Dividends = Ending

Retained Earnings
Non-owner
• Accumulated (OCI) falls under equity section. transactions
8) Other Comprehensive Income (OCI)
• Pension adjustment that is parked and not yet paid out
• Financial assets owned and not liquidated (unrealized gains/losses)
• Currency fluctuation gains/losses
• Effective Cash flow hedges (e.g. currency swaps)
• R- Revaluation surplus PPE and intangibles only in IFRS. (discussed later)

Quick Recap
• Income statement ends with Net Income
• OCI – Comprehensive Income for the year.
• Net income flows into retained earnings
• OCI – flows into accumulated OCI (AOCI) in the equity section (B/S).
The Balance Sheet
Basics of the Balance Sheet
Total Assets Liabilities
• Balance Sheet is a Current Assets Current Liabilities
representation of a Cash Accounts Payable
company’s assets. Accounts Receivable Short-Term Debt
Inventory
• It can be broadly
Prepaids Non Current Liabilities
categorized as current
Marketable Securities (Investments) Long-Term Debt (e.g. Bond)
and noncurrent
assets. Non Current Assets Equity
• Or as equity and Property Plant and Equipment (PPE) Commonshareholds
liabilities Intangibles Amount Paid in Capital
Retained Earnings
AOCI
Components of Balance Sheet
• Current Assets:
• Cash
• Accounts Receivable
• Inventory
• Prepaids
• Marketable Securities
• Noncurrent Assets:
• Property, Plant and Equipment
• Other Intangibles
Components of Balance Sheet
• Current Liabilities:
• Accounts Payable
• Short-term debt
• Non current liabilities:

• Long-term debt
• Equity:
• Commonshare holders
• Amount Paid in Capital
• Retained Earnings
• AOCI
Statement of Cash Flows
• It represents how cash has changed from beginning of the year to end
of the year (inflows and outflows of cash in an entity or company).
• Sources and Uses into 3 categories
• 1. Operating Activities
• 2. Investing Activities
• 3. Financing Activities
Categorization (Thumb Rule, not Watertight)
• Most items in the income statement, current assets and current
liabilities fall under operating activities. Note most not all.
• Most non-current assets on balance sheet would fall under investing

activities
• And lastly, most noncurrent liabilities and equities are categorized as

financing activities
Balance Sheet
Assets Liabilities
Current 2010 2009 Current liabilities 2010 2009
Cash and eq. 160 50

Operating Activities Net Sales (Revenue)
-Cost of Goods Sold (COGS)
• Cash collected on sales. (Only when cash is Gross Profit/Margin/Income
collected, not when sold) -Selling, General and Administrative Expenses
(SG&A)
• Payments for purchases, selling expense, g&a.
Operating Income (EBIT)
(Only when payment is made)
+/-Non-Operating Income/Expense
• Non-operating income (interest and dividend
Income from Continuing Operations Before Tax
received, only once received)
-Tax
• Non-operating expense (interest – cash outflow Income from Continuing Operations After Tax
once paid)
+Discontinued Operations
• Taxes (cash outflow, once paid) +/- Extraordinary gains and losses
Net Income
Investing Activities
• Loans made
• Investments (Stocks, bonds)
• Property, Plant and Equipment
• Intangibles
• Gain or loss in Investing activities would fall under non-operating

income on the income statement. Those in operating activities would
fall under operating income.
3 Golden Rules of Accounting
• Debit the receiver, credit the giver.
• Debit what comes in, credit what goes out.
• Debit all expenses and losses and credit all incomes and gains.
Journal Entry Example
Debit Credit Buying and selling of Property, Plant and Equipment
with gain from selling
• PPE 100
• Cash 100
• Cash 40
• AD 70
• PPE 100
• Gain 10
Debit Credit Buying and selling of Property, Plant and Equipment
with loss from selling
• PPE 100
• Cash 100
• Cash 25
• AD 70
• Loss 5
• PPE 100
Debit Credit Investment gains
• Investment 100
• Cash 100
• Cash 125
• Investment 100
• Gain 25
Debit Credit Investment losses
• Investment 100
• Cash 100
• Cash 80
• Loss 20
• Investment 100
Financing Activities
• Loans taken or loans borrowed
• Bonds (Issuing), Bonds payable
• Equity (Owners injecting Capital)
• Dividends Paid Out
Net Cash Increase or Decrease
• Operating Activities = 470
• Investing Activities = (750)
• Financing Activities = 390
• Net increase (or decrease) in cash = 110
• Assume 50 was beginning cash balance.

• Ending cash balance = beginning cash balance + net increase/decrease
= 160
This number represents the cash and cash equivalents on balance sheet.
Balance Sheet
Assets Liabilities
Current 2010 2009 Current liabilities 2010 2009
Cash and eq. 160 50

Direct Method
• This method that we just used, a summary of where cash came in and
went out is referred to as direct method.
• We are required to use this with investing and financing activities at

all times.
• However, for operating activities, we can use the indirect method.

Which is similar to a reconciliation approach.
Direct Method (Read for understanding)
Indirect Method
• Net income is reconciled to net cash flows from operating activities by
adjusting for differences related to changes in balance sheet
operating accounts (A/R, Inventory, A/P) and noncash income items
(depreciation, ammoratization, deferred income taxes).
Net Sales (Revenue) = 1500 1
-Cost of Goods Sold (COGS) = 500
2
Gross Profit/Margin/Income = 1000
-Selling, General and Administrative Expenses (SG&A) = 250 + 100
-Depreciation = 125
3+4 Take depreciation is applicable to
Operating Income (EBIT) = 525 5 COGS, SG&A
+/-Non-Operating Income/Expense = 75 (Interest)
Interest expense
Income from Continuing Operations Before Tax = 25 (Dividends) + 25 (Realized gains 6
from sale)
Dividend and gain from sale of
-Tax = 150
7+9 equity
Income from Continuing Operations After Tax = 350
+Discontinued Operations = 0
+/- Extraordinary gains and losses = 0
8
Net Income = 350
Income Statement
1 Sales 1500
2 COGS (500)
3 Selling Expense (250)
4 General and Administrative Expense (100)
5 Depreciation Expense (125)
6 Interest Expense (75)
7 Equity in Earnings of Investee 25
8 Income Tax Expense (150)
9 Gain on sale of Available for sale Security 25
Net Income 350
Select Changes in Balance Sheet
• Accounts receivable increased by $200
• Inventory increased by $75
• Accounts payable increased by $50
• Allowance for uncollectibles increased by $50
• Accumulated depreciation increased by $125
• Bond discount decreased by $15
• Investment under equity method increased by $25
• Deferred Tax liability decreased by $25
• Taxes Payabled liability increased by $100
Balance Sheet – Income Statement Item
Relation
• Accounts receivable increased by $200 1
• Inventory increased by $75 2
• Accounts payable increased by $50 2
• Allowance for uncollectibles increased by $50 3

5
6
7
8
• Taxes Payabled liability increased by $100 8
1) Direct Method
• Let us try to create journal entries, create cash plugs and fit to
summary of cash account (operating activities).
• Sales increased by $1500.

• Accounts receivable increased by $200
• What this tells us, is that despite a sales increase of $1500, cash may
have increased by only $1300 since there is a $200 increase in
accounts receivable.
1) Cash Plug (Sales)
Debit Credit
• Cash 1300
• Accounts Receivable 200
• Sales 1500
• The 1300 is what we were looking for (cash plug). It will flow into
the cash account.
Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
2) Direct Method
• Let us try to create journal entries, create cash plugs and fit to summary of
cash account (operating activities).
• COGS - $500.
• Inventory increased by $75
• Accounts payable increased by $50
• What this tells us, is that despite a COGS of $500 and inventory increase of
$75, cash outflow is only $525 since there is $50 increase in accounts
payable (credit).
2) Cash Plug (COGS)
Debit Credit
• COGS 500
• Inventory 75
• Accounts Payable 50
• Cash 525
• The 525 is what we were looking for (cash plug). It will flow out
of the cash account.
Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
3) Direct Method
• Let us try to create journal entries, create cash plugs and fit to summary
of cash account (operating activities).
• Selling expense - $250.

• Allowance for uncollectibles increased by $50
• In balance sheet allowance for uncollectibles is subtracted from A/R
• What this tells us, is that despite a Selling expense of $250, cash outflow
is only $200 since there is $50 increase in allowance for uncollectibles.
3) Cash Plug (Selling Expense)
Debit Credit
• Selling Expense 250
• Allowance for Uncollectibles 50

• Cash 200
Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
4) Direct Method
• G & A- $100.
• There is a $100 cash outflow for $100 G&A.

4) Cash Plug (G&A)
Debit Credit
• G&A Expense 100
• Cash 100
Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
5) Direct Method
• Depreciation - $125.
• What this tells us, is that despite depreciation of $125, there is no

cash outflow from the cash accounts. Therefore there is no cash plug.
5) Cash Plug (Depreciation)
Debit Credit
• Depreciation 250
• Accumulated depreciation 250
• There is no cash plug.

Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
6) Direct Method
• Interest expense - $75.

• What this tells us, is that despite a Interest expense of $75, cash
outflow is $60 since there is $15 decrease in Bond discount
6) Cash Plug (Interest Expense)
Debit Credit
• Interest Expense 75
• Bond discount (15)

• Cash 60
Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
7) Direct Method
• Equity in Earnings of Investee - $25.

• What this tells us, is that there is no cash plug.

7) Cash Plug (Equity in Earnings of Investee)
Debit Credit
• Selling Expense 25
• Allowance for Uncollectibles 25
• There is no cash plug.

Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
8) Direct Method
• Let us try to create journal entries, create cash plugs and fit to summary of
cash account (operating activities).
• Income Tax Expense- $150.

• Taxes Payabled liability increased by $100
• What this tells us, is that despite a Income tax expense of $150, cash
outflow is only $75 since there is $25 decrease in deferred tax liability and
$100 increase in taxes payable.
8) Cash Plug (Income Tax Expense)
Debit Credit
• Income Tax Expense 150
• Deferred Tax Liability 25
• Taxes Payabled Liability 100
• Cash 75
Income Statement
1 Sales 1500
2 COGS (500)
Net Income 350
Relation

5
6
7
8
9) Direct Method
• Gain on sale of Available for sale Security - $25.
• This comes under investing activities. (Non-operating income)

Cash Account (Operating Activities)
Debit Credit Change
• Cash Collected in Sales 1300
• Payments for - Purchases 525
• - Selling 200
• - G&A 100
• Interest Paid 60
• Taxes Paid 75
1300 960 340
Indirect Method
• We start backwards from Net income $350, and try and arrive at $340
net change in cash flow from operating activities.
• First we adjust for non-cash items.

Income Statement
1 Sales 1500
2 COGS (500)
5 Depreciation Expense (125) 1
7 Equity in Earnings of Investee 25 1
Net Income 350
Indirect Method
• We start backwards from Net income $350, and try and arrive at $340
net change in cash flow from operating activities.

• Start with depreciation. (Non-cash item) and Equity in Earnings of
Investee
• Secondly, identify all the non-operating activities items.

Income Statement
1 Sales 1500
2 COGS (500)
5 Depreciation Expense (125) 1
7 Equity in Earnings of Investee 25 1
9 Gain on sale of Available for sale Security 25 2
Net Income 350
Cash Account (Operating Activities)
Debit Credit
• Net Income 350
• Depreciation Expense 125
• Equity in Earnings of Investee 25
• Gain on sale of Available for sale Security 25
Indirect Method
• We start backwards from Net income $350, and try and arrive at $340 net
change in cash flow from operating activities.

• Start with depreciation. (Non-cash item) and Equity in Earnings of Investee
• Secondly, identify all the non-operating activities items.
• Thirdly, all changes in the balances of accrual accounting.

Preparing T Accounts
Operating Activities
Debit Credit
• Net Income 350
Non-cash • Depreciation Expense 125
items
Non
Operating • Gain on sale of Available for sale Security 25
Activies
Relation

5
6
7
8
Accounts Inventory Accounts Allowance for Accumulated
Receivable Payable Uncollectibles Depreciation
200 75 50 50 125
Decrease in Increase in Increase in Increase in Taxes

Bond Discount Investment Deferred Tax Payable
Liability
15 25 25 100
First Adjustment Preparing T Accounts
Debit Credit
• Net Income 350
items
Non
Activies
200 75 50 50 125

Liability
15 25 25 100
First Adjustment Preparing T Accounts
Debit Credit
• Net Income 350
items
Non
Activies
200 75 50 50 125

Liability
15 25 25 100
Second Adjustment Preparing T Accounts
Debit Credit
• Net Income 350
items
Non
Activies
Nothing needs to be done with gain on sale of available for sale security
because it is not a non-operating activity.
200 75 50 50 125

Liability
15 25 25 100
Third Adjustment Preparing T Accounts
Debit Credit
• Net Income 350
Non-cash
items • Equity in Earnings of Investee 25
Non
Activies •
Increase in Accounts Receivable 200
200 75 50 50 125

Liability
15 25 25 100
Debit Credit
• Net Income 350
Non-cash •
Equity in Earnings of Investee 25
items
Non • Gain on sale of Available for sale Security 25
Operating • Increase in Accounts Receivable 200
Activies
• Increase in Inventory 75
200 75 50 50 125

Liability
15 25 25 100
Debit Credit
• Net Income 350
Non-cash • Gain on sale of Available for sale Security 25
items • Increase in Accounts Receivable 200
Non • Increase in Inventory 75
Operating • Increase in Accounts Payable 50
Activies • Increase in Allowance for Uncollectibles 50
200 75 50 50 125

Liability
15 25 25 100
Debit Credit
• Net Income 350
Non-cash • Increase in Accounts Receivable 200
items • Increase in Inventory 75
Non • Increase in Accounts Payable 50
Operating • Increase in Allowance for Uncollectibles 50
Activies • Decrease in Bond Discount 15
200 75 50 50 125
Decrease in Increase in Decrease in Increase in Taxes

Liability
15 25 25 100
Debit Credit
• Net Income 350
Non-cash • Increase in Accounts Receivable 200
• Increase in Inventory 75
items
• Increase in Accounts Payable 50
Non • Increase in Allowance for Uncollectibles 50
Operating • Decrease in Bond Discount 15
Activies • Decrease in Deferred Tax Liability 25
200 75 50 50 125

Liability
15 25 25 100
Debit Credit
• Net Income 350
• Increase in Accounts Receivable 200
Non-cash • Increase in Inventory 75
items • Increase in Accounts Payable 50
• Increase in Allowance for Uncollectibles 50
Non • Decrease in Bond Discount 15
Operating • Decrease in Deferred Tax Liability 25
Activies • Increase in Tax Payables 100
200 75 50 50 125

Liability
15 25 25 100
Debit Credit Change in O.A.
• Net Income 350
• Increase in Accounts Receivable 200
Non-cash • Increase in Inventory 75
items • Increase in Accounts Payable 50
• Increase in Allowance for Uncollectibles 50
Non • Decrease in Bond Discount 15
Operating • Decrease in Deferred Tax Liability 25
Activies • Increase in Tax Payables 100
690 - 350 = 340

Adjustments
• We eliminated non cash items in adjustment 1
• We eliminated non operating items in adjustment 2
• We adjusted T accounts for changes in accrual balances.

Note
• Operating Activies can be presented either usind the direct method of
calculations or indirect method as shown above
• However, investment and financing activities are always portrayed using the
direct method.
• Net increase or decrease in cash + beginning cash balance = Net cash balance
• In direct method we use cash plugs, in the indirect method we use 3

adjustments.
Schedule for Non-Cash Investing and
• If direct method is used, indirect schedule must also be prepared and
presented.
• Further, a schedule for non-cash investing and financing activities must be

prepared.
• Cash investing and financing activities appear in cash flow statements.
• If indirect method is used, $ amount for interest and tax payments must be
disclosed.
• Assume you have taken a loan and use that to purchase PP&E
Debit Credit
• Cash X Financing
Activity
• Loan Payable X
• PP&E X Investing
• Cash X Activity
• Assume you have taken a loan and use that to purchase PP&E
Debit Credit
• Cash X Financing
Activity
• Loan Payable X
• PP&E X Investing
• Cash X Activity
However, assume now that the loan payable was made directly to the manufacturer of PP&E, there is no cash
involved. This would not appear on statement of cash flows. Such activities are required to be disclosed
separately. (Other e.g. include convertible bonds, capital leases, etc.)
Notes to F/S
Notes to F/S
• Statement of Stockholder’s Equity is an extension of equity section of the balance
sheet
• A) Significant accounting policies (initial note): are in notes to financial statements

• Example FIFO/LIFO for inventory
• Or Straight-line method for depreciation of PP&E
• This must be disclosed since alternatives exist.

• In the footnotes, principles which are peculiar to the industry must be
disclosed/unusual/innovative accounting policies.
Notes to F/S
• Other notes to F/S:
• Requirements from various pronouncements:
• Any disclosures about marketable securities, contingent liabilities or
losses, contractual obligations, restrictions on assets, covenants,
pension plans, etc.
• All disclosures as required/optional by U.S. GAAP

Read by Self
Disclosures
• B) Remaining Notes to the F/S – All other relevant information
• C) Related party transactions (parties related to the entity, affiliates, principle/owners, CFO, etc.)
• Different from ‘arms length transactions’
• Nature of relationship, amount and details of transactions must be disclosed.
• On the contrary, ordinary course of business includes salaries and bonuses paid out to
management.
• Transactions which are eliminated in consolidation do not need to be disclosed.

Disclosures
• D) Subsequent events, those that occur after the reporting of financials.
• Events which occur after the preparation but before the financials were issued.
• For instance if a company has a lawsuit and recognizes a contingent(uncertain)

payment of $5 million.
• We refer to this as Type 1 = recognized subsequent event (accrued on

financials)
• Type 2 subsequent event = when it is unrecognised. No contingent payment is
listed in the financial statement (Requires disclosure)
Disclosures
• E) Risks and Uncertainties
• Nature of Operations must be disclosed as it indirectly alerts financial statement users the risks and uncertainties
in specified industries and markets.
• Disclosure of products the company is involved in.
• Estimates in preparation of financials must be explicitly disclosed. (Since actual results may differ from estimates).
• When they are significant estimates (materially impacting), e.g. $5 million dollars contingent, potential impact of
estimates to liabilities, assets, etc. must be disclosed.
• Current vulnerabilities due to concentration. (Has the company put all their eggs in one basket? – volume of
business company transacts with a customer, manufacturer, supplier, from a product, etc.)
Integrated Reporting
• Comprehensive reporting that is concerned with value creation.
• It is a ‘process founded on integrated thinking’ that results in a

periodic integrated report.
• Concise to the point, but much wider in scope than financial reporting.
• It is not mandatory. It goes beyond finance and takes a holistic view at

how the business is creating value.
• Financial Capital (pool of funds)
• Intellectual Capital (knowledge based intangibles such as IP)
• Social and Relationship Capital (shared norms, common values, behaviour)
• Human Capital (human competencies, capabilities, experience)
• Manufactured Capital (buildings, inventory, infrastructure, etc.)

and
• Natural Capital (renewable and non-renewable resources available to the
company)
• How they use these capital resources to create value
Governance Strategy
Risk and and
Opportunities Resource
Allocation
• Financial • Financial++
• Intellectual • Intellectual++
• Social and • Social and
Relationship Relationship++
• Human++
Capita • Human
Business • Manufactured
• Manufactured Inputs Outputs Outcomes
l • Natural Activities ++
• Natural++
Performance Outlook
Self Study (Look up Ford’s Integrated
Report)
• Movement towards integrated reporting.
Benefits and Challenges of Integrated
Reporting
• Aims to improve quality of information available for the providers of
financial capital.
• Based on ability of company to create value over time.
• Challenges include no set standards, it is complex, has additional costs

and involves litigation risks.
• But could be the future of reporting!

End of A.1
• Thank you!

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CMA Part 1 – Section A.

• What we will cover during the lectures

• What you need to do from your end

• Section B – Planning, Budgeting, and Forecasting (20%)

• Section C – Performance Management (20%)

• Section D – Cost Management (15%)

• Section E – Internal Controls (15%)

• Section F – Technology and Analytics (15%)

• Recognition, Measurement, Valuation and Disclosure

• Statement of Comprehensive Income

• Net Income Last line of Income Statement

• First line of Comprehensive Income Statement

• Comprehensive Income statement can either be presented jointly

Gross Sales Net Sales

• COGS = COGAS when all goods available are sold.

• Rent for instance depending on weather it is for the warehouse or manufacturing

• This method of classification is called functional classification (based on functionality).

• Whereas, SG&A is matched to Period.

• Note: Freight- in = COGS

• 2)Dividend Income (from equity securities held)

• Dividend expense does not fall under non-operating income. In fact we

• 3)Gains or Losses (Example business car sold). Not part of primary

• GAAP (Generally Accepted Accounting Principles) vs IRS (Internal

• Temporary differences between Current as in GAAP and that of IRS, is

• This gives us Income from Continuing Operations after Tax.

• Whereas, discontinued operations are those components that are

• Discussed in detail later

• It has now been eliminated and is included as a part of Non-operating

• Reason being IFRS and GAAP are trying to harmonize.

• Note realized gains fall under non-operating income whereas,

• What we have done so far is multi-step income statement, whereas

• For example a pen reselling business unit, decides to discontinue its

• That is, discontinuation/plan to discontinue and component.

• Plan – Committed to a plan of disposal

• Program – active program to locate a buyer

• Probable – Sale is probable within next year

• Available – Asset is available for sale

• Actively Marketed – Asset is actively marketed

• Change is unlikely – Disposal plan for sale of duster is unlikely to change

• U.S. GAAP (Generally Accepted Accounting Principles) does not

• IFRS (International Financial Reporting Standards) always allows for

“Held for sale”

• Equities consist of commonshares (C/S) and additional Owner transactions

• Retained Earnings (R/E) = Net Income – Dividends = Ending

• Financial assets owned and not liquidated (unrealized gains/losses)

• Currency fluctuation gains/losses

• Effective Cash flow hedges (e.g. currency swaps)

• R- Revaluation surplus PPE and intangibles only in IFRS. (discussed later)

• OCI – Comprehensive Income for the year.

• Net income flows into retained earnings

• Non current liabilities:

• Sources and Uses into 3 categories

• Most non-current assets on balance sheet would fall under investing

• And lastly, most noncurrent liabilities and equities are categorized as

Current 2010 2009 Current liabilities 2010 2009

Cash and eq. 160 50

• Gain or loss in Investing activities would fall under non-operating

• Debit the receiver, credit the giver.

• Debit what comes in, credit what goes out.

• Net increase (or decrease) in cash = 110

• Assume 50 was beginning cash balance.

Current 2010 2009 Current liabilities 2010 2009

Cash and eq. 160 50