CHAPTER-1 INTRODUCTION OF FINANCIAL INFORMATION
LO1 PURPOSE OF ACCOUNTING
Business transactions such as sales and purchases occur regularly. Accountants and bookkeepers
will record and account for these transactions.
Bookkeeping is the act of recording financial transactions wholly and summarising and
categorising those transactions appropriately.
Accounting is the use of the information compiled by the bookkeeper to prepare financial
information for management (management accounts) and the financial statements of an
organisation.
LO2 BUSINESS TRANSACTIONS
A business transaction is the exchange of goods, services, or money between two or more parties.
Key transaction categories relevant to FA1 include:
● Sales – Main source of revenue.
○ Cash sales: Payment received immediately (e.g., card payments).
○ Credit sales: Payment received later (common in B2B sales).
● Purchases – Buying goods or services needed to operate.
○ Manufacturers buy raw materials.
○ Retailers and wholesalers buy finished goods for resale.
○ Businesses also buy utilities and services like IT.
○ Often made on credit.
● Payments and receipts – Involves cash inflows and outflows through bank accounts,
including customer payments.
● Petty cash transactions – Small cash payments for low-value items, like taxi fares or
office coffee.
● Payroll transactions – Paying wages and salaries, deducting and paying tax and social
security to authorities.
● Financing transactions – Involve raising funds for investment and working capital:
○ Owner’s capital or drawings.
○ Bank loans, including interest payments and loan repayments.
LO3 FINANCIAL STATEMENTS
Financial statements are reports of an entity to provide its stakeholders with necessary information
for their decision-making needs.
3.1 Components of financial statements
A complete set of financial statements consists of:
● a statement of financial position
● a statement of comprehensive income
● a statement of changes in equity
● a statement of cash flows; and
● Notes to these financial statements,
3.2 Statement of financial position
The statement of financial position is a structured presentation of the assets, Capital and
liabilities of the business. The difference between assets and liabilities is capital (equity).
Statement of financial position is a snapshot of the entity's financial position at a point in
time that enlists assets, liabilities and equity of an entity at a particular date.
1 H.M. UMER
, CHAPTER-1 INTRODUCTION OF FINANCIAL INFORMATION
3.3 Statement of comprehensive income
This statement provides information about the performance of an entity in a period.
Comprehensive income during a period is the sum of:
● the profit or loss for the period and
● other comprehensive income. (Examinable in CAF-1)
Statement of comprehensive income is a combination of profit or loss and other
comprehensive income. Profit or loss shows the financial results for a period by
summarising income earned and expenses incurred during that particular period.
3.4 Statement of Profit or Loss and Other Comprehensive Income
________________________________________
The statement of profit or loss and other comprehensive income shows the sales and costs
and other income of a business for a particular period of time.
Example 1
Statement of profit or loss and other comprehensive income for the year ended 31
December 20X6
20X6 20X5
Revenue 36,000 33,000
Cost of sales (24,000) (22,000)
Gross profit 12,000 11,000
Selling expenses (2,800) (2,650)
General and administrative expenses (2,300) (2,050)
Operating profit 6,900 6,300
Rental income from investment properties 500 500
Profit before financing and income taxes 7,400 6,800
Interest expenses on borrowings (1,000) (1,000)
Profit before income taxes 6,400 5,800
Income tax expense (1,600) (1,450)
Profit for the year 4,800 4,350
Other comprehensive income
Gains on property revaluation 2,000 0
Total comprehensive income for the year 6,800 4,350
3.5 Components of profit or loss:
● Revenue refers to the total sales for the year.
● Cost of sales includes the cost of goods or services sold—product purchase costs
for retail businesses and manufacturing costs for producers. It also includes
carriage inwards.
● Gross profit is revenue minus cost of sales, showing profitability from core
products or services before indirect costs.
● Selling expenses are costs related to selling goods, such as sales staff salaries,
commissions, and carriage outwards.
● General and administrative expenses include office rent and salaries of
administrative and finance staff.
● Operating profit reflects the profit from business operations, excluding interest and
tax.
● Adding other income gives profit before financing and income tax.
● Deducting interest gives profit before tax.
2 H.M. UMER
LO1 PURPOSE OF ACCOUNTING
Business transactions such as sales and purchases occur regularly. Accountants and bookkeepers
will record and account for these transactions.
Bookkeeping is the act of recording financial transactions wholly and summarising and
categorising those transactions appropriately.
Accounting is the use of the information compiled by the bookkeeper to prepare financial
information for management (management accounts) and the financial statements of an
organisation.
LO2 BUSINESS TRANSACTIONS
A business transaction is the exchange of goods, services, or money between two or more parties.
Key transaction categories relevant to FA1 include:
● Sales – Main source of revenue.
○ Cash sales: Payment received immediately (e.g., card payments).
○ Credit sales: Payment received later (common in B2B sales).
● Purchases – Buying goods or services needed to operate.
○ Manufacturers buy raw materials.
○ Retailers and wholesalers buy finished goods for resale.
○ Businesses also buy utilities and services like IT.
○ Often made on credit.
● Payments and receipts – Involves cash inflows and outflows through bank accounts,
including customer payments.
● Petty cash transactions – Small cash payments for low-value items, like taxi fares or
office coffee.
● Payroll transactions – Paying wages and salaries, deducting and paying tax and social
security to authorities.
● Financing transactions – Involve raising funds for investment and working capital:
○ Owner’s capital or drawings.
○ Bank loans, including interest payments and loan repayments.
LO3 FINANCIAL STATEMENTS
Financial statements are reports of an entity to provide its stakeholders with necessary information
for their decision-making needs.
3.1 Components of financial statements
A complete set of financial statements consists of:
● a statement of financial position
● a statement of comprehensive income
● a statement of changes in equity
● a statement of cash flows; and
● Notes to these financial statements,
3.2 Statement of financial position
The statement of financial position is a structured presentation of the assets, Capital and
liabilities of the business. The difference between assets and liabilities is capital (equity).
Statement of financial position is a snapshot of the entity's financial position at a point in
time that enlists assets, liabilities and equity of an entity at a particular date.
1 H.M. UMER
, CHAPTER-1 INTRODUCTION OF FINANCIAL INFORMATION
3.3 Statement of comprehensive income
This statement provides information about the performance of an entity in a period.
Comprehensive income during a period is the sum of:
● the profit or loss for the period and
● other comprehensive income. (Examinable in CAF-1)
Statement of comprehensive income is a combination of profit or loss and other
comprehensive income. Profit or loss shows the financial results for a period by
summarising income earned and expenses incurred during that particular period.
3.4 Statement of Profit or Loss and Other Comprehensive Income
________________________________________
The statement of profit or loss and other comprehensive income shows the sales and costs
and other income of a business for a particular period of time.
Example 1
Statement of profit or loss and other comprehensive income for the year ended 31
December 20X6
20X6 20X5
Revenue 36,000 33,000
Cost of sales (24,000) (22,000)
Gross profit 12,000 11,000
Selling expenses (2,800) (2,650)
General and administrative expenses (2,300) (2,050)
Operating profit 6,900 6,300
Rental income from investment properties 500 500
Profit before financing and income taxes 7,400 6,800
Interest expenses on borrowings (1,000) (1,000)
Profit before income taxes 6,400 5,800
Income tax expense (1,600) (1,450)
Profit for the year 4,800 4,350
Other comprehensive income
Gains on property revaluation 2,000 0
Total comprehensive income for the year 6,800 4,350
3.5 Components of profit or loss:
● Revenue refers to the total sales for the year.
● Cost of sales includes the cost of goods or services sold—product purchase costs
for retail businesses and manufacturing costs for producers. It also includes
carriage inwards.
● Gross profit is revenue minus cost of sales, showing profitability from core
products or services before indirect costs.
● Selling expenses are costs related to selling goods, such as sales staff salaries,
commissions, and carriage outwards.
● General and administrative expenses include office rent and salaries of
administrative and finance staff.
● Operating profit reflects the profit from business operations, excluding interest and
tax.
● Adding other income gives profit before financing and income tax.
● Deducting interest gives profit before tax.
2 H.M. UMER
