About Financial Accounting Volume 2

Chapter 1: Introduction to the preparation and presentation of financial statements 3 Overview of the introduction to the preparation and presentation of financial statements Introduction to the preparation and presentation of financial statements In this chapter three aspects that form the basis for the preparation and presentation of financial statements are discussed 1 Conceptual framework for financial reporting Par 1.2 2 Presentation of financial statements (IAS1) Par 1.4 3. Financial instruments (IAS32,IAS39, IFRS7, IFRS9) Par 1.5 1.1 Introduction STUDY OBJECTIVES After studying this chapter, you should be able to: l describe what the concept the Conceptual Framework entails; l list the specific purposes of the Conceptual Framework regarding the preparation and presentation of financial statements; l explain the main objective of financial reporting according to the Conceptual Framework; l explain the underlying assumption when preparing financial statements as discussed in the Conceptual Framework; l discuss the qualitative characteristics of financial reporting according to the Conceptual Framework; l explain what is implied by the Conceptual Framework when it refers to the constraints in preparing financial statements; l discuss the elements of financial statements as explained in the Conceptual Framework and indicate which elements are balance sheet (Statement of financial position) elements and which are income statement (Statement of profit or loss and other comprehensive income) elements; l discuss the concepts of recognition of the elements incorporated in the financial statements as explained in the Conceptual Framework; continued 4 About Financial Accounting: Volume 2 l explain what is meant by the measurement of the elements of financial statements by referring to the measurement methods discussed in the Conceptual Framework; l explain the acronyms GAAP, IFRSs, APB and SAICA; l explain what type of business ownership must comply with the IFRSs; l define each of the following terms by referring to IAS1: • fair presentation, • reporting period, • consistency of presentation, • materiality and aggregation, • offsetting, and • comparative information; l list the individual statements that, according to IAS 1, together form the financial statements of a reporting entity; l explain what is meant by the identification of financial statements; l explain what is meant by the reporting period; l explain what is meant by the operating cycle; l explain which items comprise current assets and which comprise current liabilities, according to IAS 1; l list the items that must be presented on the face of the statement of financial position and statement of profit or loss and other comprehensive income respectively by referring to IAS 1; l list the items that can, according to IAS 1, be presented on either the face of the statement of financial position and statement of profit or loss and other comprehensive income or in the notes for the financial period; l discuss the purpose of notes by referring to IAS 1; l discuss the order in which items, that make up the notes, are normally presented as indicated by IAS 1; l explain what is meant by the term “financial instrument”; l identify the instances when an asset will be classified as a financial asset; l identity the instances when a liability will be classified as a financial liability; l explain what is meant by the term “equity instrument”; l explain what the term “fair value” means; l explain when an entity must recognise a financial asset and a financial liability; l explain what is meant by the term “transaction costs”; and l briefly explain the initial and subsequent measurement of a financial instrument with an indication of the accounting treatment of any resulting gain and/or loss on re-measurement. Chapter 1: Introduction to the preparation and presentation of financial statements 5 In About Financial Accounting Volume 1 the reader was introduced to the subject “Financial Accounting”. The Conceptual Framework for Financial Reporting (issued in December 2010 and hereafter referred to as the “Conceptual Framework”) was the starting point of study. Various concepts and procedures were introduced and discussed that enabled the reader to record business transactions in journals, post to ledger accounts and prepare trial balances. The collecting, classifying and recording of accounting data enabled the reader to correctly prepare the financial statements of a sole trader. It is thus at this point necessary to emphasise that a thorough knowledge of all the learning content of Volume 1 is essential to continue with the learning content of Volume 2 of this textbook. In Volume 2, the Conceptual Framework is again the starting point. However, the angle of the discussion differs largely from that of Volume 1 as an in-depth knowledge of the Conceptual Framework (December 2010) and IAS 1 Presentation of Financial Statements (June 2011) forms an important part of the learning content of this volume. Volume 2 focuses on the preparation and presentation of the financial statements of partnerships and close corporations, the purpose of which is to enable the reader to correctly prepare a full set of financial statements for these two types of business ownership. Other related and important issues regarding partnerships and close corporations, for example changes in ownership, dissolutions and conversions, are dealt with in detail as these events are reported on in the financial statements. Other topics discussed in Volume 2 are: l Statements of cash flows: Although a statement of cash flow forms part of the financial statements of an entity, it is dealt with separately from the other financial statements due to its complexity. l Introduction to companies: The reader is introduced to the company as a form of business ownership. It is compared to partnerships and close corporations, specifically relating to its capital structure. l Analysis and interpretation of financial statements: The purpose of and the methods used to analyse and interpret the information contained in financial statements are discussed. l Branches: The concept of an entity with branches is discussed, focusing on the recording of the transactions between the head office and its branches. l Manufacturing entities: The concept of manufacturing and all related issues are discussed, with special reference to the recording of transactions that are unique to manufacturing entities. l Budgets: The preparation of various types of budgets used by an entity, mainly to predict future cash flows, are discussed. The objective of this chapter is to serve as a general introduction for the preparation and presentation of financial statements. In order to achieve its objective, this chapter utilises a thorough discussion of the Conceptual Framework and IAS 1 to equip the reader with the necessary knowledge to prepare the financial statements of partnerships and close corporations.