Preparing Financial Statements Notes for ACCA FA/FFA By PW

Preparing financial statements is a key part of ACCA Financial Accounting (FA/FFA). This chapter brings together the accounting information recorded during the reporting period and explains how it is presented in the statement of profit or loss and other comprehensive income and other financial statements.

PW provides notes and ACCA study resources that provide additional support for syllabus-based learning and revision. These notes and practice material can be used to understand financial statement formats, revenue recognition, income tax and other comprehensive income before attempting exam-style questions.

General-Purpose Financial Statements

General-purpose financial statements provide information to primary users, particularly investors and creditors, to help them make decisions about providing resources to an entity.

A complete set of financial statements includes:

• Statement of Profit or Loss and Other Comprehensive Income (SPL&OCI)

• Statement of Financial Position (SFP)

• Statement of Changes in Equity (SOCIE)

• Statement of Cash Flows (SCF)

• Significant accounting policies and explanatory notes

Each statement presents a different aspect of the entity's financial information and contributes to an overall understanding of its financial performance and position.

Statement of Profit or Loss and Other Comprehensive Income

A company can present profit or loss and other comprehensive income either as one statement or as two separate statements. Under IFRS 18, income and expenses are classified into categories, with specified subtotals presented in the statement.

The required subtotals include:

• Operating profit

• Profit before financing and income taxes

• Profit

Sole Trader and Company Presentation

The presentation of expenses differs between a sole trader and a company.

A sole trader shows the cost of goods sold calculation:

Opening inventory + Purchases − Closing inventory = Cost of goods sold

The sole trader also lists individual expenses. Income tax is not presented as a business expense because the tax liability belongs personally to the owner.

A company generally presents a single cost of sales figure and can classify operating expenses into areas such as selling, research and development, general and administrative, and other operating expenses.

Expenses by Nature and Function

Expenses can be presented according to their nature or function.

• By nature: Costs are grouped according to what they are, such as depreciation and employee benefits. This approach is relatively simple and objective.

• By function: Costs are grouped according to their purpose, such as cost of sales and selling expenses. This can provide information that is more relevant to users but requires judgement when allocating costs.

Revenue Recognition Under IFRS 15

Revenue from contracts with customers is recognised using a five-step model:

1. Identify the contract with the customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognise revenue when, or as, each performance obligation is satisfied.

Understanding the sequence is important when dealing with questions involving revenue recognition under IFRS 15.

Income Tax

Income tax expense includes the current year's estimated tax and any adjustment relating to the previous year's estimate.

Income tax expense = Current tax estimate for the year + Under-provision from prior year − Over-provision from prior year

The accounting entries include:

Estimated tax:
Debit — Income tax expense
Credit — Current tax payable

Payment:
Debit — Current tax payable
Credit — Bank

For example, if the current year's tax estimate is $35,000 and the previous year's estimate was $30,000, but the actual amount settled was $32,000, there is a $2,000 under-provision. Therefore:

Income tax expense = $35,000 + $2,000 = $37,000

Other Comprehensive Income

Other comprehensive income includes certain gains and losses that are not recognised directly in profit or loss.

Under IAS 16, an entity may choose to measure property using the revaluation model. When a qualifying asset is revalued upwards, the gain can be recognised in a revaluation surplus within equity and presented as other comprehensive income.

The accounting entry for the revaluation can be represented as:

Debit — Cost
Debit — Accumulated depreciation
Credit — Revaluation surplus

Preparing Financial Statements PDF 

The Preparing Financial Statements PDF by PW can bring the chapter's key formats, calculations and accounting treatments together for revision. It can be particularly useful when revisiting the statement of profit or loss, revenue recognition, income tax and other comprehensive income.

After studying the concepts, use the PDF to review the relevant pro-formas and worked examples before moving into question practice. This can help you keep the main accounting treatments together while progressing through the ACCA FA/FFA syllabus.

A Practical Approach to Preparing Financial Statements for ACCA FA/FFA

This chapter combines presentation formats with accounting calculations, so your revision should cover both how financial statements are structured and how individual figures are calculated. Here’s how you can focus on your preparation:

• Locate the chapter in the ACCA FA/FFA syllabus: Start by identifying the financial statement preparation areas you need to cover and use the syllabus as a revision checklist.

• Revise the financial statement formats: Learn what information belongs in the SPL&OCI, SFP, SOCIE and SCF and understand the purpose of each statement.

• Practise revenue recognition: Work through the five stages of the IFRS 15 revenue model and apply them to different customer-contract scenarios.

• Work through income tax calculations: Practise current tax, under-provisions and over-provisions and make sure you can record the related journal entries.

• Understand presentation by nature and function: Compare both methods and revise examples of expenses that may appear under each classification.

• Revise other comprehensive income: Pay particular attention to revaluation gains and how they affect equity and the financial statements.

• Use financial statement preparation questions: After revising the individual concepts, practise questions that require you to prepare or complete financial statement extracts.

• Review the ACCA exam pattern: Use the exam structure to plan your mix of concept revision and question-solving practice.

Preparing Financial Statements brings together several accounting concepts required to present financial information under IFRS Accounting Standards. Understanding financial statement formats, revenue recognition, income tax and other comprehensive income is important for applying the concepts covered in ACCA FA/FFA. PW provides online coaching and revision resources that can complement your syllabus preparation and question practice.