Part F Preparing
basic financial statements
22: Events after the reporting period
385
Quick Quiz
1
When does an event after the reporting period require changes to the financial statements?
A Never
B
If it provides further evidence of conditions existing at the reporting date
2
What disclosure is required when it is not possible to estimate the financial effect of an event not requiring
adjustment?
A No
disclosure
B
A note to the accounts giving what information is available
3
Which of the following items are adjusting events?
(i)
Inventory found to have deteriorated
(ii)
Dividends proposed at the year end
(iii)
A building destroyed by fire after the reporting date
A (i)
only
B (ii)
only
C (iii)
only
D
None of the above
4
Which of the following items are non-adjusting events?
(i)
Inventory destroyed by flood two days before the reporting date
(ii)
A customer goes bankrupt
(iii)
Fall in value of an investment between the reporting date and the date the financial statements are
finalised
A (i)
only
B (ii)
only
C (iii)
only
D
None of the above
5
A receivable has been written off as irrecoverable. However the customer suddenly pays the written off
amount after the reporting date. Is this event
A Adjusting
B Non-adjusting
386
22: Events after the reporting period Part F Preparing basic financial statements
Answers to Quick Quiz
1
B
Assets and liabilities should be adjusted for events after the reporting period when these provide
additional evidence for estimates existing at the reporting date.
2
B
A statement of the nature of the event and the fact that a financial estimate of the event can not be
made.
3 A
4 C
5 A
Now try the questions below from the Exam Question Bank
Number
Level
Marks
Time
Q46
Examination
1
1 min
Q47
Examination
2
2 mins
387
Statements of
cash flows
Introduction
In the long run, a profit will result in an increase in the company's cash balance
but, as Keynes observed, 'in the long run we are all dead'. In the short run,
the
making of a profit will not necessarily result in an increased cash balance.
The observation leads us to two questions. The first relates to the importance
of the distinction between cash and profit. The second is concerned with the
usefulness of the information provided by the statement of financial position
and income statement in the problem of deciding whether the company has, or
will be able to generate, sufficient cash to finance its operations.
The importance of the
distinction between cash and profit and the scant
attention paid to this by the income statement has resulted in the development
of statements of cash flows.
This chapter adopts a systematic approach to the preparation of statements of
cash flows in examinations; you should learn this method and you will then be
equipped for any problems in the exam itself.
Topic list
Syllabus reference
1 IAS 7 Statement of cash flows F5(a)–(h)
2 Preparing a statement of cash flows
F5(g)
388
23: Statements of cash flows Part F Preparing basic financial statements
Study guide
Intellectual level
F5
Statements of cash flows (excluding partnerships)
(a)
Differentiate between profit and cash flow
1
(b)
Understand the need for management to control cash flow
1
(c)
Recognise the benefits and drawbacks to users
of the financial statements
of a statement of cash flows
1
(d)
Classify the effect of transactions on cash flows
1
(e)
Calculate the figures needed for the statement of cash flows including:
(i) Cash flows from operating activities
(ii) Cash flows from investing activities
(iii) Cash flows from financing activities
1
(f)
Calculate the cash flow from operating activities using the indirect and direct
methods
1
(g)
Prepare extracts from statement of cash flows from given information
1
(h)
Identify the treatment of given transactions in a company's statement of
cash flows
1
Exam guide
This topic is very important. You are certain to be examined on it. Exam questions will not ask you to
prepare a full statement, but some element of the cash flow will need to be calculated (eg cash flow from
financing activities).
At the 2009 ACCA Teachers' Conference, the examiner highlighted statements of cash flows as another
area consistently answered badly in the exam. She also recommended practising full questions in this key
area. It will not only help you through F3 but is an essential skill for F7.
1 IAS 7 Statement of cash flows
Statements of cash flows. are a useful addition to the financial statements of a company because
accounting profit is not the only indicator of performance. Statements of cash flows concentrate on the
sources and uses of cash and are a useful indicator of a company's liquidity and solvency.
It has been argued that 'profit' does not always give a useful or meaningful picture of a company's
operations. Readers of a company's financial statements might even be
misled by a reported profit
figure.
(a)
Shareholders might believe that if a company makes a profit after tax, of say, $100,000 then this is
the amount which it could afford to
pay as a dividend. Unless the company has
sufficient cash
available to stay in business and also to pay a dividend, the shareholders' expectations would be
wrong.
(b)
Employees might believe that
if a company makes profits, it can afford to
pay higher wages next
year. This opinion may not be correct: the ability to pay wages depends on the
availability of cash.
(c)
Survival of a business entity depends not so much on profits as on its
ability to pay its debts
when they fall due. Such payments might include 'profit and loss' items such as material
purchases, wages, interest and taxation etc, but also capital payments for new non-current assets
and the repayment of loan capital when this falls due (for example on the redemption of loan
stock).
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Exam focus
point