Acca f3 Financial Accounting (int) Study Text

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 

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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 

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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)

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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).

FAST FORWARD

Exam focus 

point

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