Accounting Fundamentals: Chapter 12 -Company financial statements under IFRS Accounting Standards

What is the purpose of a statement of profit or loss (SoPL)?

Shows a company’s financial performance over a period, detailing revenue, expenses, and profit/loss.

What is the functional format of the profit or loss?

Splits costs into:

• Cost of sales

• Administrative expenses

• Distribution costs
  Exam tip: Use professional judgement to allocate costs; always include company name & period.

What is the statement of financial position for?

Shows the company’s assets, liabilities, and equity at a point in time.

What is the structure of a company’s income statement (profit or loss)? (Mnemonic: R – C = G + O – D – A – F = PBT – T = Net Profit)

• Revenue → starting point

• Cost of sales → subtract → Gross profit

• Other income → add

• Distribution costs (selling expenses) → subtract

• Administrative expenses (office/management) → subtract

• Finance costs (interest on loans) → subtract → Profit before tax

• Tax expense → subtract → Profit for the period (Net Profit)

Exam tip:

• Show expenses as negative (brackets or minus)

• Include company name & period

Mnemonic to remember:
Revenue – Cost = Gross profit + Other – Distribution – Admin – Finance = PBT – Tax = Net Profit

What is the purpose of a statement of financial position (SOFP)?

Shows the financial position at a point in time: assets, liabilities, and equity.

Key sections of SOFP

• Assets: Non-current (PPE, goodwill, intangibles), Current (inventories, receivables, cash)

• Equity: Share capital, reserves (share premium, retained earnings, other)

• Liabilities: Non-current (long-term borrowings, preference shares), Current (trade payables, tax, provisions)

Example SOFP layout – DUCAT PLC (£)

• Total assets: 758,000

• Total equity: 501,000

• Non-current liabilities: 178,000

• Current liabilities: 79,000

Exam tip: Include company name and date; adjust trade receivables for allowances.

What is a statement of changes in equity (SOCE)?

Explains changes in equity during the year: share issues, dividends, profits/losses.

Example SOCE – Bunbury Ltd (£)

• Share capital: 100,000 → 5,000 shares issued at £0.80, 20,000 preference shares issued

• Retained earnings: 45,500 + profit 15,800 - dividends

• Total equity: sum of share capital, reserves, retained earnings

Steps to prepare single entity accounts from a trial balance

• Review TB & additional info to identify changes

• Transfer figures into pro forma or working

• Post adjustments (debit & credit)

• Complete workings; no empty boxes (use ‘0’ if necessary)

• Calculate SPL profit and post to retained earnings

• Complete retained earnings and transfer totals to pro forma

Depreciation exam treatment

• Buildings 2% per annum on cost → admin expenses

• Motor vehicles 40% reducing balance → distribution costs

• Furniture 25% per annum cost less 10% residual → admin expenses
  Exam tip: Record adjustments in SPL; ignore the other side for SOFP if asked only SPL.

How to adjust draft SPL for errors or final transactions

• Review draft and additional info

• Transfer figures to whiteboard/pro forma

• Adjust easiest items first

• Correctly add/deduct from figures

• Transfer totals back to pro forma; enter ‘0’ if needed

Exam tip: Depreciation may require 1 entry (SPL), wrong expense category may require 2 entries (decrease one, increase another).

Steps to adjust draft SOFP

1. Review draft & additional info

2. Transfer figures to pro forma/working

3. Adjust easiest items first

4. Correctly add/deduct, post two entries if adjustment affects profit → retained earnings

Exam tip: Always set up a retained earnings working for profit-impacting adjustments.

How should the disposal of a non-current asset be reflected in the financial statements?

• Remove the asset cost and accumulated depreciation from the statement of financial position.

• Record any proceeds from the sale.

• Record any gain or loss on disposal in profit or loss under the relevant category (e.g., distribution costs or other operating income).

• Depreciation already recorded → don’t double-count.

How should an error in closing inventory valuation be corrected?

• Compare inventory at cost vs recorded value.

• Adjust cost of sales to reflect the correct cost.

• Ensure statement of financial position reflects correct inventory balance.

Tax liability vs tax expense

• Tax expense: SPL, expense for year

• Tax liability: SOFP, amount owed to tax authority
  Exam tip: Adjust tax based on under/over provisions.