FINANCIAL REPORTING

SLIDES COMPILED BY:

ATIEMO FRANCIS YEBOAH

BSC. ACCOUNTING

You learn something everyday if you

pay attention_Ray LeBlond

TEL: 0261134908
FINANCIAL REPORTING
BACT 307

SERVICE EXCELLENCE 2
 Introduction
In this lesson, we would be looking at
• IASB’s Conceptual Framework with emphasis on
• The Objective of General Purpose Financial Statement
• Underlying Assumptions and Concepts
• The Qualitative Characteristics of Financial Information
• Recognition and Measurement of the Elements of
Financial Statements

At the end of the lesson, students must be able to

• Explain the objectives of general purpose financial statement
• Differentiate between elements and components of financial stateme nt
• Explain the qualitative characteristics of financial information.

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 Meaning of Conceptual Framework
• Conceptual Framework for financial reporting has to do with
generally accepted theoretical principles and concepts that form
the basis for preparation of financial Statements.

• The theoretical principles provide the basis for the development

of new standards and the evaluation of those already existing

• The conceptual framework will form the theoretical basis for

determining which events should be accounted for, how they
should be measured and how they should be communicated to
the user.
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 Need for the Conceptual Framework
Dangers of not having Conceptual Framework
Standards tend to be produced in a haphazard and fire fighting approach

Fundamental principles are tackled more than once in different standards

thereby producing contradictions and inconsistencies in basic concept (prudence
and matching).

I t leads to ambiguity and it affects the true and fair concept of financial
reporting

CF can bolster standard setters against political pressure from various lobby
groups and interested parties.

The lack of CF has become clear in the USA because of their application of the
US GAAP.
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 t o assist auditors in forming an opinion on whether financial statements
comply with international accounting standards; and

t o provide those who are interested in the work of the IASB with information
about its approach to the formulation of accounting standards.

t o assist national standard-setting bodies in developing national accounting

standards;

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 t o assist preparers of financial statements in applying international financial
reporting standards and in dealing with topics that have yet to form the subject
of an accounting standard.

t o assist users of financial statements in interpreting the information

contained in financial statements prepared in compliance with international
financial reporting standards

t o assist the IASB in promoting harmonisation of regulations, accounting

standards and procedures relating to the presentation of financial statements
by providing a basis for reducing the number of alternative accounting
treatments permitted by accounting standards,

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 ISSUES TO NOTE
• Keep in mind this Conceptual Framework is not an accounting
standard itself, and it doesn’t override the requirements of any
existing accounting standard.

• Occasionally, an accounting standard may conflict with the

Conceptual Framework, although this is rare. When this happens
the requirements of the accounting standard override the
requirements of the Conceptual Framework.

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 Disadvantage of IASB Conceptual
Framework
• Financial statements are intended for a variety of users and it is not certain
that a single CF can be devised which will suit all users

• There may be a need for a variety of accounting standards each produced for
a different purpose (and with different concepts a basis)

• It is not clear that a conceptual framework makes the task of preparing and
then implementing standards any easier than without a framework

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Coverage of the Conceptual
Framework

SERVICE EXCELLENCE 10
 Objectives of Financial Reporting

To provide financial information that is

useful to a wide users in making
decisions relating to providing resources
to the entity

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Objectives of Financial Reporting
Users’ decisions involve decisions about

buying, selling or
holding equity or debt providing or settling loans and
instruments other forms of credit

voting, or otherwise influencing

management’s actions

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Objectives of Financial Reporting
To make these decisions, users assess

prospects for future net cash

inflows to the entity

management’s
stewardship of the entity’s
economic resources

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Objectives of Financial Reporting
To make the two assessments discussed earlier,
users need information about both

the entity’s economic resources,

claims against the entity and
changes in those resources and
claims

how efficiently and

effectively management
has discharged its
responsibilities to use the
entity’s economic
resources 14
Financial Statements and the Reporting
Entity
Reporting entity :
•It is an entity that is required, or chooses, to prepare financial
statements

•not necessarily a legal entity-could be a portion of an entity or comprise

more than one entity

Financial statements:
a particular form of financial reports that provide
information about the reporting entity’s assets,
liabilities, equity, income and expenses

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Financial Statements and the Reporting
Consolidated financial statements :
Entity
Unconsolidated financial statements :
provide information about assets,
provide information about assets, liabilities,
liabilities, equity, income and expenses of
equity, income and expenses of the parent
both the parent and its subsidiaries as a
only
single reporting entity

Combined financial statements:

provide information about assets, liabilities, equity,
income and expenses of two or more entities that are
not all linked by a parent- subsidiary relationship

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 Underlying Assumptions
Accruals basis
The effects of transactions and other events are recognised when they occur (and not as
cash or its equivalent is received or paid) and they are recorded in the accounting records
and reported in the financial statements of the periods to which they relate.

Going Concern
The entity is viewed as continuing in operation for the foreseeable future. It is assumed that
the entity has neither the intention nor the necessity of liquidation or of curtailing materially
the scale of its operations

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CONCEPT

Business Entity

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CONCEPT

Period of Time

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CONCEPT
Monetary Unit

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 CONCEPT
Historical Cost
Usually, the exchange price is retained in the accounting records as
the value of an item until it is removed from the records.

Cost
GH₵18,000

Replacement Cost Market Value

GH₵15,000 GH₵17,500

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 CONCEPT

Historical Cost

Which amount should be used?

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CONCEPT

Matching

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The Qualitative Characteristics Of Financial
Information
Fundamental Qualitative Characteristics
• Relevance
• Faithful Representation

Enhancing Qualitative Characteristics

• Comparability
• Verifiability
• Timeliness
• Understandability

SERVICE EXCELLENCE 24
The Qualitative Characteristics Of Financial
Information
Relevance:
•Accounting information is relevant if it can make a difference in a decision.

•The Relevance of information is affected by its nature and its materiality.

•Materiality is an aspect of relevance which is entity-specific.

•It means that what is material to one entity may not be material to another. It is relative.
Information is material if it is significant enough to influence the decision of users.

•Example, the financial statements must show the profit of a division which has been
closed.

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hful Representation:
hful Representation is the second Fundamental Qualitative Characteristic.
financial information in the financial reports should represent what it purports to represent. Meaning,
ould show what really are present (Example: Position of Assets and Liabilities) and what really
pened (Example: Position of Income and expenditure), as the case may be.
e are three characteristics of faithful representation:
ompleteness: Presentation of all necessary information for a user to understand the events being
cted. It includes all necessary descriptions and explanations (adequate or full disclosure of all
essary information),

eutrality: Presentation of Financial information must not be bias or manipulated in any way in order to
ence the decision of users. (fairness and freedom from bias). We often refer to a term called True and
View in Accounting.

ee from error: There should not be material errors and inaccuracies in the preparation the financial
ements. That does not mean no inaccuracies SERVICE
can arise,EXCELLENCE
particularly in case of making estimates. 26
standards expect that the estimates are made on a realistic basis.
 The Qualitative Characteristics Of Financial
Information
•

•
•

• Verifiability: A company's accounting results are verifiable when they are reproducible, so
that, given the same data and assumptions, an independent accountant can produce the
same result the company did.

SERVICE EXCELLENCE 27
 The Qualitative Characteristics Of Financial
Information
• Timeliness: The timeliness of accounting information refers to the provision
of information to users quickly enough for them to take action.

• Information becomes obsolete and useless if it is not reported within time. In

Ghana, the companies code specifies the time for preparation and
presentation of Financial reports.

• Understandable: Accounting information should be understandable to users

who have a reasonable knowledge of business and economic activities and
who are willing to study the information carefully.

SERVICE EXCELLENCE 28
 The Elements of Financial Statements
Statement of Financial Position
• Assets: is a economic resource controlled by the entity as a result of past
events.
• An economic resource is a right that has the potential to produce economic
benefits
• Liability: present obligation of the entity to transfer an economic resource as
a result of past events
• An obligation is a duty or responsibility that the entity has no practical ability to
avoid

• Equity: the residual interest in the assets of the entity after deducting all its
liabilities.

SERVICE EXCELLENCE 29
 Statement of Profit or Loss and other
Comprehensive Income
Income: Increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to contribution from
equity participants.

Expenses: Decrease in economic benefits during the accounting period in the

form of outflow or depletions of assets that result in decreases in equity other
than those relating to distribution to equity participants.

SERVICE EXCELLENCE 30
Recognition
it is the process of capturing for inclusion in the statement of
financial position or the statement(s) of financial performance an
item that meets the definition of an asset, a liability, equity, income
or expenses

Recognition is appropriate if it results in both relevant information

about assets, liabilities, equity, income and expenses and a faithful
representation of those items, because the aim is to provide
information that is useful to investors, lenders and other creditors
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 Recognition of the Elements
According to the Framework, an item that meets the definition of an element should be
recognized (i.e., incorporated in the financial statements) if:

• Relevance:
it is probable that any future economic benefit associated with the item will flow to or
from the entity with certainty,

• Faithful representation:
the item has a cost or value that can be measured with reliability.

The recognition processes are of three stages :

•Initial recognition,
• subsequent measurement and
•de-recognition (e.g. disposal or destruction).

SERVICE EXCELLENCE 32
 Measurement of the elements of
financial statements
Historical cost measurement bases
• Historical cost provides information derived, at least in part, from the price
of the transaction or other event that gave rise to the item being measured.

• Historical cost of assets is reduced if they become impaired and historical

cost of liabilities is increased if they become onerous.
(onerous liability is an obligation in which the aggregate cost required to
settle it is higher than the economic benefit to be obtained from it)

• one way to apply a historical cost measurement basis to financial assets and
financial liabilities is to measure them at amortised cost

SERVICE EXCELLENCE 33
Current value measurement bases
Current cost:
Assets are carried at the amount of cash or cash equivalents that would have to be paid
if the same asset was acquired now.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that would
have to be required to settle the obligation now.

Fair Value:
The price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date

Value in use:
Reflects entity-specific current expectations about the amount, timing and uncertainty of
future cash flows

SERVICE EXCELLENCE 34
 Conclusion

END OF PRESENTATION

SERVICE EXCELLENCE 35
SERVICE EXCELLENCE 36
FINANCIAL REPORTING
BACT 307
WEEK 2

SERVICE EXCELLENCE
 NEED FOR THE REGULATORY
FRAMEWORK
Regulatory Framework is the most important element in
ensuring relevant and reliable reporting that meets
needs of shareholders and other users

Without a single body overall responsible for producing

financial reporting standards(IASB) and a framework of
general principles within which they are produced(the
framework), there would be no means of enforcing
compliance with GAAP

SERVICE EXCELLENCE
In Ghana, the regulatory framework for preparation of financial
statements includes:
1) The Companies Act 2019
•Section 44—Issue of Shares
•Section 45—Payment of Shares.
•Section 49—Classification of Shares
•Section 68 — Meaning of “stated capital”
•Section 69— Reduction of stated capital
•Section 70 — Meaning of “surplus”
•Section 71— Meaning of “income surplus”
•Section 72— Legality of dividend payments

SERVICE EXCELLENCE
 REGULATORY FRAMEWORK FOR THE
PREPARATION AND PRESENTATION OF
FINANCIAL STATEMENTS
•Section 127—Keeping of books of account and preparation of financial
statements
•Section 128— Circulation of financial statements and reports
•Section 129 — First financial statement after incorporation
•Section 130 — Balance sheet
•Section 131 — Consolidated financial statements

2) Ghana Stock Exchange listing rules and

3) International Financial Reporting Standards (IFRS)

SERVICE EXCELLENCE
 INTODUCTION TO
ACCOUNTING STANDARDS
Overview
DMeaning of Accounting Standards
DThe Importance of Accounting Standards
DLimitations of Accounting Standards
DOptions for the Development of Accounting Standards
DBenefits of the global harmonization of accounting standards
D Disadvantages of adopting International Accounting Standards
DDue Process for developing International Accounting Standards

SERVICE EXCELLENCE
What are accounting standards?
Accounting Standards are pronouncements,
purposefully issued by a body with authority to
regulate the practice of accounting for the purpose
of prescribing the accounting treatments and
disclosure requirements of financial transactions in
financial statements.

SERVICE EXCELLENCE
 The Importance of Accounting
Standards
D Accounting Standards prescribe treatments and disclosure
requirements for transactions in financial transactions.
D Accounting Standards enforce objectivity in reporting financial
transactions.
D Accounting Standards enhance comparability of financial
statements between similar entities and between different
accounting periods.
D Accounting Standards serve as a major source of authority for
resolving issues of accounting that may be in controversy.
D Accounting Standards help establish a body of theory and practice
that act as a general guide in accounting issues and promote best
practices.

SERVICE EXCELLENCE
Limitation of Accounting Standards
D The standards setting process may be subjected to
lobbying thereby tending to serve the interest of groups
with vested interest that have the strongest lobbying
powers;

D It is often argued that, the real user groups are often not
actually involved to a larger extent in the standards
setting process.

D Sometimes, accounting standards may tend towards

rigidity and move away from flexibility thereby increasing
the cost of compliance;

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 Options for the Development of
Accounting Standards
DDevelop own national standards

DAdapt existing accounting standards

DAdopt International Accounting

Standards

QUESTION

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Harmonization of Accounting Standards
DHarmonisation is the attempt, to bring together different systems.

DHarmonisation is a “process of increasing the compatibility of

Accounting Practices by setting limits on how much they can vary.”

DHarmonization of financial statements refers to financial reporting

that is based on international accounting standards that are accepted
across the globe.

DThe international business community recognized the need for

uniform accounting standards.

DThis has been necessitated by the spectacular growth in the

number and size of multinational companies, foreign investments
and cross-border listings on the stock exchanges.

SERVICE EXCELLENCE
Benefits of the Global Harmonization
of Accounting Standards
DHarmonization leads to the use of best international accounting
practices;

DHelps national accounting standard setters to save cost;

DSimplifies accounting theory and practice and further simplifies the

training of accountants for all countries of the world;

DLends international credence to the reporting standards of the less

developed countries, reduces the accounting risk and thereby facilitates
easy flow of foreign direct investments;

DMost of-the-shelve accounting software are calibrated to be IFRS and

IPSAS compliant.

SERVICE EXCELLENCE
D Centralized political pressure on the global standards setting body;

D Monopoly conferred on the global standard setting body over the

standard setting process;

D A single set of global standards may not be suited to all economic

environments;

D Cost of migration by local firms from existing national GAAP.

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 Due Process for developing
International Accounting Standards
The steps of the due process are as follow:

(1) Setting the Agenda

Topics to add to the IASB’s work programme
are initially identified and evaluated by
reference to the needs of investors.
The IASB considers the following:
• the relevance to users of the information and the
reliability of information that could be provided;
• whether existing guidance is available
• the possibility of increasing convergence;
• the quality of the standard to be developed; and
• resource constraints.

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 Due Process for developing
International Accounting Standards

(2) Planning the project

At this stage the IASB decides whether to

work on the project to develop or amend a
standard. A work team is then selected.

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 Due Process for developing
International Accounting Standards
(3) Developing and publishing a discussion paper

A discussion paper is not mandatory, however the

IASB normally publishes it as the first publication on
any major new topic.

The purpose of the discussion paper is to explain the

issue and solicit early comment.

A discussion paper will normally include:

•A comprehensive overview of the issue
•Possible approaches to addressing the issue
•The preliminary views of the IASB
•Invitation to comment

SERVICE EXCELLENCE
 Due Process for developing
International Accounting Standards
(4) Developing and publishing the exposure draft
An exposure draft is a mandatory step in the due
process and is the IASB main vehicle for consulting the
public. An exposure draft is draft of IFRS.
The public are invited to comment and this process may
result in the issue of a further exposure draft.
The development of the exposure draft begins with the
IASB considering the following: :
• issues on the basis of staff research and recommendations;
• comments received on the discussion paper (if one was
published)
• suggestions made by the IFRS Advisory Council, working
groups, other standard setters

SERVICE EXCELLENCE
 Due Process for Developing
International Accounting Standards

(5) Developing and publishing the Standard

When all issues from the exposure draft

stage have been resolved and the IASB
members have balloted in favour of
publication, a final IFRS is published.

SERVICE EXCELLENCE
 Due Process for developing
International Accounting Standards

(6) After the Standard is issued

Post-issues of the implementation of the standard is

monitored in order that the IASB can identify any
issue arising from its application and its impacts.

Post-implementation reviews are carried out on

major new standards, usually after they have been
applied internationally for two year.

SERVICE EXCELLENCE
 Status of IFRS in Ghana
D IFRS are not enshrined in international law and as a results
their application is not mandatory in a general sense.
D Their use in particular countries depends on adoption by
local authorities
D The council of the Institute of Chartered Accountants
(Ghana) voted to adopt IFRS as Ghana National Accounting
Standard with effect from 1st January, 2007. it later adopted
the IFRS for SMEs in 2010.
D As a result all companies in Ghana are required to apply
either:
– Full IFRS or The IFRS for SMEs
• Currently (2019) we have 40 IAS and IFRS in issue

SERVICE EXCELLENCE
 Difference between IAS AND IFRS
DIAS are the standards issued by the International
Accounting Standard Committee (IASC) from 1973 to
2001.

DIFRS is the current IAS version issued by the

International Accounting Standard Board (IASB) from
2001 to date.

SERVICE EXCELLENCE
SERVICE EXCELLENCE
 FINANCIAL REPORTING
BACT 307
INTERNATIONAL FINANCIAL REPORTING
STANDARDS
(IAS 1 & IAS 2)
 IAS 1:
Presentation of Financial Statements
IAS 1: Presentation of Financial Statements
o Objective and scope
o General purpose financial statements (covered already)
o Accounting concepts (covered already)
o Elements of financial statements (covered already)
o Measurement of the Elements of financial statements
Accounting concepts (covered already)
o Components of financial statements
o Disclosures
 Objective of IAS 1
The purpose of IAS 1 is to provides guidelines on the presentation of
the “general purpose financial statements,”.

To ensure comparability with the entity’s financial statements of

previous periods and with those of other entities.

It provides overall requirements for the presentation of financial

statements.

It provides guidance on their structure, and the minimum

requirements for their content.
 Scope of the IAS 1
The requirements of IAS 1 are to be applied to all “general purpose
financial statements” that have been prepared and presented in
accordance with International Financial Reporting Standards (IFRS).

•“General purpose financial statements” are those intended to meet the

needs of users who are not in a position to demand reports that are
tailored according to their information needs.

IAS 1 is not applicable to condensed interim financial statements

prepared according to IAS 34
 Components of Financial
Statements
Financial statements should contain following:

DA statement of financial position at the end of the period.

DA statement of profit or loss and other comprehensive Income for

the period.

DA statement of changes in equity for the period

DA statement of Cash flow.

DNotes, comprising of summary of accounting policies and other

relevant explanatory notes to the financial statements.
 COMPONENTS OF FINANCIAL STATEMENTS

Statement
of financial
position

Statemen
t of profit
or Loss
Component Statemen
s of t of
Financial Changes
Statements in Equity
Cash
Flow
Statemen
t

Notes

6
 Reporting Period
• The basic assumption is that the financial statement
should be prepared annually (i.e., 12 months).

• Any financial statements prepared that depart from

the annual reporting period should be disclosed by
reason for this change and a warning associated
with comparability.
 Statement of Financial Position
• Noncurrent and current assets and liabilities should be classified
separately on the face of the balance sheet except in circumstances
when a liquidity-based presentation provides more reliable and relevant
information (an example is reporting for financial institutions)

• Current assets. A current asset is one that is likely to be realized within

the normal operating cycle or 12 months after balance sheet date, held
for trading purposes, or is cash or cash equivalent. All other assets are
noncurrent.

• Current liabilities. A current liability is one that is likely to be settled

within the normal operating cycle or 12 months after Statement of
Financial Position date, held for trading purposes, or there is no
unconditional right to defer settlement for at least 12 months after
Statement of Financial Position date. All other liabilities are noncurrent.
Statement of Financial Position
The minimum line items to be included on the face of SFP are:
o Property, plant, and equipment
o Investment property
o Intangible assets
o Financial assets
o Inventories
o Trade and other receivables
o Cash and cash equivalents
o Trade and other payables
o Provisions
o Liabilities and assets for current tax
o Deferred tax etc.
o Issued capital and
o Reserves
 Statement of Financial Position
Statement of Financial Position as at 31st December 2018
ASSETS
Non-Current Assets: GH¢'000
Property, Plant and
Equipment 41,655
Investment Property 9,000
Intangible Assets 700
51,355
Current Assets:
Inventories 3,150
Trade Receivables 8,200
Total Assets 62,705
 Statement of Financial Position
Cont’d
EQUITY AND LIABILITIES
Equity:
Stated Capital 15,750
Retained Earnings 10,480
Revaluation Surplus 15,560
General /Statutory/Contingency
Reserve 1,500
43,290
Non-Current Liability:
10% Loan Note 2,500
10% Preference shares (redeemable) 3,000
Deferred taxation 2,300
 Statement of Financial Position
Cont’d
Current Liabilities:
Trade payables 3,400
Loan interest accrued 305
Bank overdraft 910
Income tax accrued 7,000
Total Equity and Liabilities 62,705
 Income for the year ended 31st December 2018
GH¢’000
Revenue 68,865
Cost of sales (35,500)
Gross profit 33,365
Administrative expenses (10,695)
Selling, Marketing & Distribution costs (5,600)
Operating profit 17,070
Other incomes-(rental/investment income/Gain IAS 40) 1,360
 Statement of Profit or Loss and
other Comprehensive Income Cont’d
Profit before Interest and
Tax 18,430
Finance Cost (500)
Profit before Tax 17,930
Income tax expense (7,000)
Profit after Tax 10,930
Other Comprehensive Income:
Revaluation gain (IAS 16) 14,760
Total Comprehensive
Income 25,690
 Statement of Changes in Equity
Statement of Changes in Equity for the year ended 31st December 2018
Stated Retained Revaluation General Total
Capital Earnings Surplus Reserve
GH¢’000 GH¢’000 GH¢’000 GH¢’000 GH¢’000
Balance as at 1/1/2017 14,500 3,200 800 1,500 20,000
Profit for the year 10,930 10,930
Revaluation gain on PPE 14,760 14,760
Bonus issue of shares (500000/4*10) 1,250 (1,250) 0
Dividends (2,400) 2,400
15,750 10,480 15,560 1,500 43,290
 Statement of Cashflow

DThe statement of cash flow serves as a basis for evaluating the entity’s ability
to generate cash and cash equivalents and the needs to utilize these cash flows.

DRequirements of statement of cash flow presentation have been elaborated in

IAS 7, Statements of Cash Flow.

DThis financial statement will be covered in week 10

Notes to the financial statements
IAS 1 suggested that note should be presented in the following order:
o A statement of compliance with IFRSs.
o A summary of significant accounting policies applied including.
o The measurement basis (or bases) used in preparing the
financial statements.
o The other accounting policies used.
 IAS 2 - OVERVIEW

DObjective and scope

DExpense recognition
DMeasurement
DDisclosure
 IAS 2 –Objective and Scope
•. The Standard prescribes the accounting treatment for inventories.

• It provides guidance on the determination of the cost and

subsequent recognition of expense to be written down of
inventory (i.e., Net realizable value).

• The Standard also provides guidance on the cost flow

assumptions (“cost formulas”) that are to be used in assigning
costs to inventories.

• It is used to determine the costs to be recognized as inventory costs and

the cost to be transferred to the statement of profit or loss as expense
 IAS 2 – Objective and Scope

IAS 2 applies to inventories excepts:

•construction work-in-progress (i.e., NOW IFRS 15).
•Financial instruments (i.e., IAS 32).
•Biological assets related to agricultural produce
at the point of harvest (i.e., IAS 41).
 Definition of Inventories
Inventories are assets:
oHeld for sale in the ordinary course of business (usually
within the 12 months of the entity)
oIn the process of production for such sale (W.I.P), or
oIn the form of materials or supplies to be consumed in
the production process or in the rendering of services (e.
g., raw materials )
 IAS 2 - Measurement
There are three stages involved in valuing
inventory.
1. Inventory should be value at cost or
production cost.
2. Determine the Net realisable value of the
inventory.
3. Using the standard measurement such as:
the lower than cost/ production cost.
Determination of Net Realizable Value
(NRV)
• NRV is the estimated selling price in the ordinary
course of business less Trade discount or rebate, the
estimated costs of completion and the estimated
costs necessary to make the sale such as (Marketing,
selling and distribution expenses)
 Determination of Cost
Cost includes:
o cost of purchase (exclude trade discounts and rebates)
o Actual cost of conversion (include ‘normal’ production overheads)
o Other costs incurred in bringing the inventories to their present
location and condition
Fixed production overheads must be allocated to items of inventory on the
basis of normal capacity of the production facilities
 Determination of Cost

Cost excludes:
abnormal amounts of wasted materials,
labour or other production costs
storage costs, unless necessary in the
production process before the next
production stage
administrative overheads
selling costs
 IAS 2- Measurement
Example 1- Valuing Inventory
LBC manufactures mechanical talkative recorder, which trade under the name
‘Talkative’. In the year ended 31 December 2018, 10,000 Talkatives were
manufactured and the related costs were
GH₵
Materials 3,000
Labour 4,000
Depreciation of Machinery 2,000
Factory rates 1,000
Sundry factory expenses 3,000
Selling expenses 2,000
Expenses at head office 4,000
19,000
In addition to the information above, at 31 December 2018, there were 1,000
Talkatives in inventory.
Requirement
Assuming that these have a resale value of GH₵4 and a Net Realisable Value of
GH₵1.20 each, what value should be placed on the closing inventory?
 IAS 2- Measurement
Example 1- Valuing Inventory
Solution
GH₵
Materials 3,000
Labour 4,000
Depreciation of machinery 2,000
Factory rates 1,000
Sundry factory expenses 3,000
Total cost 13,000

Units manufactured 10,000

Unit cost GH₵1.30

Number of units on hand at year end 1,000

Value of closing inventory (1,000 x GH₵1.2) GH₵1,200
 IAS 2- Measurement
Example 2- Valuing Inventory
Finished Goods of dissimilar items at 31 December 2018:
Item Cost NRV Value
GH₵ GH₵ GH₵
Samsung 1,000 1,400
Nokia 800 700
Sony 2,500 2,800
Ericson 1,800 1,700
infinix 200 300
Dumsor 300 250
6,600 7,150

What figure should be recorded for the inventories in the financial

statements at 31 December , 2017?
 IAS 2- Measurement
Example 2- Valuing Inventory
Solution:
Finished Goods of dissimilar items at 31 December 2018:
Item Cost NRV Value
GH₵ GH₵ GH₵

Samsung 1,000 1,400 1,000

Nokia 800 700 700
Sony 2,500 2,800 2,500
Ericson 1,800 1,700 1,700
infinix 200 300 200
Dumsor 300 250 250
6,600 7,150 6,350
 IAS 2 – Measurement
Example 3-Valuing inventory
Finished Goods of dissimilar items at 31 December 2018:
Esinam Ltd has the following products in inventory at the end of 2018:
Units Cost per unit GH¢
Ahomka (completed) 5,400 22
Adonko (part complete) 2,800 26
Each product normally sells at GH¢34 per unit. Due to the difficult trading
conditions, Esinam Ltd intends to offer a discount of 15% per unit and expects to
incur GH¢4 per unit in selling costs. GH¢10 per unit is expected to be incurred to
complete each unit of Adonko.
Required:In accordance with IAS 2 Inventories, at what amount should inventory be
stated in the financial statements of Esinam Ltd as at 31 December 2018?
(3 marks)Source: ICA, NOV., 2017
 Quantity Cost NRV Total GH¢
Ahomka 5,400 22 34*0.85=28.9-4=24.9 118,800
Adonko 2,800 26 34*0.85=28.9-4-10=14.9 41,720
160,520
 Cost Formulae
Methods of valuing inventory issues are:
> First In First Out (FIFO)
> Last In First Out (LIFO)
> Weighted Average
LIFO is not allowed under IAS 2
 DISCLOSURE
D Accounting policy adopted in measuring inventories,
including cost formulas
D Carrying amount of inventories under major headings
(e.g. raw materials, WIP and finished goods)
D Carrying amount of inventories at fair value less costs
to sell
D Amount expended in the period
D Amount of any write downs of inventories
D Amount of any reversal of write downs
D Cause of write downs
D Carrying amount of inventories pledged as security
 ASSIGNMENT 1- IAS 2:
QUESTION 1 INVENTORIES
LBC manufactures mechanical talkative recorder, which trade under the name
‘Talkative’. In the year ended 31st December 2017, 10,000 Talkatives were
manufactured and the related costs were:

In addition to the information above, at 31st December 2017, there were 2,000
Talkatives in inventory.
Required:
Assuming that these have a resale value of GH¢5 and a Net Realisable Value of
GH¢1.15 each, what value should be placed on the closing inventory?
 ASSIGNMENT 1- IAS 2:
QUESTION 2 INVENTORIES
a) State how closing inventory is to be measured according to IAS 2.
b) Using the following information calculate;
(i)The value of closing inventory for each of the Phones (Nokia, Sumsung and
Motorola).
(ii)The total value of all the closing inventories (Nokia, Sumsung and Motorola).
Azonto trades in different types of phones on wholesale basis. The following data
was extracted at the end of the year 31st December, 2016.

Nokia Sumsung Motorola

Cost per unit GH¢8 GH¢10 GH¢19
Net realisable value per unit GH¢10 GH¢7.9 GH¢15.6
Selling price per unit in the market GH¢12 GH¢11 GH¢14
Units in inventory 10,000 20,000 30,000
FINANCIAL REPORTING
BACT 307

SERVICE EXCELLENCE
 PROPERTY, PLANT AND EQUIPMENT
(IAS 16)

DObjective and scope

DRecognition
DMeasurement at recognition
DMeasurement after recognition (CM, RM)
DDerecognition
DDisclosure

SERVICE
 IAS 16 - OBJECTIVE AND SCOPE

DIAS 16 objective:
Standards for the recognition and
derecognition of PP&E assets, measurement
at and after acquisition, and disclosures

DScoped out:
Assets held for sale , agricultural biological
assets, non-renewable natural resource rights
and reserves and investment property. These
are all treated under separate standards

SERVICE
•Definition of PPE
“Tangible items that:
(a) are held for use in the production or supply of
goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one
period”

SERVICE
• Carrying amount
• It is the amount at which an asset is recognised
after deducting any accumulated depreciation
and any accumulated impairment losses

• Depreciation
• It is the systematic allocation of the depreciable
amount of an asset over its useful life.

SERVICE
 IAS 16 - Initial cost of PPE

> Purchase price after trade discounts but before

settlement discounts, and includes transport and handling
costs and non-refundable tax such as import duties, etc

> If self-constructed, labour costs of own employees (but

abnormal costs such as wastage and errors are excluded).

> Please note: Also written off to Profit or Loss immediately

are staff training costs – these must not be capitalised;
even IAS 38 on Intangibles says so. Also it is not
permissible to add a profit margin to self-constructed
assets.

SERVICE
 IAS 16 - Initial cost of PPE

> Includes site-preparation and installation costs

and professional fees (such as legal and
architect’s fees)

> also included can be borrowing costs during

construction phase only (for self-constructed
qualifying assets) and removing and dismantling
and restoration costs which qualify as a liability
(where a present obligation exists) under IAS 37.

SERVICE
 IAS 16 - Initial cost of PPE

Cost elements to exclude:

1. Costs after asset is in place and ready for use
as management intended
2. Borrowing cost if the asset is not a qualifying
asset
3. Costs to open a new facility, introduce a product,
move to new location
4. General and administrative overhead type costs

SERVICE
 IAS 16 – RECOGNITION CRITERIA

Costs are recognized as PP&E only if:

1. probable that future economic benefits
associated with the item will flow to the entity,
and
2. the cost can be measured reliably.

Applies to costs at acquisition and after acquisition.

SERVICE
 IAS 16 - ILLUSTRATION 1

Situation-equipment:
• Price list GH₵ 100,000 cost,
• 7% sales tax
• GH₵ 10,000 to transport to plant,
• GH₵3,000 labour, GH₵2,000 materials to
calibrate machine.
• GH₵4,000 general administrative cost
• GH₵ 11,000 to consultant for services related to
choice of machine and calibration

SERVICE
 IAS 16 – SOLUTION 1

Equipment cost: GH₵

Invoice price 100,000
Sales tax: 7,000
Transportation 10,000
Material and Labour/Calibration 5,000
Professional fees 11,000
133,000

SERVICE
 IAS 16 - ILLUSTRATION 2
Construction of BB and KK’s new store began on 1st April 2017. The
following costs were incurred on the construction:
GH¢000
• Freehold land 4,500
• Architect fees 620
• Site preparation 1,650
• Materials 7,800
• Direct labour costs 11,200
• Legal fees 2,400
• General overheads 940
• BB and KK secured a loan of GH¢25m on 1st April 2017` to finance the
construction of the new store (which meets the definition of a
qualifying asset per IAS 23). The loan carried an interest rate of 8% per
annum and is repayable on 1st April 2018. The amount of the interest
on the loan for the current year stands at GH₵1,500,000

SERVICE
 IAS 16 - ILLUSTRATION 2

.
The store was completed on 1st January 2018 and brought into use
following its grand opening on the 1st April 2018.
Required
Calculate the amount to be included as property, plant and equipment in
respect of the new store for the year ended 31st March 2018 in
accordance with IAS 16

SERVICE
 IAS 16 - SOLUTION 2

GH¢000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
Borrowing cost 1,500
29,670

SERVICE
 Assignment - PPE
• QUESTION 1
• Construction of BB block by KK Limited began on 1st April 2016. The
following costs were incurred on the construction:
• GH¢
• Freehold land 4,500,000
• Architect fees 620,000
• Site preparation 1,650,000
• General overheads 940,000
• Price list of Materials purchased 7,800,000
• Discount on materials 10%
• Direct labour costs 11,200,000
• Legal fees 2,400,000

SERVICE
 Assignment - PPE
• QUESTION 1 CONTINUATION

KK secured a loan of GH¢25m on 1st April 2016 to finance the construction of

•
the new store (which meets the definition of a qualifying asset per IAS 23).
The loan carried an interest rate of 8% per annum and is repayable on 1st April
2017.
• The block was completed on 1st January 2017 and brought into use
following its grand opening on the 1st April 2017.

• Required:
Calculate the amount to be included as property, plant and equipment in respect
•
of the new store for the year ended 31 st March 2017 in accordance with IAS 16

SERVICE
Subsequent measurement
Choice of two models:
1. Cost model
2. Revaluation model

Separate decision for each class of PP&E assets.

Examples of a class: land, office equipment,
machinery, buildings

SERVICE
Cost Model (CM):
PP&E are carried after acquisition at cost, less
accumulated depreciation and accumulated
impairment losses

Revaluation Model (RM):

PP&E are carried after acquisition at fair value at date of
revaluation, less any
accumulated depreciation
and impairment losses after revaluation

SERVICE
Depreciation:
• Each major component may have a different
depreciation policy

• Depreciable amount: carrying amount less residual

value
• Residual value defined:
- estimate of net amount entity would receive now
from asset’s disposal, if asset was as old and in
same condition as expected at end of its useful life

SERVICE
Depreciation (continued):
DDepreciation period begins when PP&E is in place
and ready to use, continues even if not used or is
retired from active use
DDepreciation period ends when PP&E is derecognized or
classified as held for sale (IFRS 5)
DDepreciate over useful life to entity

DUseful life – consider capacity, wear and tear,

technology changes, changes in product
demand, contractual or legal limits

SERVICE
• Impairment
• Decrease in service potential of an asset as a
consequence of an irregular event or catastrophe,
resulting in its recoverable amount being less than its
carrying amount.

• Impairment of an Asset
• An asset is impaired if the fair value of the asset is
lower than the carrying amount (book value) of the asset.
If an asset is impaired, the carrying amount is reduced to
the fair value and the difference between fair value and
carrying amount is recognized as an impairment loss

SERVICE
RM accounting –
What happens if the carrying amount of an asset
increases?

SERVICE
 IAS 16 - MEASUREMENT AFTER
RECOGNITION: REVALUATION MODEL (RM)

RM accounting –
What happens if the carrying amount of an asset
decrease ?

SERVICE
 IAS 16 - ILLUSTRATION 2

Facts:
On January 1, Year 1, LBC Limited acquires a building
at a cost of GH₵ 10,000. The building is expected to
have a 25-year life and no residual value. The asset
is accounted for under the revaluation model and
revaluations are carried out every three years.
On December 31, Year 3, the fair value of the building
is appraised at GH₵ 9,000.

Required:
Prepare the entries required on December 31, Year 3

SERVICE
 IAS 16 – SOLUTION 2

December, 31-Year 3
GH₵
Building 10,000
Accumulated Depreciation
(10,000/25 yrs) x 3yrs 1,200
Carrying Amount 8,800
Revaluation Amount 9,000
Revaluation Gain 200

SERVICE
 IAS 16 – SOLUTION 2

•At December, 31 of Year 3

•DR Building with GH₵ 200
•CR Revaluation Surplus GH₵ 200

• New depreciation rate is needed as of

• January 1, Year 4 end:

• GH₵9,000 carrying amount = GH₵410 per year

• 25 – 3 years
•

SERVICE
• When disposed off or when no future economic
benefits can be derived from the use of the
assets:
DRemove carrying amount from statement of
financial position
DGain or loss = difference between carrying
amount of asset (or part of asset if a
replacement) and net proceeds on disposal

SERVICE
Whether CM or RM :
Depreciation methods used
Depreciation rate or useful lives
Beginning and ending balances and reconciliation
of the two for gross amount and total of
accumulated depreciation and impairment
losses

SERVICE
If RM used:
• Date of revaluation
• Independent valuation?
• Methods, techniques used
• Assumptions made in determining FV
• Amounts if CM had been used
• Details of changes in Revaluation Surplus

SERVICE
 Question
On January 1, Year 1, LBC Limited acquires a building
at a cost of GH¢50,000. The building is expected to
have a 25-year life and no residual value. The asset is
accounted for under the revaluation model and
revaluations are carried out every three years.
On December 31, Year 3, the fair value of the building is
appraised at GH¢45,000.

Required:
Prepare the entries required on December 31, Year 3

SERVICE
 Question
Joyce Limited purchased land and building on 1st January,
2012 for GH¢200,000 (land GH¢60,000 and buildings
GH¢140,000). While there is no depreciation on land,
however the company uses 5% reducing balance method
on building. On 1st January 2016 the land was revalued to
GH¢75,000 and the buildings to GH¢135,000. Depreciation
on buildings is computed at 4% reducing balance. The
financial statements are prepared on a yearly basis.

Required:
Calculate the revaluation reserve for the year ended 31st
December, 2016.

SERVICE
INVESTMENT PROPERTY
IAS 40

SERVICE EXCELLENCE
 IAS 40 - OVERVIEW

DObjective and scope

DRecognition
DMeasurement at recognition
DMeasurement after recognition
DTransfers
DDerecognition
DDisclosures

SERVICE
 IAS 40- OBJECTIVE AND SCOPE

DIAS 40 identifies what an investment property is,

Dhow it differs from property, plant and
equipment (owner-occupied property); and
Dwhat recognition, measurement and disclosure
standards apply to investment properties

SERVICE
 IAS 40- OBJECTIVE AND SCOPE

Investment property is defined as: property

held to earn rentals or for capital
appreciation or both, rather than for
(a)use in the production or supply of goods or
services or for administrative purposes; or
(b) sale in the ordinary course of business

SERVICE
 IAS 40- RECOGNITION CRITERIA

Investment property is recognized as an asset

when:
1. probable that future economic benefits
associated with the item will flow to the entity,
and
2. the cost can be measured reliably.

SERVICE
DAfter initial recognition, an entity has a choice of
methods to account for investment property:

Use either
DFair value model (FVM), or
DCost model (CM)
DMust apply one model to all of its investment
property

SERVICE
 IAS 40- INITIAL RECOGNITION

• Investment property is recognized initially at

cost –
Dapplying the cost model of IAS 16 Property,
Plant and Equipment
D – including what is capitalized in cost and the
principles for non-monetary transactions
DLeased investment property is measured
according to IAS 17 Leases

SERVICE
FVM example:
Investment property is acquired January 11, 2014, at a
cost of GH₵200,000.
Fair values on:
December 31, 2014 - GH₵190,000
December 31, 2015 – GH₵198,000
December 31, 2016 - GH₵205,000

Required:
Account for how the above transaction should be treated.

SERVICE
 IAS 4 0 – MEASUREMENT AFTER
RECOGNITION
FVM example:
Dec.31/2014 – D r Loss in value or P & L GH₵10,
000
Cr Investment property GH₵10,000
Dec.31/2015 Dr Investment property GH₵8,000
Cr Gain in value or P & L GH₵8,000
Dec.31/2016 Dr Investment property GH₵ 7,000
Cr Gain in value or P & L GH₵7,000

SERVICE
Cost model (CM)
D- Applies cost model described in IAS 16
DAssets reported at cost less accumulated
depreciation and accumulated impairment
losses
DDepreciation expense recognized each period of
the statement of profit or loss

SERVICE
IAS 4 0 – TRANSFERS

SERVICE
 IAS 4 0 – DERECOGNITION

Derecognize investment property

DOn disposal – when sold or transferred under a
finance lease, or
DOn retirement – when permanently removed
from use and no benefits are expected from its
disposal
DGains and losses on disposal generally
recognized in profit or loss

SERVICE
• whether the FVM or the CM is applied
D if FVM, whether and when any operating leases are
classified as investment property
D criteria used to distinguish between owner-occupied
investment property and property held for sale where
judgment is needed
D methods and assumptions underlying fair value
measurements, including extent to which market-related
evidence is used
D extent to which the fair values were determined by an
experienced, professional, and independent appraiser
D existence of restrictions and contractual obligations
related to the properties
D amounts and specific types of income and expense
recognized in profit or loss

SERVICE
 Assignment – IAS 40
KK owns the following properties as at 31st December
2018:
Property: Fair value GH¢
Land with future use undetermined 3,200,000
Factory rented to KK’s subsidiary under an operating
lease 2,400,000

10 floor office building (fair value is equal per floor)

with 3 floors used as the subsidiary's head office and
seven floors

SERVICE
 Assignment – IAS 40
rented to third parties under an operating lease. 15,000,000
Empty building held for capital appreciation, but not leased out.
4,100,000

KK's accounting policy is to hold its investment properties under

the fair value model and its land and buildings under the
revaluation model.

Required:
In accordance with IAS 40 Investment Property calculate the
carrying amount to be recognized as investment property in KK's
consolidated financial statements as at 31 December 2018.

SERVICE EXCELLENCE
SERVICE EXCELLENCE
FINANCIAL REPORTING
BACT 307
ISSUE OF SHARES AND
DEBENTURES

LECTURERS:
DR. (MRS.) H. AHULU, MR. PAUL
MUDA, IVY EKLEMET (MRS)
MS. PATIENCE D.A
KORSORKU, MS. SALOMEY
OSEI ADDO
 SHARES
• What is a share?
– It is a unit of ownership that represents an equal proportion
of a company’s capital.
– Share certificate provides evidence of ownership in a
company.
– It is an ownership right acquired in a company which may
be transferable.
– Share is issued by a company at par value or no par value

SERVICE
Sample of a share certificate

SERVICE
 SHARES
– Par value share is a share that has a face value, that is,
its issue price is written on it.
– No par value share has no face value. That is the issue
price is not stated on it.

– In Ghana, shares are issued at no par value.

– This means that future disposal of shares cannot be
done at discount or premium

SERVICE
 SHARES
No Par Value:
• Shares offered to the public do not have any fixed
value.
• The prices of the shares are determined during the
time of sale to the public.
• These types of shares are called “Shares of No Par
Value” or simply No Par Value Shares.

• With no par value shares, there are no accounts for

share premium or discounts on shares.

SERVICE
 SHARES
Classification of Shares:
– The law allows for the creation of different
classes of shares with certain rights regarding
dividend, voting, repayment or otherwise.
–Generally, there are two main classes of shares
• Preference shares
• Ordinary /equity or common shares
– Note that Americans refers to shares as Stock

SERVICE
 SHARES
Preference shares
– These are shares that are entitled to a fixed and
specified rate of dividend.
– These are shares that are entitled to a capital
redistribution before ordinary shareholders
when the company is winding up (liquidation).
–Preference shareholders do not have voting
right (section 44 of the companies code 2019).
– Dividend payable on preference shares may be
either cumulative or non cumulative.

SERVICE
 SHARES
• Cumulative preference shares are entitled to
dividend in arrears in period where no dividends are
declared and paid.
• Non cumulative preference shares are not entitled
to dividend arrears.
• All preference shares are deemed to be cumulative
unless otherwise indicated.

SERVICE
 SHARES
• Ordinary shares
– These are also known as equity shares or common
shares.
– These are shares which entitle the holders to the
residue of profit or assets after the dividend or
capital of preference shareholders have been
determined.
– Ordinary shareholders have the right to vote on any
resolution placed before the company.
– They do not carry fixed rates of dividends and
usually bear the risk of the company.

SERVICE
 SHARES
• Treasury shares
– These are shares which have been lawfully redeemed,
purchased or acquired or forfeited and are in the
company’s custody prior to their re-issue.
– Note that the consideration received in respect of re-
issue of treasury shares is not part of the stated
capital.
– Issued share capital is the consideration received for
shares issued and paid for to date. This may be lower
or equal to stated share capital.

SERVICE
 SHARES
• There are different methods of issuing shares:
– Public issue (prospectus):
• This is where prospectus is advertised in the media
inviting the public to subscribe to the shares of the
company.

– Offer for sale

• Here the company sells all the shares to an issuing
house, usually a financial institution which in turn
sells them to the public at profit.

SERVICE
 SHARES
Public Placement:
A stockbroker is contracted and he finds persons or financial institutions
who wish to buy the shares. His reward is called brokerage.

Right Issue:
Existing company may wish to raise additional capital by offering the
existing shareholders an additional shares to subscribe to on pro-rata basis.
The price of issue is usually lower than the existing market price. The
shareholder has the option to take up the offer, sell the right or refuse it.

Bonus issue or capitalization issue:

Existing shareholders are offered additional shares in the company without
payment of cash. The consideration involves transfer of surplus to
stated capital.

SERVICE
 Issue of shares: Legal
considerations
• Shares up to the total number authorized by the
regulations may be issued at any time and for any
consideration determined by the company.
• Shares issued may be paid for at such time as are
agreed between the member & company or as
determined by the regulation
• All shares, except for bonus shares, should be issued for
valuable consideration paid or payable to the company.
• Shares shall be paid for in cash unless otherwise agreed.

SERVICE
 Stages of Issues
The following stages may the involved
• Application invited and received with the agreed
consideration
• Applications considered and unsuccessful ones rejected
and monies refunded
• Allotment is made to successful applicants and monies
received accordingly
• First call and subsequent calls (per the agreement)
made and monies received
• Shares of defaulting shareholders forfeited and share
retired to treasury.
• Treasury share re-issue and monies sent to share deals.

SERVICE
 Accounting for share Issue
• Note that the price for a share offer may be paid
• In full upon application or
• In installment at application, allotment through to
the calls.
• Accounting issues are uncomplicated when full
payment is required on application. The issue of
forfeiture will not apply. In this case we debit bank
account and credit stated capital with the amount.
• Where installment basis is applied then the
stages will be followed through and through.

SERVICE
Accounting Entries – Installment
Basis

SERVICE
 Question 1
Addo Ltd was formed on 1 January 2019 with 200,000 equity shares of no par value. The directors
st

offered 100,000 shares for sale to the public under the following terms:
• February GH¢1.50 payable on application
• March GH¢0.75 payable on allotment
• April GH¢0.25 payable on call

Applications were received for 180,000 shares and the directors made the issues as follows:
– Applications for the first 40,000 shares were allotted in full;
– Next applicants for the 60,000 shares received two-thirds of application;
– Next 20,000 shares applicants had 60% of application;
– Next 20,000 shares applicants were allotted 40% of application;
– The remaining applications were rejected All monies were duly received.
Overpayments and payments by unsuccessful applications were duly dealt with (i.e. excess
application monies were refunded to unsuccessful applicants or set off against allotment for
partially successful applicants.
Required:
a) Prepare a statement showing over/under payment;
b) Prepare ledger entries to give effect to the above transaction; and
c) Prepare relevant statement of financial position extract.

SERVICE
 Question 2
Alavanyo Company after incorporation, invited, invited application for 60,00equity shares payable on the following terms:

GH¢
31 January, 2019 Payable on application 0.25

28 February, 2019 Payable on Allotment 0.20

31st March, 2019 Payable on First call 0.15

30 April, 2019 Payable on Second Call 0.10
0.70

Applications were received for 87,000 shares. The underwriters in consultation with the directors, decided as follows:
– To reject applications for 7,000 for not meeting the requirements.
– To give full allotment to foreign strategic investor who applied for 20,000 shares.
– To allot to a local institutional investor 30,000 shares out of the 40,000 shares applied for.
– To allot the remaining applications pro-rata.
Surplus application monies are to be held to reduce the amount payable on allotment. The calls were made and paid in full
by members with the exception of Mr. Alloy who failed to pay the first and second calls on the 1,400 shares allotted to
him.
Required:
Show how the transactions will be recorded in the Company’s ledgers and show the relevant statement of financial position
extract. Note that Journals are required.

SERVICE EXCELLENCE
 DEBENTURES
• Definition
– Debenture is a written acknowledgement
of indebtedness by the company setting
out the terms and conditions of the loan.
– A company may raise loan by issue of a
debenture.
– A debenture holder is a special creditor
who is entitled to fixed interest whether
profit is made or not.

SERVICE
 DEBENTURES
Characteristics of Debentures:
• Debenture holders are the creditors of the company
carrying a fixed rate of interest.
• Debenture is redeemed after a fixed period of time.
• Debentures may be either secured or unsecured.
• Interest payable on a debenture is a charge against
profit and hence it is a tax deductible expenditure.
• Debenture holders do not enjoy any voting right.
• Interest on debenture is payable even if there is a loss.

SERVICE
 DEBENTURES
• Types of debenture
– Redeemable (i.e. repayable at or by specified date)
or
– Perpetual debenture (i.e., redemption taking place
only when the company is liquidated)
– Convertible debenture (i.e., can be converted into
equity shares).
– Secured or naked debenture
– debenture may be secured by a floating charge or a
fixed charge or both.

SERVICE
 DEBENTURES

Merits of Debentures (Company):

• No dilution of control: Issue of debenture does not
result in dilution of interest of equity shareholders
as they do not have right either to vote or take part
in the management of the company.
• It is allowable expense : Interest on debenture is a
tax deductible expenditure and thus it saves
income tax.

SERVICE
 DEBENTURES
Demerits of Debentures (Company):
• Payment of interest on debenture is obligatory
and hence it becomes burden when the
company makes loss.
• Too much dependence on debentures increases
the financial risk of the company.
• Redemption of debenture involves a larger
amount of cash outflow.

SERVICE
SERVICE EXCELLENCE
FINANCIAL REPORTING
BACT 307
 REVIEW OF IAS 1

Tuesday, June 21, 2022 2

 Statement of Profit or Loss and
other comprehensive income

Tuesday, June 21, 2022 3

 Format for Statement of Profit or Loss and
other comprehensive Income

XXX
(XXX)
XXX
(XX)
(XX)
XX
(XX)
(XX)
XX
(XX)
XX

XX

Tuesday, June 21, 2022 4

Tuesday, June 21, 2022 5
Tuesday, June 21, 2022 6
Tuesday, June 21, 2022 7
 Statement of Financial Position Format
Total Non- Current Assets xx
CURRENT ASSETS
Inventories (Stock) xx
Trade Receivables xx
Prepayments xx
Cash and cash Equivalents xx
Total Current Asset xx
Total Assets xxx

Tuesday, June 21, 2022 8

 Statement of Financial Position Format
EQUITY & LIABILITIES
EQUITY
Share Capital XX
Other Reserves XX
Retained Earnings XX
Total Equity XX

NON- CURRENT LIABILITIES

Long Term Borrowings XX
Deferred Tax XX
Long Term Provisions XX
Total Non-Current Liabilities XX

Tuesday, June 21, 2022 9

 Statement of Financial Position Format
EQUITY & LIABILITIES
CURRENT LIABILITIES
Trade & other payables XX
Short Term Borrowings XX
Current portion of Long-term borrowings XX
Current tax payable XX
Short term Provisions XX
Total Current Liabilities XX
Total Liabilities XX
Total Equity and Liabilities XXX

Tuesday, June 21, 2022 10

 Statement of Changes in Equity
o It is a statement showing the movement in the
equity portion of the statement of Financial
position
o It begins with the opening Balances of Stated
Capital, Retained Earnings, Capital Surplus etc
and shows the additions and deductions from
each of them, arriving at the closing balance
to be shown on the face of the Statement of
Financial Position at the end of the financial
year

Tuesday, June 21, 2022 11

 Format for Statement of Changes in Equity

Share Retained Revaluation Total

Capital Earnings Surplus Equity
GH¢ GH¢ GH¢ GH¢
XX XX XXX
(XX) - (XX)
XX XX XXX
- (XX) - (XX)
XX
- XX
XX XX
Balance at 31/12/2018 XX XX XXX

Tuesday, June 21, 2022 12

Tuesday, June 21, 2022 13
 FINANCIAL REPORTING
BACT 307

PREPARATION OF FINANCIAL STATEMENTS

FOR BANKS AND OTHER FINANCIAL
INSTITUTIONS
 INTRODUCTION

Tuesday, June 21, 2022 2

 Some relevant provisions of Act 930

Tuesday, June 21, 2022 3

Some relevant provisions of Act 930

Tuesday, June 21, 2022 4

 Some relevant provisions of Act 930
Permissible activities of banks (Section 18)
(1) A bank or specialized deposit-taking institution shall not carry on a
business other than any of the following:
(a) acceptance of deposits and other repayable funds from the
public
(b) Lending;
(c) Financial leasing;
(d) Investment in financial securities:
(e) Money transmission services;
(f) Issuing and administering means of payment including credit
cards, travelers’ cheques and bankers’ drafts and electronic
money
(g) Guarantees and commitments;
Tuesday, June 21, 2022 5
Some relevant provisions of Act 930

Tuesday, June 21, 2022 6

 Some relevant provisions of Act 930
Permissible activities of banks (Section 18)
(m) credit reference services;
(n) safe custody of valuables;
(o) electronic banking; and
(p) any other services as the Bank of Ghana may determine.

Tuesday, June 21, 2022 7

 Some relevant provisions of Act 930
Restrictions on Commercial, Agricultural or Industrial activities and
immovable property (SECTION 19)

Tuesday, June 21, 2022 8

 Some relevant provisions of Act 930
Representative office (SECTION 26)

Tuesday, June 21, 2022 9

 Some relevant provisions of Act 930
Capital Adequacy (SECTION 29)

Tuesday, June 21, 2022 10

 Some relevant provisions of Act 930
Guidelines on accounting standards and disclosures in
financial
Statements (SECTION 78)

Tuesday, June 21, 2022 11

Some relevant provisions of Act 930

Tuesday, June 21, 2022 12

Some relevant provisions of Act 930

Tuesday, June 21, 2022 13

Some relevant provisions of Act 930

Tuesday, June 21, 2022 14

Some relevant provisions of Act 930

Tuesday, June 21, 2022 15

Some relevant provisions of Act 930

Tuesday, June 21, 2022 16

Some relevant provisions of Act 930

Tuesday, June 21, 2022 17

Some relevant provisions of Act 930

Tuesday, June 21, 2022 18

 Format for Statement of Profit or Loss
ABC Bank Ltd
(XX)

XXX
XXX
XX
XXX
(X)
(XX)
XXX
Other income (rental income) XX
Net profit before tax XXX
Corporate income tax (XX)
Net profit after tax XXX

Tuesday, June 21, 2022 19

 Format for Statement of Changes in equity

Statutory Total

GH¢ GH¢ GH¢ GH¢

XXX XXX XXX XXX
- XXX
(XX) XX - -
- (XX)
- - - XXX
Balance as at 31/12/2018 XXX XXX XXX XXX XXX

Tuesday, June 21, 2022 20

 Format for Statement of Financial Position
ABC Bank Ltd
Statement of Financial Position as at 31st December, 2018.
ASSETS GH¢
Cash in hand XXX
XXX
XXX

XXX
XXX
 Format for Statement of Financial Position
EQUITY AND LIABILITIES GH¢
EQUITY
XXX
XXX
XXX
XXX
XXX

XXX
XXX
XXX
XXX

TOTAL EQUITY & LIABILITIES XXX

Tuesday, June 21, 2022 22

Tuesday, June 21, 2022 23
 FINANCIAL REPORTING
BACT 307

PREPARATION OF FINANCIAL STATEMENTS

FOR INSURANCE COMPANIES
 WHAT IS INSURANCE?

Tuesday, June 21, 2022 2

 Principles of Insurance
There are seven basic principles that create an
insurance contract between the insured and the
insurer:
1. Utmost Good Faith
2. Insurable Interest
3. Proximate Cause
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

Tuesday, June 21, 2022 3

 The Principle of Utmost Good Faith

Tuesday, June 21, 2022 4

 The Principle of Insurable Interest

Tuesday, June 21, 2022 5

 The Principle of Indemnity

Tuesday, June 21, 2022 6

 The Principle of Indemnity (Cont’d)

Tuesday, June 21, 2022 7

 The Principle of Contribution

Tuesday, June 21, 2022 8

 The Principle of Subrogation

Tuesday, June 21, 2022 9

The Principle of Subrogation (Cont’d)

Tuesday, June 21, 2022 10

 The Principle of Proximate Cause

Tuesday, June 21, 2022 11

 The Principle of Proximate Cause
(Cont’d)

Tuesday, June 21, 2022 12

 The Principle of Loss Minimization

Tuesday, June 21, 2022 13

 What is Reinsurance?

Tuesday, June 21, 2022 14

 What is Reinsurance? (cont’d)

Tuesday, June 21, 2022 15

 Reinsurer

Tuesday, June 21, 2022 16

 Advantages of reinsurance

Tuesday, June 21, 2022 17

 Advantages of reinsurance (Cont’d)

Tuesday, June 21, 2022 18

 Advantages of reinsurance (Cont’d)
Reinsurance Protects the Insurance Funds
The insurance funds of the insurer is well protected due to reinsurance.
Additional security and peace of mind is an added advantage of reinsurance
for the insurer and the company that offers the insurance.
Reinsurance Reduces Competition
The competitions between inter company is reduced as everyone work in a
cooperative manner and with the helping tendency in the insurance
business. Thus reinsurance helps to control competition and increase
overall morale of the employees in the insurance business.
Reinsurance Reduces profit fluctuations
The reinsurance plans reduce, to a considerable extent the violent
fluctuations in the profits of the company. For eg. When re-insurance is
nonexistent heavy risks are retained by the original insurer, his profits are
greatly upset due to a heavy single loss. Reinsurance can provide financing
for the primary company’s growth.

Tuesday, June 21, 2022 19

 Advantages of reinsurance (Cont’d)

Tuesday, June 21, 2022 20

 Disadvantages of reinsurance

Tuesday, June 21, 2022 21

 Format for Statement of Profit or Loss
(Life Business)
XYZ LIFE ASSURANCE COMPANY

Gross premium income XXX Less:

reinsurance (XX)
Net premium income XXX Net
Claims incurred (XX)
Commission expense (XX)
Surrenders (XX)
Management expense (XX)
Increase in Life fund (XX)
Underwriting profit/ (loss) XXX

Tuesday, June 21, 2022 22

 Format for Statement of Profit or Loss
(Cont’d)
GH₵
Under writing profit/ (loss) XXX
Investment income XXX
Other income XXX
Net profit before tax XXX
Taxation (XX)
Net profit after tax XXX
Other Comprehensive income
Revaluation surplus XXX
Total Comprehensive Income XXX

Tuesday, June 21, 2022 23

 Format for Income Surplus Account
XYZ INSURANCE COMPANY LIMITED
INCOME SURPLUS ACCOUNT FOR THE YEAR ENDED DECEMBER31, 20XX
GH₵
Balance as at 1st January XXX
Net profit after tax XXX
XXX
Less:
Contingency reserve XXX
Dividends XXX
Transfers to other reserve, XXX (XX)
Balance as at December 31,20XX XXX

Tuesday, June 21, 2022 24

 Format for Statement of Changes in equity
XYZ LIFE INSURANCE COMPANY
Statement of Changes in Equity for the year ended 31st December, 20XX

surplus
GH¢ GH¢ GH¢ GH¢ GH¢
XXX XXX XXX XXX
XXX - - XXX
(XX) XX - -
- - (XX)
- - XXX
Balance as at 31/12/20XX XXX XXX XXX XXX

Note: where the statement of changes in equity is prepared, income surplus account
may not be prepared.

Tuesday, June 21, 2022 25

 Format for Statement of Financial Position

Tuesday, June 21, 2022 26

 Format for Statement of Financial Position
Non-Current Liabilities
Life Fund XXX
Deferred Tax Provision XXX
Total Non-current Liabilities XXX
Current liabilities
Prov. for unearned premium XXX
Provision for claims XXX Amount
due to reinsurers XXX Creditors
XXX
Dividend payable XXX
Total Current Liabilities XXX
Total Equity and Liabilities XXX

Tuesday, June 21, 2022 27

 Format for Statement of Financial Position
Represented by:

Non- current assets

Property, plant and equipment XXX
Investment property XXX
Investments in financial instruments XXX
Intangible Assets XXX
Total Non-current assets XXX
Current assets
Premium debtors XXX
Amount due from reinsurers XXX
Deferred acquisition costs XXX
Other debtors XXX
Short-term investments XXX
Cash and bank XXX
Total Current Assets XXX
Total Assets XXX

Tuesday, June 21, 2022 28

 Format for Statement of Profit or Loss
(General Business)
XYZ ASSURANCE COMPANY LTD
STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED DECMBER 31, 2016

GH₵
Gross premium income XXX
Less: reinsurance (XX)
Net premium written XXX
Less: Provision for Unearned Premium (XX)
Net Premium Earned XXX
Net Claims incurred (XX)
Commission expense (XX)
Management expense (XX)
Underwriting profit/ (loss) XXX

Tuesday, June 21, 2022 29

 Format for Statement of Profit or Loss
(Cont’d)
GH₵
Under writing profit/ (loss) XXX
Investment income XXX
Other income XXX
Finance Cost (XX)
Net profit before tax XXX
Taxation (XX)
Net profit after tax XXX
Other Comprehensive income
Revaluation surplus XXX
Total Comprehensive Income XXX

Tuesday, June 21, 2022 30

 General Business (Profit & Loss Illustration)
Sea Never Dries Insurance Company limited has been in business for several years preparing accounts to 31st
March each year. Below are extracts from the accounts for the year ended 31st March 2017.
GH¢
Gross Premium received 68,100
Auditors Remuneration 2,500
Bad debt 980
Provision for unexpired Risk (1/4/2016) 14,000
Utilities 3,816
Commission to agents 4800
Claims settled and paid 24,600
Re-insurance Recoveries 16,000
Re-insurance Premiums paid 8,000
Premiums returned 3,600
Investment Income 18,400
Notes:
1. Make a Provision for unexpired risk @ 40% of Net Premium income
2. The company undertakes General Insurance Business
[Link] tax provision of GH¢8,500 should be made
Required:
Prepare Profit or Loss Account for the year ended 31st March 2017

Tuesday, June 21, 2022 31

 Solution
Sea Never Dries Insurance Company limited
Profit or Loss Account for the year ended 31st March 2017
GH¢
Gross Premium received 68,100
Less: Premiums returned (3,600)
Re-insurance Premiums paid (8,000)
Net Premium Received 56,500
Provision for Unexpired Risk [(40% x 56,500) – 14,000] (8,600)
Net Premium Earned 47,900
Net Claims Paid (24,600 – 16,000) (8,600)
Commission to agents (4,800)
Management Expenses (2,500 + 980 + 3,816) (7,296)
Underwriting Profit 27,204
Investment Income 18,400
Profit before tax 45,604
Taxation (8,500)
Profit for the year 37,104

Tuesday, June 21, 2022 32

Tuesday, June 21, 2022 33
 FINANCIAL REPORTING
BACT 307

IAS 7- PREPARATION OF CASHFLOW STATEMENTS

 Learning Outcomes
Upon completion of this topic, students
will
DExplain the meaning of statement of
cash flow;
DExplain objectives of statement of cash
flow;
DExplain the method of preparing
statement of cash flow as per IAS 7; and
DSolve practical questions on statement
of cash flow.
SERVICE EXCELLENCE
 Cash Flow Statement
• A statement of cash flow is a financial statement that shows
how changes in statement of financial position and profit or
loss affect cash and cash equivalents.
• The statement of cash flows breaks the analysis down to
operating, investing and financing activities.

• Essentially, the statement cash flow is concerned with the flow

of cash in and out of the business.

• International Accounting Standard 7 (IAS 7) is the International

Accounting Standard that deals with cash flow statements.
• The cash flow statement includes only inflows and outflows of
cash and cash equivalents; it excludes transactions that do not
directly affect cash receipts and payments.

SERVICE EXCELLENCE
 Cash Flow Statement
Operations - cash flows related to selling
goods and services; that is, the principle
business of the firm.

Investing - cash flows related to the

acquisition or sale of noncurrent assets.

Financing - long term and short term

cash flows related to liabilities and
owners’ equity; dividends are a
financing cash outflow.
SERVICE EXCELLENCE
 What is Cash?
• Cash includes cash and cash equivalents
• Cash equivalents:
– treasury bills maturing in 90 days or less;
– investment funds;
– foreign currency on hand;
– checking account and free savings account

SERVICE EXCELLENCE
External uses of Statement of Cash
Flow (CFS)
•To assess the ability of a firm to manage cash
flows
•To assess the ability of a firm to generate cash
through its operations
•To assess the company’s ability to meet its
obligations and its dividend policy
•To provide information about the effectiveness
of the firm to convert its revenues to cash
•To provide information to estimate or anticipate
the company’s need for additional financing

SERVICE EXCELLENCE
 Internal uses of Statement of Cash
Flow (CFS)
• Along side with cash budget CFS is used:
– To assess liquidity
• Determine if short-term financing is necessary

– To determine dividend policy

• Decide to distribute; or increase or decrease

– To evaluate the investment and financing

decisions

SERVICE EXCELLENCE
Cash flow from operating activities
•Examples (IAS No.7):
•cash received from customers through sale
of goods or services performed;
•cash received from non-operating activities
such as dividends from investments, interest
revenue, commissions, and fees;
•cash payments to suppliers or employees;
•cash payments for taxes and other expenses;
D

SERVICE EXCELLENCE
Cash flow from Investing Activities
Examples of investing activities include:
• cash payments to acquire property,
plant, and equipment (PPE), other
tangible or intangible assets, and
other long-term assets; and sale of
such non-current assets

• loans extended to other companies;

and collection of such loans;
SERVICE EXCELLENCE
Cash flow from Financing Activities
Examples of financing activities are :
• cash received from issuing share capital;
• cash proceeds from issuing bonds,
loans, notes, mortgages and other short
or long-term borrowings;
• cash repayment of loans and other
borrowings; and
• cash payments to shareholders as
dividends
SERVICE EXCELLENCE
 FORMAT FOR CASHFLOW STATEMENTFFOFOR
Notes GHC GHC

Cash-flow from operating activities

Net profit before interest & tax xxx

Depreciation/Amortisation xxx

Profit/ loss on disposal (xx)/ xx

(Increase)/Decrease in inventories xxx

(Increase)/Decrease in receivables xxx

(Decrease)/Increase in payable xxx

Tax paid xxx

Interest paid xxx

Net cash flow from operating activities xxx

Cash-flow from investing activities

Purchase of fixed assets for cash (xxx)

Sales of asset for cash xxx

Net cash from investing activities (xxx)

SERVICE EXCELLENCE
 FORMAT CONT.
Cash from financing activities
• Cashflow from financing activities
• Issue of shares xxx
• Issue and redemption of debentures xxx
• Dividend paid (xxx)
• Repayment of loan (xxx)
• Loan notes acquired xxx
• Net cashflow form financing activities xxx
• Net cash and cash equivalents xxx
• Opening cash and cash equivalent xxx
• Cash and cash equivalent at close xxx

SERVICE EXCELLENCE
SERVICE EXCELLENCE
 FINANCIAL REPORTING
BACT 307
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
Tools for Interpretation of
Accounts
1. Trend analysis or Horizontal Analysis
2. Vertical analysis
3. Ratio analysis

2
Trend or Horizontal Analysis
• Trend analysis involves computing trend percent for a series of
financial numbers (that is the amount of each item on one or more
earlier statements).

• The amount of increase or decrease in the item is then listed, along

with the percentage of increase or decrease.

Trend Analysis

3
Vertical Analysis (Common Size
Analysis)
• Vertical analysis is a tool to evaluate individual financial statement
items or a group of items in terms of a specific base amount. It is a
percentage analysis used to show the relationship of each component
to the total within a single financial statement.

• It usually defines a key aggregate figure as the base and the base
amount is commonly defined as 100%.

• For instance, a statement of profit or loss is usually revenue and a

statement of financial position’ base is usually total asset. Since the
sum of individual items in vertical analysis is 100%, this analysis is also
called common size analysis.
• Vertical Analysis-Example

4
 Ratio Analysis
Introduction to Ratio Analysis
• The bare figures are not useful to the users of the
financial statements.

• It is only through comparisons (usually of ratios) that

their significance can be established.

5
 Meaning of Accounting Ratio
• Ratio is an arithmetical relationship between two figures.
• It is expressed when one figure is divided by another.

• Ratio analysis is the process of determining and

interpreting numerical relationship between figures of
financial statements.

• Ratio is used as an index or yardstick for evaluating the

financial position and performance.
• “An accounting ratio can also be defined as the
quantitative relationship between two or more items of
the financial statements connected with each other.”

6
Analysis and Interpretation of Financial Statements
(cont.)
The various accounting ratios used to analyse financial

statements are:

• Liquidity ratios (i.e., short term solvency)

• Profitability ratios

• Activity ratios (Efficiency ratios)

• Shareholders investment ratios

• Long term solvency and stability

7
 Analysis and Interpretation of Financial Statements
(cont.)
Liquidity ratios
• This is also known as short-term solvency ratios.

• Liquidity ratios are used to determine a company’s

ability to meet its short-term debt obligations.

• Investors often take a close look at liquidity ratios when

performing fundamental analysis on a company.

• A company that is consistently having trouble meeting

its short-term debt is at a higher risk of bankruptcy.
8
Analysis and Interpretation of Financial Statements
(cont.)
•

9
Analysis and Interpretation of Financial Statements
(cont.)
•

10
Analysis and Interpretation of Financial Statements
(cont.)
• Working Capital: This is the amount of money needed to run
the day to day activities of the business.
o This also refers to as the net current assets.

• This is the difference between the current assets and current

liabilities.

• A larger working capital is an indication that the business in

solvent (financially healthy) and can take advantage of trade
conditions.

• Working capital = Current assets- current liabilities.

11
 Analysis and Interpretation of Financial Statements
(cont.)
Profitability Ratios

• Profit before interest and tax is the better figure to use

than profit after taxation (because of variation of interest
and tax charges from year to year which is not within the
control of management).

12
Analysis and Interpretation of Financial Statements
(cont.)
•

13
 Analysis and Interpretation of Financial Statements
(cont.)
•
Analysis and Interpretation of Financial Statements
(cont.)
• Efficiency ratios (Activity ratios): These ratios are used to
measure the level of company’s operating performance or the
level of the company’s efficiency.

• These ratios are used to measure efficiency and effectiveness

with which assets have been managed.

• Some of the ratios to be looked at are:

o Rate of inventory period (times)
o Receivable collection period in (days, weeks, and
months)
o Payable collection period in (days, weeks, and months)
o Sales to capital employed 15
Analysis and Interpretation of Financial Statements
(cont.)
•

16
Analysis and Interpretation of Financial Statements
(cont.)
• The higher the inventory turnover period is an indication that
the company is taking longer time in converting inventory into
sales.

• It shows how many times a company’s inventory is sold and

replaced with another inventory over a period of time.

• The shorter the period (i.e., days, weeks or months) the better
it is and longer the period less efficient is the rate inventory
period.

17
Analysis and Interpretation of Financial Statements
(cont.)
•

18
Analysis and Interpretation of Financial Statements
(cont.)
•

19
Analysis and Interpretation of Financial Statements
(cont.)

• : This ratios helped the equity shareholders and other investors

to assess the value and quality of their investments.

• Some of the ratios to be looked at are:

o Earning per share (EPS)

o Dividend per share

o Dividend cover

o Dividend yield

o P/E ratio 20
Analysis and Interpretation of Financial Statements
(cont.)
•

21
Analysis and Interpretation of Financial Statements
(cont.)
•

22
Analysis and Interpretation of Financial Statements
(cont.)
•

23
Analysis and Interpretation of Financial Statements
(cont.)
•

24
Analysis and Interpretation of Financial Statements
(cont.)
•

25
Analysis and Interpretation of Financial Statements
(cont.)
Long term solvency and stability:
• Many companies finance their long term operation with long term
capital (i.e., Equity and debt capital).

• Debt capital is cheaper but riskier than equity capital (It exposed equity
shareholders to risk).

• Therefore excessive borrowing of debt capital can create problem for

the company.

• Some of the ratios to be looked at are:

o Debt ratio
o Gearing ratio
o Interest cover
26
Analysis and Interpretation of Financial Statements
(cont.)
•

27
Analysis and Interpretation of Financial Statements
(cont.)
•

28
Analysis and Interpretation of Financial Statements
(cont.)
Advantages of Ratio Analysis
• This simplifies the content of the financial statements
and makes understanding of financial statements better.

• This can be used to establish relationship between the

various financial figures in financial statements.

• This is used as instrument to diagnose the financial

health or condition of a business.

• This is used to aids the management in their discharge

of their basic functions of forecasting, planning,
communication, control, etc.
29
Analysis and Interpretation of Financial Statements
(cont.)
• It is used to provide data necessary for comparison of
the performance of the different departments or
divisions of the same firm.

• Other stakeholders (i.e., creditors and long term capital

providers) apart from management also used to
ascertain the extent of security in respect of their
indebtedness or amount due to him.

30
Analysis and Interpretation of Financial Statements
(cont.)
Limitations of Ratio Analysis
• The ratios generated from the financial statements are
dependent on the financial data used to prepare the
financial statements (manipulated FS will not serve any
usefulness).

• Financial statements are prepared based on accounting

conventions and concepts, this creates disparate in
comparisons (different depreciation rates and other
estimates etc.,).

• Ratios can not be used to predict the future but only used
to explain historical performance of the company. 31
• PRACTICE EXERCISES

32