Rangajewa Herath B.Sc. Accountancy and Financial Management(Sp.)(USJ) MBA-PIM(USJ)

 LKAS 1 - Presentation of Financial Statements prescribes the basis for the presentation of general purpose financial statements for public limited companies.  It sets out the overall requirements for presentation of financial statements, guideline for structure

Are the financial statements those intended to meet the needs of users who are not in a position to require an entity to require an entity to prepare reports tailored to their particular information needs.

The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity to wide range of users in making economic decisions.

 Assets;  Liabilities;  Equity;  Income and expenses;  Contribution from and distribution to owners in their capacity of owners; and  Cash flows

The components of a complete set of financial statements are;  Statement of Financial Position  Statement of profit or loss and other comprehensive Income  Statement of Changes in Equity  Statement of Cash Flows  Notes, including a summary of significant accounting policies and other explanatory information  A statement of financial position at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements.

Other comprehensive income comprises items of income and expenses that are not recognized in profit or loss as required or permitted by other SLFRS. Profit or loss is the total income less expenses excluding the components of other comprehensive income.

Changes in revaluation surplus. Gains or losses arising from translating the Financial Statements of a foreign operation. Gains or losses on re-measuring available-for-sale financial assets. The effective portion of gains and losses on hedging instruments in a cash flow hedges. Actuarial gains and losses on defined benefit plans.

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Total Comprehensive = Profit or Loss + Other Comprehensive Income Income

When preparing financial statements, management shall make an assessment of the entity’s ability to continue as going concern. An entity should prepare the financial statements on going concern basis unless the management either intends to liquidate the business or cease trading, or has no realistic alternative but to do so.

An entity should prepare its financial statements, except for the cash flow information, on accrual basis.

Each material class of similar items should be separately presented. Immaterial items can be aggregated and presented according to either their nature or function

An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an SLFRS.

 An entity should disclose comparative information in respect of the previous period for all amounts reported in the current period’s Financial Statements.

 What is an asset?

 Inventories ( LKAS 2)  Property, plant and equipment ( LKAS 16)  Cash and cash equivalent ( LKAS 7)  Intangible assets (LKAS 38)  Investment property (LKAS 40)  Biological Assets ( LKAS )  Financial assets (SLFRS )  Deferred tax assets (LKAS 12)  Non-current assets held for sale(SLFRS)

Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventories shall be measured at the lower of cost and net realizable value.

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost of purchase XXX Cost of conversionXXX Other costs to bring the inventory to present location and conditionXXX Cost of inventoriesXXX

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date.

Tranga Company PLC is a textile manufacturing company. Following information is relevant clothes and other materials imported during the December Purchased price (Prior to the trade discount)  Discount10%  Freight and insurance  Import duties  Transport charges  During the period these materials were used to manufacture garments and direct laboure cost and manufacturing overhead incurred were Rs and Rs respectively. Special design cost incurred Rs for a special customer order which was manufactured using these materials. These items are still available in the stores and storage cost is Rs General administration cost of the December was Rs  Required: Calculate the cost of closing inventory as at

 Lanka Company PLC. had units of product X which was purchased at Rs.40 each. But these items now can only be sold at Rs.35 per unit. However 10% sales commission should be given to sales staff at the time of sale. Required: Calculate the NRV of the stock.

 Lanka Company PLC. had units of product X which are party completed. Cost incurred up to date is Rs.150,000. These items can be sold at Rs.25 each once the product is completed. However a cost of Rs.80,000 has to be incurred to complete these products. Further, 10% sales commission should be given to sales staff at the time of sale.  Required: Calculate the NRV of the stock.

 First-in first- out (FIFO) The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced.  Weighted Average Cost (WAC) Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period.

 Property, plant and equipment are 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.

 Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.  Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

 Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other Standards.

 Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

 Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity.

 An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.

a) Costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment; (b) Cost of site preparation; (c) Initial delivery and handling costs; (d) Installation and assembly costs; (e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and (f) Professional fees.

 A business imported a plant for its manufacturing factory. Purchase price of the machine is Rs and 5% trade discount was received from the buyer. Fright and insurance cost of bring the machine to Sri Lanka was Rs Import duties and other taxes paid at the port was Rs Local transport cost of Rs was incurred to bring the plant to the factory. Rs.5000 wages for laborers and Rs professional fee for engineer was paid at the installation of the plant. Fire insurance policy is obtained for the plant and annual insurance premium paid is Rs Prior to commence the commercial production, a test run was made by incurring Rs cost. Items produced in this test run were sold for Rs after incurring Rs.5000 selling expenses.  Required: Calculate Cost of Plant which should be recognized in the financial statements.

 Cost Model After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation.  Revaluation Model After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.