1. Financial Accounting

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3. 3 Section F: Preparing Basic Financial Statements Designed to give you knowledge and application of: F1. Statement of financial position F3. Events after the reporting period F4. Accounting for partnerships F5. Statements of cash flows (excluding partnerships) F6. Incomplete records

4. 4 F1:Statement of Financial Position Learning outcomes  Recognise how the balance sheet equation and business entity convention underlie the SOFP.  Understand the nature of reserves.  Identify and report reserves in a company statement of financial position (SOFP).  Understand why the heading retained earnings appears in a company SOFP.

5. 5 Business is treated as a separate entity from its owners for purpose of accounts Assets = Liabilities + owner’s Capital May be re-arranged as Capital = Assets – Liabilities Assets: show what entity owns Liabilities: show amount invested by outsiders Owner’s Capital: shows amount invested by owners & retained profit of owners Business Entity Convention Accounting Equation Nature of statement of financial position Refer to Example on page 458 Refer to Example on page 459 Refer to Example on page 460 Business entity concept and balance sheet equation

6. 6 Understand the nature of reserves Statutory Reserves Mandated by law & not available for distribution as dividends Voluntary Reserves a)Specific reserves (defined purpose) b)Non-specific reserves It can be distributed as dividends at management’s discretion Revaluation or capital maintenance reserves Reserves created because of increase in value of net assets after revaluation of assets & liabilities E.g. requirements for banks to transfer a certain % of profits to a statutory reserve fund E.g. an asset replacement reserve Eg. a general reserve Eg. revaluation of a company's capital assets such as its property holdings. Refer to Test Yourself 2 on page 461

7. 7 Reserves in a company’s SOFP Revaluation Reserve Share Premium Reserve Asset Replacement Reserve Dividend Equalisation Reserve General Reserve Capital Redemption Reserve Amount paid by shareholders for shares in excess of their nominal or par value A fraction of the value of asset set aside for future investment Created to ensure maintenance of stable rate of dividend in lean periods Reserve created to fund share redemption payments (not available for dividend distribution) Created for general purposes and used for dividend distribution only in extreme cases Reserve created because of an increase in the value of net assets after revaluation of assets and liabilities Reserves in a company’s SOFP

8. 8 What are retained earnings and why do they appear in the SOFP? Retained earnings are the profits earned by a company that are retained in the business and not distributed as dividends. Retained Earnings Net assets Assets generated through profit earned are retained in the business. CONVERSELY When profits are distributed by way of dividends. Retained Earnings Net assets Dividends would mean an outflow of assets. When profits are earned since Retained earnings appear in the SOFP since Profits for the year are usually not disclosed separately but included in the capital account in the following manner: Opening capital X Add: Profits during the period X Less: Drawings during the period X Closing capital X

9. 9 RECAP  Recognise how the balance sheet equation and business entity convention underlie the SOFP?  Explain the nature of reserves with examples?  Identify and report reserves in a company SOFP?  Explain why the heading retained earnings appears in a company SOFP? 9

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