ACCA Applied Skills · Financial Reporting

Preparation of single entity financial statements: formula sheet

Full chapter guide

Key formulas

Total comprehensive income: Total comprehensive income = Profit for the year + Other comprehensive income; Show OCI net of tax or show tax on OCI items separately.
Gross profit: Gross profit = Revenue − Cost of sales; Used in the function-of-expense format.
Gross profit to profit before tax: Profit before tax = Gross profit + other income − distribution costs − administrative expenses − finance costs; Finance costs must be shown separately on the face of the statement.
Current classification test: Current if due or realised within 12 months of the reporting date, or in the normal operating cycle, or held for trading (assets: or cash); A liability is also current if there is no right to defer settlement for at least 12 months at the reporting date.
Equity and liabilities: Total assets = Equity + Non-current liabilities + Current liabilities; The statement must balance. Use this as a check.
Share capital and reserves order: Equity: share capital, share premium, revaluation surplus, retained earnings; Dividends recognised as distributions to equity holders during the period (for example, those paid) go through the statement of changes in equity, not profit or loss. Dividends declared after the reporting date are only disclosed in the notes.
Closing equity component: Closing balance = Opening balance + movements in the year; Apply this separately to each column. The closing totals must agree to the statement of financial position.
Retained earnings roll-forward: Closing retained earnings = Opening + profit for the year − dividends recognised ± transfers; Profit for the year is after tax. Adjust the opening balance for any prior period error or change in accounting policy (IAS 8), whether it increases or decreases retained earnings. Dividends recognised are those declared or authorised in the year, whether or not paid.
Revaluation gain (OCI): Revaluation gain (OCI) = Revalued amount − carrying amount before revaluation; A gain goes to OCI and the revaluation surplus. Closing revaluation surplus = opening surplus + gain − any transfer to retained earnings. If the asset was previously impaired through profit or loss, the gain first reverses that loss in profit or loss.
Share issue at a premium: Share capital = shares × nominal value; Share premium = shares × (issue price − nominal value); Deduct issue costs from share premium, not from profit or loss.
Bonus issue: Bonus shares × nominal value is debited to a reserve (share premium, revaluation surplus or retained earnings) as specified in the question, and credited to share capital; No cash is received. Total equity does not change. Use the reserve the question specifies; if none is stated, state your assumption.
Total comprehensive income: Total comprehensive income = Profit for the year + Other comprehensive income; Show profit in the retained earnings column and OCI in the revaluation surplus column.
Revaluation surplus transfer: Excess depreciation transfer = Depreciation on revalued amount − Depreciation on historical cost; Optional under IAS 16. It moves an amount from revaluation surplus to retained earnings each year. Do it only if the question says so.
Cash generated from operations: Profit before tax + depreciation and amortisation + finance costs − investment income + loss on disposal (or − profit on disposal) ± changes in working capital; Increase in inventory or receivables is deducted. Increase in payables is added. Decreases do the opposite.
Net cash from operating activities: Cash generated from operations − interest paid − income tax paid; Interest paid can alternatively go in financing, if you apply the policy consistently.
Tax paid: Opening tax liability + tax charge for the year − closing tax liability; Include deferred tax movements in the charge and the liability if the question includes deferred tax. Use a T-account.
Purchase of property, plant and equipment: Closing carrying amount − opening carrying amount + depreciation + carrying amount of disposals − revaluation surplus; Subtract revaluation surplus because it is not a cash flow. Add acquisitions made through leases only as non-cash.
Proceeds of disposal: Carrying amount of asset sold + profit on disposal (or − loss); Shown in investing activities.
Dividends paid: Opening retained earnings + profit for the year − closing retained earnings; Use this when dividends paid are not given. Dividends paid can be operating or financing.
Interest paid: Finance cost in profit or loss + opening interest accrual − closing interest accrual; Where interest is paid in full, interest paid equals the finance cost.
Proceeds from share issue: Increase in share capital + increase in share premium; Exclude bonus issues, which are non-cash.
Net change in cash: Net cash from operating + investing + financing activities = closing cash and cash equivalents − opening cash and cash equivalents; Your final check. If it does not agree, find the error.
Cost of sales: Opening inventory + purchases (net of returns, plus carriage in) − closing inventory; Closing inventory is lower of cost and net realisable value (IAS 2).
Accrual: Dr Expense; Cr Accruals (current liabilities); Expense for the year = amount paid + accrual at the end − accrual at the start.
Prepayment: Dr Prepayments (current assets); Cr Expense; Expense for the year = amount paid − prepayment at the end + prepayment at the start.
Straight-line depreciation: (Cost − residual value) ÷ useful life; Charge for the year. Time-apportion in the year of purchase if the question's policy says so.
Reducing balance depreciation: (Cost − accumulated depreciation) × rate; The rate applies to the carrying amount, not cost.
Net realisable value: Estimated selling price − costs to complete − costs to sell; Write inventory down only when NRV is below cost.
Irrecoverable debt and allowance: Write off debt; allowance required = % × (receivables − debts written off); P/L charge = required allowance − opening allowance; If the required allowance is lower than the opening one, the difference is a credit to profit or loss.
Finance cost: Loan × rate × time − interest already paid = accrued interest; Total finance cost goes to profit or loss. Accrued interest is a current liability.
Income tax: Current year estimate ± over/under provision from the prior year; Profit or loss charge. The liability is the unpaid prior-year amount plus the current-year estimate.
Accounting equation check: Assets = Equity + Liabilities; Use it to test that your statement of financial position balances.
Gross margin: Gross margin = gross profit ÷ sales × 100%; Based on sales. Cost of sales is (100% − margin) of sales.
Mark-up: Mark-up = gross profit ÷ cost of sales × 100%; Based on cost. Sales are (100% + mark-up) of cost of sales.
Sales from cost of sales: Sales = cost of sales ÷ (1 − margin) or Sales = cost of sales × (1 + mark-up); Choose the one that matches the percentage you are given.
Converting between margin and mark-up: Margin = mark-up ÷ (1 + mark-up); Mark-up = margin ÷ (1 − margin); A 25% margin equals a 33⅓% mark-up. Check by assuming sales of 100.
Cost of sales: Cost of sales = opening inventory + purchases − closing inventory; Include carriage inwards in purchases. Rearrange to find the missing item.
Receivables account: Credit sales = closing receivables + cash received + discounts allowed + irrecoverable debts written off − opening receivables; Use the same logic for payables to find purchases or payments.
Payables account: Credit purchases = closing payables + payments + discounts received − opening payables; Returns reduce purchases and are treated like payments in the account.
Expense accrual or prepayment: Expense for the year = cash paid + closing accrual − opening accrual (or − closing prepayment + opening prepayment); Build a T-account for each expense with a balance.
Profit from net assets: Profit = closing net assets − opening net assets + drawings − capital introduced; For a sole trader. For a company, use the movement in equity plus dividends.
Share issue entry: Dr Cash (issue price × shares); Cr Share capital (nominal × shares); Cr Share premium (balance); Issue costs: Dr Share premium, Cr Cash.
Bonus issue entry: Dr Share premium or retained earnings; Cr Share capital (shares issued × nominal); No cash. Total equity is unchanged.
Rights issue entry: Dr Cash (rights price × new shares); Cr Share capital (nominal); Cr Share premium (balance); Total equity increases by the cash received less costs.
Equity dividend: Dr Retained earnings; Cr Cash or dividend payable; Only when declared or paid before the reporting date. Not in profit or loss.
Liability finance cost: Finance cost = opening liability × effective rate; Closing = opening + finance cost − cash paid; Applies to loans and redeemable preference shares.

Quick revision

IAS 1 requires current and non-current assets and liabilities to be shown separately unless a liquidity presentation is more reliable.
Profit or loss and other comprehensive income can be shown in one statement or two.
The statement of changes in equity shows total comprehensive income, share issues and dividends for each component of equity.
Share premium is the amount received above nominal value on issue.
Issue costs of shares are deducted from equity, usually from share premium.
A dividend is recognised as a liability only if it is appropriately authorised and no longer at the entity's discretion on or before the reporting date. A final dividend proposed by directors but approved after the reporting date is disclosed only, not recognised (IAS 10).
In the indirect cash flow method, start with profit before tax, add back depreciation and finance costs, deduct investment income, and adjust for gains or losses on disposal and for working capital changes. This gives cash generated from operations. Then deduct interest paid (if classified as operating) and tax paid to reach net cash from operating activities.
An increase in receivables or inventories reduces cash; an increase in payables increases it.
Cash flow from investing activities includes purchase and sale proceeds of non-current assets, using cash paid and cash received rather than cost or carrying amount.
IAS 7 permits interest paid to be shown as operating or financing, and dividends paid as financing or operating. ACCA FR answers normally show interest paid under operating activities and dividends paid under financing activities unless the question says otherwise.
For sole traders and partnerships, incomplete records often use the formula: closing net assets − opening net assets + drawings − capital introduced = profit. For a company, use the equity movement instead: profit = closing equity − opening equity + dividends − share issues (assuming no other comprehensive income).
Adjustments such as accruals, prepayments and depreciation must be posted to both the statement of profit or loss and the statement of financial position.

Common mistakes

Putting a revaluation gain in profit or loss. Fix: Take a revaluation gain on property, plant and equipment to OCI and the revaluation surplus in equity. Only a reversal of a previous loss on the same asset goes to profit or loss.
Showing a whole loan as non-current when part is repayable within 12 months. Fix: Split the liability. The amount due within 12 months of the reporting date is current. The rest is non-current.
Putting dividends through profit or loss Fix: Dividends are a distribution of profit. Show them only as a deduction from retained earnings in the SOCIE.
Deducting a proposed final dividend Fix: Deduct only dividends recognised in the period, meaning declared or authorised, whether or not paid. A dividend proposed after the year end is a note disclosure under IAS 10.
Adjusting working capital in the wrong direction Fix: Ask: did this item use cash or save cash? A higher receivable means customers have not paid yet, so cash is lower. A higher payable means you have not paid suppliers yet, so cash is higher.
Forgetting to add back finance costs, then also deducting interest paid Fix: Add back the finance cost in the reconciliation. Deduct interest actually paid after cash generated from operations. This keeps interest in only one place.
Applying the adjustment to only one side, so the statement of financial position does not balance. Fix: Write the debit and credit for every note in your working before you update either statement.
Charging the whole allowance for receivables to profit or loss instead of the movement. Fix: Required allowance minus opening allowance is the charge. Write off irrecoverable debts first and base the % on the reduced receivables.
Mixing up margin and mark-up Fix: Margin is always on sales. Mark-up is always on cost. Write 100 against the base and the other figure beside it, for example cost 100, mark-up 40, sales 140.
Treating all receipts as credit sales Fix: Use a receivables account. Cash received is not sales. Sales equal cash received plus the movement in receivables, adjusted for discounts and irrecoverable debts.

Exam tips

In Section C, start with a clean proforma and label every line. Markers award marks for correct headings and structure.
Learn the 12-month test for current liabilities and the operating cycle test for current assets. Objective questions often hinge on a single loan, deposit or deferred tax item.
Always check that the statement of financial position balances before moving on. A difference points to a missing adjustment.
Know which items go to OCI, for example revaluation gains. Dividends on equity shares never go in profit or loss; they are shown in the statement of changes in equity. Dividends on preference shares classified as liabilities are finance costs in profit or loss.
Show workings for adjustments with references, so you earn method marks even if a number is wrong.
In an objective test question, find the missing figure by rolling forward one column: opening + profit − dividends recognised = closing retained earnings. Do not build the full statement.
Read dates carefully. A dividend declared or authorised in the year reduces equity, even if it is unpaid at the year end. A dividend proposed after the year end does not.
Show total comprehensive income clearly if the question asks for it. It is profit plus OCI, and examiners reward the sub-total.