CMA Part 1 Unit 1 (2021)

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The Objective of General Purpose Financial Reporting

Financial statement should provide useful information (relevant + faithfully p

Financial Statements Include


1 Income Statement
2 Balance Sheet(Statement of Financial Position)
3 Statement of Comprehensive Income
(Income Statement + Other Comprehensive Income)
4 Statement of Changes in Equity
5 Statement of Cash Flows
6 Notes to the Account(Disclosures)

Notes to the Account(Disclosures)


Financial vs Management Accounting

AIM = FA aim is to provide information to outsiders (external Parties) and


information to internal Parties (management) for decision making

Regulatory Requirements = FA is mandatory by governing bodies, MA is n


statutory authority

Governing Principles = FA statements are prepared based on GAAP or IFR


basis for preparing MA statements

Time Horizon = The time horizon for FA is "Past" generally it is one accoun
MA there is no time horizon as specified

Output = FA documents contain Balance Sheet, Profit and Loss Account, S


other statements. MA documents include documents analysis of product o

Relevance of Data = FA data is 100% verifiable and precise. Data of MA m


is based on forecast which can not be 100% perfect.
Independent Audit = In FA there is mandatory requirement to have mand
statements. However, there is no such mandate of having independent of

Confidentiality = There is no question of confidentiality of FA documents a


documents are meant for management and hence confidential.

Other Points
F/S should be prepared in accordance with the concept of Going Concern (our
indefinite time/ foreseeable future)
Note - when we prepare F/S we can use the following
1- Net Realizable value (Receivables, Inventory)
2- Present Values (Lease Receivable/Payable)
3- Historic Cost (land)
4- Market values (Investment in stock/bonds of other company)
5- Replacement cost(is the cost of brand new item) (inventory)
Note- Wenever use Liquidation value when we prepare the F/S

Accrual Concept
Users of Financial Statements

Note
Financial Statement Relationships
1.2 Statement of Financial Position (Balance Sheet)
1.3 Income Statement= Reflect the Operational Information(P/L)
Note
1- Single step I/S
(Revnue + Gains) xxx
Less (Expenses + Losses) (xxx)
NI/NL xxx

No concept of Gross Profit which is = (Sale - Cost of sale)


2- Multi Step I/S Without Discontinued Operations
Note Multi Step I/S With Discontinued Operations
Statement of Comprehensive Income (SOCI)
Statement of Changes in Equity:
Accounting for Stocks
Note. We will always calculate the dividend on PAR Value
Par value of stock is $10
Dividend in % 5%
Dividend $ = Par value x dividend %
0.5$ $10 x 5%
Entry - For Issuance of stock

Dr. Cash (Number of stocks x Issue price) xxx


Cr. Common stock (No. of stocks x Par value) xxx
Cr. APIC (difference of above two) xxx

Note If issue price is not given, Market price at the date of issue will be taken

Entry for stock related issue cost

Dr. Additional paid in capital(APIC) 10000


Cr. Cash 10000
1- Cash Dividend
2- Property Dividend

3- Stock Dividend
Example
Co have old Issued stock = 10,000 Stocks
Now Co is planning to issue new Stock as dividend = 1000 Stocks
step #1
We need to calculate the % of new issued stock
% of New Stock = (new stocks / old stocks x 100%)
10%= 1000/10000 x100%

Note. If New % is 25% or less it is treated as stock dividend


If new % is more than 25% it is treated as stock split

if it is stock dividend if % is Equal or Less than 25%

If it is stock Split, if new % is >25%

Par Total Par


Stock Value Value

Before Stock Split 10000 $1 $10,000

In stock split No. of stock PV will


will increase Decrease Unchaged
No. of stock PV will
Unchaged
will increase Decrease

After stock 20000 $0.50 $10,000

Note- in stock split voting right will remain unchanged

Statement of Cash flows

Purpose of SOCF = is to check LIQUIDITY, SOLVENCY and FINANCIAL FLEXIBILIT

Cash flow statement is divided into three sections

1- Cash Flows from (Used) 2- Cash Flows from (Used)


in operating activities in Investing activities
(Either Direct Method Or indirect
Method)

Condensed Format for SOCF

1- Cash flow form (used) in Operating activities N-1


2- Cash flow form (used) in Investing activities N-2
3- Cash flow form (used) in Financing activities N-3

Net Increase/(Decrease) in cash and cash equivalent for the period


Plus : Beginning balance of cash and cash equivalent
From last balance sheet)
Closing balance of cash and cash equivalent

N-1 Statement of cash flow (Indirect Method)


1- Cash flow from (used) in Operating activities
Net Income from I/S (W-1)
Add Depreciation/ Amortization exp from I/S W-3
Add Loss on Disposal of Non current Asset (NCA) (W-2)
Or
Less Gain on Disposal of Non current Asset (NCA) (W-2)
Less Undistributed Earning on Equity Method Investment
(Net Income of Investee x Holding %) = Share in Profit or Loss
Share in Profit or Loss - Dividend received)

Less Gain on disposal of Equity method Investment (OR)


Add Loss on disposal of equity method investment
add Impairment of Good Will

Adjustment related to Working capital (CA- CL)


Add/ CA Increase in CA Outflow
Less Decrease in CA Inflow

Add/ Increase in CL Inflow


CL
Less Decrease in CL Outflow

Other Adjustment

Interest Paid Outflow


Interest Received Inflow
Dividend received Inflow
Tax/fine paid Outflow
Net Cash flow from Operating Activities

W-1 Calculation of Net Income


Closing Balance of Retained Earnings
Plus Dividend declared
minus Beginning balance of Retained Earnings
Net Income
W-2 Calculation of Gain or loss on disposal

Sale price of asset


less Carrying value of asset (Cost - Acc. Dep)
Gain on Disposal/(loss)
If SP > CV = Gain
If SP < CV = Loss

W- 3 How to calculate depreciation expense


Closing balance of acc. Dep
plus Acc. Dep on asset sold
minus opening balance of Acc. Dep
Depreciation Expense

W- 4 Gain or Loss in disposal of equity method investment


Sale Proceed xxx
Less CV of Investment (xxx)
Gain/ (loss) xxx/(xxx)

Note= This sale proceed will be written as inflow in Investing Ac

N-2 Cash flow form (used) in Investing activities


Sale proceeds from sale of NCA Inflow
NCA
Cost of asset purchased Outflow
Stock of Purchased of stock Outflow
other co Sale Proceed from Sale of stock Inflow
Bonds of Purchase of bond Outflow
other co sale of bonds Inflow
Loan to others Outflow
Repayment of loan from other Inflow
(only principle)
Cash flow from Investing activities

Note Interest receipts or payment , both are under operating activates

W-1
Sale price of asset 200
less Carrying value of asset -100
Gain on Disposal/(Loss) 100

If SP > CV = Gain
If SP < CV = Loss
Sale Price/proceed = CV + Gain Or CV -loss

W-2 Closing balance of NCA at Cost xxx


Plus: Cost of asset sold xxx
Less : opening balance of NCA at
Cost (xxx)
Cost of asset purchased xxx

N-3 Cash flow from (used) in Financing activities


own Issue stock/bonds
stock/bond Repurchase the stock/ repayment
of bond(For bonds only Principle)

Loan from other


Repayment of loan to others(principle)
Dividend paid on our own stock
Principle amount of installment paid by lessee
(under Finance Lease)
Cash flow from Financing Activities

Lease Effects on Cash Flows


ant + faithfully presented + comparable)
nal Parties) and aim of MA is to provide
n making

g bodies, MA is not mandatory by nay

d on GAAP or IFRS. There is no standard

y it is one accounting year . In contrast, for

Loss Account, Statement of Cash Flows and


lysis of product or function

e. Data of MA may not be 100% precise as it


nt to have mandatory audit of financial
independent of MA documents.

FA documents as these are for public. MA


ential.

oing Concern (our business will continue for

company)
ventory)
mation(P/L)
150
-90
60
sue will be taken as issue price
000 Stocks
ANCIAL FLEXIBILITY

(Used) 3- Cash Flows from (Used)


in Financing activities

xxx/(xxx)
xxx/(xxx)
xxx/(xxx)

xxx/(xxx)

xxx
xxx/(xxx)

$
$1,000
200
0

-100
0
or Loss

(W-4)

0 2019 2020
50 100 80

100
0

-100 Opening Interest payable


200 Plus Interest expense (From I/S)
300 Less Interest paid
-500 Closing interest payable
$1,150

xxx
xxx
(xxx)
xxx

200
-100
100

xxx
xxx
(xxx)
xxx

stment
w in Investing Activities

$
W-1 1000
W-2 -500
-220
500
0
500
-100
500

1680

activates
OR

$
Inflow 1900

Outflow -1500

Inflow 1000
Outflow -600
Outflow -200
Outflow 0

600
$1,050
$1,060
$600

$2,710

$300
$3,010 This should be equal to cas

payables

Interest payable
expense (From I/S)

nterest payable
d be equal to cash balance in balance sheet

2019 2020
150 100

Dec by 50 (outflow)

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