The summary of Components 1 to 6 of Financial management 314. Each Component contains the lecture notes, class problem answers as well as self study answers, some have the electronic problem answers as well. Additional explanations of some of the calculations are included.
• Financial statements need to be comparable
- Statements of companies may not be comparable as a result of different accounting standards
- SA companies converted to IFRS after 2005; comparison to previous years where other
accounting standards were used may be problematic; IFRS only a guideline, open for
interpretation
- Multinational firms: US GAAP vs. IFRS
• Solution ?
- Standardise published financial statements
o Facilitates comparisons between companies and over time
o Simplifies the calculation of financial ratios
3 Financial Statements:
• Statement of profit or loss (Income statement)
- Income = Expenses + retained earnings
o Expenses increase or decrease amount of retained earnings left
• Statement of financial position (Balance sheet)
- Non-current assets + current assets = (ordinary shares + reserves + preference shares + non-
controlling interest) → equity (+ non-current liabilities + current liabilities) → debt
• Statement of cash flow (cash flow statement)
- Cash at the beginning of the year + movement in cash during the year = cash at the end of the
year
o Movement in cash during the year = cash from operating activities +/- cash from investing
activities +/- cash from financing activities
• Formats of standardised financial statements:
- Examples of the three major financial statements are provided on SUNLearn
- Need to understand relationship between the ELEMENTS that form part of each statement, and
be able to identify all ITEMS included within these elements
- NB: Terminology used in the module
Component 1 – Difficult Ltd.:
Statement of Financial Position:
,Goodwill:
Revaluated at R600 000 [was R900 000 end 2019]
Impairment in Goodwill = R300 000
Treat the same as depreciation and amortization in the statement of cash flows (ie add back)
Share investments
Opening balance = R 400 000
Total share investment was sold, i.e. closing balance is R 0
Sold at a profit of 50% = 50% × 400 000
= 200 000 (Gain in SPL)
Proceeds (SCF) = R 600 000
,Issued ordinary share capital
Retained earnings :
2020 2019
385 000 240 000
Retained earnings for the year = 385 000 – 240 000 = 145 000
, Statement of Profit or Loss:
Statement of Cash Flows:
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