Financial Accounting and Reporting: Core Measurement and Presentation Skills
What you must command
This domain tests whether you can move a transaction from source document to published statement. Expect the accounting equation, double-entry mechanics, the accrual basis versus the cash basis, adjusting and closing entries, depreciation and disposal of non-current assets, inventory costing (FIFO, weighted average, and the lower-of-cost-and-net-realizable-value rule), receivables and allowance for expected credit losses, provisions and contingencies, and the construction of the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, and statement of cash flows. Ratio interpretation and the effect of errors on profit and equity also recur.
Traps candidates fall into
- Direction of adjustments. Accrued expense raises a liability and reduces profit; prepaid expense is an asset. Read which side the question asks about.
- Depreciation base and date. Depreciation starts when the asset is available for use, not on the invoice date; the depreciable amount excludes residual value.
- Inventory write-downs. NRV is estimated selling price less costs to complete and sell, not replacement cost. Reversals are permitted for inventory but not for revalued assets.
- Cash flow classification. Interest and dividends paid or received may be classified consistently as operating or financing/investing; a change of policy must be disclosed and applied consistently.
- Allowance movements. Only the movement in the allowance hits profit; a write-off against an existing allowance does not.
Rule of thumb
Post every adjustment twice: once to the statement of profit or loss and once to the statement of financial position. If the entry does not balance across the two statements, the treatment is wrong. For disposals, gain or loss equals proceeds minus carrying amount, where carrying amount is cost less accumulated depreciation to the disposal date.
Worked example
An asset costs 100,000, residual value 10,000, useful life five years, straight-line, acquired 1 April. Year-end is 31 December. Annual depreciation is (100,000 − 10,000) / 5 = 18,000. First-year charge is 18,000 × 9/12 = 13,500. If sold on 30 September of year two for 70,000, accumulated depreciation is 13,500 + 13,500 = 27,000, carrying amount 73,000, and the loss on disposal is 3,000.