Financial Accounting and Financial Reporting
Core Concepts
Candidates must master the accounting equation, double-entry mechanics, and the accrual basis. Key areas include revenue recognition (IFRS 15 five-step model), expense matching, depreciation methods, inventory valuation (IAS 2), and the preparation of financial statements: statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, and statement of cash flows (IAS 7). Understand the distinction between profit and cash flow, and the impact of non-cash items.
Common Traps
- Confusing accruals (expenses incurred but not paid) with prepayments (paid but not incurred).
- Misapplying depreciation (e.g., using straight-line when reducing balance is required).
- Forgetting to adjust for non-cash transactions in the cash flow statement.
- Treating provisions as contingent liabilities (provisions are recognised when a present obligation exists and a reliable estimate can be made).
- Overlooking intra-group eliminations in consolidated financial statements.
Worked Example
A company purchases equipment for BGN 120,000 with a residual value of BGN 20,000 and a useful life of 5 years. Using straight-line depreciation, annual depreciation = (120,000 - 20,000) / 5 = BGN 20,000. If the reducing balance method at 20% is used, first-year depreciation = 120,000 * 20% = BGN 24,000. Rule of thumb: Always check the depreciation method specified and whether residual value is considered.
Key Points
- The accounting equation (Assets = Liabilities + Equity) underpins all entries.
- Accrual accounting recognises transactions when they occur, not when cash moves.
- Financial statements must comply with IFRS as adopted by the EU.
- Provisions are recognised only when a present obligation exists and outflow is probable.
- Cash flow statements classify cash flows into operating, investing, and financing activities.