Financial Accounting
Financial Accounting tests whether a candidate can prepare and interpret general-purpose financial statements from a trial balance and supporting records. The Egyptian register expects accrual accounting, consistent policies, and correct presentation of assets, liabilities, equity, income and expenses, plus the adjusting and closing entries that make the statements articulate.
Recognition and measurement
- Apply the accrual basis and going concern assumption; recognise income when performance obligations are satisfied and expenses when economic benefits are consumed.
- Measure most items at historical cost, but use fair value for revaluation-model property, plant and equipment, investment property, and many financial instruments.
- Test inventory at the lower of cost and net realisable value; allocate fixed production overheads on normal capacity, not actual output.
- Depreciate assets systematically over useful life and account for changes in useful life or residual value prospectively as changes in estimate.
- Separate capital expenditure that extends useful life or capacity from revenue expenditure that merely maintains the asset.
Worked example
A trader invoices goods with a list price of 120,000 and offers a 2% settlement discount for payment within 10 days. The customer pays on day 8. The discount is variable consideration and reduces the transaction price because payment is probable. Revenue = 120,000 × 98% = 117,600. The entry is Dr Trade receivable 117,600 and Cr Revenue 117,600. If the invoice had been recorded gross at 120,000, the correction is Dr Revenue 2,400 and Cr Trade receivable 2,400. The discount is not a finance cost.
Presentation and articulation
- Current versus non-current classification depends on the operating cycle and the entity's unconditional right to defer settlement.
- Profit for the period closes to retained earnings; the statement of cash flows reconciles opening and closing cash.
- Prior-period errors are corrected retrospectively; changes in estimate are recognised prospectively.
Traps that cost marks
- Treating a settlement discount as an expense or as other income.
- Capitalising repairs that only maintain an asset, or expensing a cost that extends useful life.
- Forgetting deferred tax on temporary differences between carrying amounts and tax bases.
- Depreciating a revalued asset entirely against profit when part of the depreciation relates to the revaluation surplus.
- Presenting bank overdrafts as cash equivalents, or netting assets and liabilities without a legal right of set-off.