FA Mod 1: Financial Statements (overview)


FA Mod 1: Financial Statements (overview)

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FA Module 1: Financial Statements (overview)

(The attached PDF file has better formatting.)

Readings: chapter 1, §3 major financial statements, excluding

●    Exhibit 9 (Volkswagen)
●    sub-section 3.1.7 (auditor’s reports)
●    sub-section 3.2 (other sources of information)

[Sections 2 and 4 are not on the syllabus for this course.]

This course focuses on three financial statements (the IFRS names are in parentheses):

●    Balance sheet (statement of financial position)
●    Income statement (statement of profit and loss)
●    Cash flow statement

Total comprehensive income = profit and loss + other comprehensive income. Know which items are included in net income (profit and loss) and which items are in other comprehensive income. Other modules specify certain items as other comprehensive income (such as translation adjustments) and certain items as net income (such as remeasurement gains or losses).

The statement of changes in equity and many financial notes and supplementary schedules are discussed in the illustrations. The final exam tests changes to equity stemming from other comprehensive income.

Readings: chapter 2, Financial reporting mechanics

●    § 2 the classification of business activities
●    § 3 accounts and financial statements (especially §3.2 accounting equations)
●    § 4 the accounting process
●    § 5 accruals and valuation adjustments
●    Appendix: debit/credit accounting system

[Sections 6 and 7 are not on the syllabus for this course.]

The mechanics of financial reporting are background. You must understand the financial statements and how they articulate: that is, how the cash flows, balance sheet entries, and income statement entries inter-relate.

The textbook explains the accountant’s work as background information. The important items for you are

●    Accounting equations for the balance sheet and the income statement
●    Articulation of financial statements
●    Double-entry book-keeping
●    Cash vs accrual accounting
●    Valuation adjustments
●    Deferred revenue and prepaid expenses

A final exam problem may ask to determine Exhibit 6 for an insurer reporting under GAAP (SFAS 60) or IFRS 17 (both the building block approach and the premium allocation approach). As you work through the modules on insurance contracts at the end of this course, review section 4 of chapter 2 and work out the entries.

Know well the paragraph beginning “Unearned revenue (or deferred revenue) arises …” following Exhibit 10. Final exam problems may ask about unearned revenue for insurance contracts; the answer differs for SFAS 60 (and for short duration vs long duration contracts) vs IFRS 17 (and for building block approach vs premium allocation approach).

Understand the debit/credit accounting system in the appendix to chapter 2. Double-entry book-keeping helps you follow the accounting entries on the balance sheet and the income statement. Know which entries are debits and which are credits. A practice problem on the discussion forum may say “credit revenue and debit an asset” or “debit expense and credit a liability.”

Final exam problems do not ask you to create T-accounts or trial balances, but they may ask whether an entry on the income statement or on the balance sheet is a credit or a debit.

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