Financial Accounting: GAAP Principles 3e

Tutorial 3.1
(Solution included in SQB)

General purpose financial

statements

Chapter 3

Basic level

IAS1, Presentation of Financial Statements (as well as Section 3 of IFRS for SMEs)
prescribes the basis for presentation of general purpose financial statements to ensure
comparability both with the entitys financial statements of previous periods and with the
financial statements of other entities. Write a paragraph in which you discuss the various
aspects that you would take into account when preparing entity financial statements.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 3.2

Purpose of financial
statements

Chapter 3

Basic level

Recently, your Uncle Waldo Ralph, who knows that you always have your eye out for a
profitable investment, has discussed the possibility of purchasing some of the shares in
Cricket (Pty) Limited. Cricket manufactures and sells novelty cricket accessories.
You have told Waldo that, unless you can take a look at Crickets financial statements, you
would not feel comfortable about such an investment. Believing that this is a chance of a
lifetime, Uncle Waldo has procured a copy of Crickets most recent, unaudited financial
statements, which are a year old. These statements were prepared by Mrs. Cricket. You
peruse these statements and they are quite impressive. The balance sheet showed a debt
to-equity ratio of 10% and, for the year shown, the company reported a profit of R2,4 million.
The financial statements are not shown in comparison with amounts from other years. In
addition, no significant note disclosures about inventory valuation, depreciation methods,
loan agreements, etc. are available.
Required:
Write a letter to Uncle Waldo Ralph, explaining why it would be unwise to base an
investment decision on the financial statements that he has provided to you. Be sure to
explain why these financial statements are neither relevant nor a faithful representation of
the financial information of the company.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 3.3

IRFS for SMEs

Chapter 3

Basic level

In July 20x9 the International Accounting Standards Board (IASB) published the International
Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs).
Required:
Answer the following questions relating to IFRS for SMEs:
1. Which companies may apply IFRS for SMEs when preparing financial statements?
2. What are the benefits of a global financial reporting standard for SMEs?
3. Who are the main groups of external users of an SMEs financial statements? Briefly
discuss their information needs.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 3.4

Preparation of annual and

interim financial
statements

Chapter 3

Basic level

1.

What factors need to be taken into account in deciding on an appropriate accounting

policy where no specific statement of generally accepted accounting practice applies?

2.

You have noticed that some entities do not classify assets and liabilities as current on
non-current when preparing a statement of financial position. Comment on the validity of
such presentation and, if considered appropriate, discuss what is meant by the term
current.

3.

Your client has included the loan repayable in six months time under long-term liabilities
(that is, as non-current). Under what circumstances would that be appropriate?

4.

What is the alternate to displaying cost of sales on the statement of comprehensive

income, and what additional information needs to be disclosed if cost of sales is
disclosed?

5.

What disclosure is required of movements in equity, other than those arising in the
statement of comprehensive income?

6.

Which companies are required to prepare interim financial statements, when should
interim financial statements be prepared and what should be included in interim financial
statements?

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 3.5

Operating segments

Chapter 3

Basic level

Required:
Answer the following questions:
1. Which companies must comply with the disclosure requirements laid out in IFRS 8,
Operating Segments?
2. The year-end results of the identified operating segments of Hungry Ltd are as follows:

V
W
X
Y
Z
Total

Revenue
(R000)
50
20
80
150
800
1100

Detail the segments which would be separately reportable in terms of IFRS 8.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 3.6

Operating segments

Chapter 3

Intermediate

A company identified the following segments, and provided the following profits/losses and
revenue amounts for each segment:

Required:
Answer the following questions relating to this information:
1. What is the quantitative threshold for profit/loss that must be met or exceeded to make
the segment reportable?
2. Which segments are reportable based on the profit/loss and revenue quantitative
thresholds (ignore asset thresholds)?
3. Which segments are the final reportable segments? Explain your answer.
4. If A is economically similar to D and meets all of the aggregation criteria with D, which
segments are the final reportable ones?

Department of Accounting, UCT and Oxford University Press Southern Africa