Financial Accounting

Eleventh Edition
Global Edition

Chapter 4
Presentation of
Financial
Statements

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Course Overview
What is accounting? ✓
Why do we do accounting in the way that will be discussed
in this course? ✓
How do we do accounting?
➢The format: T-accounts & journal entries ✓
➢Accrual accounting: Adjusting entries ✓
➢Presenting Financial Statements (This Lecture)
➢Details of common accounts and cash flow (Lecture 5-10)
How do we use accounting information? (Lecture 11)

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Chapter Overview
Usually, we do not see financial statements existing on their
own. They are generally presented as an integrated part of
the annual report, which (public) companies release to their
shareholders and the public after the end of a fiscal year to
discuss their companies’ activities in the last year, and to
give an outlook of the companies’ future.
Therefore, we will briefly introduce the whole annual report,
and discuss how the financial statements are integrated and
presented in it.

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Learning Objectives
4.1 Appreciate the role of annual reports as a
communication tool
4.2 Know the general presentation requirements of
financial statements
4.3 Understand presentation requirements for
Statement of Financial Position
4.4 Understand presentation requirements for
Statement of Comprehensive Income

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Learning Objectives
4.5 Understand presentation requirements for
Statement of Changes in Equity
4.6 Evaluate a company’s short-term liquidity

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Learning Objective 4.1
Appreciate the role of annual reports as a
communication tool

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Appreciate the Role of Annual Reports
as a Communication Tool (1 of 8)
• Annual Reports
– Substance over style
• Obtaining annual reports
– Investor relations websites of companies
– Securities authorities’ repository:
– HKEXnews 披露易
https://www.hkexnews.hk/

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Appreciate the Role of Annual Reports
as a Communication Tool (2 of 8)
Structure of an Annual Report
• An annual report has the following structure
– Corporate information
– Analysis and commentaries
– Other statement or disclosures
– Financial statements

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Appreciate the Role of Annual Reports
as a Communication Tool (3 of 8)
Corporate Information
• Provides information like
– Company background
– Business strategy
– Organizational structure
– Key markets and product portfolio
– Operating statistics
– Financial highlights

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Appreciate the Role of Annual Reports
as a Communication Tool (4 of 8)
Analysis and Commentaries
• Usually a letter from the Chairman of the Board of
Directors (or President of the company)
• Discusses achievements in the financial year, returns to
shareholders, and the key goals for the future

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Appreciate the Role of Annual Reports
as a Communication Tool (5 of 8)
Other Statements and Disclosures
• ESG (Environmental, Social and Governance)
• Corporate Governance
– Ensures corporate direction, responsibility, and
accountability
• Risk factors and legal proceedings

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Appreciate the Role of Annual Reports
as a Communication Tool (6 of 8)
Financial Statements
• An acknowledgement by directors and management
• An auditor’s report
• The full set of financial statements

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Appreciate the Role of Annual Reports
as a Communication Tool (7 of 8)
Auditor’s Report
• Provides independent professional opinion to shareholders
about the company’s financial statements
• Assure that the financial statements are prepared in conformity
with the accounting standards, and represent a true and fair
view of the company’s performance

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Appreciate the Role of Annual Reports
as a Communication Tool (8 of 8)
Auditors Report
• Unqualified Opinion: issued when financial statements are fairly
presented. It is the highest statement of assurance that an
independent auditing firm can express
• Qualified Opinion: issued if the financial statements are fairly
presented, except for some particular items
• Adverse Opinion: opposite of an unqualified opinion, i.e., the
financial statements do not fairly represent the company’s
financial position

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Learning Objective 4.2
Know the general presentation requirements of
financial statements

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General Presentation Requirements of
Financial Statements (1 of 11)
IAS 1 (HKAS1) Presentation of Financial Statements
– Sets the overall requirements for the presentation
of financial statements
– Guidelines for the structures
– Minimum requirements for the content

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General Presentation Requirements of
Financial Statements (2 of 11)
Financial statements comprise of:
• Statement of financial position at the end of the period
• Statement of comprehensive income for the period
• Statement of changes in equity for the period
• Statement of cash flows for the period
• Notes comprising significant accounting policies and
other explanatory information

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General Presentation Requirements of
Financial Statements (3 of 11)
General Features:
True and Fair view and Compliance with IFRS
• Refers to the Conceptual Framework
• An entity cannot rectify inappropriate accounting
policies either by disclosing the policy used
• An entity cannot selectively apply the standards it
likes and proclaim compliance with IFRS

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General Presentation Requirements of
Financial Statements (4 of 11)
Going Concern
• The entity’s intention and ability to operate into at
least the next period (12 months)
Accrual Basis of Accounting
• Financial statements are prepared using the accrual-
basis of accounting, except for cash flow information

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Example of Going Concern
Recall the simple example in Chapter 1:
Asset = Liability + Equity
Exercise Book $100 Share Capital $100

The exercise book is an asset because it is useful for

the business to operate. You need it in providing
services to your students.
Imagine that you are graduated and found a full-time
job, and no longer do private tutorship. Is this book still
useful? What is the remaining value of the book?

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Example of Going Concern
The remaining way that the book can benefit you / the
business is to be sold on 2nd hand market. Suppose you
do a search online and find that the 2nd hand price is
$20, you need to write-down the asset:
Asset = Liability + Equity
Exercise Book $20 Share Capital $100
RE -$80

Therefore, the value of assets is dependent on that

the business keeps running. The Going Concern
assumption is vital to ensure that the assets are as
valuable as they are stated on the balance sheet.
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General Presentation Requirements of
Financial Statements (5 of 11)
Materiality and Aggregation
• Real companies use thousands, millions, and even
billions of accounts
• How many accounts can be aggregated into a single
item e.g. “other operating expenses”?
• Materiality depends on the size and nature of the item

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Example: Materiality and Aggregation

Source: Hypebeast LTD. (2020) Annual Report 2019-2020. Retrieved from:

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0722/2020072200438.pdf
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Exhibit 4-4 Number of General Ledger
Accounts by Revenue Size

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General Presentation Requirements of
Financial Statements (6 of 11)
Offsetting
• Cannot offset assets and liabilities, or income and
expenses
• i.e. need to keep the items separated, e.g. not
grouping receivables and payables with the same
counterparty into “net receivables”
• Offsetting reduce the financial statement user’s ability
to understand the two separate business phenomena

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General Presentation Requirements of
Financial Statements (7 of 11)
Frequency of Reporting
• Entities are required to present a complete set of
financial information at least annually
• Larger entities are often required to report on a half-
yearly or quarterly basis
Comparative Information
• Numbers from previous period(s) that allow readers to
understand financial information (at least 2 sets)

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General Presentation Requirements of
Financial Statements (8 of 11)
Consistency of Presentation
• Entities are required to maintain the presentation and
classification of items in the financial statements from
one period to another

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General Presentation Requirements of
Financial Statements (9 of 11)
Consistency of Presentation
Suppose for 20X4 and 20X5, the company has the
exact same expenses, with $20,000 sales and
marketing expenses and $30,000 other operating
expenses respectively. Prior to issuing the 20X5
financial statements, a particular operating expense
amounting to $2,000 is found to be more appropriately
disclosed as a sales and marketing expense.

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General Presentation Requirements of
Financial Statements (10 of 11)
Consistency of Presentation
The previous presentation gives an impression that
more sales and marketing expenses were incurred
comparing 20X5 to 20X4, it mislead readers as the
expenses were exactly the same for 20X5 and 20X4. If
this new classification is adopted, you would adjust the
20X4 comparative and show:.

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Example of Consistency
• Effect of the standard change on iPhone sales (in millions):

Source: Apple Inc. (2010) Form 10-K/A (Amendment No. 1). Retrieved from:
https://www.sec.gov/Archives/edgar/data/320193/000119312510012091/d10ka.htm
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General Presentation Requirements of
Financial Statements (11 of 11)
Notes to the Accounts
• Integral part of financial statements
• Contains additional information beyond the items
presented on the face of financial statements
• Presented systematically, with appropriate cross-
references from each item on the financial statements

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Learning Objective 4.3
Understand presentation requirements for Statement of
Financial Position

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Understand presentation requirements for
Statement of Financial Position
• IAS 1 specifies that:
– Standard line items should be displayed on the
Balance Sheet
– Additional line items, headings, and subtotals in
the statement of financial position should be
presented when it is relevant (material) to the
entity’s financial position
– Should separate current/non-current assets and
liabilities

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Exhibit 4-5 Line Items on the Balance
Sheet

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The Balance Sheet – Assets
• Current assets – expected to be used or converted to
cash within the next fiscal year
– Examples: cash and cash equivalents,
accounts receivable,
inventory
• Long-term assets – expected to benefit the company
beyond just the next fiscal year
– Examples: property, plant, and equipment (PPE),
intangible assets,
land

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Illustrative Presentation (1 of 5)

Source: HKAS1 (Revised) – Presentation of Financial Statements (Revised Jan 2019) Appendices:
Implementation Guidance. Retrieved 18/02/2020

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Illustrative Presentation (2 of 5)

Source: HKAS1 (Revised) – Presentation of Financial Statements (Revised Jan 2019) Appendices:
Implementation Guidance. Retrieved 18/02/2020

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The Balance Sheet – Liabilities
• Current liabilities – debts due within next year
– Examples: accounts payable,
salaries payable,
short-term notes payable
• Long-term liabilities – debts payable after the next
year
– Examples: long-term notes payable,
long-term bonds payable

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Illustrative Presentation (3 of 5)

Source: HKAS1 (Revised) – Presentation of Financial Statements (Revised Jan 2019) Appendices:
Implementation Guidance. Retrieved 18/02/2020

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Illustrative Presentation (4 of 5)

Source: HKAS1 (Revised) – Presentation of Financial Statements (Revised Jan 2019) Appendices:
Implementation Guidance. Retrieved 18/02/2020

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Illustrative Presentation (5 of 5)

Source: HKAS1 (Revised) – Presentation of Financial Statements (Revised Jan 2019) Appendices:
Implementation Guidance. Retrieved 18/02/2020

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Learning Objective 4.4
Understand presentation requirements for Statement of
Comprehensive Income

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Understand Presentation Requirements for
Statement of Comprehensive Income (1 of 2)
• All items of income and expense to be presented in
either of the following two formats
– A single Statement of Comprehensive Income
– Two statements
• Income Statement (statement of profit or loss)
• Statement of Comprehensive Income

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Exhibit 4-8 Statement of
Comprehensive Income Formats

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Understand Presentation Requirements for
Statement of Comprehensive Income (2 of 2)
• The Income Statement should show:
– Revenue
– Finance costs
– Share of profits of associates
– Tax expense

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Learning Objective 4.5
Understand presentation requirements for statement of
changes in equity

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Understand presentation requirements for
statement of changes in equity
Statement of Changes in Equity
• Reconciles the movement in total equity, from the
beginning to the end of a financial period
• Such reconciliation must be done for each component
of equity

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Exhibit 4-11 Key Reconciling Items
for Statement of Changes in Equity

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Understand presentation requirements for
statement of changes in equity
Basic structure of a Statement of Changes in Equity:

Share Capital Retained Earnings Total

=last period ending
Opening Balance 500 1000 1500 balance
Issuance of shares or
Share transactions 500 Share repurchases
Net Income/loss 1000 From Income Statement
Dividends (500)
Ending Balance 1000 1500 2500

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Course Overview
Starting from this lecture, we will introduce some techniques
to evaluate a company using accounting information found in
their financial statements at the end of each chapter.
This should gradually give you a taste of how users may use
the numbers produced by accountants.
These techniques are generally some ratios between
different accounting elements, and their usage is called
“financial statement analysis”.
Finally, there will be an in-depth discussion of financial
statement analysis in the last lecture.

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Learning Objective 4.6
Evaluate a company’s short-term liquidity

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Evaluate a Company’s Short-term
Liquidity (1 of 2)
• Current Ratio
– Divides total current assets by total current
liabilities

Asset liquidity: How easy can the asset be converted into cash
Accounting liquidity: How easy can the company obtain enough cash to
pay short-term liabilities

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Evaluate a Company’s Short-term
Liquidity (2 of 2)
As a rule of thumb, a strong current ratio is 1.50, which
indicates that the company has $1.50 in current assets
for every $1.00 in current liabilities.

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Chapter Summary
• The Financial Statements are usually presented as a part
of the Annual Report of a company
• Besides the financial statements, the Auditor’s Report in
the annual report particularly interests us. In the report,
auditors give their opinion on whether the financial
statements are prepared according to the accounting
standards and present a true and fair view of the company
• They can give 3 types of opinions, the best is Unqualified
Opinion, followed by Qualified Opinion, and the worst is
Adverse Opinion

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Chapter Summary
• The requirements for presentation of financial statements
are set in the IAS 1
• A complete set of financial statements include:
– Statement of Financial Position
– Statement of Comprehensive Income
– Statement of Changes in Equity
– Statement of Cash Flow
– Notes to the financial statements

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Chapter Summary
• According to the IAS 1, the General Features of financial
statements include:
– True and Fair View and Compliance to the IFRS
– Going Concern
– Accrual Basis
– Materiality and Aggregation
– No Offsetting
– Frequency of Reporting
– Comparative Information
– Consistency of Presentation

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Course Overview
What is accounting? ✓
Why do we do accounting in the way that will be discussed
in this course? ✓
How do we do accounting?
➢The format: T-accounts & journal entries ✓
➢Accrual accounting: Adjusting entries ✓
➢Presenting Financial Statements ✓
➢Details of common accounts and cash flow (Lecture 5-10)
How do we use accounting information? (Lecture 11)

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Course Overview
Details of common asset accounts:
➢Cash (Next Lecture)
➢Receivables (Next Lecture)
➢Inventory (Lecture 6)
➢Property, plant and equipment (Lecture 7)
Details of common liability accounts (Lecture 8)
Details of equity (Lecture 9)
Details of Statement of Cash Flow (Lecture 10)

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Course Overview
Financial Statement Analysis:
•Current Ratio

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Homework Assignments
• E4-17A
• Due 15 Oct, 11:59pm
• Upload to Blackboard
• Late submission is not accepted

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