N6 Financial Accounting

Financial Accounting Downloaded from hlayiso.com N6

Module 1: Conceptual framework INTRODUCTION The Conceptual Framework for Financial Reporting forms the foundation or basis of all International Financial Reporting Standards. The purpose of the conceptual framework is to set out the various concepts underlying financial reporting in order to assist the International Accounting Standards Board to develop and evaluate new forms of IFRSs. Downloaded from hlayiso.com www.futuremanagers.com

Module 1: Conceptual framework (continued) QUALITATIVE CHARACTERISTICS In order for a set of financial statements to be useful to its users, it must have certain qualitative characteristics. These include: • Relevance; • Verifiability; • Faithful representation; • Timeliness; and • Comparability; • Understandability. Downloaded from hlayiso.com www.futuremanagers.com

Module 1: Conceptual framework (continued) UNDERLYING ASSUMPTIONS It is very important that users may assume that the financial statements relate to a going concern that plans to continue operating for the foreseeable future. A going concern means that the entity’s assets exceed its liabilities. Downloaded from hlayiso.com www.futuremanagers.com

Module 1: Conceptual framework (continued) ELEMENTS OF FINANCIAL STATEMENTS There are five elements that make up the entire double-entry accounting system: • Assets; • Liabilities; • Equity; • Income; and • Expenses. Downloaded from hlayiso.com www.futuremanagers.com

Module 1: Conceptual framework (continued) RECOGNITION CRITERIA A transaction can only be recorded (journalised in the ledger) if it meets the definition of an element first and secondly meets the recognition criteria. The recognition criteria are: • The flow of future economic benefits caused by this element must be probable, and • The element must have a cost/value that can be reliably measured. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax INTRODUCTION VAT is taxation on the rendering of goods or services which is borne by the consumer in the final stage of supply, but which is collected during each stage of production and marketing. The rate at which VAT is levied is determined by legislation. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax (continued) THE WORKING OF VAT During each stage of the production and services process the supplier’s profit is determined and taxed. This is attained by the supplier paying VAT on every input, which he uses to supply goods and services to his clients. The VAT paid by the supplier is his input tax. The supplier charges VAT on goods and services supplied to his clients. The VAT charged by the supplier is his output tax. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax (continued) THE BASIS OF VAT VAT is levied on: • The supply of goods or services delivered by the dealer, on or after the inception date, during the normal course of business; • The importing of goods to the RSA by any person on or after the inception date; and • The supply of imported goods by any person or after the inception date. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax (continued) CALCULATION OF VAT There are two methods of calculating VAT: • Invoice basis: VAT is payable or recoverable when an tax invoice is issued, or upon receipt thereof, regardless of whether payment has been made or received; and • Payment basis: VAT is only payable or recoverable once payment has been made or received. Special permission is needed to pay according the payment basis. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax (continued) THE SALE OF GOODS Businesses that are registered VAT vendors in terms of tax legislation must charge VAT on the sale of all the goods and services supplied by them. The marked price of all these goods and services must be shown inclusive of VAT. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax (continued) THE PURCHASE OF GOODS When a business, that is a VAT vendor, buys goods or services from a VAT vendor, the business can claim the VAT they paid on these goods or services from SARS. If the business from which you buy goods or services, is not a VAT vendor, no VAT can be claimed from SARS. Downloaded from hlayiso.com www.futuremanagers.com

Module 2: Value-added tax (continued) COMPLETION OF VAT RETURNS The VAT return is called VAT201. On this form the VAT vendor must declare the Output VAT and Input VAT for that specific period. The difference between the two is payable to or receivable from SARS. Downloaded from hlayiso.com www.futuremanagers.com

Module 3: Companies DIFFERENT TYPES OF COMPANIES Companies are divided into categories: • State-owed companies; • Private companies; • Personal liability companies; • Public companies; and • Non-profit companies. Downloaded from hlayiso.com www.futuremanagers.com

Module 3: Companies (continued) THE ESTABLISHMENT OF A COMPANY • Registration; • Legal entity; • Name reservation; • Memorandum of Incorporation; • Registered office; • Commencing with a company; • Public interestDownloaded score. from hlayiso.com www.futuremanagers.com

Module 3: Companies (continued) CAPITAL OF A COMPANY There are different forms of company capital: • Authorised share capital; • Issued share capital; and • Un-issued or reserve share capital. Downloaded from hlayiso.com www.futuremanagers.com

Module 3: Companies (continued) TAXATION The company is a taxpayer separate from its shareholders. The company income tax is calculated on the taxable income according to the requirements of the Income Tax Act. The income tax rate paid by a company is set at a fixed percentage, and not on a sliding scale as in the case with individuals and trusts. Downloaded from hlayiso.com www.futuremanagers.com

Module 3: Companies (continued) FINANCIAL STATEMENTS ACCORDING TO THE REQUIREMENTS OF THE INTERNATIONAL FINANCIAL REPORTING STANDARDS The annual financial statements should be drawn up according to the financial reporting standards as stated below and should be a fair representation of the following: • The state of the company’s affairs and its business at the end of the financial period concerned; and • The profit or loss of the companyfrom Downloaded for the financial period concerned. hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) CHARACTERISTICS OF CLOSE CORPORATION AS AN ENTERPRISE • One to ten natural persons can form a Close Corporation. • A Close Corporation is a legal entity which is independent of its members. • The name must end in CC. • CC has no share capital or shareholders. Owners are called ‘members’. • Each member holds a ‘members interest’ expressed as a percentage. • All members may take part in the management of the CC. Downloaded from hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) ADVANTAGES OF CLOSE CORPORATION AS AN ENTERPRISE • The cost of the formation of a CC is lower than for a company. • No compulsory meeting. • All members may take part in the management of the business. • Can hold shares in companies and may even have controlling powers in the company. • The liability of the members is limited, except in certain circumstances. Downloaded from hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) DISADVANTAGES OF CLOSE CORPORATION AS AN ENTERPRISE • An action by a member as an agent of the CC with a third party, will be binding on the CC. • A CC is no longer exempt from being audited but will not be subject to an audit on the same terms and conditions as companies. • Members must agree before a member can withdraw his interest. • Expansion is hampered due to the limited number of members. Downloaded from hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) (continued) MEMBERS’ CONTRIBUTION • Every member of a CC must make a contribution to the business. • Members’ contributions can be in the following formats: cash, assets or services and can be increased or decreased. • • The changes in the members’ contributions must be recorded in an amended founding statement. • The CC is a legal person - the law regards the business as if it were a person. Therefore the business owns Downloaded fromassets and is responsible for debts. hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) (continued) MEMBERS’ INTEREST The interest of each member refers to the percentage ownership that each member has in the close corporation. The contributions by members need not be in the same proportion as the members’ percentage interest. It is the members’ interests, and not their contributions, which determine the proportion in which profits and losses are to be shared. Downloaded from hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) (continued) FINANCIAL STATEMENTS The financial statements of a close corporation consist of: • A balance sheet, • An income statement. • Notes which comprise a summary of accounting policies. • Statement of changes in equity. • Cash flow statement. Downloaded from hlayiso.com www.futuremanagers.com

Module 4: Close Corporation (CC) (continued) DISCLOSURE ITEMS Annual financial statements must disclose separately the following items: • Contributions by members; • Retained income (undrawn profits); • Revaluation of non-current assets; • Amount of loans to members; and • Amount of loans from members. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow INTRODUCTION The statement of cash flow may be the most important statement which is drafted by any business. This statement traces the flow of funds (cash, money or working capital) into and out of the business during an accounting period. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) OBJECTIVES OF A STATEMENT OF CASH FLOW The primary purpose (objectives) of the statement of cash flow is to provide management with information regarding the cash receipts and cash payments in a business for a specified period of time. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) USERS OF THE STATEMENT OF CASH FLOW This includes: • Entrepreneurs/owners; • Credit granters; and • Those who handle cash flow management. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) DESCRIPTIONS AND CONCEPTS OF THE STATEMENT OF CASH FLOW • Cash is generally any currency a business owns. • Cash equivalents are assets that can be converted into cash within a short time but are subject to an insignificant risk of changes. • Cash flows are the flow of funds in and out of a business. • Investment activities are the acquisition and disposal of long-term assets and other investments which are not included in cash and cash equivalents. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) ADVANTAGES OF THE STATEMENT OF CASH FLOW • It provides adequate information as regards the inflows and outflows of cash resources to and from the business. • It evaluates the level of efficiency of the management of the business as regards the uses of its cash resources. • It discloses the liquidity and solvency position of the business. • It helps management a lot for future cash planning of the business. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) DISADVANTAGES OF THE STATEMENT OF CASH FLOW • It shows only the cash position, it is therefore not possible to arrive at the actual profit and loss of the business by just looking at this statement. • It does not take into consideration any future growth. • The information on a cash flow statement is not necessarily easy to interpret. You can see where all of the cash is going, but you may not know if it should be going there. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) NON-CASH FLOW ITEMS Non-cash flow items are entries which do not represent a flow of cash, but are recorded in the accounting records of the business. These entries are normally book entries or journals passed by the management of the business and they do not represent any transactions with a third party. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) THE TWO METHODS OF PRESENTATION OF CASH FLOW AND THE NOTES TO THE CASH FLOW The international accounting standard covering the statement of cash flow, allows for two methods to be used to present a statement of cash flow: • The direct method; and • The indirect method. Downloaded from hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) PROCEDURES TO BE FOLLOWED WHEN COMPILING A STATEMENT OF CASH FLOW 1. Do the ledger accounts of assets that are disposed of. 2. Calculate the amount for ‘Cash receipts from customers’ . 3. Calculate the amount for ‘Cash payments to suppliers and employees’. 4. Calculate the actual cash amounts paid to shareholders 5. Prepare the two notes to the statement of cash flow. 6. Prepare the face of the statement Downloaded of cash from flow. hlayiso.com www.futuremanagers.com

Module 5: Statement of cash flow (continued) SPECIAL ITEMS • Depreciation written off at the end of the financial year is a non-cash item which does not represent a flow of cash and it is included in the income statement as an operating expense. • The income statement only shows the profit or loss made on the sale or scrapping of the asset and does not indicate the total cash received when the asset was sold. Downloaded from hlayiso.com www.futuremanagers.com

Module 6: Auditing INTERNAL AUDITING Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Downloaded from hlayiso.com www.futuremanagers.com

Module 6: Auditing (continued) EXTERNAL AUDITING External Auditing is an independent, objective process of obtaining and evaluating evidence and expressing an opinion on whether the annual financial statements of a company fairly present the actual financial position of the company and assist in any other financial service a company may require. Downloaded from hlayiso.com www.futuremanagers.com

Module 6: Auditing (continued) DIFFERENCE BETWEEN INTERNAL AND EXTERNAL AUDITING Internal auditing External auditing The audit is carried out by a business employee. The audit is carried out by a professional practitioner. The primary objective is to meet the needs of The primary objective is to meet the need of third management. parties for reliable financial data. The work is primarily divided according to business The work is primarily divided in relation to the functions and the nature of management statement of financial position and statement of responsibilities. comprehensive income accounts. The overview of the business’s activities is ongoing. The investigation of supporting data to the financial statements is periodical – usually once a year. Downloaded from hlayiso.com www.futuremanagers.com

Module 6: Auditing (continued) AUDITING EVIDENCE Audit evidence is obtained by performing: • Risk assessment procedures; • Compliance procedures or test of controls; and • Substantive procedures. Downloaded from hlayiso.com www.futuremanagers.com

Module 6: Auditing (continued) AUDITING REPORTS In auditing, there can be an internal report and an external report. The objective of the internal audit report is to provide a written record of the findings during the internal audit and to make recommendations on how to resolve problem situations. Downloaded from hlayiso.com www.futuremanagers.com