Understanding Financial Statements: Key Concepts and Disclosures
Financial Statement Disclosures: Inventory
NIC 2 – Information to be Disclosed in Financial Statements
The following information regarding inventory should be disclosed in the financial statements:
- (a) Accounting Policies: The accounting policies adopted for the valuation of inventories, including the cost formula used.
- (b) Total Carrying Amount: The total carrying amount of inventories and partial sums according to classifications appropriate to the entity.
- (c) Fair Value Less Costs to Sell: The carrying amount of inventories carried at fair value less costs to sell.
- (d) Inventories Recognized as Expense: The amount of inventories recognized as an expense during the period.
- (e) Write-Down of Inventories: The amount of any write-down of inventories recognized as an expense.
- (f) Reversal of Write-Downs: The amount of any reversal of previous write-downs recognized as a reduction in the amount of expenditure.
- (g) Circumstances of Reversal: The circumstances or events that led to the reversal of any write-down.
- (h) Inventories Pledged as Security: The carrying amount of inventories pledged as security for liabilities.
Paragraph 37 – Classification of Inventories
Information about the carrying amount of different classes of inventories and their variation during the year is useful to users. Common classifications include merchandise, production supplies, raw materials, work in progress, and finished goods. Inventories of service providers may be described as work in progress.
Paragraph 38 – Cost of Sales
The amount of inventories recognized as expense during the period, typically called the cost of sales, includes costs previously included in the valuation of sold products, undistributed indirect costs, and abnormal production costs. Specific circumstances may require the inclusion of other costs, such as distribution costs.
Paragraph 23 – Specific Identification of Cost
The cost of inventories of non-interchangeable products and goods/services produced for specific projects should be determined using the specific identification method.
Paragraph 24 – Specific Identification Method
This method allocates specific cost items to identified inventories. It’s suitable for products segregated for specific projects, regardless of production or purchase origin. However, it’s inappropriate for large quantities of interchangeable products, as selecting specific items could manipulate profit or loss.
Paragraph 25 – FIFO and Weighted Average Cost
For inventories not covered in Paragraph 23, the cost is assigned using the First-In, First-Out (FIFO) or weighted average cost method. The same formula should be used for inventories with similar nature and use. Different formulas may be justified for inventories with different nature or use.
Other Financial Concepts and Definitions
Dividends
Dividends represent the distribution of a corporation’s profits to its owners or shareholders.
Free Shares (Bonus Shares)
Free shares are issued through the capitalization of profits or reserves. They are exempt from payment by shareholders as they represent a return on investment.
Retained Earnings
Retained earnings are profits not distributed to shareholders or partners in a given period.
Tonnage of Case
This refers to the count of values and documents in a case, providing information and control over their operation.
International Accounting Standards (IAS) and Interpretations
IAS 1 – Presentation of Financial Statements
Under IAS 1, a complete set of financial statements includes a balance sheet, income statement, statement of changes in equity, cash flow statement, and notes. These notes provide a summary of accounting policies and other explanatory information.
NIC 1 – Presentation of Financial Statements
The purpose of NIC 1 is to establish the basis for presenting general-purpose financial statements, ensuring comparability with previous periods and other entities. These statements provide information about an entity’s assets, liabilities, equity, income, expenses (including gains and losses), other changes in equity, and cash flows.
Components of Other Comprehensive Income
Components of other comprehensive income include revaluation surplus, gains and losses in defined benefit plans, gains and losses from translating financial statements, gains and losses on available-for-sale financial assets, and effective portions of cash flow hedges.
Total Comprehensive Income
Total comprehensive income represents the change in equity during a period, resulting from transactions and events other than those with owners.
Conceptual Framework
Objectives and Qualitative Characteristics
The Framework addresses the objective of financial statements and the qualitative characteristics that determine the usefulness of the information. It also covers the definition, recognition, and measurement of financial statement elements, as well as the concepts of capital and capital maintenance.
Objective of Financial Statements
The objective of financial statements is to provide information about an entity’s financial position, performance, and changes in financial position. This information is useful for a wide range of users in making economic decisions.
Benefits of Cash Flow Information
The cash flow statement, when used with other financial statements, provides information that helps users evaluate changes in net assets, financial structure (liquidity and solvency), and the ability to affect the amounts and timing of cash flows. This information is useful in assessing an entity’s ability to generate cash and cash equivalents, developing models to assess and compare the present value of net cash flows, and comparing operating performance across different entities.