Ch2. ACCA — Financial Accounting (FA): IFRS & Financial Statements

The IFRS Conceptual Framework

IFRS (International Financial Reporting Standards) are developed by the IASB and adopted in over 140 countries. They provide the foundational principles for preparing and presenting financial statements.

The 5 Components of Financial Statements (IAS 1)

Statement of Financial Position (Balance Sheet)
Statement of Profit or Loss and Other Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flows
Notes (including accounting policies)

Double-Entry Bookkeeping

Accounting equation: Assets = Liabilities + Equity

Every transaction is recorded in at least two accounts with equal debits and credits.

Debit and Credit Rules

Account Type	Increase	Decrease
Assets	Debit	Credit
Liabilities	Credit	Debit
Equity	Credit	Debit
Revenue	Credit	Debit
Expenses	Debit	Credit

Key IFRS Standards Summary

IAS 2: Inventories

Permitted methods: FIFO, Weighted Average Cost
LIFO prohibited under IFRS (key difference from US GAAP)
Measured at lower of cost and Net Realizable Value (NRV)

IAS 7: Cash Flow Statements

Both direct and indirect methods permitted (indirect is more common in practice)
Interest received: operating or investing (IFRS flexibility)
Dividends received: operating or investing

IAS 16: Property, Plant and Equipment

Cost model: Acquisition cost − accumulated depreciation − impairment
Revaluation model: Carry at fair value (IFRS only)
Depreciation: straight-line, reducing balance, units of production

IAS 1: Presentation of Financial Statements

Going concern assumption
Accruals basis of accounting
Comparative period information required

Financial Ratio Analysis

Profitability

Ratio	Formula
Gross profit margin	Gross profit / Revenue × 100
Net profit margin	Profit after tax / Revenue × 100
ROCE	EBIT / (Equity + Non-current liabilities) × 100

Liquidity

Ratio	Formula	Benchmark
Current ratio	Current assets / Current liabilities	≥ 2:1
Quick ratio	(Current assets − Inventory) / Current liabilities	≥ 1:1

Efficiency

Inventory days = (Inventory / Cost of sales) × 365
Receivable days = (Receivables / Revenue) × 365
Payable days = (Payables / Purchases) × 365

ACCA FA High-Frequency Topics

Inventory valuation (IAS 2: FIFO vs. weighted average)
Depreciation calculations for PPE
Cash flow statement (indirect method)
Error correction journal entries
Ratio calculation and interpretation

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Next: Performance Management (PM) — cost classification, CVP analysis, standard costing and variance analysis, and performance metrics (KPIs, BSC).