KASNEB · AdvancedAdvanced Financial ReportingBETA — flag if wrong

Preparation of Financial Statements

This topic focuses on the preparation of financial statements in accordance with IFRS, including the statement of profit or loss and other comprehensive income.

3objectives

3revision lessons

12practice questions

What you’ll learn

Aligned to the KASNEB Advanced Financial Reporting syllabus.

CA32.2.A Prepare a statement of profit or loss in accordance with IFRS.
CA32.2.B Prepare a statement of financial position in accordance with IFRS.
CA32.2.C Compute and present earnings per share.

Preparing a statement of profit or loss in accordance with IFRS

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The statement of profit or loss (SOPL) presents the financial performance of an entity over a specific period, in compliance with IFRS. Key components include revenue, cost of sales, gross profit, operating expenses, and profit before tax. Under IFRS 15, revenue is recognized when control of goods or services is transferred to customers. Cost of sales includes all costs directly attributable to the production of goods sold during the period. Operating expenses encompass administrative and distribution costs. The final profit figure is calculated by deducting tax expenses from profit before tax.

In Kenya, companies must adhere to the Companies Act 2015 and ensure compliance with the International Financial Reporting Standards (IFRS) as set by ICPAK. The SOPL is crucial for stakeholders to assess profitability and operational efficiency. Ensure all figures are rounded correctly and presented clearly, with appropriate disclosures for any significant items affecting profit.

Key points

Revenue recognized under IFRS 15 when control transfers.
Cost of sales includes direct production costs.
Operating expenses are categorized as distribution and administrative.
Profit before tax is calculated before tax expenses are deducted.
Compliance with Companies Act 2015 and IFRS is mandatory.

Worked example

Statement of Profit or Loss for ABC Limited for the year ended 31 December 2026

| Particulars | KES (million) | |-----------------------------------|----------------| | Revenue | 1,200 | | Cost of sales | (800) | | Gross profit | 400 | | Administrative expenses | (150) | | Distribution costs | (100) | | Profit before tax | 150 | | Income tax expense | (30) | | Profit for the period | 120 |

Calculation Breakdown:

Revenue: KES 1,200 million
Cost of sales: KES 800 million
Gross profit: KES 1,200 million - KES 800 million = KES 400 million
Total expenses: KES 150 million (administrative) + KES 100 million (distribution) = KES 250 million
Profit before tax: KES 400 million - KES 250 million = KES 150 million
Income tax expense: KES 30 million
Profit for the period: KES 150 million - KES 30 million = KES 120 million

More on this topic

CA32.2.B Preparing a Statement of Financial Position per IFRSBETA — flag if wrongAI 100

The Statement of Financial Position (SOFP) provides a snapshot of a company's financial position at a specific date, detailing assets, liabilities, and equity. Under IFRS, specifically IAS 1, the SOFP must classify assets and liabilities as either current or non-current. Current assets are expected to be settled or realized within one year, while non-current assets are held for longer periods. Similarly, current liabilities are obligations due within one year, whereas non-current liabilities extend beyond that timeframe.

In Kenya, companies must adhere to the Companies Act 2015 and IFRS standards when preparing their financial statements. The SOFP typically includes:
- Assets:
- Non-current Assets (e.g., property, plant, and equipment, intangible assets)
- Current Assets (e.g., inventory, trade receivables, cash)
- Liabilities:
- Non-current Liabilities (e.g., long-term borrowings)
- Current Liabilities (e.g., trade payables, bank overdrafts)
- Equity (e.g., share capital, retained earnings, reserves)

When preparing the SOFP, ensure that the accounting equation (Assets = Liabilities + Equity) holds true. This is critical for accurate financial reporting and compliance with IFRS.

CA32.2.C Computing Earnings Per Share (EPS) for Financial StatementsBETA — flag if wrongAI 100

Earnings per Share (EPS) is a key financial metric that indicates the profitability of a company on a per-share basis. It is calculated using the formula:

EPS = (Profit for the year - Preference dividends) / Weighted average number of ordinary shares outstanding.

For companies in Kenya, EPS is crucial for investors, especially those listed on the Nairobi Securities Exchange. The calculation must comply with IAS 33 - Earnings per Share.

When computing EPS, consider the following:
1. Profit for the year: This is the net income after tax as reported in the income statement.
2. Preference dividends: These are dividends payable to preference shareholders and must be deducted from the profit for the year.
3. Weighted average number of ordinary shares: This accounts for any changes in the number of shares during the reporting period, such as new issues or buybacks.

It’s important to ensure that the EPS is presented both as basic and diluted EPS if there are potential ordinary shares that could dilute the earnings.

In Kenya, companies must disclose EPS in their financial statements as per the requirements of the Companies Act 2015 and the guidelines set by ICPAK. This enhances transparency and aids investors in making informed decisions.

Sample KASNEB-style questions

3 of 12 questions. Beta-flagged questions are AI-drafted and pending CPA review — flag anything that looks wrong.

Q1 · MCQ · easyBETA — flag if wrongAI 100

Which of the following is included in the calculation of gross profit in a statement of profit or loss?

A.A) Interest income
B.B) Cost of sales✓ correct
C.C) Administrative expenses
D.D) Tax expense

Q2 · MCQ · mediumBETA — flag if wrongAI 84

What is the primary purpose of the statement of profit or loss?

A.A) To show the cash position of a company
B.B) To report the company's financial position
C.C) To show the company’s revenues and expenses✓ correct
D.D) To report changes in equity

Q3 · SHORT ANSWER · mediumBETA — flag if wrongAI 93

List and explain two components that must be included in a statement of profit or loss according to IFRS.

Model answer

1. Revenue: This represents the total income generated from normal business operations before any expenses are deducted. 2. Expenses: These are the costs incurred to generate revenue, including cost of sales and operating expenses.

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Common questions

Prepare a statement of profit or loss in accordance with IFRS.

Revenue recognized under IFRS 15 when control transfers.

Prepare a statement of financial position in accordance with IFRS.

SOFP reflects financial position as of a specific date.

Compute and present earnings per share.

EPS = (Profit - Preference dividends) / Weighted average shares.