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Preparation of Financial Statements — KCSE Advanced Financial Reporting

KCSE Advanced Financial Reporting · 0 practice questions · 3 syllabus objectives · 3 revision lessons

Last updated · Aligned to the KNEC KCSE syllabus

What You'll Learn

Key learning outcomes for this topic, aligned to the KNEC KCSE syllabus.

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

Prepare a statement of financial position in accordance with IFRS.

Compute and present earnings per share.

Revision Notes

Concise lesson notes for Preparation of Financial Statements, written to the KCSE Advanced Financial Reporting marking standard. Read the first lesson free below.

Preparing a statement of profit or loss in accordance with IFRS

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 to remember

  • 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:

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

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Lesson 2: Preparing a Statement of Financial Position per IFRS

Objective: Prepare a statement of financial position in accordance with IFRS.

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.

  • SOFP reflects financial position as of a specific date.
  • Classify assets and liabilities as current or non-current.
  • Follow IAS 1 for presentation and structure.
  • Ensure Assets = Liabilities + Equity for balance.
  • Adhere to Companies Act 2015 and IFRS standards.

Statement of Financial Position for Zeddy Limited as at 31 October 2014

Zeddy Limited
Statement of Financial Position
As at 31 October 2014

| Assets | KES (million) | | Liabilities and Equity | KES (million) | | |-------------------------------|----------------|--|--------------------------------------|----------------|--| | Non-current Assets | | | Non-current Liabilities | | | | Property, Plant and Equipment | 1,526 | | Long-term Borrowings | 200 | | | Intangible Assets | 300 | | | | | | Total Non-current Assets | 1,826 | | Total Non-current Liabilities | 200 | | | | | | Current Liabilities | | | | Current Assets | | | Trade Payables | 150 | | | Inventory | 400 | | Bank Overdraft | 100 | | | Trade Receivables | 250 | | Total Current Liabilities | 250 | | | Cash in Hand | 50 | | | | | | Total Current Assets | 1,100 | | Equity | | | | | | | Ordinary Share Capital (Sh. 10 each) | 800 | | | | | | Retained Earnings | 576 | | | Total Assets | 2,926 | | Total Liabilities and Equity | 2,926 | |

This example illustrates how to structure the SOFP, ensuring that total assets equal total liabilities and equity.

Lesson 3: Computing Earnings Per Share (EPS) for Financial Statements

Objective: Compute and present earnings per share.

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.

  • EPS = (Profit - Preference dividends) / Weighted average shares.
  • Deduct preference dividends from profit for accurate EPS.
  • Weighted average shares account for changes in share capital.
  • Disclose both basic and diluted EPS as per IAS 33.
  • EPS is crucial for investors on the Nairobi Securities Exchange.

Calculation of Earnings Per Share (EPS)

Given:

  • Profit for the year: KES 1,200,000
  • Preference dividends: KES 200,000
  • Ordinary shares at start: 100,000
  • New shares issued: 50,000
  • Ordinary shares at end: 150,000

Step 1: Calculate the weighted average number of ordinary shares:
Weighted average shares = (100,000 + 150,000) / 2 = 125,000

Step 2: Calculate EPS:
EPS = (1,200,000 - 200,000) / 125,000
EPS = 1,000,000 / 125,000
EPS = KES 8.00

Conclusion

The Earnings Per Share for the period is KES 8.00.

Sample Questions

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Frequently asked questions

What does the KCSE Advanced Financial Reporting topic "Preparation of Financial Statements" cover?

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

How many practice questions are available for Preparation of Financial Statements?

HighMarks has 0 Preparation of Financial Statements practice questions for KCSE Advanced Financial Reporting, each with a full marking scheme. The first 0 are free; sign up to access the rest, plus all KCSE mock exams and past papers.

Are these aligned with the KNEC KCSE syllabus?

Yes. Every objective on this page is taken directly from the official KNEC KCSE Advanced Financial Reporting syllabus. Practice questions match the KCSE exam format and are graded against the standard KNEC marking scheme.

How should I revise Preparation of Financial Statements for the KCSE exam?

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