4 Conceptual Framework of Financial Statements.

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Presentation transcript:

4 Conceptual Framework of Financial Statements

CHAPTER OBJECTIVES

Purpose of the Framework Assistance to: Preparers Auditors Introduction Purpose of the Framework Assistance to: Preparers Auditors Users of Financial Statements Accounting Standards Board (ASB) Scope and Coverage Components of Financial Statements Balance Sheet Statement of Profit and Loss Cash Flow Statement Notes to Account and Accounting Policies

Researsh in Financial Reporting Case 1: Research in financial reporting Tata Motors Ltd.

Objective of Financial Statements Financial position Economic resources Financial structure Liquidity and solvency Performance Cash flows Users and Their Information Needs Present and Potential Investors Employees and their Representative Groups Lenders Suppliers and other Trade Creditors Customers Governments and their Agencies Public Management Others

Case 2 Reliance Industries Ltd. Annual Report 2005–06

Assumptions Underlying Preparation of Financial Statements Accrual basis Going concern Consistency Qualitative Characteristics of Financial Statements Understandability Relevance Materiality

Illustration 1

Constraints on qualitative characteristics Reliability Faithful representation Substance over form Neutrality Prudence Completeness Comparability Constraints on qualitative characteristics Balance between Timeliness and Reliability Balance between Benefit and Cost Balance between Qualitative Characteristics True and fair view

Definitions and Characteristics Definitions, Characteristics Recognition and Measurement of the Elements of Financial Statements Definitions and Characteristics Financial position Assets Liabilities Equity Performance Income Expenses Cash flows Recognition Process of recognition Specific Issues

Concepts of Capital and Capital Maintenance Capital Measurement Measurement bases Historical cost Current cost Realisable value Present value Concepts of Capital and Capital Maintenance Capital Financial concept Physical concept Capital maintenance and determination of profit Financial capital maintenance Illustration 2 Physical capital maintenance

Case 3 Infosys Technologies Ltd. (Annual Report 2005–06) Concluding Remarks