Financial Reporting

Lecture Outline Statement of Financial Position Defined Purpose Elements Statement of Financial Position Equation Example Statement of Financial Performance Defined Purpose Elements Formats

Statement of Financial Position Defined: A statement showing the resources controlled and the obligations due by an entity at a given point in time.

Statement of Financial Position The statement of financial position shows; Resources controlled (ie assets) Debt Liquidity : ability to repay short term debt This information combined allows a user to assess an organisation’s financial position.

Financial Accounting Elements Financial Accounting contains five elements. These are: 1. Assets Statement of 2. Liabilities Financial Position 3. Equity 4. Revenues Statement of 5. Expenses Financial Performance

Assets 1 st Test – Is an item an asset? Must possess future economic benefit Control Result of a past transaction or event 2 nd Test – Can we recognise the asset? Reliable Measurement  Historical cost  Fair Value  Present value It must be probable that economic benefits will occur.

Current Assets Assets the business estimates it will hold for less than 12 months. Cash Accounts receivable Short term investments Inventory Prepaid expenses

Non Current Assets Assets the business estimates it will hold for greater than 12 months. Buildings Land Machinery Motor Vehicles Long Term Investments

Liabilities 1 st Test – Does a liability exist? Present obligation to sacrifice economic benefit. Result of a past transaction or event 2 nd Test – Can we recognise the liability? Reliable Measurement  Historical cost  Fair Value  Present value It must be probable that sacrifice of economic benefits will occur.

Current Liabilities Defined: Liabilities that are payable within 12 months. Bank overdraft Accounts payable (amount owed to suppliers) Short term loan Accrued expenses Unearned revenue

Non Current Liabilities Defined: Liabilities which are not due within the following 12 month period. Long Term Loan

Equity Partnership Defined Residual interest in the assets after liabilities have been deducted. Capital A [Amount invested by Partner A] Capital B [Amount invested by Partner B] Retained Profits A [ Partner A’s share of profit ] Retained Profits B [ Partner B’s share of profit ]

Accounting Equation Assets - Liabilities = Owners Equity A - L = OE Principle of Duality Every transaction has two opposite and equal components.

Accounting Equation Example Assets - Liabilities = Owners Equity 97, ,200= 36,700 The owner invests $10,000 into the business. +15, , , ,200= 51,700

Business Entity Principle The B.E.P states that the personal assets and liabilities of the owner(s) must be kept separate from those of the business. Owner Assets Liab. Company Assets Liab.

Statement of Financial Performance Defined A statement conveying an entity’s operating performance (profitability) for a given period. Profit/loss for a given period is determined by; Profit/Loss = Revenue - Expenses

Revenue Defined: An inflow of assets (usually cash) as a result of providing goods or services. Savings in outflow are also considered to be revenues. Discount received

Revenue Revenues (if earnt within the current period). Fees from providing a service. Cash from the sale of goods. Discount Received. Not Revenues in the current period. Cash obtained from a loan. Cash received from selling an asset. Cash received for goods and services to be provided in a future period. Cash received for goods and services provided in a previous period.

Expenses Loss or consumption of economic benefits.

Expenses Expenses (if incurred in current period). Discount Allowed Wages Electricity Rent Telephone Depreciation Doubtful Debts Non Expenses Repayment of Loan Principle. Purchase of Assets Payment made for expenses to be incurred in a future period. Payment made for expenses incurred in a previous period.