1. MEASURING AND REPORTING FINANCIAL POSITION
Part One
FINANCIAL ACCOUNTING
Chapter 2
MEASURING AND REPORTING FINANCIAL POSITION

2. Explain the nature and purpose of the three major financial statements
LEARNING OUTCOMES
You should be able to:
Prepare a simple statement of financial position and interpret the information that it contains
Explain the nature and purpose of the three major financial statements
Discuss the uses and limitations of the statement of financial position for decision-making purposes
Discuss the accounting conventions underpinning the statement of financial position

3. The major financial statements – an overview
Income statement
Statement of financial position
Statement of cash flows

4. The relationship between the major financial statements
Income statement
Statement of cash flows
Statement of financial position
Time
Period 2
Period 1
Figure 2.1 The relationship between the major financial statements

5. Decision chart for identifying an accounting asset
Is there a probable future benefit?
Is there a right to control the resource?
Does the economic benefit arise from a past transaction or event?
Can the resource be reliably measured in financial terms?
Accounting asset
Not an accounting asset
Yes No
Figure 2.2 Decision chart for identifying an accounting asset

6. Claims
Equity
Liabilities

7. The accounting equation
Liabilities
Assets
Equity = +

8. The effect of trading transactions on the accounting equation
The accounting equation can be extended as follows:
Profit (Loss)
Assets
Equity
Liabilities = +
+ (−)

9. The classification of assets
The classification of assets may vary according to the nature of the business:
Current assets
Non-current assets

10. Current assets
Expected to be sold within the next year
Held principally for trading
Held for sale or consumption during the business’s operating cycle
They are cash or near equivalents to cash

11. Do not meet the definition of current assets
Non-current assets
Do not meet the definition of current assets

12. The circulating nature of current assets
Cash
Trade receivables (trade debtors)
Inventories (stock)
Figure 2.3 The circulating nature of current assets

13. The classification of claims
Current liabilities
Non-current liabilities

14. Current liabilities
Held principally for trading purposes
Due to be settled within a year after the statement of financial position date
Expected to be settled within the business’s normal operating cycle
No right to defer settlement beyond a year after the statement of financial position date

15. Non-current liabilities
Do not meet the definition of current liabilities

16. Brie Manufacturing Statement of financial position as at 31 December 2013
£000
ASSETS
Non-current assets
Property 45
Plant and equipment 30
Motor vans 19 94
Current assets
Inventories 23
Trade receivables 18
Cash at bank 12 53
Total assets
147

17. Brie Manufacturing Statement of financial position as at 31 December 2013 (Continued)
£000
EQUITY AND LIABILITIES
Equity 60
Non-current liabilities
Long-term borrowings 50
Current liabilities
Trade payables 37
Total equity and liabilities
147

18. Non-current liabilities Non-current liabilities
Standard layout
Alternative layout
equals
Non-current assets
Current assets
Total assets
plus
Equity
Equity + liabilities
Non-current liabilities
Current liabilities
Non-current assets
Current assets
Total assets
plus
equals
minus
Non-current liabilities
Current liabilities
Equity
Figure 2.4 Layouts for the statement of financial position

19. Accounting conventions influencing the statement of financial position
Business entity convention
Dual aspect convention
Prudence convention
Historic cost convention
Going concern convention
Statement of financial position
Figure 2.5 Accounting conventions influencing the statement of financial position

20. Money measurement Key measurement problems: Goodwill and brands
Human resources
Monetary stability

21. Uses of the statement of financial position
Can provide a basis for assessing the value of the business
Relationships between assets and claims can be assessed
Shows how the business is financed and how funds are deployed
Performance can be better assessed