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

1st Test – Is an item an asset? Must possess future economic benefit Control Result of a past transaction or event

2nd 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.

BuildingsLandMachineryMotor VehiclesLong Term Investments

Liabilities

1st Test – Does a liability exist? Present obligation to sacrifice economic benefit. Result of a past transaction or event

2nd 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

EquityPartnership

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 EquationExample

Assets - Liabilities = Owners Equity

97,900 - 61,200 = 36,700

The owner invests $10,000 into the business.

+15,000 +15,000

112,900 - 61,200 = 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.

OwnerAssets Liab.

CompanyAssets 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.