8/9/2019 Lecture 3 - Assets, Liabilities and Users

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Lecture 3

The elements of financial statementsAssets,

Liabilities,

Equity,

Income and expenses

The presentation of financial statementsStatement of financial performance

Profit and loss account

*STROGL (or Statement of Changes in Equity)

Balance sheet

Cash Flow Statement

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Definitions: Assets

rights or other access to future economic benefits controlled by an entity as a result

of past transactions or events

Note: ownership normally conveys rights of access, but it is not a prerequisite; contractual rights

(leases, licences, copyright etc) can give rise to assets.

Control also involves being able to prevent other parties using your assets/receiving benefits.

Future benefits:

often interpreted as giving rise to future cash flows

future benefits which cannot be evidenced are not assets

(e.g. large advertising campaign may give benefits for a long time, but it is not an asset as cannot

prove that benefits will continue.)

Past transactions or events

The method by which we can establish that control has been achieved (concept of objectivity).

Cannot recognise an asset unless it is capable of reliable measurement

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Definitions: Liabilities

obligations of an entity to transfer economic benefits as a result of past transactions

of events

Note the mirroring of the definition of an asset

Obligations are usually legal (enforceable), but may be constructive

e.g. voluntary environmental costs carbon offset payments or high-street store willexchange/refund clothing if it makes your bum look big

Normally the transfer of economic benefits will be future cash payments (can have bartertransactions).

Liabilities are generally transaction based:*Receiving goods or services (invoice)

*Borrowing money (loan agreement)

Past transactions or events- similar meaning to that of assets

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The balance sheet and accounting equations

Having defined assets and liabilities we can now formulate the balance

sheet equation:

Assets Liabilities = Ownership interests (or equity)

This can be refined to give the accounting equation:

Profit = capital c/f - capital b/f - capital introduced + drawings

Intuitively:

opening net assets are increased by net profit and further capital introduced

and reduced by any drawing (or dividends)

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Users and their NeedsInvestors: present and prospective

Hold or sell shares

Income/returns (dividends) and their growth

Risk/security/stability of investment Efficiency of management (re-appoint directors)

Secondary issues: ethical/green investments

Lenders: banks loan providers

Can company pay interest and capital on loan

Cash flow statement important

Imposition of charges on assets/covenants

Problem of off balance sheet finance

Employees (and representatives trade unions)

Secure employment Levels of remuneration (pensions)

Promotion prospects

Job satisfaction (staff turnover rates?)

ManagementAchieving stewardship function

Safeguarding the company's assets

Managing the business efficiently

Satisfying fiduciary (trust) relationship

Government (local and national)*Corporation tax

*Income tax from employees*VAT from consumers*Business rates

Allocation of resources*Distribution of grants or incentives

National statistics*Exports*Inflation

Business Contact Groups

Suppliers (creditors), customers and competitors

PublicInteraction with local economy/environment