2. Measuring and Reporting Financial Position Flashcards
What is the nature and purpose of the statement of financial position?
Displays the financial position of a business at a particular point in time. It sets out the assets of the business and sets out the liabilities in the business.
Assets are things are expected to generate economic benefit in the future and can be tangible such as machinery and equipment or non tangible assets such as reputation of a business. Liabilities can be internal such as owners equity or external such as a loan from a bank.
Describe what assets, liabilities and owners’ equity are in terms of recognition, measurement and classification.
Assets - Have an expected future economic benefit. The business has exclusive rights to control the asset otherwise it is not an asset to the business. It must be capable of being measured in monetary terms e.g. customer loyalty is valuable but impossible to quantify.
Liabilities - Represent the claims of individuals and organisations , apart from the owners, that have come from past transactions or events such as supplying goods and services or borrowing money for the business.
Owners equity - Represents the owners claim against the business. The residual interest in the assets of the entity after deducting all of its liabilities.
What is the statement of financial position also called a balance sheet?
Because it represents the balances in the permanent accounts (assets, liabilities) at a point in time (normally at end of accounting period).
Does a statement of financial position show how much a business is worth?
No as the statement of financial position only measures things that can be measured reliably, thus employee skills etc will not appear.
Also the historic cost convention shows assets being recorded at their outlay cost rather than current cost value.
Explain why the accounting equation (owners equity + liabilities = assets) always holds true
If a business wishes to acquire assets it must raise funds equal to that assets worth through either the owners (owners equity) or other outside parties (liabilities) or both. Hence the total cost of assets should always equal the total owners’ equity (capital) + liabilities.
