Chapter 1: The main financial statements Flashcards
What are the key financial statements prepared under the IRFS Standards?
Which standard sets out the form and content of financial statements?
Financial statements prepared under IFRS Standards collectively comprise a statement of financial position, a statement of profit and loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, notes and in certain circumstances, a revised statement of financial position from an earlier period.
IAS1, Presentation of Financial Statements sets out the form and content of financial statements.
What does IAS1 set out as a ‘complete set of financial statements’ for a reporting period (typically a year)? (6)
IAS1 identifies a complete set of financial statements for a reporting period (typically a year) as comprising:
1) A statement of financial position as at the end of the reporting period (under UK GAAP this is called a balance sheet)
2) A statement of profit or loss and other comprehensive income for the reporting period, which can be a two-part format including a separate statement of profit or loss (under UK GAAP this is called a profit and loss account)
3) A statement of changes in equity for the reporting period
4) A statement of changes in cash flow for the reporting period
5) Notes comprising a summary of significant accounting policies and other explanatory information
6) A statement of financial position as at the beginning of the earliest period when an entity applies an accounting policy retrospectively, makes a restatement of items in its financial statements, or reclassifies items.
Define the statement of financial position.
The statement of financial position is a list of all the assets controlled and all the liabilities owed by a business as at a a particular date: it is a snapshot of the financial position of the business at a a particular moment. Monetary amounts are attributed to assets and liabilities. It also quantifies the amount of owners’ interest in the company, which is known as equity.
Define equity.
Equity is the amount invested in a business by the owners. The Conceptual Framework defines equity as ‘the residual interest in the assets of the entity after deducting all its liabilities’.
Give four factors which affect a company’s financial position at any one time.
1) The economic resources it controls (cash, labour, materials, machinery, skills)
2) The financial structure (whether it is funded by owners, lenders, suppliers, or by all three)
3) Its liquidity (short term availability of cash) and solvency (long-term access to funds)
4) Its adaptability to changes in its operating environment
How does the Conceptual Framework suggest the amount of an entity’s economic resources and claims (liabilities) can help users to identify the reporting entity’s financial strengths and weaknesses? (4)
The conceptual framework points out that information about the nature and amounts of an entity’s economic resources and claims can help users to assess:
1) The entity’s liquidity and solvency
2) The entity’s need for additional financing
3) How successful the entity is likely to be in obtaining that financing
Additionally, by gaining knowledge of the economic resources a business controls, users will be in a better position to predict the entity’s ability to generate cash in the future.
How does information about the financial structure of a company help users of financial statements? (3)
Information on the financial structure of a company helps users of financial statements:
1) To predict future borrowing needs
2) To predict how future profits and cash flows will be distributed among owners and lenders
3) To predict how successfully it will be able to raise future finance
How does information about the liquidity of a company help users of financial statements?
Information on the liquidity of a company helps users of financial statements:
To predict its ability to meet financial commitments as they fall due.
Define the statement of profit or loss.
The statement of profit or loss is a statement displaying items of income and expense in a reporting period as components of profit or loss for the period. The statement shows whether the business has had more income than expense (a profit for the period) or vice versa (a loss for the period).
How does the Conceptual Framework suggest information about businesses financial performance is needed by users? (3)
The Conceptual Framework suggests information about businesses financial performance is needed by users:
1) To understand the return that the entity has produced on its economic resources
2) To assess management’s stewardship of the entity’s economic resources
3) To help predict the businesses future returns on its economic resources
What provides the link between the statement of financial position and the statement of profit or loss and other comprehensive income?
The link between the statement of financial position and the statement of profit or loss and other comprehensive income is provided by the statement of cash flows and the statement of changes in equity.
What will companies reporting under UK GAAP present their financial statements in accordance with? (2)
1) Companies Act 2006
2) FRS 102
Generally the the profit and loss account formats require less detail than IAS 1. The Companies Act balance sheet formats are less flexible than the IAS 1 formats. The Companies Act formats are enshrined in law.
