Chapter 2 - Measuring & Reporting Financial Position Flashcards
What are the three financial statements and what questions do they seek to answer?
- The statement of cash flows; What cash movements took place during the period? Objective statement without assumptions.
- The income statement (profit and loss account); How much wealth was generated in the period?
- The statement of financial position (balance sheet); What is the accumulated wealth of the business at the end of the period, and what form does it take?
What characteristics must a resource held have to be included as an asset in the balance sheet?
- Be an economic resource. Provide a right for potential to receive economic benefits. (–> not public goods)
- Be under control of the business. Exclusive right to benefits and how to use.
- Be capable of measurement in monetary terms. Can be estimation of not too many surrounding uncertainties.
What are the two major categories of Claims in the balance sheet?
- Equity. Owners’ claim.
- Liabilities. Other parties’ claims. Obligation to transfer economic resource because of past event.
Assets must meet ANY of the following four criteria to be classified as Current assets..
- Held for sale/consumption during normal operating cycle.
- Expected to be sold within a year.
- Held principally for trading.
- Are cash, or near cash.
Liabilities must meet ANY of the following four criteria to classify as Current liabilities..
- Expected to be settles in the normal operating cycle
- Arise as a result of trading.
- Due for settlement within a year.
- No right to defer settlement longer than a year.
What are the 5 main accounting conventions (to deal with practical problems)?
- Business entity convention. Business and owners are treated as separate.
- Historic cost convention. Value of assets in balance sheet should be based on historic cost = acquisition cost -> increased reliability/credibility.
- Prudence convention. Caution should be exercised when preparing statements.
- Going concern convention. Prepare statements on assumption that business will continue operations, unless there is evidence of the contrary.
- Dual aspect convention. Each transaction has two aspects that affect the balance sheet.
What are some sources that normally pose measurement problems in monetary terms?
- Goodwill and brands
- Human resources
- Monetary stability (fail to recognise inflation).
What are examples of things that are covered by the term Goodwill?
- Quality of product
- Employees’ skills
- Customer relations
What is significant about Goodwill and Brands?
They are intangible non-current assets that lack a clear separate identity. When these are internally generated, they are not recognised as assets on the balance sheet, because it is difficult to determine their cost or measure their current value (or to be sure they even exist). When they are acquired through an arm’s-length transaction, the uncertainty of existence and measurement is resolved. They are identified and a price is agreed upon, which means that they can be acknowledged as assets in the balance sheet. Goodwill reflects the remaining value once all identifiable assets have been priced.
What types of non-current assets are there?
- Non-current assets with finite lives (provide benefit for a limited period of time)
- Non-current assets with indefinite useful lives (provide benefit without a foreseeable time limit)
(can be both tangible and intangible)
What value are non-current assets initially recorded at in the balance sheet?
Historic cost, including any amount spent on getting them to location and ready for use.
What is certain of the handling of non-current assets with finite lives in financial accounting?
They are subject to depreciation (called amortisation for intangibles) because they are used up over time as a result of market changes, wear and tear, etc. The depreciation = amount used up, should be measured for each reporting period that the assets are held. A proportion of the historic cost has been consumed in the process of attempting to generate benefits.
What is certain of the handling of non-current assets with indefinite useful lives in financial accounting?
Benefits may or may not be used up over time, so they are not subject to routine depreciation each period. Intangible ones must be impairment tested at the end of each reporting period.
What does it mean to use Fair values for non-current assets?
PPE can be revalued using market based fair values that represent the selling price under current market conditions, provided that it can be measured with a reasonable degree of certainty. The frequency of revaluations becomes important, to ensure that the carrying amount does not differ substantially from the current market values. All items in the same asset group must be revalued at fair value if one item in that group is. Intangible assets are usually not revalued at fair values, because of the lack of an active market that can determine the value.
What are the assets that are always valued at fair value, for listed companies that follow the IFRS?
- Biological assets
- Investment property
- some financial assets
