Elements and Components of Financial Statements Flashcards
Financial accounting
Financial accounting is a process of identifying, measuring, recording, classifying, summarizing and communicating information to users to enable them to make informed judgements and decisions.
Financial Statements
Financial statements are structured statements showing an organization’s financial position, financial performance and cashflows to assist a wide range of users in making informed judgements and decisions.
Relationship between Shareholders (Owners) / directors (managers) & Auditors (law)
Directors are stewards to shareholders and are responsible for the shareholder’s funds moreover for producing financial statements
Auditors are appointed by shareholders to verify reports according to the law of the country
Elements of financial statements
ALICE
Assets - Something that you own, that gives future benefits
Liability - Something that you owe and reduces future benefit
Income - Amounts earned by the business (SPL)
Capital - Initial investment of a firm via the owners
Expense - Amounts spent by the business (SPL)
Components of financial statements
Statement of financial position (SFP) with Balance sheet (BS);
Statement of profit or loss (SPL) with Income statement (IS).
SFP, SPL, SCF, SCE, Notes
SFP - Statement of financial position: Showing wealth and net worth
SPL - Statement of profit or loss: showing p/l and other income
SCF - Statement of cash flow : Showing cash flow changes
SCE - Statement of changes in equity: Showing equity changes.
Notes - Showing accounting policies and explanatory notes.
Parent, Subsidiary, Non controlling interest, Group and Consolidated financial statements
Parent - An entity that has one or more subsidiaries
Subsidiary - An entity controlled by another entity
Non-controlling interest - Percent of the organization not owned by the company
Group - Parent + Subsidiary
Consolidated financial statements - Financial statements of a group presented as one single statement
3 parts of the financial statements (in order)
Conceptual framework (GAAP)
Regulatory framework (IAS, IFRS)
Legal framework(Company law)
FRC
FASB
IASB
IAS
IFRS
FRC - Accounting standard used in UK
FASB - Accounting standard used in USA
IASB - Body that sets accounting standards
IAS - International accounting standards
IFRS - International Financial Reporting Standards used in the modern day
GAAP (Generally accepted accounting principles)
It is a set of guidelines used in the preparation of financial statements, more practical than theoretical.
12 Examples of GAAP
1) Business Entity - Owner/company are separate entities
2) Historical cost - The original cost
3) Prudence - Being conservative with P&L
4) Going concern - Concerned about the firm’s future
5) Dual aspect - Debit/credit (Equal)
6) Money measurement - Items without monetary value cannot be recorded
7) Accrual - Items should be recorded when a transaction happens
8) Matching - Income/expense when it is incurred at the same time
9) Materiality - Significant transactions disclosed to shareholders
10) Objectivity - Stating only the facts not opinions
11) Consistency - Sticking to the methods of accounting formats
Qualitative characteristics of financial information
Comparability: Compare financials from all years
Verifiability: Reports should be verifiable by auditors
Relevance: Being up to date
Faithful representation: Accurate, free from errors
Understandability: Keeping the report simple
Source documents
A written document that provides details of a transaction and the evidence that the transaction has taken place.
Examples ; Invoice, cheque and bank statement
Posting
Moving accounts from Journals to ledgers
Equations
Profit/(Loss) equation (SPL) : I – E
Accounting equation (SFP) :
1) A - L = C
2) A - L = C + Profit/(Loss)… A – L = C + I - E
3) A = L + OE
Financial year
Lasts 12 months
