Financial Statements Flashcards
Primary Statements
Statement of Profit or Loss
Statement of Financial Position
Statement of changes in equity
Statement of cash flows
Statement of Profit or Loss
Profit and loss account, also known as Income Statement
Shows financial performance of entity
Statement of Financial Position
Also known as Balance Sheet
Shows financial position of an entity at a particular date
Statement of changes in equity
Reconciles owners interest from start to end of period
Statement of Cash Flows
Presents cash movements in and out of the entity
What are financial statements used for?
To provide information about an entity that is useful in making economic decisions
Relevance
Will make a difference to the decisions users make. Relevant financial information may have a predictive value, or a confirmatory value
Confirmatory value
Confirms how accurate previous predictions have been
Predictive value
It may provide information that helps users make predictions about future performance.
Faithful representation
Representing transactions of a business as accurately as possible. It is approximately equivalent to ‘true and fair’ which is used in UK company law. There are three aspects : completeness, neutrality, and freedom from error
Completeness
No information is missing
Neutrality
Freedom from bias
Freedom from error
Accuracy of the information
4 enhancing (secondary) characteristics
Comparability
Understandability
Verifiability
Timeliness
Comparability
Comparability is about a level of standardisation that allows users to make comparisons between different entities and also from year to year
Verifiability
Whether there is evidence to support the information, and therefore whether it can be checked.
Understandability
Presenting the information in a concise and clear way, so that users with a reasonable level of knowledge can make sense of it.
Timeliness
Receiving information soon enough to be useful since information is of no use if it is only available so long after the event that any decisions have already been made
Why cant all four enhancing characteristics be fully achieved?
Some figures may have to be based on assumptions, if waiting for actual figures, the information might come too late to be used in decision making. Applying the enhancing characteristics does not negatively affect the fundamental characteristics. Some transactions are inherently complicated - simplifying accounting treatment on basis of understandability might compromise faithful representation
Revenue
(Income, Expense, Asset, Liability, Equity??)
Income
Electricity
(Income, Expense, Asset, Liability, Equity??)
Expense
Interest
(Income, Expense, Asset, Liability, Equity??)
Expense
Unpaid interest would be a liabilty
Inventory
(Income, Expense, Asset, Liability, Equity??)
Asset
Bank loan
(Income, Expense, Asset, Liability, Equity??)
Liability
Ordinary share capital
(Income, Expense, Asset, Liability, Equity??)
Equity
Profit on sale of a factory building
(Income, Expense, Asset, Liability, Equity??)
Income
Corporation tax
(Income, Expense, Asset, Liability, Equity??)
Expense
Tax owed to HMRC is a liability
Types of expense
Cost of sales (clothes, homewares)
Distribution costs (postage, packaging)
Administrative expenses (insurance, wages/salaries, cleaning services, advertising, maintenance, business rates)
Finance costs (bank interest)
Tax expense (corporation tax)
Asset - definition
A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Assets: examples
Cash
PPE
Inventory
Trade receivables
Prepayments
Motor vehicles
Fixtures and fittings
Controlled assets
PPE
Inventory
Cash
Trade receivables
Prepayments
Not controlled assets
Customers
Employees
Market share
Assets : Future economic benefit
Cash inflows - trade receivables
Use in the business - cash, PPE
Future services - prepayments
spend money
debit assets (if meets def of assest, if not recognise as expense)
Receive money
credit liabilities (if meets def of liability, if meets def of income - recognise income, if not equity)
recording depreciation in books
debit: depreciation expenses
credit: accumulated depreciation
dividend paid before year end
dr: retained earnings
cr: cash
dividend paid after year end
dr: retained earnings:
cr: dividend payable
net realisable value (nrv)
selling price - costs to complete - costs to sell
revaluation gains
recognised in other comprehensive income
increase revaluation reserve
unless reverses previous loss in SoPL then:
recognise as gain in SoPL,
increase retained earnings
revaluation losses
recognised as expense in SoPL
decrease retained earnings
Unless reverses a previous gain, then:
recognise in other comprehensive income,
decrease revaluation reserve
