Financial Statements Flashcards
Assets
Resources controlled by an entity, as a result of past events, from which future economic benefits are expected to flow to the entity
Liabilities
Resources controlled by an entity, as a result of past events. The settlement of which is expected to result in an outflow of economic benefits from the entity
Equity
Is the residual interest in the assets of the entity after deducting all of its liabilities
What is the equation for assets?
Equity + Liabilities
Revenue
Increase in economic benefits in an accounting period, in the form of inflows or enhancements of assets at decrease in liabilities. That results in increase in equity, other than those relations to contributions from equity participants
Expenses
Decrease in economic benefits in an accounting period in the form of outflows or depletion of assets or incurring of liabilities. That results in decrease in equity, other than those relating to distributions to equity participants
Basic objectives of Financial Statements
To provide financial information about the reporting equity, that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to the entity
1st fundamental principal
Relevance
- Be cape able of making a difference in the decisions made by users
- Have predictive value which helps users predict future outcomes
- Have confirmatory value, which helps users confirm previous evaluations
2nd fundamental principal
Faithful Representation
- Correspond to the effect of transactions or events
- As far as possible be complete (to include all information necessary for all users), neutral (without bias) and free from error
Materiality
- Information is material if it’s omission or mis-statement would influence the economic decision that users make based on the financial information about a specific reporting entity
- Materiality is an entity specific aspect of relevance, based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report
Comparibility
Enables users to identify and understand similarities and differences for several years of an entity’s trading or between different companies
Verifiability
Helps to assure users that information is faithfully represented. Can be direct (counting cash, stock take etc) or indirect (application of inventory value using a specific method (LIFO, FIFO, etc.))
Timeliness
Means having the information available to decision makers in time to be capable of influencing their decisions. The older the information the less useful it is
Going concern basis
Means that financial statements are prepared on the assumption that the entity will continue in. Haines for the foreseeable future. Thus there is no need to liquidate or reduce the size of the business. - if this were the case, the financial statements would have to be prepared on the break up basis
Accrual Accounting
Means the financial statements are prepared on the assumption that transactions are recorded/ recognised when they occur and not when the cash is received or paid. Using accrual accounting means revenues and costs are entered in the accounting period to which they relate and not when the cash is paid or received
