Lecture 5 published financial reports Flashcards
Communication tool
Financial facts of business communicated with legislation & regulation from governments and professional accounting bodies
Published annual report
State and affairs of company past period. Independent external auditor checks on accuracy, completeness and reliability
Agency theory
Main feature of public companies: separation of ownership (principal) and management (agent)
The anglo Saxon approach (US, UK)
Management is chiefly accountable to stockholders. Thus, key in decision making
Rhineland approach (Europe, Japan)
Management is accountable to all stakeholders (stockholders being on of the stakeholders)
Direct method cash flow statement
Simply list of cash payment and receipts made during year
Indirect method of a cash flow statement
Derive cash flow statement from balance sheets and income statements
Categories of a cash flow statement
- Cash flows from operating activities
- Cash flows from investing activities
- Cash flows from financing activities
Accounting principles
Guidelines and principles evolved because of common business practices and general consent
US GAAP
Generally accepted accounting principles. Developed and maintained by financial accounting standards board (FASB) it is rules-based
IFRS (EU) (International financial reporting standards)
Developed and maintained by international accounting standards boards (ASB). It is principle based
Financial planning
Making a project statement
Unlimited liability
Means that the owner is forced to use his private funds to pay back any debts incurred during business
Limited liability
Owners in the company can lose no more than the money they have invested in the company
Going concern
Co. assumed to reamin in operation unless evidence to contrary
Prudence
Conservative view of profit, asset valuation and losses
Realization
Recognition of profit & losses on realization only
Matching
Expenses presented in same period for resulting revenues made
Consistency
Consistency in composing financial statements
Accruals
Revenues and expenses recognized and recoreder when incurred not when actual cash takes place
Objectivity
Financial statements prepared free from personal opinion
Relevance
Reports should be based on what is relevant
Economic entity assumption
Seperation of business transactions from personal transactions. Means financial statements can be prepared for a group
Monetary unit assumption
Allows acountant to express assets as dollar amounts and assumes, the dollar does not lose purchasing power over time
Time period assumption
Business operations and financial results can be divided into distinct periods
Prudence principle
Means that you should remove the doubtful debts and present a net receivable amount on balance sheet
Objectivity principle
Objectivity or estimates and opinion involved?
