The Nature and Contents of Financial Reports

1
Lecture 3 4

• The Nature and Contents of Financial Reports
• (Reference chapters 2, 4)

2
ObjectivesChapter2

• Identify factors that influence the preparation
  of financial statements.
• Explain what are FRC, AASB,UIG,IASC,IAS,FIA.
• Explain the requirements of Corporations Act.
• Explain what is meant by a conceptual framework
  and why it is important.
• Explain the objectives of General Purpose
  Financial Reporting.
• Explain the qualitative characteristics of
  financial information.

3
Factors

• Accounting Standards
• Corporations Act
• Stock Exchange
• Accouniting Concepts

4
THE FINANCIAL REPORTING FRAMEWORK

• FRC Financial Reporting Council
• AASB Australian Accounting Standards Board.
• UIG Urgent Issues Group
• AAS Australian Accounting Standards
• IAS - International Accounting Standards. FIA?

5
Corporations Act Requirements

• The Directors Report
• The Directors Statement
• The Auditors report
• An Income Statement
• A balance Sheet
• A statement of changes in equity
• A Statement of Cash Flows
• Notes to Financial Statements

6
Conceptual Framework

• A theory base of all accounting rules and
  principles from which accounting standards are
  drawn.
• Needed for CF more consistent accounting
  standards guides accountants where no standard
  exists, defence against politicisation

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Qualitative Characteristics Financial Information

• Relevance
• Reliability
• Understandability
• Materiality
• conservatism

8
Balance Sheet Objectives Chapter 4

• Explain the meaning and purpose of the balance
  sheet.
• Define asset.
• Distinguish between current and non-current
  assets.
• Define Liability
• Distinguish between current and non-current
  liability.
• Explain the term equity

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Balance SheetThe statement offinancial position

• Contains information about the investing and
  financing decisions of the entity
• a statement, at one point in time, which shows
  all the resources controlled by the enterprise
  and all the obligations due by the enterprise.
• Show the wealth position

10
The Accounting entity principle

• For accounting purposes, the entity and its owner
  are considered to be separate.
• This applies to all types of entities
  irrespective of the fact that an enterprise may
  not be recognised as a separate legal or taxable
  entity.

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Elements

• Financial position
• Assets Liabilities Equity
• Financial performance
• Revenue Expenses Profit

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Assets

• Assets are resources controlled by the entity as
  a result of past events from which future
  economic benefits are expected to flow to the
  entity
• There are three essential characteristics that
  must be present 
• future economic benefits
• control
• past event

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Assets

• There are a number of characteristics that are
  indicative of an asset but not essential
• acquisition at a cost
• tangibility
• exchangeability
• legal enforceability 

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Assets

• Recognition of an asset
• when it is probable that the future economic
  benefit will eventuate
• when the asset has a cost or value that can be
  measured reliably.

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Types of Assets

• Current Assets includes
• cash and cash equivalents or
• Inventory
• Accounts receivable.
• Non-current assets are all assets other than
  current assets.
• examples
• property, plant and equipment
• long term investments

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Liabilities

• Liabilities are present obligations of the entity
  arising from past events, the settlement of which
  is expected to result in an outflow from the
  entity of resources embodying economic benefits.

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Types of Liabilities

• Current Liabilities
• expected to be settled in the normal course of
  the entitys operating cycle eg. Accounts payable
• due to be settled within twelve months of the end
  of the accounting period. Eg. Current part of
  loan
• Non-current liabilities
• are all liabilities other than current
  liabilities.
• Examples
• debentures payable, mortgage loan

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Equity

• Equity is the residual interest in the assets of
  the entity after deduction of its liabilities.

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The statement of financial position (balance
sheet) equation

• assets liabilities owners equity
• A L OE
• OR
• assets - liabilities owners equity

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Starting up a business

• K. Smith starts up a business K.S.A. to make and
  supply aluminium screens.
• Deposits 100,000 into bank account on 1 July,
  20X1.

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K.S.A. statement offinancial positionas at 1
July, 20X1

• Assets
• Cash at Bank 100 000
• Liabilities 0
• Owners Equity
• K. Smith Capital 100 000

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July 2

• Purchased equipment worth 5,000 paid 1,000
  cash, balance in 90 days.

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K.S.A. statement offinancial positionas at 2
July, 20X1

• Assets
• Cash at bank 99,000
• Equipment 5,000
• 104,000
• Liabilities
• Accounts payable 4,000
• Owners equity
• K. Smith capital 100,000
• 104,000

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July 3

• Purchased inventory of 2,000 and paid cash.

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K.S.A. statement offinancial positionas at 3
July, 20X1

• Assets
• Cash at bank 97,000
• Stock 2,000
• Equipment 5,000
• 104,000
• Liabilities
• Accounts payable 4,000
• Owners equity
• K. Smith capital 100,000
• 104,000

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July 4

• Sold screens costing 500 for 1,000 cash.

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K.S.A. statement offinancial positionas at 4
July, 20X1

• Assets
• Cash at bank 98,000
• Stock 1,500
• Equipment 5,000 104,500
• Liabilities
• Accounts payable 4,000
• Owners equity
• K. Smith capital 100,000
• Profits 500
• 104,500

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K.S.A. statement offinancial positionas at 4
July, 20X1

• Current assets
• Cash at bank 98,000
• Inventory 1,500
• Total current assets 99,500
• Non-current assets
• Equipment 5,000
• Total non-current assets 5,000
• Total assets 104,500

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K.S.A. statement offinancial positionas at 4
July, 20X1

• Current liabilities
• Accounts payable 4,000
• Total current liabilities 4,000
• Net assets 100,500
• Owners equity
• K. Smith capital 100,000
• Profits 500
• Total owners equity 100,500

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Duality

• The principle of duality is the basis of the
  double-entry bookkeeping system on which
  accounting is based.
• It states that
• every transaction has two opposite and equal
  components.

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Limitations of the statementof financial position

• Snapshot in time and therefore may not be a
  true representation
• Measurement system adopted (historic cost versus
  replacement cost)
• Contains many estimates
• May be manipulated (window dressing)
• May not capture contingent assets and liabilities
  due to off balance sheet activities

32
Tutorial week 3

• Review Questions 2,3,8 and 9 (pp.64-65)
• Problem 1 (p. 65)
• Problem 4 (p113)