BU1002 Lecture Notes - Lecture 4: Balance Sheet, Cash Flow Statement, Financial Statement
Topic 4 – Balance Sheet
Recap
General purpose financial reports
- Income statement, balance sheet and cash flow statement
- Prepared for users who are unable to command the information they require to
assists in their decision making
- Known as financial reporting and therefore highly regulated
Special purpose financial reports
- Specific reports tailored to meet the needs of internal users
- Known as management accounting
- Not bound by regulatory requirements
Nature and Purpose of the Balance Sheet
- The balane sheet is a fiaial stateet that details the etitys assets, liailities
and equity as at a particular point in time, usually at the end of the reporting period
- The balance sheet is a financial statement the shows
o What an entity owns (or controls) as at a particular date : the assets
o The external claims on the entity: the liabilities (owe)
o The internal claim on the etitys asset: the equity (owners)
Accounting Policy Choices, Estimates and Judgement
- There are choices in recording transactions that will involve estimations and
judgements by preparers
- Examples of policy choices
o Method of costing inventory
o Measurement of property, plant and equipment
o Method of calculating depreciation
o Development expenditure – capitalise or expense?
- Example of estimation:
o Impairment of accounts receivable (doubtful debts)
o Employee benefits – long services leave and sick leave
- Accounting policy choices – disclosed in the first notes to the financial statements
Definition and Recognition of assets
- Conceptual fraeok defiitio of a asset: as a esoue otolled y the etity
as a result of past events and from which future economic benefits are expected to
flo to the etity
- The essential characteristics of an asset are:
o Future economic benefits
▪ Items must provide benefits to the entity that used them in order to
be regarded as assets
o Control by entity
▪ An entity must control the item for that item to be considered an
asset and recognised on the balance sheet
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▪ The concept of control refers to the capacity of the entity to benefit
from the asset in the pursuit of its objectives, and to deny or regulate
the access of others to the benefit
o Result of a past event
▪ Every asset must have arisen from a transaction that has happened
▪ A company cannot include an asset it will be getting in the future
- Recognition criteria
o Probable
▪ It is more than likely that the future economic benefits will flow from
the asset to the business controlling it
o Reliable measurement
▪ The value of the asset can be measured reliably
▪ May involve the use of estimates
Definition and Recognition of Liabilities
- Coeptual Faeok Defiitio of a Liaility: a peset oligatio of the etity
arising from past events, the settlement of which is expected to result in an outflow
fo the etity of esoue eodyig eooi eefits
- The essential characteristics of a liability are:
o Present obligation
▪ A commitment to another entity to provide resources to that entity
• Can be formal (legal) or informal
• Entity may not be known
o I.e sale of goods that may have been returned
(warranty)
o An outflow of resource to pay for the obligation
▪ Future scarifies of economic benefits are associated with adverse
financial consequences for the entity
• One resource flow out of business, they cannot be used to
generate revenue or obtain assets in the future
o Result of a past transaction or event
▪ The obligation must have arisen as a result of a past event
▪ Can be an obligation arising in the future if the event is currently
occurring e.g, court case
▪ Cannot be an obligation you intend to get.
- Recognition criteria
o Probable occurrence
▪ It is more than likely that future economic benefits will flow from the
business to another entity
o Reliable measurement
▪ The value of the vialility can be measured reliably
▪ Involves the use of estimates
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Income statement, balance sheet and cash flow statement. Prepared for users who are unable to command the information they require to assists in their decision making. Known as financial reporting and therefore highly regulated. Specific reports tailored to meet the needs of internal users. The balan(cid:272)e sheet is a fi(cid:374)a(cid:374)(cid:272)ial state(cid:373)e(cid:374)t that details the e(cid:374)tity(cid:859)s assets, lia(cid:271)ilities and equity as at a particular point in time, usually at the end of the reporting period. There are choices in recording transactions that will involve estimations and judgements by preparers. Impairment of accounts receivable (doubtful debts: employee benefits long services leave and sick leave. Accounting policy choices disclosed in the first notes to the financial statements. Conceptual fra(cid:373)e(cid:449)o(cid:396)k defi(cid:374)itio(cid:374) of a(cid:374) asset: as (cid:858)a (cid:396)esou(cid:396)(cid:272)e (cid:272)o(cid:374)t(cid:396)olled (cid:271)y the e(cid:374)tity as a result of past events and from which future economic benefits are expected to flo(cid:449) to the e(cid:374)tity(cid:859) The essential characteristics of an asset are: future economic benefits.