Accounting and Financial statements

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Business Accounting Assignment

Question a.)

The general purpose of the statement of comprehensive income is defined as a financial report which provides a comprehensive report of the adjustment in a company’s net assets throughout a particular period of time. It specifies the requirements for presenting an entity’s financial performance for that period, the line items to be presented as well as prohibiting any items of income or expense deemed as ‘extraordinary items’ from being presented or described. Furthermore, expenses which are analysed using classification based on nature of expenses or function of expenses within an entity which is either reliable or more relevant is required to be presented. A statement of comprehensive income can consists of revenue, finance costs, tax expenses, discontinued operations, profit share and profit or loss. In addition to this, a choice of selection of the accounting policy of either presenting the total comprehensive income in a single or two separate statements is being provided.

If the approach of using two separate statements is being used, the minimum line items that the income statement is required to present the amount for the period is

  1. Revenue
  2. Finance Costs
  3. Share of the profit or loss of investments in associates and jointly controlled entities accounted for the equity method
  4. Tax expense excluding tax allocated to items 5, 7 and 8 below
  5. A single amount which consists of the total of
    1. The post-tax profit or loss of a discontinued operation, and
    2. The post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the nets assets constituting the discontinued operation.
  6. Profit or Loss

For the statement of comprehensive income, profit or loss is to be displayed as the first line and the minimum line items that is required to be present the amount for the period is

  1. Each item of other comprehensive income classified by nature (excluding amount in 8)
  2. Share of other comprehensive income of associates and jointly controlled entities accounted by the equity method
  3. Total comprehensive income

In addition to the above mentioned line items, an entity is required to disclose the following items as allocations for the period separately in the statement of comprehensive income

  1. Profit or loss for the period attributable to
    1. Non-controlling interest
    2. Owners of the parent
  2. Total comprehensive income for the period attributable to
    1. Non-controlling interest
    2. Owners of the parent

Under the existing conceptual framework for financial reporting, the term income is defined as the growths in economic benefits in the form of inflows or enhancements of assets or the diminutions of liabilities which resulted in the increase in equity in the course of the accounting period, with the exception of those relating to contributions from the participants of equity. There are two categories of income which consists of Revenue and Gains. Revenue occurs during ordinary events of an entity while gains refers to the other items which has met the definition of income but might or might not occurs during ordinary events of the entity. It is noted in the existing conceptual framework that gains is similar in nature to revenues as both signifies the growth in economic welfare.

The term expenses defined under the existing conceptual framework is the declining in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities which resulted in the decrease in equity in the course of the accounting period, with the exceptions of those relating to distributions from the participants of equity. The two categories of expense consist of expenses and losses, expenses that occur during ordinary events of entity as well as losses which might or might not occur during ordinary events of entity. It is noted in the existing conceptual framework that losses is similar in nature to other expenses as both signifies the decline in economic welfare.

Question b.)

The general purpose of the statement of financial position is described as the specification of line items which is required to be presented in the statement of financial position as well as the providing of mandatory guidance on items sequencing and aggregation levels. It could also be known as the balance sheet and is considered as one of the main financial statements which provide a presentation of an entity’s financial position at a provided date. The differentiating between current liabilities and current assets from non-current liabilities and non-current assets is also decided by it. In addition to this, it also decides when the current/non-current distinction is required to be made. Furthermore, it is able to provide assistance to users of financial statements In terms of accessing an entity’s financial soundness by financial risk, liquidity risk, business risk and credit risk. The statement of financial position consists of three main components which includes the assets, liabilities as well as equity.

The minimum line items which presents the following amounts that is required to be presented in the statement of financial position is:

  1. Cash and cash equivalents
  2. Trade and other receivables
  3. Financial assets (excluding amounts shown under 1,2,10 and 11)
  4. Inventories
  5. Property, plant and equipment
  6. Investment property carried at fair value through profit or loss
  7. Intangible assets
  8. Biological assets carried at cost less accumulated depreciation and impairment
  9. Biological assets carried at fair value through profit or loss
  10. Investments in associates
  11. Investments in jointly controlled entities
  12. Trade and other payables
  13. Financial liabilities (excluding amounts shown under 12 and 16)
  14. Liabilities and assets for current tax
  15. Deferred tax liabilities and deferred tax assets (required to be classified as non-current at all times)
  16. Provisions
  17. Non-controlling interest, presented within equity separately from the equity attributable to the owners of the parent
  18. Equity attributable to the owners of the parent

An asset is a resource that an entity owns or controls due to past events in order to obtain economic benefits from its use. Assets are required to be classified as non-current or current in the balance sheet according to the period which the reporting entity expects to retrieve economic benefits from its use. When an asset is expected to deliver economic benefits in a long term, it is being classified as non-current assets while an asset is expected to deliver benefits within one year from the reporting date is being classified as current assets. In addition to this, assets are also being classified depending on their nature basis in the statement of financial position.

  1. Tangible and intangible: For assets that is non-current but with physical substance, it is classified as plant, property and equipment. If it is without a physical substance, it is classified as intangible assets. An example of intangible asset is Goodwill.
  2. Inventories balance: goods that are held for sale in ordinary course of the business. Inventories could consist of raw materials, work in progress and finished goods.
  3. Trade receivables consist of the amounts that can be recovered from customers upon credit sales.
  4. Cash and cash equivalents consists of cash in hand along with any short term investments that can be converted promptly into cash amounts that are recognised.

A liability is a current obligation of the entity due to past events and the settlement includes a cash transfer or other resources. Depending the period of time which an entity anticipate to settle the liability, liabilities is required to be classified into either current or non-current in the statement of financial position. A non-current liability refers to a liability which will be settled over a long term, while a current liability refers to a liability which will be settled within one year from the reporting date. In addition to this, liabilities are also being classified depending on their nature basis in the statement of financial position.

  1. Trade and other payables: Inclusive of liabilities which are mainly due to suppliers and contractors for credit purchases. Also includes insignificant payables such as sundry payables.
  2. Short term borrowings: Consists of bank overdrafts and short term bank loans with a less than 12 months repayment schedules
  3. Long term borrowings: Consists of loans which a repayment schedule exceeds one year.
  4. Current tax payable: due to the materiality of the amount, it is normally presented as a separate line item in the statement of financial position.

Equity is the residual interest in an entity’s assets that belongs to the owners. It is derived after deducting all its liabilities from all the assets. In the statement of financial position, equity is normally presented in these categories

  1. Share capital: signifies the amount invested by owners in the entity
  2. Retained earnings: consists of the entire net profit or loss left in the business after dividends are allocated to owners.
  3. Revaluation reserve: consists of the net additions of any upward adjustment of property, equipment and plant directly identified in equity.

Question c.)

Accrual basis of accounting is defined as an accounting method that identifies economic events no matter when cash transactions occur in order to evaluate a company’s performance and position. The overall idea is that economic events are identified by corresponding revenues to expenses (the matching principle) not during the time payment is being made or received but during the time where the transactions occurred. By using this method, the current cash inflows or outflows is allowed to be joined with the expected cash inflows or outflows of the future to provide a more accurate picture of the current financial condition of a company. The principle of the accrual basis of accounting is the concept that accounting transactions is required to be recorded in the period which they actually occur and not the period which related cash flows occur. It is an essential requirement of all accounting framework, for example the generally accepted accounting principles and international financial standards.

Some examples of situations that accrual principles is appropriately used is

  1. Record sales when the customer is invoiced and not when the customer pays.
  2. Record an expense when it is incurred and not when it is paid for.
  3. Record the estimated amount of bad debt when a customer is invoiced rather when the customer is apparently not paying.
  4. Record depreciation for a fixed asset over its useful life, rather than charging it to the expense in the period purchased.
  5. Record a commission that a salesperson earn in the exact period when it is earned, rather than the period where he received payment.
  6. Record earned wages in the exact period, rather than the paid period.

If appropriately implemented, the accrual principle enables an entity to aggregate all information of revenue and expense for the period of accounting, depriving of all delaying and distortions as a result of cash flow that occurs from that period of accounting.

An illustrated example is, if Penguin Ice company bought 5,000 boxes of ice cream at 5 dollars each and sold 4,000 boxes of ice cream at 10 dollars each, the sales revenue is 4,000 X $10/box = $40,000. The cost of goods sold is 4,000X$5/box = $20,000. Therefore, the gross profit is calculated as $40,000 - $20,000 = $20,000. It is essential for adjustment to be made because, if the cost of goods is being calculated as 5,000X$5/box = $25,000, the end result of the gross profit (trading profit) would decrease and it would not be accurate. In relation to accrual basis, the earned revenue in this period must matched to the expenses incurred (matching concept) to generate the revenue in the same period no matter whether the cash has been paid or received.

References

AccountingCoach.com

What is the statement of financial position? | AccountingCoach

AccountingCoach.com,. (2014). What is the statement of financial position? | AccountingCoach. Retrieved 27 August 2014, from http://www.accountingcoach.com/blog/what-is-the-statement-of-financial-position

Accounting-simplified.com

Statement of Financial Position | Components | Format | Example | Template | Purpose

Accounting-simplified.com,. (2014). Statement of Financial Position | Components | Format | Example | Template | Purpose. Retrieved 27 August 2014, from http://accounting-simplified.com/financial/statements/statement-of-financial-position.html

Accountingtools.com

Accrual Principle - AccountingTools

Accountingtools.com,. (2014). Accrual Principle - AccountingTools. Retrieved 27 August 2014, from http://www.accountingtools.com/accrual-principle

BusinessDictionary.com

What is statement of comprehensive income? definition and meaning

BusinessDictionary.com,. (2014). What is statement of comprehensive income? definition and meaning. Retrieved 27 August 2014, from http://www.businessdictionary.com/definition/statement-of-comprehensive-income.html

Ifrs.org

Ifrs.org,. (2014). Retrieved 27 August 2014, from http://www.ifrs.org/IFRS-for-SMEs/Documents/IFRS%20for%20SMEs%20Modules/Module05__version%202013.pdf

Ifrs.org

Ifrs.org,. (2014). Retrieved 27 August 2014, from http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf

Ifrs.org

Ifrs.org,. (2014). Retrieved 27 August 2014, from http://www.ifrs.org/IFRS-for-SMEs/Documents/Module04_version2010_1_SOFP_Eng.pdf

Investopedia

Accrual Accounting Definition | Investopedia

Investopedia,. (2013). Accrual Accounting Definition | Investopedia. Retrieved 27 August 2014, from

http://www.investopedia.com/terms/a/accrualaccounting.asp

Investopedia

Comprehensive Income Definition | Investopedia

Investopedia,. (2009). Comprehensive Income Definition | Investopedia. Retrieved 27 August 2014, from http://www.investopedia.com/terms/c/comprehensiveincome.asp

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