ACC 110 Chapter Notes - Chapter 2: Cash Flow Statement, Current Liability, Financial Statement

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25 Apr 2012
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Chapter 2 accounting
General purpose financial statements
- These are financial statements that are made to be used by a wide variety of stakeholders, the
opposite of this are special purpose reports which are created to help a single stakeholder in
their decision making
- Because this statement does not meet all the information needs of stakeholders, the preparer
must decide what information must be placed that may be helpful for these stakeholders make
their decision
Leon’s financial statements; an overview
- Consolidated financial statements means that they sum up financial information of more than
one company into a set of financial statements, this can only occur if the company owns more
than 50% of other companies and intends on providing information to all stakeholders about the
company
- Financial statements compare two years of a company’s financial performance as this allows
stakeholders to determine whether or not a company was able to increase its profits or increase
its loss within one fiscal period
- Accounting information that cannot be compared to other information isn’t useful to
stakeholders
- Financial statements report information pertaining to the company’s performance for a year,
this 12 month period can be chosen at any date
- Dollar amounts in these statements are rounded to the nearest thousands as it does not greatly
influence the perspective of investors and makes the financial statement more organized in
appearance
- Materiality refers to the importance of information to a stakeholder where information is
classified as material if its exclusion influences the perspective of stakeholders.
- Financial statements must be free from material error and any material error that was identified
must be disclosed as mentioned before it can mislead stakeholders into believing what may not
be true
- Information’s classification as material depends on the stakeholder’s judgment, what they need
the information for and who will be using the financial statements
The balance sheet
- The balance sheet shows the company’ most recent financial position and this information is
subject to change after this report was produced and the information from previous years
would be different. Stakeholders can use this information to determine the risk in investing in
this business, the financial health of the business and determine whether or not they will
receive future cash flow in the future
- Assets are economic resources that benefit the entity in the long run
- Liabilities is the money that is owed to an entity’s financers such as creditors
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- - Owner’s equity is the sum of cash that was invested into the business
- The balance sheet follows the idea of the accounting equation where assets must equal
liabilities + owner’s equity
- The right side of the equation represents the amount of money earned from financers and
owners/shareholders that were used in order to purchase these assets
- Creditors are people who money is owed to
- Accounts provide additional information about an entity’s financial position
- Economic events that are entered into the accounting system take on the form of impacts on
the accounting equation in terms of assets, liabilities and owners equity
Assets
- Under IFRS
i) The asset must help the entity generate cash in the near future and it must be likely that
the entity that owns this asset will benefit from it
ii) The entity must have the right to use the asset to generate cash flow from it
iii) Assets are earned as a result of a transaction
iv) They can be measured
- Entities do not necessarily have to own the asset in order for it qualify as an asset, they must be
the one who benefits from it. For instance leasing a piece of land qualifies as an asset for that
very reason
-missing assets may not be reported on the balance sheet because they may not qualify as an asset,
for instance a brand name may not qualify because there is not a lot of certainty that the brand will
benefit from its image to consumers. Therefore it is important to realize that the balance sheet
does not include all assets of an entity
- balance sheet measurements: when assets are gained they are recorded at the amount of money
that was paid for them. After acquiring them inventory is recorded at its cost value while capital
assets can be either reported at the amount that was paid to acquire them, or the curret market
value under IFRS, A/R are valued at the amount that is estimated to be collected from A/R
- current assets are assets that expected to be liquidated, used up or sold within a year or an
operating cycle. Operating cycle is the time it takes for a return on investment since the day the
asset was purchased
- noncurrent assets are assets that will not be used up, liquidated or sold within a year
Liabilities
- Liabilities occurs when the firm is expected to fulfill an obligation or settle a debt
I)According to IFRS, a liability is the result of a past transaction or economic event
ii)Requires a payment of money to settle the debt
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