...5 The Balance Sheet and Financial Disclosures CHAPTER LEARNING OBJECTIVES OVERVIEW LO1 LO2 LO3 LO4 LO5 Chapter 1 stressed the importance of the financial statements in helping investors and creditors predict future cash flows. The balance sheet, along with accompanying disclosures, proAfter studying this chapter, vides relevant information useful not only in helping you should be able to: investors and creditors predict future cash flows Describe the purpose of the balance but also in the related assessments of liquidity sheet and understand its usefulness and limitations. and long-term solvency. Distinguish between current and noncurrent The purpose of this chapter is to provide assets and liabilities. Identify and describe the various balance sheet an overview of the balance sheet and asset classifications. notes to the financial statements and to Identify and describe the two balance sheet liability classifications. explore how this information is used by Explain the purpose of financial statement decision makers. disclosures. LO6 Explain the purpose of the management discussion and analysis disclosure. LO7 Explain the purpose of an audit and describe the content of the audit report. LO8 Identify and calculate the common liquidity and financing ratios used to assess risk. FINANCIAL REPORTING CASE What’s It Worth? “I can’t believe it. Why don’t you accountants prepare financial statements that are relevant...
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...INTERMEDIATE FINANCIAL ACCOUNTING AND REPORTING CAEA 1214 FINANCIAL ACCOUNTING AND REPORTING II Semester 2, 2015/2016 Learning outcome • Determine the different types of events after the reporting period in accordance with MFRS110. • Apply MFRS 110 to account for events after the reporting period either to: • Make adjustments in the financial statements • Prepare the necessary disclosures • Present the different types of events after the reporting period in the financial statements in compliance with MFRS110. Lecture outline • Introduction • Definitions • Types of Events -Adjusting Events -Non Adjusting Event • Other Issues -Date of authorization for issue -Dividends -Going concern -Disclosure Introduction • Bursa Malaysia requires large publicly traded companies to lodge their unaudited financial statements within 2 months of fiscal year-end and full financial statements within 4 months • Business continues during this “subsequent period” and events could take place that have an impact upon the firm’s financial statements for the preceding year • These events are referred to in the accounting literature as subsequent events or post-balance sheet events. Introduction • The IASB has released IAS 10, dealing specifically with the accounting for subsequent events. • IAS 10 requires that companies adjust the reported amount of assets and liabilities if events occurring after the balance sheet date provide...
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...A FRAMEWORK FOR MORE EFFECTIVE FINANCIAL REPORTING Corporate financial statements and their related disclosures are fundamental to sound investment decision making. The well-being of global financial markets, and of the investors who entrust their financial present and future to those markets, depends directly on the information financial statements and disclosures provide. The following framework is intended to enhance effectiveness in financial reporting. Guiding Principles • The primary financial statements must provide the information needed by equity investors, creditors, and other suppliers of risk capital. • In financial reporting, standard-setting as well as statement preparation, the entity must be viewed from the perspective of an investor in the common equity issued by the company. • Fair value information is the most relevant information for financial decision making. • Recognition and disclosure must be determined by the relevance of the information to investment decision making and not based upon measurement reliability alone. • All transactions and events must be recognized as they occur in the financial statements. • Investors’ information requirements must determine the materiality threshold. • Financial reporting must be neutral. • All changes in net assets, including changes in fair values, must be recorded in a single financial statement, the Statement of Changes in Net Assets Available to Common Shareowners. • The...
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...Chapter 3 The Balance Sheet and Financial Disclosures Questions for Review of Key Topics Question 3-1 The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized array of assets, liabilities, and shareholders’ equity at a point in time. It is a freeze frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period. Question 3-2 The balance sheet does not portray the market value of the entity (number of common stock shares outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair value, but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will not be representative of the company’s market value. Question 3-3 Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year, or within the normal operating cycle of the business if the operating cycle is longer than...
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...Why Contingent assets are not on balance sheets. It is a key principle for accountants to give a fair and true view of a business to help people that use this information to make more informed decisions. It is important to provide the users, accurate financial information that is as close to the true circumstances as possible and so not to alter the decisions of the users. Accountants produce financial statements that display all of the useful information for all user groups. One of the most common financial statements is the balance sheet. The purpose of the balance sheet is to show the financial position of an entity at a certain point in time by presenting assets, liabilities and ownership interest. The balance sheet reflects the accounting equation (assets minus liabilities equals ownership interest). An asset can be defined as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity” (Weetman, 2006). Not all of the company assets and liabilities always appear on the balance sheet for different reasons, even though they meet the definition of an asset. These assets are called off-balance-sheet assets (OBS). The OBS is not part of the balance sheet and it acts as a note of disclosure. The OBS has featured in the headlines of many news articles. This is because businesses have been using OBS financing to keep their leverage and debt to equity ratios low. The term OBS financing became popular...
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...IAS 1: Presentation of Financial Statements Introduction The IASB – International Accounting Standards Board issued its framework for the Preparation and Presentation of Financial Statements in 1989. This is referred to as its conceptual framework. The framework sets out the concepts that underline preparation and presentation of financial statements for external users. The IASB framework assists the IASB: • “in the development of future International Accounting Standards and in its review of existing International Accounting Standards; and • in promoting the harmonisation of regulations, accounting standards and procedures relating presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards. In addition, the framework may assist: • preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form the subject of an International Accounting Standard; • auditors in forming an opinion as to whether financial statements conform with International Accounting Standards; • users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting Standards; and • those who are interested in the work of IASB, providing them with information about its approach to the formulation of accounting standards.” The...
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...Chapter 3 The Balance Sheet and Financial Disclosures AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e with the following AACSB learning skills: |Questions |AACSB Tags |Exercises (cont.) |AACSB Tags | |3–1 |Reflective thinking |3–3 |Reflective thinking | |3–2 |Reflective thinking |3–4 |Analytic | |3–3 |Reflective thinking |3–5 |Analytic | |3–4 |Reflective thinking |3–6 |Analytic | |3–5 |Reflective thinking |3–7 |Analytic | |3–6 |Reflective thinking ...
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...Eddie required to accrue a liability as of March 31, 2011, financial statements related to the ongoing government investigation? If so, how much? Yes. Fast Eddie is required to accrue a liability of $3.7 million. Subsequent Events are Events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. There are two types of subsequent events: a. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events). b. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events). According to ASC 855-10-25-1, an entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. An example of recognized subsequent events is that if the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled after the balance sheet date but before the financial statements are issued or are available to be issued, for an...
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...Indraprastha Marg, New Delhi - 110 002. Sahitya Bhawan Publications, Hospital Road, Agra 282 003 December/2011/5,000 Copies Printed by : Foreword The Ministry of Corporate Affairs of the Government of India has been taking many initiatives for overhauling the Companies Act, 1956 through major amendments, circulars and notifications. To make Indian business and companies competitive and globally recognisable, a need was felt that format of Financial Statements of Indian corporates should be comparable with international format. Since most of the Indian Accounting Standards are being made at par with the international Accounting Standards, the changes to format of Financial Statements to align with the Accounting Standards will make Indian companies competitive on the global financial world. Taking cognizance of imperative situation and need, the Ministry of Corporate Affairs revised the existing Schedule VI to the Companies Act, 1956 and made it applicable to all companies for the Financial Statements to be prepared for the financial year commencing on or after April 1, 2011. The...
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...Public sector accounting has recently been improved. Currently, there are requirements to disclose stock information in addition to the flow information presented in budget statements or accounts statements. Public sectors have prepared and disclosed their financial statements (including balance sheets and income statements) based on business accounting approaches. Moreover, as a matter of policy, the government tends to prepare and disclose cost information along with the financial statements for the individual ministries and governmental agencies. The objectives of clarifying the fiscal conditions in a state through the preparation and disclosure of financial statements are to fulfill the state’s accountability to its citizenry and market participants and to optimize and enhance the efficiency of its fiscal activities. Most importantly, the improved information should contribute to democratic decisions on public finance. A perspective different from the business accounting is that public sector accounting places more emphasis on inter-generational fairness. With respect to the inter-generational benefits and burdens, however, various factors must be considered, and the differences between assets and liabilities in the balance sheet may not be the indicators for that purpose. Public sector accounting is considered to have been developed based on the business accounting approach. As such, the objective of the accounting is to retrospectively review how assets and liabilities have changed...
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...1.Abstract The balance sheet is necessary because it shows what the business has (assets) and what the business owes against those assets (liabilities). The difference between the assets and the liabilities shows the net worth of the business. The net worth of the business is important in that it is a measurement of the time the business is expected to stay in financial power. The balance sheet also provides the business with information on how best it is able to pay its debts. Underwriters also use the information in the balance sheet (working capital) to assess the business' ability to finance its operations. The balance sheet is necessary for the managers. It assists the managers of businesses in making decisions regarding purchasing of equipments for the business. Business managers depend on the balance sheet to analyze whether buying certain equipment on debt is the right move for the business at that time. Business managers need the balance sheet so as to decide the best source of credit for the business at that time. The balance sheet shows the accounting equation in a physical representation. The balance sheet also shows the owner's equity for example, it shows the value of the stock and the number of shares outstanding. The balance sheet is also used by the government agencies to make sure that the business is complying with the set laws. It also provides information to any potential lenders of the business on the credit worthiness of the business. When a group of...
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...: - existence recorded cash balances exist at the balance sheet date. - completeness recorded cash balances include the effects of all cash trans-actions that have occurred; year – end transfer of cash between banks are recorded in the proper period. - rights and obligations the entity has legal title to all cash balances shown at the balance sheet date. - valuation recorded cash balances are realizable at the amounts stated on the balance sheet and agree with supporting schedules. - presentation and disclosure cash balances are properly identified and clas-sified in the balance sheet; lines of credit, loan guarantees and other re-strictions on cash balances are appropriately disclosed. !!! REMARKS: o A high volume of cash transactions result in a high inherent risk. o Controls over cash transactions are usually strong and are tested in connec-tion with the audits of sales and purchases. o Regular bank reconciliations are an important control over the prevention and detection of fraud and error. o The use of “imprest” accounts for petty cash and for payroll and dividend cheques is a further control over safeguarding cash balances. o Cash balances are usually relatively small but significant because of their importance for liquidity. o The small balance means that auditors tend to adopt a predominantly sub-stantive approach to the audit of cash balances. o Analytical procedures are little used in the audit of cash balances. o Cut – off tests are performed...
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...Introduction Financial statements are the basic ways to tell the condition of a company or organization. These statements are developed from the bookkeeping process of the business firms. The firms record the financial transactions through recording the transactions in the accounting journals and the general ledgers. Time after time, the financial statements begin to appear. The two most widely used statements are the Balance Sheet and Income Statement. They are two types of accounting documents which are particularly prevalent in the U.S. because the official forms of the documents must be regularly filed with the U.S. Securities and Exchange Commission. Theoretical Framework Different kinds of classification and illustration are dedicated by scholars in finance and business area. For example, studies from Wolk, Dodd and Rozycki explain the relationship between the income statement and balance sheet from two approaches, which are articulated approach and non-articulated approach. While, Debarshi’s works classify this relationship from three aspects: stock and flow relationship, complementary relationship and link relationship. Wolk, Dodd and Rozyki They explain the relationship of income statement and balance sheet mainly from two approach: articulated and non articulated. Articulation Revenue-Expense Approach Since the 1930s, accounting policy has been mainly concerned with the definition, recognition, and measurement of income. Income is derived by matching...
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...PREPARATION OF BALANCE SHEET AND STATEMENT OF PROFIT AND LOSS OF A COMPANY GENERAL INSTRUCTIONS 1. Where compliance with the requirements of the Act including Accounting Standards as applicable to the companies require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head or sub-head or any changes, inter se, in the financial statements or statements forming part thereof, the same shall be made and the requirements of this Schedule shall stand modified accordingly. 2. The disclosure requirements specified in this Schedule are in addition to and not in substitution of the disclosure requirements specified in the Accounting Standards prescribed under the Companies Act, 2013. Additional disclosures specified in the Accounting Standards shall be made in the notes to accounts or by way of additional statement unless required to be disclosed on the face of the Financial Statements. Similarly, all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in this Schedule. 3. (i) Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required (a) narrative descriptions or disaggregations of items recognised in those statements; and (b) information about items that do not qualify for recognition in those statements. (ii) Each item on the face of the Balance Sheet and Statement...
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...Furthermore, although it is a more expensive option leasing provides management with the opportunity to utilize different equipment until the optimal combination in terms of productivity is attained (Noland, 2006). Thus, leasing allows an organization to attain flexibility and efficiency in order to keep its business operations current. In regard to AASB117, preparers of general purpose financial reports (GPFS) are required to categorize leases at the period of inception as either finance or operating leases. This is applied by evaluating the substance of the transaction rather than the form of the contract (CPA Australia,2009). If a non cancellable lease fulfills one or more criteria that includes; “a) ownership transfer to the lessee, b) a bargain purchase option, c) a lease term equating to a minimum 75 percent of the assets estimated useful life and d) the present value of the minimum lease payments to be minimum 90 percent of the leased assets fair value”, then it will be regarded as a finance lease (CPA Australia, 2009). Therefore, this lease will be capitalized into the balance sheet of the lessee and recorded as an asset or liability equal to the assets current fair value. Additionally, any contingent rent will be expensed at the time it is incurred (CPA Australia, 2009). If a lease does not meet one...
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