Accounting

Accounting provides an explanation or report in

financial terms about the transactions of an
organization to satisfy stakeholders
Financial statements or reports (Companys
Accounts)

Income Statement
Balance Sheet
Cash Flow Statement

International Financial Reporting Standards (IFRS)

applicable to public entities

Accounting Standards for Private Entities (ASPE)

applies to private companies

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Managements Responsibility
for Fair Presentation

Financial reports must

present

fairly the financial position, financial

performance, and cash flows of an entity
be prepared according to generally accepted
accounting principles (GAAP)
be audited or reviewed to ensure that this is the
case

? Accounting standards are principles based

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International Financial
Reporting Standards (IFRS)

IFRS Objectives

Promote the use and rigorous application of those standards

Take account of the financial reporting needs of emerging
economies and small and medium-sized entities (SMEs)
Bring about convergence of national accounting standards and
IFRSs to high-quality solutions

IFRS and ASPE set out recognition, measurement,

presentation, and disclosure requirements dealing with
transactions and events that are important in generalpurpose financial statements (directed toward the
common information needs of a wide range of users)
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Conceptual Framework
for Financial Reporting

A complete set of financial statements or reports

includes
Statement of Financial Position
Statement of Comprehensive Income
Statement of Changes in Shareholders Equity
Statement of Cash Flows
Notes to the financial statements

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Objectives of Financial Statement

To provide financial information about the

reporting entity that is helpful to the users
in making decisions about providing
resources to the entity
decision usefulness

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Qualitative Characteristics
of Financial Statements
Relevance

Predictive and confirmatory value

Affected by materiality

Faithful representation
Comparability
Verifiability
Timeliness
Understandability
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Some objectives of Management

Meet investors expectations

Maintain stock price
Meet budget goals
Obtain best terms for loans
Avoid violation of debt covenants
Obtain grants from government
Minimize taxes
Generally influence decisions arising out of
accounting information

GAAP

Even in the US, GAAP allows for flexibility

in the choice of:
Accounting Policies- more than 1 allowable
option
Accounting Estimates- professional judgment
Disclosure- no required wording

Earnings Mgmt Possibilities (Not all inclusive)

Subject
Policies
Estimates
Revenue
Recognition

When to recognize
revenue?

Bad Debts
Returns Discounts

Inventory

Valuation- FIFO,LIFO,
average cost
What is included in
inventory cost?

Write-downs of obsolete
and damaged inventory,
Net Realizable Value

Capital Assets

Amortization Method
Capitalization policies

Useful lives, Write

downs and write offs
Salvage values

Liabilities

Leases
When to recognize
liabilities

Warranty provisions
Pensions
Accruals

Assets vs
Expenses

Capitalization policies

Other

Other

Expensing assets
Classifications Long/Short
term, ordinary, unusual,
extraordinary
Disclosure of contingencies

Elements of Financial Statements

Assets
Liabilities
Equity
Income

Revenues
Gains

Expenses

Losses
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Elements of Financial Statements

Recognition
Incorporating

in the Statement of Financial Position or

Statement of Comprehensive Income items in words and
monetary measurement that meets the definition of an
element
Element should be recognized if both of the following are
true:
1. It is probable that any future economic benefit associated with
the item will flow to or from the entity

2. The item has a cost or value that can be measured with

reliability
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Elements of Financial Statements

Measurement
The

process of determining the monetary

amount at which elements are recognised in
the Statement of Financial Position or
Statement of Comprehensive Income
Four bases of measurement:
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
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Reporting Profitability:
The Statement of Comprehensive Income
Profit = Income - Expenses

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Matching Principle

Matching income with the expenses

incurred in earning that income
Income

Revenue (sales, fees, interest, rent, etc.)

Gains (disposal of non-current assets, revaluations)

Expenses

Expenses (salaries, advertising, etc.)

Losses (fire & flood, sale of non-current assets)

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Reporting Profitability:
The Statement of Comprehensive Income - Extended
Operating profit = Gross profit - Expenses

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Reporting Financial Position:

The Statement of Financial Position
Asset is classified as current asset when ?

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Reporting Financial Position:

The Statement of Financial Position

Assets
Current

Money in Bank
Accounts receivable
Inventory

Non

current

Tangible (Property, plant and equipment)

Intangible (Patents, trademarks)

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Reporting Financial Position:

The Statement of Financial Position

Liabilities
Current

?
Non current

Shareholders Equity (or Capital)

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Reporting Financial Position:

The Statement of Financial Position
1.

2.
3.

Net assets = Total assets total liabilities

(equal to equity)
or
Assets = liabilities + equity
or
Assets - liabilities = equity

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Reporting Financial Position:

The Statement of Financial Position

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Accrual Accounting
Recognizes income when it is earned and
expenses when they are incurred
Cash versus accruals accounting
Matching principle
Adjustments for

Prepayments
Accruals
Provisions
Depreciation
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Prepayments and accruals

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Provisions
Doubtful debts (Bad Debts)
Inventory
Depreciation

The

term Amortization is used for

intangible assets, such as patents or
copyrights)

Each of the above items is a deduction from

the its asset value in the Balance Sheet
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Depreciation
Depreciation is an expense that spreads the cost of the
asset over its useful life

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Reporting cash flow:

The Statement of Cash Flows

Movement in cash during a financial period

From operations

Depreciation
Increases or decreases in working capital

Interest receipts and payments

Income tax paid
Capital expenditure
Dividends paid
New borrowings or repayments of borrowings

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Statement of Cash Flows

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Cash Flow Statement

Cash flow from operations:
Operating Profit
+ depreciation (non-cash)
+/- change in working capital
- interest
- income taxes
- capital expenditure
- dividends
+/- new borrowings or repayment of borrowings
= Net increase in Cash
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Critical Perspective on
Accounting Standards

Continual changes in standards

Practical implementation issues (e.g., Pension funds and
stock options)
Exclusion of US from IFRS
Complexity
Lobbying effect on standards (e.g., Enron)
Standards can lead to more creativity
Narrow accounting focus

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Conclusion

Financial Statements
Statement

of comprehensive income
Statement of financial position
Statement of cash flows

IFRS and Conceptual Framework

Accruals, prepayments, provisions
Depreciation
Critique of standards

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