CHAPTER 12 FINANCIAL STATEMENTS 12 1 Overview of financial statements 12 2 Accounting asssumptions and principle for financial reporting 12 3 Statement of financial position 12 4 Statement of comprehe[.]
175 CHAPTER 12: FINANCIAL STATEMENTS 12.1 Overview of financial statements 12.2 Accounting asssumptions and principle for financial reporting 12.3 Statement of financial position 12.4 Statement of comprehensive income 12.5 Statement of Cash Flows 12.6 Statement of changes in equity 12.7 Notes to Financial statements FINANCIAL ACCOUNTING 176 CHAPTER 12: FINANCIAL STATEMENTS OBJECTIVE: After studying this chapter, you should be able to: Identify the main financial statements and their purpose Understand how to prepare Statement of financial position, Statement of comprehensive income, Statement of Cash Flows, Statement of changes in equity and Notes to Financial statements FINANCIAL ACCOUNTING 12.1.Overview of financial statements 12.1.1.Definition of financial statements 12.1.2.Types of financial statements 177 FINANCIAL ACCOUNTING 12.1.1.DEFINITION OF FINANCIAL STATEMENTS • The financial statements provide information about an entity's assets, liabilities, equity, income and expenses that is useful to financial statements users in assessing the prospects for future net cash inflows to the entity and in assessing management's stewardship of the entity's resources • The financial statements of limited liability companies are usually governed by national legislation and accounting standards • From an international standpoint, however, the general content of financial statements is governed by IAS Presentation of financial statements 12.1.1.DEFINITION OF FINANCIAL STATEMENTS • The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources 12.1.1.DEFINITION OF FINANCIAL STATEMENTS The entity should identify each component of the financial statements very clearly IAS also requires disclosure of the following information in a prominent position • Name of the reporting entity (or other means of identification) • Whether the accounts cover the single entity only or a group of entities • The reporting date or the period covered by the financial statements (as appropriate) • The reporting currency used in presenting the figures in the financial statements • Reporting period: Entities normally present financial statements annually IAS states that they should be prepared at least as often as this 12.1.2.TYPES OF FINANCIAL STATEMENTS A complete set of financial statements includes the following • Statement of financial position • Statement of profit or loss and other comprehensive income (either as a single statement or as two separate statements: the statement of profit or loss and the statement of other comprehensive income) • Statement of changes in equity • Statement of cash flows • Notes, including a summary of significant accounting policies and other explanatory information 12.2.Accounting asssumptions and principle for financial reporting 12.2.1.Accounting assumptions 12.2.2.Accounting principles 182 FINANCIAL ACCOUNTING 12.2.1.ACCOUNTING ASSUMPTIONS Underlying assumption •The IFRS Framework states that the going concern assumption is an underlying assumption •The going concern basis of accounting is the assumption in preparing the financial statements that an entity will continue in operation for the foreseeable future and does not plan to go into liquidation, and will not be forced into liquidation or to curtail its operations Thus, the financial statements presume that an entity will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required Note: they may require valuation of assets on a break-up basis if the company will cease trading 12.2.1.ACCOUNTING ASSUMPTIONS Accrual assumption •Under the accrual basis, the effects of transactions and other events are recognised when they occur, and not as cash is received or paid Under the accruals basis, events are recorded in the accounting records and reported in the financial statements of the periods to which they relate Financial statements prepared on the accrual basis inform users not only to past transactions when cash was paid or received but also of obligations to pay cash in the future and of cash or its equivalents to be received in the future ... significant accounting policies and other explanatory information 12. 2 .Accounting asssumptions and principle for financial reporting 12. 2.1 .Accounting assumptions 12. 2 .2 .Accounting principles 1 82 FINANCIAL. .. financial statements 12. 1.1.Definition of financial statements 12. 1 .2. Types of financial statements 177 FINANCIAL ACCOUNTING 12. 1.1.DEFINITION OF FINANCIAL STATEMENTS • The financial statements... of financial position 12. 3.1 Overview of the statement of financial position 12. 3 .2 Preparation of the statement of financial position 186 FINANCIAL ACCOUNTING 12. 3.1 OVERVIEW OF STATEMENT OF FINANCIAL