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Overall Framework Of Financial Reporting Notes

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OVERALL FRAMEWORK OF FINANCIAL REPORTING Lectures

Generally Accepted Accounting Principles (GAAPs) o Business entity - business is separate from the owner and others o Going concern - business is perceived to be an ongoing activity for an indefinite length of time o Objectivity - verifiable nature of all transactions o Cost - transactions must be recorded at their actual costs o Time period - accounts be prepared to know the performance and position o Accrual - accounts be kept to give effect when an event arise and not when cash is paid o Matching - revenues and expenses must be matched in relation to the accounting period o Recognition - when should income be recognised?
o Consistency - accounting policies must be followed consistently o Conservatism/prudence - method of determining asset value or net income which yields lesser amount should be used when a choice exists - need to gain the right to receive the profit before putting it in the account o Reliability - is information reliable?
o Materiality - information that influences the economic decision making must be disclosed


Double entry book keeping ACCOUNT Left hand - DEBIT (when assets come) Right hand - CREDIT (when assets go)


This means that... Account Debit Credit Assets


Expenses


Liabilities


Shareholder Equity


Revenue


Note the process... o DEB -> Trial Balance -> IS -> BS


The accounting equation: o Assets = Liabilities + Equity LIABILITIES ASSETS SHAREHOLDER EQUITY

Income statement EXPENSES REVENUE INCOME o Gross profit = revenue after cost of sales accounted for o So... Income Statement Sales 15,000 Cost of sales 5,000 Gross profit 10,000

Operating expenses 2,000 Operating profit (PBIT) 8,000 Interest Payable 1,000 Profit before tax 7,000 Tax 2,000 Profit after tax 5,000 Dividends 4,000 Retained earnings 1,000 Balance sheet Current Assets Current liabilities Non-current liabilities Non-current assets Shareholder equity + retained earnings

o Balance Sheet Non-current assets 10,000 Current assets 5,000 Less Current liabilities (3,000) Net current assets 2,000 Non-current liabilities (1,500) Net assets 10,500 Shareholders' Funds Shareholders' Equity 7,000 Retained Earnings 3,500 10,500 Cost of sales = Opening stocks + purchases - closing stocks Capital/Revenue: o An expenditure, the benefit of which is of an enduring nature is considered as a capital expenditure.
 Always reflected on the BS under non-CA o An expenditure, the benefit of which expires in the year itself, is treated as revenue expenditure
 Reflected on the IS as an expense January 2010 - 'Lenders could have to write off millions of pounds in loans to customers who have not been provided with proper terms and conditions after a High Court ruling clarified when such debts are unenforceable.' Cash flow Net cash flow from operating activities (plus/minus...) Returns from investment and servicing of finance (plus/minus...) Taxation (plus/minus...) Capital expenditure (plus/minus...) Dividends paid (plus/minus...) Management of liquid resource (plus/minus...) Financing (equals...) Increase or decrease in cash over period o Net cash flow from operating activities then gets taken to the top box. (PBIT/operating profit) FT.com (October 2008)

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