ACCT5001-S2 2014 - Topic 2_6slides per page(1)

› A present obligation of the entity from past events, › the settlement of which is expected to result in an outflow of resources embodying economic benefits from the entity y. › e.g. Characteristics: › Present obligation must exist from a past event (not contingent or future) › likely to involve a sacrifice of resources to an external entity
Noncurrent assets
Land Equipment (net) TOTAL $100 $150
Shareholders’ equity
Share capital 250 Retained profits $ 495 $130 $175 $ 305 $495
(i.e. residual of A – L) › It provides indication of - Liquidity (ability to pay debts when due) and - Solvency (ability to continue operations in the longer term)
it owes
Balance sheet – Horizontal style
Assets
Current assets
Cash Accounts receivable Inventory 50 75 120
Liabilities & Equity
Current liabilities
Accounts payable $73 Wages payable $30 $ 103 245 Noncurrent liabilities Loan $ 87
Assets
Definition: › A resource owned/controlled by the entity as a result of past events, from which future economic benefits are expected to flow to the entity › e.g.
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Recognition of assets and liabilities
› Recognition is the process of including assets and liabilities
that meet the definitions on to the Balance Sheet. (not all are recognised) › An item that meets the definition of an element should be recognised if: that any future economic benefit will (a) it is flow to or from the entity, and (b) the item has a cost or value that
- e.g.
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Use of elements/classifications
Can help to see key relationships and ratios
Some measurement Issues
Accounting records what has happened - Assets are initially recorded at what they cost. - Liabilities at what was promised when the obligation arose. Issues • relevance v reliability some accounting standards allow more relevant measures (e.g fair value, net realisable value, present value, lower of cost and market value) • If an asset becomes negative the account is reclassified (e.g. if bank a/c is overdrawn is now a bank overdraft liability). Contra accounts – negative items associated with an asset are deducted from it in the B/Sheet to show its written down amount › e.g. Asset - Accumulated depreciation = Written-down amount (we will learn more about these issues in the next few weeks)
Current v non-current classifications
› Current assets - those that will be converted to cash, or used up (consumed) within one year of the balance sheet date. - e.g. › Non-current assets that will not be converted to cash or used up (consumed) for at least the next financial year.
Assets Current assets Cash Accounts receivable Inventory Noncurrent assets Land Equipment (net) Total assets Liabilities Current liabilities Accounts payable Wages payable Noncurrent liabilities Loan Total liabilities Shareholders’ equity Share capital Retained profits Total shareholders’ equity Total Liabilities and Equity
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Liabilities
Definition:
Equity (Shareholders’ equity)
Definition: The residual after liabilities (obligations) are deducted from assets (resources)
50 75 120 245 100 150 250 $495 73 30 103 87 190 130 175 305 $495
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Characteristics:
› future economic benefits generates cash flows › control is the capacity to benefit from the asset and to deny/regulate access of others from its use › past event has occurred to give control over the future economic benefits
Describe the contents of a balance sheet Carry out preliminary analysis based on a balance sheet Determine whether an item is an asset or a liability y in the B/Sheet Prepare a balance sheet Determine the effect of transactions on revenue and expenses
BUSINESS SCHOOL
Prepare an income statement Explain the nature of each of the items in the balance sheet and income statement for a public company Describe the note reconciling opening and closing retained profits Explain the importance of both financial statements to managers Interpret the contents of profit announcements in the financial press
Learning Objectives
This is the second of 5 topics on the accounting process (Make sure you have read the Chapter 2 Overview, pp.43-55) On completion of this week’s topic, you should be able to:
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Balance sheet
› Is a snapshot of financial position as at a particular point in time › It summarises resources controlled & their sources of finance Assets it owns or controls t l
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ACCT5001 Accounting Principles
Topic 2:
Introduction to Financial Reporting: Measuring and evaluating financial position and performance
Text: Trotman et al., Ch. 2 (2.1 - 2.11), pp. 43 - 75
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SE
=
A
–
L
It is a nominal amount that can’t be defined without measuring assets and liabilities It consists of the following categories: 1. 2. 3. Share capital Retained profits Reserves (discussed in later chapters).
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We tend not to use this format in practice.
4Hale Waihona Puke Balance sheet – vertical style
Assets Current assets Cash Accounts receivable Inventory Noncurrent assets Land Equipment (net) Total T t l assets t Liabilities Current liabilities Accounts payable Wages payable Noncurrent liabilities Loan Total liabilities Net assets Shareholders’ equity Share capital Retained profits Total shareholders’ equity 50 75 120 245 100 150 250 495 73 30 103 87 190 $305 130 175 $305
- e.g. eg
› Current liabilities - those that will be required to be settled within one year of the balance sheet date. - e.g. › Non-current liabilities not required to be settled for at least the next financial year.