measuring and reporting financial position
the nature and purpose of the statement of financial position and its component parts
explain the accounting equation and use it to build up a statement of financial position at the end of a period
classify assets and clains
apply the different possible formats for the statement of financial position
identify the main factors that influence the content and values in a statement of financial position
explain the main ways in which the statement of financial position can be useful for users of accounting information
identify the main deficiencies or limitations in the statement of financial position
the purpose of the statement of financial position is to set out the financial position of a business at a particular point in time
this statement represents a summary of information provided in the accounts, and is effectively a listing of the balances in all of the detailed accounts-this is where the term "balance sheet"comes from
definations
assets
characteristics
a probable future economic benefit
the business has an exclusive right to control the benefit
the asset must be capable of reliable measurement in monetary term
the benefit must arise from some past transaction or event
tangible and intangible
tangible asset: have a real, physical substance
intangible assets:assets that have no physical substance but still represent potential benefits
inventory,plant,equipment
copyright,trademark,patent,franchise,goodwill
claims
liabilities
owners' equity
represent the claims of individuals and organisations, apart from those of the owner(s), which have arisen from past transactions or events, such as supplying goods and services or lending money to the business
accounts payable, bank overdrafts, personal loans, mortgages and provisions for warranty,long-service leave, holiday pay, taxation
different kinds of liabilities
legal claims by external parties/the provision of goods and services
provisions
an estimated liability for which there is greater uncertainty regarding the amount or timing of the amount than for a normal liability
income tax, long-service leave, warranties
contingent liability
a potential liability that might arise in the event of a particular event occurring. It will become a liability contingent on that event happening
equity/capital
the claim of the owners on the assets of the business
the share of the business which represents the owner's interests
The Accounting Equation assets=owners' equity+ liabilities
Assets at the end of the period= Owners' equity at the beginning+ profit(or - loss)+liabilities at the end of the period
Assets at the end of the period= Owners' equity at the beginning+ profit(or - loss)+(or -)other owners' equity changes+liabilities at the end of the period
The Balance Sheet (Statement of Financial Position)
definition
is a financial statement that details the entity’s assets, liabilities and equity as at a particular point in time — the end of the reporting period
• Commonly 30th June in Australia/New Zealand
It shows
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• what the entity owns (or controls) as at a particular date ‐ the assets
• the external claims on the entity’s assets — the liabilities (owe)
• the internal claim on the entity’s assets — the equity (owners)
What can the Balance Sheet tell us?
• What has the entity invested in? Types of assets e.g. inventory
• How much cash does it have and how much in the short term does it owe?
• About the assets which can be readily converted to cash and how it compares to the short term cash demands – liquidity
• Use of liabilities (external) relative to equity (internal) to finance assets
• Types and terms of liabilities
• Sources of equity
• And more
claim
external claims
internal claims
liabilities
owners' equity, equity or capital
Recognition criteria
o probable that an outflow will occur
o capable of reliable measurement in monetary terms
Provision准备金
Contingent liability或有负债
Estimated liability, greater uncertainty regarding the amount or timing of the amount than for a normal liability
• Potential liability that might arise if a particular event occurs
• Not recognised in financial position until the event actually occurs
definition
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• Represents the claim of the owner(s) against the business
• Defined as ‘residual interest in the assets of the entity after deducting all its liabilities’
Typically three categories
Owners’ equity
Retained profit (retained earnings)
Other reserves
assets
non-current assets
current assets
characters
• they are held for sale or consumption during the business’s normal operating cycle
• they are expected to be sold within the next year
• they are held principally for trading, and/or
• they are cash, or near‐cash (such as easily marketable, short term investments)
examples
• cash at bank
• accounts receivable (aka debtors)
• inventory (aka stock)
• Supplies (i.e. consumables)
• short‐term investments
examples
• fixtures and fittings
• office equipment
• motor vehicles
• property, land
• plant and equipment
• goodwill
• patents, trademarks
Classification of Liabilities
current liabilities
non-current liabilities
characters
• they are expected to be settled within the business’s normal operating cycle
• they are held principally for trading purposes
• they are due to be settled within a year after the date of the relevant statement of financial position, and/or
• there is no right to defer settlement beyond a year after the date of the relevant statement of financial position
examples
• accounts payable (aka creditors)
• bank overdraft
• bank loan (repayable within 12 months)
• revenue received in advance (e.g. subscriptions)
• staff leave & bonus entitlements
• provisions for owners’ distributions, tax payable
examples
• mortgage loan
• long‐term loans
• long‐service leave entitlements
• warranty provisions
Measurement of assets and liabilities
carrying amount/ book value
The dollar value assigned to assets and liabilities is called their
carrying amount or book value
Alternative measurement systems include:
– Historical cost; i.e., original cost
– Current cost (cost of replacing the item)
– Market value (expected cash from selling the item)
– Present value (sum of DCF)
So how do we know what measure to use?
• No universally accepted answer
• Financial information is a balance between reliability and relevance to decision making
• Although it is common to leave assets at their cost price (or cost price adjusted for depreciation), entities are also permitted (and sometimes required) to revalue certain items to fair value
Valuing Non‐Current Assets (NCAs)
Fair value公允价值
• An alternative method for recording non‐current assets, provided fair value can be reliably estimated
• Fair value means the current market value (i.e. the exchange value in an arm’s length transaction)
Impairment of assets减值准备
• Where an asset suffers a fall in value, meaning its carrying amount is higher than the amount that could be recovered from continued use or sale
• Could be caused by changes in market conditions, technological obsolescence
• Fall in value written off as a loss
• Impairment also applies to current assets such as inventories
Non‐current assets have lives that are either finite有限的 or indefinite无限的
Non‐current assets with finite lives
Non‐current assets with indefinite lives
As these assets are used up over time, their cost is recognised as an expense in each period
tangible asset: ‐ “depreciation” expense 折旧
Intangible asset: ‐ “amortisation” expense 摊销
Assets not used up over time so not subject to routine annual depreciation over time
Disclosure
Information that doesn’t satisfy recognition and reliability criteria may be disclosed in the Notes to the Accounts (e.g. pending legal action).
Notes to the accounts
– Purpose is to explain, provide more information to clarify figures in the financial statements
– Specify accounting policies chosen
– Provide more detailed data
Accounting Data Classifications
• Assets – resources of the business
• Liabilities – what the business owes or others have claim to
• Equity – what the owners own or have rights to
• Income – money/value earned
• Expenses – value/resources consumed
Recognising business transactions
• Business transactions are occurrences that affect the assets, liabilities and equity of an entity
• A business transaction is recorded when it can be reliably measured in monetary terms
• Evidenced by, for example, receipts收据, invoices发票, purchase orders采购订单, cheque butts 支票根etc
The concept of duality
Every business transaction has a dual effect 双重影响
Every transaction affects the accounting equation in such a way that the equation remains in balance
Business transactions are analysed by examining
– the dual effect of each business transaction
– the impact on the accounting equation
The Effect of Trading Operations on the
Statement of Financial Position
Trading introduces additional transactions to the statement of financial position
The profit earned over a period of time increases the equity at the end of the period
i.e. assuming no drawings or new contributions
equity at end of year = equity at start of year + profit
Therefore
ASSETS = LIABILITIES + OPENING EQUITY + INCOME – EXPENSES
– “Opening” equity means the equity at the beginning of the period
When there are drawings or new contributions:
Drawings
Dividends 股息
Contributions
the sole trader or partner withdraws capital from the business
capital is returned to shareholders
sole trader or partner invests more capital
company issues more shares in exchange for money from shareholders
Assets = Liabilities + Opening Equity + Income – Expenses + Contributions – Drawings/Dividends
Recording of transactions
smaller businesses
An accounting worksheet is a means of recording business transactions
Larger businesses
• Use journals 日记账 to record individual transactions
• Use ledgers 分类账 (a system of accounts) to track the effect of transactions on the balance of accounts
• Journals and Ledgers use debits (Dr)借方 and credits (Cr)贷方
Two basic choices
Horizontal format: ‘T account’ format
Vertical format: ‘narrative’ format
current assets + non-current assets = current liabilities + non-current liabilities + owners' equity
entity approach
proprietary approach
current assets + non-current assets = current liabilities + non-current liabilities + owners' equity
current assets + non-current assets - current liabilities - non-current liabilities = owners' equity
Two most significant influences:
- Traditional accounting conventions and doctrines that have underpinned accounting practice for decades 传统的会计惯例和学说数十年来一直支持会计实务
- Continued development of professional and statutory accounting standards
Accounting Conventions 会计惯例
Business entity convention财务报表按营业单位编制的惯例
Historic cost convention实际成本惯例
Prudence convention审慎性惯例
Going concern (continuity) convention持续经营惯例
For accounting purposes, the business and its owner(s) are treated as separate and distinct
Assets should be recorded at their historic (acquisition) cost or equivalent
Holds that caution should be exercised when making accounting judgements; often means anticipating losses but only recognising realised profits
Assumption that the business will continue operations for the foreseeable future, i.e. no intention or need to liquidate the business
Dual aspect convention 复式记账惯例
Money measurement convention 货币计价惯例
Stable monetary unit convention 稳定货币单位惯例
Each transaction has two aspects and each aspect must be recorded in the financial statements
Accounting should only deal with those items which are capable of being expressed in monetary terms
Money, the unit of measurement, will not change in value over time
Usefulness of the Statement of Financial Position
• Provides insights about how the business is financed and how its funds are deployed
• Provides insights into the liquidity of the business
• Can provide a basis for assessing the value of the business
• Provides insights into the ‘mix’ of assets held by the business
• Performance can be assessed against amount of investment
Deficiencies & Limitations: Why accounting numbers can’t be taken at face value:
• Information relevant to your opinion of the business may not be captured by accounting (e.g. does not satisfy definition & recognition criteria, e.g. leased property and equipment)
• ‘stable monetary unit’ may not be true, e.g. assets valued in 2000 may be added to assets valued in 2015
• Asset values may be measured in various ways: e.g. at fair value, or historic cost
• Costs recognised as ‘expense’ or ‘asset’, e.g. advertising, repairs
• Accountants may choose between a range of accounting policies, e.g. methods of depreciating equipment, estimating bad debts, valuing inventory
• Accounting numbers may depend on estimations, e.g. useful life and residual value, % debts unrecoverable, impairments, realisable value (inventory)