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Financial Reporting L7&L8 16-17/10/17 :<3: (Recognition of expenses…
Financial Reporting L7&L8 16-17/10/17 :<3:
The income statement / profit and lost account
a summary of performance over a period
summarises the results of all transactions (economic activity)
influenced by accounting policies -> changing owners' interest
Measuring income
balance sheet approach: the difference in value between two points in time Y1 = Vt1 - Vt0 (comprehensive income)
net change doesn't show how earned
problems in measuring value
not all value changes are realised
profit calculated by matching related revenues and expenses: Income = R - E, Transactions -> Income Statement -> Owners' Interest
IFRS involve a mixture of historic cost measures and recogniton of changes in fair values
Recognition of revenue
open for business 2. buy or male stock 3. customer buys 4. customer pays
recognise at stage 3
when the performance obligation is satisfied
i.e. when revenue is earned irrespective of when paid when collectability is reasonably certain
the difference between accounting flow and cash flow :star::star:
reflected in the link between sales revenue and debtors
period sales = + opening receivables - closing receivables = cash received
Pacioli's revenue transactions
Recognition of expenses
principle of matching
certain assets are used in a different period from when acquired -> allocations of costs
period costs: if full benefits of expenditure arise in period incured = EXPENSE (recognition of accruals and prepayment)
period (expense) = paid in year + closing (balance) - opening (balance)
accruals - cost not yet paid for
prepayment - cost paid in advance
expensing assets
allocating(amortising) the expenditure associated with assets as expenses in more than one period
non-current/ long-lived assets - benefit in more than one period
need a basis for allocating the expenditure across periods
depreciation
expenses recognised depends on: cost(C)/ life(N)/ scrap of residual value(S)/ depreciation method - straight line method: D = (C - S) / N
current assets - inventory bought/ produced for resale - matching sale with cost of slaes
taking account of trading assets/inventory and the cost of sales (to match with sales revenue)
inventory may be held from period to period
accounting treatment - matching sales revenue to related cost of inventory sold
increase assets by: cost of inventory purchased <plus cost of adapting for sale>
when sold, transfer cost to the income statement
costs of sales - general basis: costs of sales = opening stock + purchases (or production) - closing stock
structure for the income statement
less cost of sales = gross profit
less administrative expenses =
less finance costs = profit before tax
less taxation expense = net profit
ASSIGNMENT!!!!