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Presentation of financial statements (Financial statements categorise the…
Presentation of financial statements
Business are set up primarily to make a profit
A business raises funds from its owners (in the form of equity) and if necessary debt form banks and others. If the business is carried out through a company, the equity is usually in the form of shares; anyone lending to the business will usually have the right to be paid back from the equity holders and so they carry the ultimate risk of the business' failure
The business uses the funds to purchase resources to run the business, including tangible and intangible assets but also tome ploy people to work in it.
Employees are an asset in the boards sense of the work but they are not classed as assets for accounting purposes as the business does not control or own them
The business carries out the activity that generates profits and cash flows. These are then used to service debt and equity holders by paying them interest and dividends and ultimately repay them and to reinvest in the business to replace assets and where the business is successful to grow the business
Financial statements are a structured representation of the financial position at a particular point in time and performance over a period of time of an entity.
The purpose of financial statements is to provide owners and other stakeholders with information on the financial position, financial performance and cash flows of the entity in which they have an interest
As information reported in financial statements is a highly aggregated summary of a substantial number of transactions, it is important that the financial statements are presented in such a manner that they are understandable and comparable with those of other entities
Financial statements also reflect the stewardship of the management team who run the business and have control of the underlying assets; they are held to account for the use they have made of the resources they have
Financial statements categorise the information presented into the following elements
Assets
Liabilities
Equity
Income and expenses (including gains and losses)
Other changes in equity (Contributions by and distributions to owners)
Cash flows
The main standard dealing with this is IAS 1 Financial Statement Presentation. This is an important standard as it sets the overall objective for the preparation of financial statements, outlines the main statements required and how they are presented as well as dealing with some important principles that apply across financial reporting
Presentation under IAS 1
An entity must present a complete set of financial statements including prior period comparative information on at least an annual basis
A complete set of financial statements would include the following components which should be given equal prominence within the annual report
Statement of financial position as at the reporting date
Statement of comprehensive income for the period
Statement of changes in equity for the period
Cash flow statement
Notes (comprising a summary of significant accounting policies and other explanatory notes)