Conceptual framework (Chapter 2, 3 and 4)
Qualitative characteristics of useful financial information
Fundamental (primary / minimum requirements)
Enhancing (secondary - not primary requirements)
Relevance
Faithful representation
Verifiability
Timeeliness
Comparability
Understandability
Confirming value
Neutrality (impartial)
Information is useful if it is comparable with other entities, or similar information of the same entity for another period or another date
Having information available to decision makers in time to be capable of influencing their decisions
Classifying, characterizing and presenting information clearly and concisely makes it understandable
Verification can be direct (counting cash) or indirect (checking the input formula and recalculating the outputs)
Can influence users' economic decisions:
-Predictive value - can be used as an input to processes employed by users to predict future outcomes
-Confirming value - provides feedback about previous evaluations
Predictive value
Freedom from material error - description and process to produce information
Completeness (all necessary information)
Materiality - Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity
Don't confuse with uniformity, uniformity helps to achieve comparability
Verifiability helps assure users that information faithfully represents the economic phenomena it shows to represent. It means that different knowledgeable and independent observers could reach consensus
Include inherently complex information, otherwise reports will be incomplete and potentially misleading
Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently
Perspective adopted financial statements
Going concern
Definition of an asset
Definition of equity
Definition of a liability
Elements of financial statements
Provide information about transactions, other events viewed from perspective of reporting entity as a whole - not from perspective of any particular group of entity's investors, lenders, creditors
F/S prepared on assumption of going concern, continue in operation for foreseeable future
Assets, liabilities and equity, which relate to the reporting entity's financial position
Income and expenses, which relate to the reporting entity's financial performance
As a result of a past event
An economic resource is a right
Controlled by the entity
That has the potential to produce economic benefits
An asset is a present economic resource
Classification - Machine
1) Write down the definition of an asset
2) Economic resource - Business must be able to use it
-Machine used by the entity to manufacture
3) Control - legal ownership and substance
-In substance I am the owner, but legally i am not
-The entity is the legal owner of the machine
Past event (date)
-On 1 January 2020 I got control over the machine
Has the potential to produce economic benefit
-We use it to produce inventory, so the economic benefit will be the sale of inventory - income
To transfer an economic resource
As a result of a past event
A liability is a present obligation of the entity
Classification - loan
1) Write down the definition
2) Present obligation (you will need to pay it sometime)
-To repay the loan toward the bank
3) Transfer of economic resource
-Repayment of my loan will result in an outflow of assets
4) Past event (date)
-Date I receive the money from the bank is the past event (20 January 2020)
Definition of an income
Definition of expenses
Equity is the residual interest in the assets of an entity after deducting all its liabilities
Or decreases in liabilities
That result in increases in equity, other than those relating to contributions from holders of equity claims
Income is increases in assets
Classification - sales
1) Definition of income
2) Increases my bank account; therefore increases my income
3) Retained earnings increased which is an equity
4) Things the owners give to the business is not part of income
Or increases in liabilities
That result in decreases in equity, other than those relating to distributions to holders of equity claims
Expenses are decreases in assets
Classification - electricity
1) Definition of the expense
2) Decreases my bank account, therefore decreases my income
3) Retained earnings decreased which is an equity
4) Payment of an expense