Financial accountancy Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers,banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.  The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents’ performance and reporting the results to interested users.
Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Management accountingprovides accounting information to help managers make decisions to manage the business. In short, Financial Accounting is the process of summarizing financial data taken from an organization’s accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization. Financial accountancy is governed by both local and international accounting standards.
Basic accounting concepts Financial accountants produce financial statements based on Generally Accepted Accounting Principles of a respective country. Financial accounting serves following purposes: ?producing general purpose financial statements ?provision of information used by management of a business entity for decision making, planning and performance evaluation ? for meeting regulatory requirements Graphic definition The accounting equation (Assets = Liabilities + Owners’ Equity) and financial statements are the main topics of financial accounting.
The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders or owners’ equity of the company on the date the accounts were prepared to…
Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them), remember the word AWED which represents the first letter of each type of account. Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them). 0 = Dr Assets Cr Owners’ Equity Cr Liabilities . _____________________________/\____________________________ . . / Cr Retained Earnings (profit) Cr Common Stock . _________________/\_______________________________ Cr Revenue . . \________________________/ \______________________________________________________/ increased by debits increased by credits Crediting a credit Thus ————————-> account increases its absolute value (balance) Debiting a debit Debiting a credit Thus ————————-> account decreases its absolute value (balance) Crediting a debit
When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract. Related qualification ?There are several related professional qualifications in the field of financial accountancy including: ? Qualified Accountant qualifications (Chartered Certified Accountant (ACCA), Chartered Accountant (CA) and Certified Public Accountant (CPA)) ?
CCA Chartered Cost Accountant (cost control) designation offered by the American Academy of Financial Management Accountancy Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers.  The communication is generally in the financial? s form statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.  Accountancy is a branch of mathematical science that is useful in discovering the causes of success and failure in business.
The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing.  Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. “ Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in the Middle East.
The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.  Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest.
The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information.  This development resulted in a split of accounting systems for internal (i. e. management accounting) and external (i. e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts byauditors.  Today, accounting is called “the language of business” because it is the vehicle for reporting financial nformation about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accountingand provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, andgovernment agencies.
Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.  Luca Pacioli and double-entry bookkeeping Main articles: Luca Pacioli and Double-entry bookkeeping system Bartering was the dominant practice for traveling merchants during the Middle Ages. When medieval Europe moved to a monetary economyin the 13th century, sedentary merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans.
One important breakthrough took place around that time: the introduction of double-entry bookkeeping, which is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form.  The historical origin of the use of the words ‘debit’ and ‘credit’ in accounting goes back to the days of single-entry bookkeeping in which the chief objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors. Debit,’ is Latin for ‘he owes’ and ‘credit’ Latin for ‘he trusts’.  The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300.  Giovanno Farolfi & Company were a firm ofFlorentine merchants whose head office was in Nimes who also acted as moneylenders to Archbishop of Arles, their most important customer.  The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer’s) accounts of the city ofGenoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains alances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.  Pacioli’s portrait, a painting by Jacopo de’ Barbari, 1495, (Museo di Capodimonte). The open book to which he is pointing may be his Summa de Arithmetica, Geometria, Proportioni et Proportionalita.  Luca Pacioli’s “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” (Italian: “Review of Arithmetic, Geometry, Ratio and Proportion”) was first printed and published inVenice in 1494.
It included a 27-page treatise on bookkeeping, “Particularis de Computis et Scripturis” (Italian: “Details of Calculation and Recording”). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice.
In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra.  Although Luca Pacioli did not invent double-entry bookkeeping, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today. 37] Even though Pacioli’s treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in vernacular Italian language, and it was a printed book.  According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others.
Three major books of account are at the direct basis of this system: the memoriale(Italian: memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.  Pacioli’s treatise gave instructions in how to record barter transactions and transactions in a variety of currencies – both being far more commonplace than they are today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described.
Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurate inventory.  The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation.
One of its social effects was to proclaim the honesty of merchants as a group; one of itsepistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system’s precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well.
Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.  Post-Pacioli The spread of the Italian accounting rules over the rest of Europe and thence further afield, was the result of treatises, some of them strongly based on Pacioli’s work, describing and explaining the system and its practice. The “Quaderno doppio” (trans. Double-entry Ledger, Venice, 1534) of Domenico Manzoni da Oderzo was one of the first reproductions of Pacioli’s “Particularis de Computis et Scripturis”.
This work, important because of elaborate examples, was very popular and widespread among merchants: it enjoyed no less than seven editions between 1534 and 1574. Other books that are directly or indirectly based on Pacioli’s work are Hugh Oldcastle’s “A Profitable Treatyce called the Instrument or Boke to learne to knowe the good order of the kepyng of the famous reconynge called in Latyn, Dare and Habere, and in Englyshe, Debitor and Creditor” (London, 1543), a translation of Pacioli’s treatise, and Wolfgang
Schweicker’s “Zwifach Buchhalten” (trans. Double-entry bookkeeping, Neurenberg, 1549), a translation of the “Quaderno doppio”.  It was the Dutch mathematician Simon Stevin who persuaded merchants to make it a rule to summarize accounts at the end of every year in a chapter entitled Coopmansbouckhouding op de Italiaensche wyse (Dutch: “Commercial Book-keeping in the Italian Way”) of hisWisconstigheg hedachtenissen (Dutch: “Mathematical memoirs”, Leiden, 1605–08).
Although the balance sheet he required every enterprise to prepare every year was based on entries of the ledger, it was prepared separately from the major books of account. The oldest semi-public balance sheet recorded was that of the East India Company dated 30 April 1671, which was submitted to the company’s General Meeting on in 30 August 1671. The publication and audit of the balance sheet was still a rarity in England until the passing of the Bank Charter Act 1844. 43] In 1863, the Dowlais Iron Company had receovered from a business slump, but had no cash to invest for a new blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory. This new financial statement was the genesis of Cash Flow Statement that is used today.  Between the publication of Pacioli’s “Particularis de Computis et Scripturis” and the 19th century, there were few other changes in accounting theory.
There was a general theoretical consensus that the double-entry method was superior because it could solve so many accounting problems simultaneously, but despite this consensus, accounting practices were remarkably varied, and merchants in the 16th and 17thcenturies seldom maintained the high standards of the double-entry method. The application of double entry bookkeeping varied across countries, industries, and individual firms, depending in part on its audience.
This audience shifted in general from sole proprietorship alone to a larger more dispersed group of partnership, coinvestors, shareholders, and even eventually the state, as capitalism became more sophisticated.  In the Ottoman Empire, which at its peak ruled over Anatolia, Middle East, North Africa, the Balkans and parts of Eastern Europe, themerdiban (Persian: ladder or stairs) accounting system that had been adopted from the Ilkhanate in the 14th century was used for 500 years until the end of the 19th century. 46] Both the Ilkhanians and the Ottomans used siyakat script (from the Arabic siyak, to lead or herd), which was stenographic writing style of Arabic used only in official documents which prevented ordinary people from reading important state correspondence.  The title for each entry is given by extending the last letter of the first word in a straight line, so that the lines between successive entries would be laid out in the style of steps of a ladder.  Permission to replace the merdiban accounting system with double-entry accounting was given by Sultan Abdulhamid II to the Ministry of Finance in 1880. 49] Accounting scandals Main article: Accounting scandals The year 2001 witnessed a series of financial information frauds involving Enron Corporation, auditing firm Arthur Andersen, the telecommunications company WorldCom, Qwest and Sunbeam, among other well-known corporations. These problems highlighted the need to review the effectiveness of accounting standards, auditing regulations and corporate governance principles. In some cases, management manipulated the figures shown in financial reports to indicate a better economic performance.
In others, tax and regulatory incentives encouraged over-leveraging of companies and decisions to bear extraordinary and unjustified risk.  The Enron scandal deeply influenced the development of new regulations to improve the reliability of financial reporting, and increased public awareness about the importance of having accounting standards that show the financial reality of companies and the objectivity and independence of auditing firms.  In addition to being the largest bankruptcy reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure. 51]The scandal caused the dissolution of Arthur Andersen, which at the time was one of the five largest accounting firms in the world. It involved a financial scandal of Enron Corporation and their auditors Arthur Andersen, which was revealed in late 2001. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron filed for Chapter 11 bankruptcy protection in December 2001.  One consequence of these events was the passage of Sarbanes-Oxley Act in 2002, as a result of the first admissions of fraudulent behavior made by Enron.
The act significantly raises criminal penalties for securities fraud, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders.  Financial statement A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants.
For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements: 1. Balance sheet: also referred to as statement of financial position or condition, reports on a company’s assets, liabilities, and Ownership equity at a given point in time. 2. Income statement: also referred to as Profit and Loss statement (or a “P&L”), reports on a company’s income, expenses, and profits over a period of time.
Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. 3. Statement of retained earnings: explains the changes in a company’s retained earnings over the reporting period. 4. Statement of cash flows: reports on a company’s cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements are often complex and may include an extensive set ofnotes to the financial statements and management discussion and analysis.
The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements. Contents [hide] •1 Purpose of financial statements by business entities •2 Government financial statements •3 Financial statements of non-profit organizations •4 Personal financial statements •5 Audit and legal implications •6 Standards and regulations •7 Inclusion in annual reports •8 Moving to electronic financial statements 9 References •10 See also •11 External links Purpose of financial statements by business entities “The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. “ Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization’s financial position.
Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. “ Financial statements may be used by users for different purposes: ? Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures.
These statements are also used as part of management’s annual report to the stockholders. ?Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unionsor for individuals in discussing their compensation, promotion and rankings. ?Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures. ?Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company. ?Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business. ?Media and the general public are also interested in financial statements for a variety of reasons. edit]Government financial statements See also: Fund accounting The rules for the recording, measurement and presentation of government financial statements may be different from those required for business and even for non-profit organizations. They may use either of two accounting methods: accrual accounting, or cash accounting, or a combination of the two (OCBOA). A complete set of chart of accounts is also used that is substantially different from the chart of a profit-oriented business Financial statements of non-profit organizations
The financial statements of non-profit organizations that publish financial statements, such as charitable organizations and large voluntary associations, tend to be simpler than those of for-profit corporations. Often they consist of just a balance sheet and a “statement of activities” (listing income and expenses) similar to the “Profit and Loss statement” of a for-profit. Personal financial statements Personal financial statements may be required from persons applying for a personal loan or financial aid.
Typically, a personal financial statement consists of a single form for reporting personally held assets and liabilities (debts), or personal sources of income and expenses, or both. The form to be filled out is determined by the organization supplying the loan or aid. Audit and legal implications Although laws differ from country to country, an audit of the financial statements of a public company is usually required for investment, financing, and tax purposes. These are usually performed by independent accountants or auditing firms.
Results of the audit are summarized in an audit report that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy. The audit opinion on the financial statements is usually included in the annual report. There has been much legal debate over who an auditor is liable to. Since audit reports tend to be addressed to the current shareholders, it is commonly thought that they owe a legal duty of care to them. But this may not be the case as determined by common law precedent.
In Canada, auditors are liable only to investors using a prospectus to buy shares in the primary market. In the United Kingdom, they have been held liable to potential investors when the auditor was aware of the potential investor and how they would use the information in the financial statements. Nowadays auditors tend to include in their report liability restricting language, discouraging anyone other than the addressees of their report from relying on it. Liability is an important issue: in the UK, for example, auditors have unlimited liability.
In the United States, especially in the post-Enron era there has been substantial concern about the accuracy of financial statements. Corporate officers (the chief executive officer (CEO) and chief financial officer (CFO)) are personally liable for attesting that financial statements “do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by th[e] report. Making or certifying misleading financial statements exposes the people involved to substantial civil and criminal liability. For example Bernie Ebbers (former CEO of WorldCom) was sentenced to 25 years in federal prison for allowing WorldCom’s revenues to be overstated by $11 billion over five years. Standards and regulations Different countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used.
Commonly referred to as Generally Accepted Accounting Principles (GAAP), these set of guidelines provide the basis in the preparation of financial statements. Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board (“IASB”). IASB develops International Financial Reporting Standards that have been adopted by Australia, Canada and the European Union (for publicly quoted companies only), are under consideration in South Africa and other countries.
The United States Financial Accounting Standards Board has made a commitment to converge the U. S. GAAP and IFRS over time. Inclusion in annual reports To entice new investors, most public companies assemble their financial statements on fine paper with pleasing graphics and photos in anannual report to shareholders, attempting to capture the excitement and culture of the organization in a “marketing brochure” of sorts. Usually the company’s chief executive will write a letter to shareholders, describing management’s performance and the company’s financial highlights.
In the United States, prior to the advent of the internet, the annual report was considered the most effective way for corporations to communicate with individual shareholders. Blue chip companies went to great expense to produce and mail out attractive annual reports to every shareholder. The annual report was often prepared in the style of a coffee table book. Moving to electronic financial statements Financial statements have been created on paper for hundreds of years. The growth of the Web has seen more and more financial statements created in an electronic form which is exchangable over the Web.
Common forms of electronic financial statements are PDF and HTML. These types of electronic financial statements have their drawbacks in that it still takes a human to read the information in order to reuse the information contained in a financial statement. More recently a market driven global standard, XBRL (Extensible Business Reporting Language), which can be used for creating financial statements in a structured and computer readable format, has become more popular as a format for creating financial statements.
Many regulators around the world such as the U. S. Securities and Exchange Commission have mandated XBRL for the submission of financial information. The UN/CEFACT created, with respect to Generally Accepted Accounting Principles, (GAAP), internal or external financial reporting XMLmessages to be used between enterprises and their partners, such as private interested parties (e. g. bank) and public collecting bodies (e. g. taxation authorities). Many regulators use such messages to collect financial and economic information. Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets,liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a “snapshot of a company’s financial condition”. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business’ calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity.
The main categories of assets are usually listed first, and typically in order of liquidity.  Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to theaccounting equation, net worth must equal assets minus liabilities.  Another way to look at the same equation is that assets equals liabilities plus owner’s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner’s money (owner’s equity).
Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections “balancing. ” Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system. A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment.
In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities. Public Business Entities balance sheet structure Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee (now International Accounting Standards Board) and numerous country-specific organizations.
Balance sheet account names and usage depend on the organization’s country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses.  If applicable to the business, summary values for the following items should be included in the balance sheet: Assets Current assets 1. Cash and cash equivalents 2. Inventories 3. Accounts receivable 4. Prepaid expenses for future services that will be used within a year Non-current assets (Fixed assets) 1. Property, plant and equipment . Investment property, such as real estate held for investment purposes 3. Intangible assets 4. Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents) 5. Investments accounted for using the equity method 6. Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.  Liabilities 1. Accounts payable 2.
Provisions for warranties or court decisions 3. Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds 4. Liabilities and assets for current tax 5. Deferred tax liabilities and deferred tax assets 6. Unearned revenue for services paid for by customers but not yet provided Equity The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders’ equity. It comprises: 1. Issued capital and reserves attributable to equity holders of the parent company (controlling interest) 2.
Non-controlling interest in equity Formally, shareholders’ equity is part of the company’s liabilities: they are funds “owing” to shareholders (after payment of all other liabilities); usually, however, “liabilities” is used in the more restrictive sense of liabilities excluding shareholders’ equity. The balance of assets and liabilities (including shareholders’ equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping.
In this sense, shareholders’ equity by construction must equal assets minus liabilities, and are a residual. Regarding the items in equity section, the following disclosures are required: 1. Numbers of shares authorized, issued and fully paid, and issued but not fully paid 2. Par value of shares 3. Reconciliation of shares outstanding at the beginning and the end of the period 4. Description of rights, preferences, and restrictions of shares 5. Treasury shares, including shares held by subsidiaries and associates 6. Shares reserved for issuance under options and contracts 7.
A description of the nature and purpose of each reserve within owners’ equity Sample balance sheet The following balance sheet is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of assets, liabilities and equity, but it shows the most usual ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well. Balance Sheet of XYZ, Ltd. As of 31 December 2009 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable (Debtors) Less : Allowances for Doubtful Accounts
Inventories Prepaid Expenses Investment Securities (Held for trading) Other Current Assets Non-Current Assets (Fixed Assets) Property, Plant and Equipment (PPE) Less : Accumulated Depreciation Investment Securities (Available for sale/Held-to-maturity) Investments in Associates Intangible Assets (Patent, Copyright, Trademark, etc. ) Less : Accumulated Amortization Goodwill Other Non-Current Assets, e. g. Deferred Tax Assets, Lease Receivable LIABILITIES and SHAREHOLDERS’ EQUITY LIABILITIES Current Liabilities (Creditors: amounts falling due within one year) Accounts Payable
Current Income Tax Payable Current portion of Loans Payable Short-term Provisions Other Current Liabilities, e. g. Unearned Revenue, Deposits Non-Current Liabilities (Creditors: amounts falling due after more than one year) Loans Payable Issued Debt Securities, e. g. Notes/Bonds Payable Deferred Tax Liabilities Provisions, e. g. Pension Obligations Other Non-Current Liabilities, e. g. Lease Obligations SHAREHOLDERS’ EQUITY Paid-in Capital Share Capital (Ordinary Shares, Preference Shares) Share Premium Less: Treasury Shares Retained Earnings Revaluation Reserve
Accumulated Other Comprehensive Income Non-Controlling Interest Income statement Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company’s financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”).
It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e. g. ,depreciation and amortization of various assets) and taxes.  The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do not produce an income statement.
Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. The income statement can be prepared in one of two methods.  The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line.
The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured. – INCOME STATEMENT BOND LLC – For the year ended DECEMBER 31 2007 € Debit Credit Revenues GROSS PROFIT (including rental income) 496,397 ——– Expenses: ADVERTISING 6,300 BANK & CREDIT CARD FEES 144 BOOKKEEPING 3,350 EMPLOYEES 88,000 ENTERTAINMENT 5,550 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632 PRINTING, POSTAGE & STATIONERY 320 RENT 13,000 RENTAL MORTGAGES AND FEES 74,400 TELEPHONE 1,000 UTILITIES 491 ——– TOTAL EXPENSES (195,512) ——– NET INCOME 300,885 ======== Items on income statement
Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U. S.. Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions. If applicable to the business, summary values for the following items should be included in the income statement: Operating section Revenue – Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. ?Expenses – Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major operations. Cost of Goods Sold (COGS) / Cost of Sales – represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes material costs, direct labour, and overhead costs (as in absorption costing, and excludes operating costs (period costs) such as selling, administrative, advertising or R, etc. ?Selling, General and Administrative expenses (SG or SGA) – consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour. Selling expenses – represent expenses needed to sell products (e. g. salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc. ). ?General and Administrative (G) expenses – represent expenses to manage the business (salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc. ). Depreciation / Amortization – the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement. ?Research & Development (R) expenses – represent expenses included in research and development. Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc. ) or by function (cost of sales, selling, administrative, etc). IAS 1. 99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1. 104) Non-operating section ?Other revenues or gains – revenues and gains from other than primary business activities (e. g. rent, income from patents). It also includes unusual gains that are either unusual or infrequent, but not both (e. g. gain from sale of securities or gain from disposal of fixed assets) ? Other expenses or losses – expenses or losses not related to primary business operations, (e. . foreign exchange loss). ?Finance costs – costs of borrowing from various creditors (e. g. interest expenses, bank charges). ?Income tax expense – sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets). Irregular items They are reported separately because this way users can better predict future cash flows – irregular items most likely will not recur. These are reported net of taxes. ?Discontinued operations is the most common type of irregular items.
Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations must be shown separately. Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO instead of weighted average method.
The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity. All comparative financial statements should be restated. (IAS 8) However, changes in estimates (e. g. estimated useful life of a fixed asset) only requires prospective changes. (IAS 8) No items may be presented in the income statement as extraordinary items. (IAS 1. 87) Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. Note: natural disaster might not qualify depending on location (e. g. frost damage would not qualify in Canada but would in the tropics). ] Additional items may be needed to fairly present the entity’s results of operations. (IAS 1. 85) Disclosures Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including: (IAS 1. 98) ? Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs ?
Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring ? Disposals of items of property, plant and equipment ?Disposals of investments ?Discontinued operations ?Litigation settlements ?Other reversals of provisions Earnings per share Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes. There are two forms of EPS reported: Basic: in this case “weighted average of shares outstanding” includes only actual stocks outstanding. ?Diluted: in this case “weighted average of shares outstanding” is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares are transformed. This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more reliable way to measure EPS. Sample income statement The following income statement is a very brief example prepared in accordance with IFRS.
It does not show all possible kinds of items appeared a firm, but it shows the most usual ones. Please note the difference between IFRS and US GAAP when interpreting the following sample income statements. Fitness Equipment Limited INCOME STATEMENTS (in millions) Year Ended March 31 2009 2008 2007 ———————————————————————————- Revenue $ 14,580. 2 $ 11,900. 4 $ 8,290. 3 Cost of sales (6,740. 2) (5,650. 1) (4,524. ) ————- ———— ———— Gross profit 7,840. 0 6,250. 3 3,766. 1 ————- ———— ———— SGA expenses (3,624. 6) (3,296. 3) (3,034. 0) ————- ———— ———— Operating profit $ 4,215. 4 $ 2,954. 0 $ 732. 1 ————- ———— ————
Gains from disposal of fixed assets 46. 3 – – Interest expense (119. 7) (124. 1) (142. 8) ————- ———— ———— Profit before tax 4,142. 0 2,829. 9 589. 3 ————- ———— ———— Income tax expense (1,656. 8) (1,132. 0) (235. 7) ————- ———— ———— Profit (or loss) for the year $ 2,485. $ 1,697. 9 $ 353. 6 ============= ============ ============ DEXTERITY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions) Year Ended December 31 2009 2008 2007 ———————————————————————————————- Revenue $ 36,525. 9 $ 29,827. 6 $ 21,186. 8 Cost of sales (18,545. ) (15,858. 8) (11,745. 5) ———– ———– ———— Gross profit 17,980. 1 13,968. 8 9,441. 3 ———– ———– ———— Operating expenses: Selling, general and administrative expenses (4,142. 1) (3,732. 3) (3,498. 6) Depreciation (602. 4) (584. 5) (562. 3) Amortization (209. 9) (141. ) (111. 8) Impairment loss (17,997. 1) — — ———– ———– ———— Total operating expenses (22,951. 8) (4,458. 7) (4,172. 7) ———– ———– ———— Operating loss (or profit) $ (4,971. 7) $ 9,510. 1 $ 5,268. 6 ———– ———– ———— Interest income 25. 11. 7 12. 0 Interest expense (718. 9) (742. 9) (799. 1) ———– ———– ———— Loss (or profit) from continuing operations before tax, share of profit (or loss) from associates and non-controlling interest $ (5,665. 3) $ 8,778. 9 $ 4,481. 5 ———– ———– ———— Income tax expense (1,678. 6) (3,510. ) (1,789. 9) Loss (or profit) from associates, net of tax (20. 8) 0. 1 (37. 3) Loss (or profit) from non-controlling interest, net of tax (5. 1) (4. 7) (3. 3) ———– ———– ———— Loss (or profit) from continuing operations $ (7,369. 8) $ 5,263. 8 $ 2,651. 0 ———– ———– ———— Loss (or profit) from discontinued operations, et of tax (1,090. 3) (802. 4) 164. 6 ———– ———– ———— Loss (or profit) for the year $ (8,460. 1) $ 4,461. 4 $ 2,815. 6 =========== =========== ============ Bottom line “Bottom line” is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called “bottom line. It is important to investors as it represents the profit for the year attributable to the shareholders. After revision to IAS 1 in 2003, the Standard is now using profit or loss rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement. Requirements of IFRS On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1: Presentation of Financial Statements, which is effective for annual periods beginning on or after 1 January 2009. A business entity adopting IFRS must include: a Statement of Comprehensive Income or ?two separate statements comprising: 1. an Income Statement displaying components of profit or loss and 2. a Statement of Comprehensive Income that begins with profit or loss (bottom line of the income statement) and displays the items of other comprehensive income for the reporting period. (IAS1. 81) All non-owner changes in equity (i. e. comprehensive income ) shall be presented in either in the statement of comprehensive income (or in a separate income statement and a statement of comprehensive income).
Components of comprehensive income may not be presented in thestatement of changes in equity. Comprehensive income for a period includes profit or loss (net income) for that period and other comprehensive income recognised in that period. All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. (IAS 1. 88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. IAS 1. 89) Items and disclosures The statement of comprehensive income should include: (IAS 1. 82) 1. Revenue 2. Finance costs (including interest expenses) 3. Share of the profit or loss of associates and joint ventures accounted for using the equity method 4. Tax expense 5. A single amount comprising the total of (1) the post-tax profit or loss of discontinued operations and (2) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation 6. Profit or loss 7.
Each component of other comprehensive income classified by nature 8. Share of the other comprehensive income of associates and joint ventures accounted for using the equity method 9. Total comprehensive income The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1. 83) ? Profit or loss for the period attributable to non-controlling interests and owners of the parent ? Total comprehensive income attributable to non-controlling interests and owners of the parent Statement of retained earnings
The Statement of Retained Earnings (also known as Equity Statement, Statement of Owner’s Equity for a single proprietorship, Statement of Partner’s Equity for partnership, and Statement of Retained Earnings and Stockholders’ Equity for corporation) is one of the basic financial statements as per Generally Accepted Accounting Principles, and it explains the changes in a company’s retained earnings over the reporting period. It breaks down changes affecting the account, such as profits or losses from operations, dividends paid, and any other items charged or credited to retained earnings
Cash flow statement In financial accounting, a cash flow statement, also known as statement of cash flows orfunds flow statement, is a financial statement that shows how changes in balance sheetaccounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. 1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is theInternational Accounting Standard that deals with cash flow statements. People and groups interested in cash flow statements include: ? Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses ? Potential lenders or creditors, who want a clear picture of a company’s ability to repay ?
Potential investors, who need to judge whether the company is financially sound ? Potential employees or contractors, who need to know whether the company will be able to afford compensation ? Shareholders of the business. Purpose Statement of Cash Flow – Simple Example for the period 01/01/2006 to 12/31/2006 Cash flow from operations$4,000 Cash flow from investing$(1,000) Cash flow from financing$(2,000) Net cash flow$1,000 Parentheses indicate negative values The cash flow statement was previously known as the flow of funds statement.  The cash flow statement reflects a firm’s liquidity.
The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few. 3] The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reported in footnotes. The cash flow statement is intended to 1. provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances 2. provide additional information for evaluating changes in assets, liabilities and equity 3. improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods 4. ndicate the amount, timing and probability of future cash flows The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets. Cash flow activities The cash flow statement is partitioned into three segments, namely: cash flow resulting from operating activities, cash flow resulting from investing activities, and cash flow resulting from financing activities. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow. edit]Operating activities Operating activities include the production, sales and delivery of the company’s product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. Under IAS 7, operating cash flows include: ?Receipts from the sale of goods or services ?Receipts for the sale of loans, debt or equity instruments in a trading portfolio ? Interest received on loans ?Dividends received on equity securities ?Payments to suppliers for goods and services ?Payments to employees or on behalf of employees Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP) Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include: ? Depreciation (loss of tangible asset value over time) ?Deferred tax ?Amortization (loss of intangible asset value over time) ?Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section. unrealized gains/losses are also added back from the income statement) Investing activities Examples of Investing activities are ?Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc. ) ? Loans made to suppliers or received from customers ?Payments related to mergers and acquisitions Financing activities Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income.
Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement. Under IAS 7, ?Proceeds from issuing short-term or long-term debt ?Payments of dividends ?Payments for repurchase of company shares ?Repayment of debt principal, including capital leases ?For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes Items under the financing activities section include: ?Dividends paid ?Sale or repurchase of the company’s stock Net borrowings ?Payment of dividend tax Disclosure of non-cash activities Under IAS 7, noncash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), noncash activities may be disclosed in a footnote or within the cash flow statement itself. Noncash financing activities may include ? Leasing to purchase an asset ?Converting debt to equity ?Exchanging noncash assets or liabilities for other noncash assets or liabilities ? Issuing shares in exchange for assets edit]Preparation methods The direct method of preparing a cash flow statement results is a more easily understood report.  The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method. Direct method The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities.
If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Sample cash flow statement using the direct method Cash flows from (used in) operating activities Cash receipts from customers3000 Cash paid to suppliers and employees(2,000) Cash generated from operations (sum)7,500 Interest paid(2,000) Income taxes paid(4,000) Net cash flows from operating activities2,500 Cash flows from (used in) investing activities
Proceeds from the sale of equipment7,500 Dividends received3,000 Net cash flows from investing activities10,500 Cash flows from (used in) financing activities Dividends paid2,500 Net cash flows used in financing activities(2,500) . Net increase in cash and cash equivalents10,500 Cash and cash equivalents, beginning of year1,000 Cash and cash equivalents, end of year$11,500 Indirect method The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions.
An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.  Rules The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and nonoperating items.  ? Decrease in non-cash current assets are added to net income ? Increase in non-cash current asset are subtracted from net income ?
Increase in current liabilities are added to net income ?Decrease in current liabilities are subtracted from net income ? Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period) ? Revenues with n