Lec 1 Flashcards
(21 cards)
Financial v management
Financial = collection and processing of financial info to meet the decision making needs of parties external to the organisation
Financial is regulated
Management = collection and processing of financial info to meet the decision making needs of parties internal to the organisation
How firms communicate
Social media
Public events
Conference calls
Business press
Annual report - unregulated
General non standard summary of company activities
Included financial statements
Distributed through media firms websites etc
Financial statements - regulated GAAP
Regulated by generally accepted accounting principles GAAP
Must be deposited into national registers
Chamber of commerce in the NL
Comply with accounting standards
Usually include all financial statements and noted
Depending on form characteristics
Financial statements
Statement of financial position (balance sheet)
Income statement
Statement of cash flows
Statement of changes in shareholders equity
Accompanying notes to the above FS are also mandatory
Role of financing reporting - scarcity of resources + comparability
Scarcity of resources = importance of efficient capital allocation decisions, capital providers demand for accounting info to better understand the firm
Comparability - access to international capital markets - compatibility of financial statements - single high quality set of accounting standards
Economic reasoning
Firm need economic resources (capital providers)
Absence of reporting = adverse selection
For an efficient functioning, capital providers write contracts to prevent management moral hazard behaviour
IFRS
Single set of rules established by a single standard setting body - high quality understandable enforceable globally accepted
To ensure that relevant and faithful info is disclosed
Normative theory
IFRS conceptual framework prescribes now assets should be measured
Accounting standards prescribes how a transaction should be reported
Positive theory
IFRS studies shows:
Net income reported under IFRS contains more value relevant info (more useful in decision making)
Controversies surrounding IFRS
Uniformity v flexibility debate: fair value v historical cost accounting
Necessity of regulation: free market perspective vs pro regulation perspective
Political interference and lobbying
Reporting issues: non financial info
Accounting for innovation
Timeliness
Purpose of conceptual framework
It establishes the big picture but If some standard is contrary to it, the standard prevails.
Chapter 1: objective of financial reporting
Provide general purpose financial reporting to satisfy general users need ( I.e. financial info about reporting entity’s economic resources and claims)
Defines primary users: investors lendors and other creditors
Emphasis on accrual accounting
Stress importance of cash flow info to assess
Entity’s ability to generate future cash flow and management stewardship
Chapter 2: qualities characters of financial information
Used when thinking about how useful an information can be
2 fundamental qualities:
1 relevance: info is predictive and confirmatory if firm value and material
2: faithful representation : info is complete, neutral and free from errors
Purpose of a conceptual framework
When relevance and faithful rep are present, other info qualities enhance the usefulness of accounting info
Comparability: comparable with firm
Over time
Verifiability : info is verifiable by several third parties
Timeliness: be presented on time for decision making
Understandability: set out as clearly and concisely as possible
Chapter 3: financial statements and the reporting entity
The 4 statements
Fs are presented under the assumption of a going concern
Reporting entity is an entity who prepares FS:
Single entity
Porting if entity
More than one
Depending on reporting entity one will prepare:
Consolidated FS: parent + sub reporting as a single entity
I consolidated FS: parent or sub alone provides FS
Combined FS: 2+ entities not linked by parent sub relationship
Chapter 4: the elements of financial statements
Assets - a present economic resource controlled by the entity as a result of past events with the potential to produce economic benefits
Liabilities - w present obligation of the entity to transfer an economic resource as a result of past events
Equity - the residual interest in the assets of the entity after deducting all its liabilities
Equity = A-L
Income - increases in assets or decreases in liabilities
Expenses - decreases in assets or increases in liabilities
Chapter 5: recognition and derecogniton of elements of FS
Derecognition - removal of an element of FS from BS and iS
Chapter 6: measurement
How we measure elements of FS:
Historical / Amortised costs: acquisition costs
Current value :
FAir value: market based estimate
Value in use and fulfilment value
PV the company expects to receive A or pay L
Current cost - amount paid
Consider relevance and faithful rep:
Relevance - characteristics of element
Faithful rep - measurement inconsistency
Chapter 7: presentation and disclosure
Guidelines on how to present info in FS
Presented in 2 ways
Comprehensive income (standard)
Other comprehensive income - exclusion of certain income
Chapter 8 : concepts of capital and capital maintenance
Financial capital - monetary capital = capital addition (+equity) General Purchasing power (inflation)
Physical capital = profit adjusted for replacement costs
E.g company buy car for 4000 and sell next year at 8000, cost of buying equilvant car is 4800 and inflation is 10%
Monetary capital 8000-4000=4000
General purchasing power 8000-4000-400=3600
Operating capital maintenance = 8000-4800=3200
