IASB FRAMEWORK

The framework sets out the concept undefined the preparation and presentation of financial
statements prepared by companies for external user.
Purpose of Framework:
1. To assist accounting standard board in its task of develop and review of Accounting
Standard.
2. To help auditors in forming an opinion as to whether financial statements confirm the
accounting standard.
3. To help the users in interpretation of financial statements.

Financial Statement
The principle means of reporting general purpose financial information to person outside of a
business organization. It is a set of accounting record of financial position.
The persons receiving these reports are called users of financial statements. A complete set of
financial statement includes Balance Sheet, Income Statement, Owner’s Equity and Cash flow
statement.

1. Balance Sheet:
A balance sheet indicating at a specific date the financial position of the company by showing
the resources that it owns the debts that it owes and the amount of the owner’s equity
(investment) in the business.

2. Income Statement
It indicates the profitability of the business, over the preceding years (or other time period).

3. Owner’s equity
It explains certain changes in the amount of owner’s equity (investment) in the business. In
business which is organized as corporations the statement of owner’s equity replaced by a
statement of retained earnings.

4. Cash flow statement

A statement of cash flows summarizing the cash receipts and cash payments of the business over
the same time period covers by the income statement.

OBJECTIVES OF FINANCIAL STATEMENTS

The framework identifies seven broad groups of financial statements user.
1. Investor
2. Employer
3. Lender
 4. Supplier
5. Customer
6. Government Agencies
7. Public

Financial Ratios
It is an index that relates to accounting numbers and it is obtained by dividing one number by the
other. These ratios are calculated to determine whether the firm is performing well or not.
So we can define financial ratios as an index that relates two pieces of financial date by dividing
one quantity by the other. It means operating a business with borrowed money.
Current Assets
1. Current Ratio = Current liabilities

Measures short run debt paying ability.

Quick Assets
2. Quick Ratio = Current liabilities

Measures the short run liquidity of firm

3. Working capital = Current assets - current liabilities
Measures short run debt paying ability
Net Income−Preferred dividend
4. Earnings per share of common stock= Shares of common outstanding

It indicates the amount of earning applicable to a share of a common stock.

Market price per share
5. Price earnings ratio =
Earnings price per share
It indicates if price of the stock is in line with the earnings.
Dividend per share
6. Dividend yield =
market price per share
It shows the rate of return earned by stock holders
Operating expense
7. Operating expense ratio=
Net sales
It indicates management ability to control expenses.
Operatingincome
8. Return on assets=
Average total assets
It measures the productivity of assets regardless of capital structure.
 Net income−Preferred dividend
9. Return on common stockholder’s equity =
Average common shareholder ’ s equity
It indicates the earning power of common stock equity.
Total stockholder ’ s equity
10. Equity ratio=
Total assets
It shows the protection to creditors and the extent of leverage being used.
Total liabilities
11. Debt ratio=
Total assets
It indicates the percentage of assets financed through borrowing. It shows the extent of
leverage being used.
Cost of goods sold
12. Inventory turnover rate =
Average inventory
It indicates marketability of inventory.
Net sales
13. Account receivable turnover rate =
Average receivable
It indicates reasonable of Account balance and effectiveness of collection.