Assignment 1

 What are financial statements?

- According to Investopedia.com it is a written records that convey the business activities

and the financial performance of a company. It is often audited by government agencies,
accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.
For-profit primary financial statements include the balance sheet, income statement,
statement of cash flow, and statement of changes in equity. Nonprofit entities use a
similar but different set of financial statements.
- The financial statements are used by investors, market analysts, and creditors to
evaluate a company's financial health and earnings potential.
- Not all financial statements are created equally. The rules used by U.S. companies is
called Generally Accepted Accounting Principles, while the rules often used by
international companies is International Financial Reporting Standards (IFRS). In
addition, U.S. government agencies use a different set of financial reporting rules.
 What are the 6 components of financial statements? Distinguish one from the other

- Balance Sheet. It provides an overview of a company's assets, liabilities, and

shareholders' equity as a snapshot in time. The date at the top of the balance sheet tells
you when the snapshot was taken, which is generally the end of the reporting period.
Below is a breakdown of the items in a balance sheet.
- Income Statement. Unlike the balance sheet, the income statement covers a range of
time, which is a year for annual financial statements and a quarter for quarterly financial
statements. The income statement provides an overview of revenues, expenses, net
income, and earnings per share. The main purpose of the income statement is to convey
details of profitability and the financial results of business activities; however, it can be
very effective in showing whether sales or revenue is increasing when compared over
multiple periods.
- Cash Flow Statement. The cash flow statement (CFS) measures how well a company
generates cash to pay its debt obligations, fund its operating expenses, and fund
investments. The cash flow statement complements the balance sheet and income
statement. The CFS allows investors to understand how a company's operations are
running, where its money is coming from, and how money is being spent. The CFS also
provides insight as to whether a company is on a solid financial footing. There is no
formula for calculating a cash flow statement. Instead, it contains three sections that
report cash flow for the various activities for which a company uses its cash. Those three
components are Operating, Investing and Financing Activities.
- Statement of Changes in Shareholder Equity. It tracks total equity over time. This
information ties back to a balance sheet for the same period; the ending balance on the
change of equity statement is equal to the total equity reported on the balance sheet.
The formula for changes to shareholder equity will vary from company to company; in
general, there are a couple of components:
- Beginning equity: this is the equity at the end of the last period that simply rolls to the
start of the next period.
 - (+) Net income: this is the amount of income the company earned in a given period. The
proceeds from operations are automatically recognized as equity in the company, and
this income is rolled into retained earnings at year-end.
- (-) Dividends: this is the amount of money that is paid out to shareholders from profits.
Instead of keeping all of a company's profits, the company may choose to give some
profits away to investors.
- (+/-) Other comprehensive income: this is the period-over-period change in other
comprehensive income. Depending on transactions, this figure may be an addition or
subtraction from equity.
- Statement of Comprehensive Income. An often less utilized financial statement, a
statement of comprehensive income summarizes standard net income while also
incorporating changes in other comprehensive income (OCI). Other comprehensive
income includes all unrealized gains and losses that are not reported on the income
statement. This financial statement shows a company's total change in income, even
gains and losses that have yet to be recorded in accordance to accounting rules.
- Nonprofit Financial Statement. Nonprofit organizations record financial transactions
across a similar set of financial statements. However, due to the differences between a
for-profit entity and a purely philanthropic entity, there are differences in the financial
statements used. The standard set of financial statements used for a nonprofit entity
includes: Statement of Financial Position, Statement of Activities, Statement of
Functional Expenses, Statement of Cash Flow
- Statement of Retained Earnings. If the income statement is a measure of financial health
at any given moment, this document also known as the statement of owner's equity, an
equity statement or a statement of shareholders’ equity offers the information over time.
Management and investors want to know if they are making or losing money, so the
statement reconciles the beginning and ending retained earnings for the period (for
instance, over a year or so) using information such as net income from the other
financial statements.
 Distinguish nominal from real accounts

- A nominal account is also known as a temporary account, while a real account is also
known as a permanent account.
- A real (permanent) account is an account that retains its balance permanently. A
nominal (temporary) account holds its balance for an accounting period, usually one
fiscal year, and then has its balance zeroed out and transferred either directly to retained
earnings or to income summary, for subsequent transfer to retained earnings. Balance
sheet accounts are permanent, and income statement accounts are temporary.
- Income statement accounts like revenue and expenses are nominal accounts. A specific
example of a nominal (temporary) account is sales revenue. This account is zeroed out
and closed at the end of the accounting period, and its credit balance is transferred to
another temporary account called income summary. At the end of the closing process,
this income summary account is then closed and its balance transferred to the equity
account (a permanent account on the balance sheet) called retained earnings.
- In short, real accounts include all assets, all liabilities, and two capital accounts, paid-in
capital and retained earnings. Note that the real accounts are all the accounts that
 appear on the balance sheet. And nominal accounts such as sales revenue and payroll
expenses are reset to zero at the end of each year.
 Distinguish financial statements format – account vs report form

- The account form balance sheet is presented in a horizontal format, with information in
two columns beside each other. The left column of the account form balance sheet lists
assets, while the right column lists liabilities and equity. Naturally, the last line in each
column lists the total value of all assets and liabilities and equity, respectively. The
account form balance sheet can be easier to use when information is being presented
for multiple periods, and it allows the reader to verify that the ledger is in balance at a
glance.
- The report form balance sheet is presented in a vertical orientation, and is essentially
one column that spans the entire width of a page. Starting with assets, the report form
balance sheet provides a total value at the end of the assets section, followed by
liabilities and equity, with the final line of the report form balance sheet providing the total
combined value of liabilities and equity.
 Define the 5 elements of accounting – ALCIE as per financial accounting definition and
give examples

- Assets. Are things that a company owns and have value. Assets are typically recorded
on the balance sheet at their original cost (also called historical cost) less accumulated
depreciation, which is an expense that reflects the wear and tears on assets over time.
Assets include fixed assets and current assets.
- Typically, businesses like to keep track of their assets in order to measure how much
they are worth or to serve as collateral for borrowing money or other financing activities.
Assets also help investors make decisions on whether the company is doing well
financially since they can see what assets are available to be used for future growth.
- Assets are resourcing your business owns that can be converted into cash and therefore
have a monetary value.
- These consist of owned property, both tangible (buildings, computers) and intangible
(patents, trademarks).
- Assets are the resources which the businesses use to conduct their activities. An item
becomes an asset when you own it or have the right to use it. Asset provides
economical support to your business. For example, if you run a factory, then the types of
machinery of that factory become your asset. Asset always serves some economic
benefit to the business either in terms of cash or credit.
- Examples: Vehicles, Machinery or equipment, Property or buildings, Copyrights, Logo,
Trademarks, Accounts Receivable, Inventory, Cash, Goodwill and etc.
- Liability. Liabilities are obligations of the business that may need to be paid back over a
period of time. These would include both short-term (current) liabilities such as accounts
payable and long-term liabilities such as mortgages.
- Typically, businesses like to keep track of their liabilities in order to measure the total
amount that they owe or are obligated to payout. Liabilities also help investors make
decisions on whether the company is doing well financially. Since they can see how
much debt the business has taken on and if it may be too much to handle.
- It is legally binding obligations that are payable to another person or entity usually sum
of money.
- These are all outstanding debts, such as loans or rent.
- Liabilities are a group of items which are obligations to the business. They arise when
you make a purchase or take a loan for the business. To settle these liabilities, you will
need to settle the assets. For example, salary due to the employees while hiring is a
liability to the company and this obligation cannot be avoided if the employee provides
his services to your business.
- Examples: Business Loans, Late Utility Bills, Outstanding Facility Maintenance Cost,
Account Overdrafts, Accounts payable, Accrued Expense, Bank Debt, Interest Payable,
Salaries Payable and etc.
- Capital. Is the money used to build, run, or grow a business. It can also refer to the net
worth (or book value) of a business. Capital most commonly refers to the money used by
a business either to meet upcoming expenses, or to invest in new assets and projects.
- Capital is a broad term that can describe anything that confers value or benefit to its
owners, such as a factory and its machinery, intellectual property like patents, or the
financial assets of a business or an individual.
- It is the money it has available to pay for its day-to-day operations and to fund its future
growth.
- The capital means the assets and cash in a business. Capital may either be cash,
machinery, receivable accounts, property, or houses. Capital may also reflect the capital
gained in a business or the assets of the owner in a company.
- Examples: Money in bank account, money from selling stocks shares, money from
selling bonds, machinery, patents, capital assets and etc.
- Income. Income is money that the company makes from its regular business operations
before accounting for expenses such as taxes, interest payments, and other financing
activities. Income does not include income from other sources such as investments
because there may be no cash inflow to offset any outflow that may occur when these
assets are sold (when funds are pulled out). As a result, it’s helpful to keep track of what
an organization earned in order to help make better investment decisions in the future.
- Income, or revenue, accounts record the amount of money a company earns from
selling its products or services. Income accounts can also include any dividends a
company earns from investments. That said, it's important to record the actual
investments themselves in an asset account. Essentially, an income account is where
companies maintain information about their revenue.
- Examples: Interest, Rent, Net Income, Revenue, Gross Income, Advertising, Cost of
Goods Sold, Capital Gains, Dividends and etc.
- Expense. Expenses are money that the company spent on its regular business
operations before accounting for income. Expenses are reduced from total income to
derive the net profit or loss of the business.
- Typically, businesses like to keep track of their expenses in order to measure how much
it costs them to generate revenue or to measure how profitable they are. Expenses also
help investors make decisions on whether the company is doing well financially since
they can see if the organization is spending more than what it makes and if so, whether
this spending will lead to future problems.
 - These are the costs of producing goods and services, from research and development to
marketing to payroll.
- Expenses are unavoidable events in the business to conduct business operations. For a
period of time, expenses reduce the assets and increase the liabilities. For example, if
you own a truck, then the fuel filled every time in the truck for business operation is an
expense to the company. Expenses are usually repeating events which are unavoidable
but can be cut down as per the business requirements. All the expenses for business
operations must accordingly be present in financial statements.
- An expense account can include the products or services a company purchases to help
generate additional income. This may include purchasing products or services to boost
the productivity of its manufacturing or distribution operations. Other expenses might be,
employee salaries, marketing costs and facility cost.
- Examples: Utilities, Rent, Legal fees, Repairs, Insurance, Office Supplies, Administrative
Expense, Taxes, Payroll, Labor Cost, Vehicle Expense, Bank charges and etc.
 Line items (in order of presentation, taken into consideration noncurrent classification)
used in financial reporting, specifically in the statement of financial position

- The line items in a financial statement will vary from one corporation to the next, but the
most common among them are revenues, costs of goods sold, taxes, cash, marketable
securities, inventory, short-term debt, long-term debt, accounts receivable, accounts
payable, and cash flows from investing, operating, and financing activities.
- A statement of financial position is often formatted as a table with three columns. The
first column lists the asset accounts, the second column lists liability or equity accounts
and the final column contains totals for each section that are used to calculate net worth.
- The line items to be included on the face of the statement of financial position are:
- (a) property, plant and equipment
- (b)investment property
- (c)intangible assets
- (d)financial assets (excluding amounts shown under (e), (h), and (i))
- (e)investments accounted for using the equity method
- (f)biological assets
- (g)inventories
- (h)trade and other receivables
- (i)cash and cash equivalents
- (j)assets held for sale
- (k)trade and other payables
- (l)provisions
- (m)financial liabilities (excluding amounts shown under (k) and (l))
- (n)current tax liabilities and current tax assets, as defined in IAS 12
- (o)deferred tax liabilities and deferred tax assets, as defined in IAS 12
- (p)liabilities included in disposal groups
- (q)non-controlling interests, presented within equity
- (r)issued capital and reserves attributable to owners of the parent.
- The line items to be included on the face of the statement of financial position are: [IAS 1.54]