Handouts 4 the Mid Term Exam

7/30/2019 Handouts 4 the Mid Term Exam

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1.0) Financial Statements:A financial statement is a formal record of the financial activities of a business, person, or other

entity. A financial statement is often referred to as an account, although the term financial statement isalso used particularly by accountants.

For an enterprise, all the relevant financial information, presented in a structured manner and in a formeasy to understand are called the financial statements.

They typically there are four basic financial statements:

1. Statement of Financial Position: also referred to as a balance sheet, reports on acompany's assets, liabilities, and ownership equity at a given point in time.

2. Statement of Comprehensive Income: also referred to as Profit and Loss statement, reportson a company's income, expenses, and profits over a period of time. A Profit & Loss statement

provides information on the operation of the enterprise. These include sale and the various

expenses incurred during the processing state.

3. Statement of Changes in Equity: explains the changes of the company's equity throughoutthe reporting period.

4. Statement of cash flows: reports on a company's cash flow activities, particularly itsoperating, investing and financing activities.

1.1) International Accounting Standard No 1 (IAS 1):1.1.1) Presentation of Financial Statements:

This revised Standard replaces IAS 1 (revised 1997) Presentation of Financial Statements willapply for annual periods beginning on or after January 1, 2005.

1.1.2) Objectives of Financial Statements:The objective of this Standard is to lay the groundwork for the submission of financial statements for

purposes of general information to ensure that they are comparable, both with the financial statements ofthe same entity in prior years, as with those of various other entities.

1.1.3) Perspectives of the Financial Statements:There are two perspectives of the financial Statements:

1) Decision Making Perspective.2) Stewardship Perspective.

Stewardship Perspective:

Stewardship is an ethic that embodies responsible planning and management

ofresources, including with respect to environment, economics, health, property, information,religion and is linked to the concept ofsustainability.

1.1.4) Scope:This rule applies to all types of financial statements for purposes of general information, which

are drafted and presented in accordance with the International Financial Reporting Standards (IFRS).

The financial statements for purposes of general information are those which seek to meet theneeds of users who are not in a position to demand reports to their specific needs for information. The
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financial statements for purposes of general information include those which presented separately, or inanother document of a public nature as the annual report.

1.1.5) Purpose of Financial StatementsThe financial statements are a representation of structured financial position of the entity. The

objective of financial statements for purposes of general information is to provide information about the

financial position, financial performance and cash flows of the entity. It is useful to users to take theireconomic decisions. The financial statements also show the results of management by managers with theresources entrusted to them. To meet this objective, the financial statements provide information about the

following elements of the entity:

(a) Assets.(b) Liabilities.(c) Net worth.

(a) Expenditures and revenues, which include gains and losses.(b) Changes in equity.

(c) Cash flows.

This information, along with that contained in the notes, will help users to predict future cash flows and inparticular the timing and degree of certainty for them.Figure below shows that, according to the IASBFrameworkthe users of financial statements include

present and potential investors, employees, lenders, suppliers and other trade creditors, customers,governments and their agencies and the public. (PECLISC)

1.1.6) Components of financial statements:

A complete set of financial statements include the following components:

(a) Stock.(b) Income statement.(c) A statement of changes in equity showing:

(i) All changes in equity, or(ii) Changes in equity other than those from transactions with owners.

(d) Cash flow statement.

(e) Notes, which will include a summary of significant accounting policies and other explanatory notes.


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1.2) Notes1.2.1) the notes:

Notes Present information about the basis for the preparation of financial statements. Disclose

information that is required by IFRS, was not present in the balance sheet, in the income statement,statement of changes in equity or the cash flow statement. Notes provide additional information that had

not included in the balance sheet, in the income statement, statement of changes in equity or the cash flowstatement is relevant for understanding some of them.

1.2.2) Presentation of Notes:The notes will be presented, as is practicable and in a systematic way. Each Item of balance sheet,

the income statement, statement of changes in equity and cash flow statement will contain a crossreference to the relevant information in the notes. Normally, the notes will be presented in the sequenceorder, in order to help users understand the financial statements and compare them with those submitted

by other entities.

QUESTION No 2

2.0) Conceptual Framework: A conceptual framework is a formal set of interrelated concepts specifying the function, scope

and purpose of financial accounting and reporting. A conceptual framework is a constitution forthe accounting standard setting process.

Types of Conceptual Framework:A conceptual framework can be descriptive, prescriptive or a mixture of both:

A descriptiveframework attempts to develop a set of interrelated concepts, which servesto explain existing financial reporting practices. (What are the accounting Practices).

A prescriptiveframework attempts to develop a conceptual basis for what financialaccounting practices should be. (What should be the accounting Practices).

2.1) Why Conceptual Frame Work:The conceptual framework is a recent concept. In fact, many accounting standard setters have

historically operated without having a conceptual framework in place.

Functions of financial statements involved in a framework ensures, consistency and assists in thedevelopment of future standards. The framework can assist users in interpreting information contained

within financial statements as it provides an understanding of the principles on which they are prepared.In practice social, economic and political factors often play a role and influence the guidance provided by

standards.

2.1.1) IASB-FASB joint project:At their joint meeting in October 2004, the IASB and the FASB decided to add to their respective

agendas a joint project to develop a common conceptual framework that both Boards would use as a basis

for their accounting standards.The two boards reached the following decisions about the project:

The project should initially focus on concepts applicable to business entities in the privatesector beginning with nonprofit organizations in the private sector.

The project should be divided into phases: Phase A: Objectives and qualitative characteristics. Phase B: Elements and recognition.
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Phase C: Measurement. Phase D: Reporting entity. Phase E: Presentation and disclosure. Phase F: Purpose and status. Phase G: Application to not-for-profit entities. Phase H: Remaining issues. (OM RAPPER)

The converged framework should be in the form of a single document. It should include asummary and a basis for conclusions.

2.2) Project milestones: (46881010)Date Development Comments

October 2004 Comprehensive project added to the active agenda

6 July 2006 Discussion PaperPreliminary Views on an improvedConceptual Framework for Financial Reporting: The

Objective of Financial Reporting and QualitativeCharacteristics of Decision-useful Financial Reporting

Information published (Phase A)

Comment deadline3 November 2006

29 May 2008 Exposure DraftAn improved Conceptual Frameworkfor Financial Reporting: Chapters 1 and 2 published

(Phase A)

Comment deadline29 September 2008

29 May 2008 Discussion PaperPreliminary Views on an improvedConceptual Framework for Financial Reporting: The

Reporting Entity (Phase D)

Comment deadline29 September 2008

11 March 2010 Exposure Draft ED/2010/2 Conceptual Framework forFinancial Reporting: The Reporting Entitypublished

(Phase D)

Comment deadline16 July 2010

28 September 2010 Conceptual Framework for Financial Reporting2010published

Completion ofPhase A,effectively

immediately

applicable

Current status of the project:

During late 2010, the Board effectively delayed further work on the joint project until after other moreurgent convergence projects were finalized, the IASB decided in September 2012 to reactivate the

Conceptual Framework project as an IASB-only comprehensive project.
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2.3) Advantages of a conceptual framework:1. A conceptual framework is useful in the development of more consistent and logical standards.2. It useful in removing the necessity to re debate conceptual issues when preparing new accounting

standards.

3. It can lead to better communication among accountants, auditors and users because all parties areusing a common set of definitions and criteria.

4. It has a potential to reduce the activities and influence of lobbies and interest groups.2.4) Conceptual framework issues:

Issue 1: Balance sheet versus profit and loss account orientation. Issue 2: Definition of assets, liabilities, equity, revenues and expenses. Issue 3: Concepts of capital maintenance. Issue 4: Which measurement method should be adopted? Issue 5: Applicability of the conceptual framework to the public sector.

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