Financial Reporting
Financial Reporting
Financial Reporting
Module 2
Financial
Reporting
2-1
Preparation of Key Financial
Statements
2-2
Financial Statements
2-3
Balance Sheet
Remember ALOE!
2-4
Accounting Equation
Assets = Liabilities + Owners’ Equity
Service potential or Future sacrifices of Residual
future economic service potential or interest of
benefits controlled future economic owner/s in the
by entity as result benefits that an assets (less
of past entity is presently liabilities) of
transactions or obliged to make as the entity
other events a result of past
transactions or
• land other events
• buildings Net assets
• equipment • accounts payable
• accounts • mortgages payable Proprietorship
receivable • wages & salaries Capital
• patents payable
2-5
Balance Sheet
Acme Auto Repairs
Balance Sheet
As at 30 June 20X1
ASSETS LIABILITIES
Cash at bank $ 16 780 Accounts payable $ 6 920
Accounts receivable 5 930 Mortgage payable 67 000
Repair supplies 4 870 $ 73 920
Repair equipment 36 900
Land 20 000 OWNER’S EQUITY
Building 85 000 M Brady, Capital 95 560
$169 480 $169 480
2-6
Specimen Company Ltd
Balance Sheet Plus notes
As at 31 December 20X1
20X1 20X0
Current Assets X X
Non-current Assets X X
Total Assets X X
Current Liabilities X X
Non-current Liabilities X X
Total Liabilities X X
Net Assets X X
Shareholders’ Equity
Share Capital X X
Reserves X X
Retained Profits X X
2-7 Total Shareholders’ Equity X X
Income Statement 1
2-8
Income Statement 2
2-9 4
Net Profit
Net profit = Revenues - Expenses
Increases in OE Decreases in OE
usually resulting representing the
from sale of consumption or
goods or loss of economic
performance of benefits in the
services form of reduction
in assets or
If R > E ⇒ net profit increases in
or liabilities
increase in OE
2-12
Financial Statements
Relationship
Income
BALANCE SHEET BALANCE SHEET
STATEMENT
as at beg yr as at end yr
A1 - L1 = OE1 for the period A2 - L2 = OE2
R - E = net profit
1 2
STATEMENT of OE 4
for the period
OE1 + net profit - drawings = OE2
3
2-13
Period of time eg one year
Business Transactions
2-14
Cash v Accrual Accounting
INCOME INCOME
- when cash - when income
received earned
EXPENSES EXPENSES
- when cash - when expenses
paid incurred
2-15
Cash Flow Statement
2-16
Illustration of concepts behind the
Cash Flow Statement
Cash inflows (1) Cash outflows
Cash flows from
Generation of operating activities Expenditure of funds
funds in normal in normal operations
operations
+ (2)
Sale of plant Purchase of plant
and equipment Cash flows from and equipment
Liquidation of investing activities Long-term
long-term investment
investment
+ (3) Retirement or
Sale of bonds, repurchase of
common stock, Cash flows from bonds, common
preferred stock, financing activities stock, preferred
and other stock, and
securities equals other securities
Payment of cash
Add items 1, 2, and dividends
3 together to arrive
at net increase
2-17 (decrease) in cash
Specimen Company Ltd
Cash Flow Statement Plus notes
For the year ended 31 December 20X1
$000s $000s
Cash flows from operating activities
- receipts from customers X
- payments to suppliers X
- payments for expenses X X
Net cash flows from operations X
Cash flows from investing activities
- sale of assets X
- purchase of assets (X) (X)
Cash flows from financing activities
- e.g., share issue X
- e.g., dividends paid (X) X
Net increase (decrease) in cash held X
Add opening balance of cash held X
2-18
Ending balance of cash held X
Key Elements of an
Accounting System
¯ Chart of Accounts
v analytical framework for recording transactions
¯ Prime Documents and Records
v records based on documentation that events
have occurred
¯ Journals
v initial recordings not captured by prime entry
¯ Ledgers
v main analytic accounting record
¯ Trial Balance
2-19 v balances of ledger accounts
Criteria for Recognising
Elements of Accounts
2-20
Measurement Bases
¯ Historical Cost
v cash equivalent attaching to an event at
time it took place
¯ Replacement Cost
v current cash amount to replace asset
¯ Net Realisable Value
v amt for which asset could be sold in open
market less any selling costs
¯ Net Present Value
v present worth, allowing for interest
2-21
charges, of net future cash flows
Depreciation Methods
Relevant information
v Growing number of dishonest managerial
and company employee practices
2-24
Changing Objectives of Company
Auditing 2
Primary objectives 1881 - 1900
v Detection of fraud and error
Secondary objectives
v Verification of accuracy of financial
accounting records
Relevant information
v Growing awareness of accountancy as a
skilled profession
v Number of professional bodies formed
2-25
Changing Objectives of Company
Auditing 3
Primary objectives 1901 - 1920
v Detection of fraud and error
Secondary objectives
v Verification of accuracy of financial
accounting records
v Attesting credibility for financial
statements
Relevant information
v Improvements in financial reporting
v An increasing use being made of
2-26
accounting information
Changing Objectives of Company
Auditing 4
Primary objectives 1921 - 1940
v Detection of fraud and error
v Verification of accuracy of fin’l acc’g records
Secondary objectives
v Attesting credibility of financial statements
v Detection of fraud and error
Relevant information
v Continued improvements in financial
accounting practices and reporting
v Gradual awareness by company mgt of its
responsibility for fraud and error detection and
2-27
prevention
Changing Objectives of Company
Auditing 5
Primary objectives 1941 - 1960
v Attesting credibility of financial statements
Secondary objectives
v Detection of fraud and error
Relevant information
v Company mgt’s general acceptance of its
responsibility for prevention and detection
of fraud and error
v Total reform of company law affecting
accounting and auditing
2-28
Changing Objectives of Company
Auditing 6
Primary objectives 1961 -
v Attesting credibility of financial statements
Relevant information
v Further improvements in company law,
financial reporting and accounting
practices
v Professional prescription for reporting and
auditing practices
2-29
Annual Report Contents
¯ Chairman’s statement
¯ Operating/financial review
¯ Directors’ report (A)
¯ Consolidated/Parent Balance Sheet (A)
¯ Consolidated/Parent Income Statement (A)
¯ Consolidated/Parent Cashflow Statement (A)
¯ Notes to the accounts (A)
¯ Auditor’s report (A)
2-30
Enduring Principles of Auditing
¯ Integrity
¯ Independence
¯ Competence
¯ Rigour
¯ Accountability
¯ Judgement
¯ Communication
¯ Providing value
2-31
Core Auditing Concepts
¯ Independence
v Expected to deliver and unbiased opinion
¯ Responsibility
v Owes a duty of care for proper discharge
of audit responsibilities
¯ Truth and Fairness
v Operational defn and its implications are
reflected in nature of reports issued by
auditors
¯ Evidence
2-32
v Available as basis for audit opinion
Threats to Auditor Independence
¯ Fee Income
v Remuneration for audit & other service fees
¯ Personal relationships
v eg family
¯ Financial involvement
v Other than normal disinterested commercial
relationship, eg banking
¯ Conflicting Interests
v Engaging in activities which might be
perceived to threaten independence, eg
professional advice which might later form
2-33 part of the subject of the audit
The Expectations Gap
¯ Nature of the audit ¯ An opinion not a guarantee
opinion
¯ Scope of the audit ¯ Covers financial stats, not
report whole annual report
¯ Economic wellbeing ¯ Deals with information risk,
of the company not commercial risk
¯ Responsibilities for:
v Content of financial v Directors, not auditors
statements
v Fraud v Directors, unless fraud
prevents “true & fair view”
v Compliance with v Primarily with mgt; auditors
regulations do have some
v Competence of mgt v Shareholders to assess
2-34
Value for Money Auditing
¯ Economy -- Acquiring resources of an
appropriate quality for minimum cost.
Diseconomies can occur when there is
overstaffing or when overpriced facilities are
used.
¯ Efficiency -- Seeking to ensure that the maximum
output is obtained from the resources devoted to
a program, or alternatively, ensuring that only the
minimum level of resources are devoted to a
given level of output.
¯ Effectiveness -- Ensuring that output form any
given activity is achieving the desired results.
Recognises that an activity may be efficiently
carried out with little outcome or impact. Difficult
2-35 to measure whether outcome IS effective.
TBS 901
Module 2
Financial
Reporting
2-36