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PART 2 - Financial Accounting and Reporting Overview

The document discusses the financial accounting and reporting overview. It provides definitions of key terms like assets, liabilities, equity, income and expenses. It also discusses the elements of a complete set of financial statements which includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes. Finally, it outlines the qualitative characteristics of useful financial information which are relevance, faithful representation, comparability, verifiability, timeliness and understandability.

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Heidee Bitancor
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104 views

PART 2 - Financial Accounting and Reporting Overview

The document discusses the financial accounting and reporting overview. It provides definitions of key terms like assets, liabilities, equity, income and expenses. It also discusses the elements of a complete set of financial statements which includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes. Finally, it outlines the qualitative characteristics of useful financial information which are relevance, faithful representation, comparability, verifiability, timeliness and understandability.

Uploaded by

Heidee Bitancor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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PART 2

THE FINANCIAL ACCOUNTING AND REPORTING OVERVIEW

The main purpose of accounting is to provide accounting information to intended users to make
sound economic decisions. This accounting information is what we call a financial report
prepared by accountants.

An example of a financial report prepared by accountants is a financial statement. All companies


prepare financial statements. It is the means by which relevant information is communicated to the
interested users.

IAS 1 Presentation of Financial Statements defines general purpose financial statements as


those intended to meet the needs of users who are not in the position to require an entity to prepare
reports tailored to their particular needs. They are the principal means through which a company
communicates its financial information to those who have no direct access to the company’s
records.

The financial statements provide information about the entity’s financial position as of the end of
the period, and the comprehensive income, cash flows, and changes in equity for the period
covered. Note disclosures are also presented to supplement these information.

THE FINANCIAL STATEMENT

A complete set of financial statements comprises:

1. Statement of financial position as at the end of the period. This financial statement presents
the resources controlled and the liabilities owed by the entity, and the equity of the owners
over the business.

2. Statement of profit or loss and other comprehensive income for the period. This financial
statement provides information about how the entity performed during a period of time, by
showing the income earned and expenses incurred. Income less expenses is equal to profit or
loss.

3. Statement of changes in equity for the period. This financial statement shows the changes
of owner’s interest in the business. It is presented starting the capital at the start of the period,
plus contributions and income, less withdrawals and losses.

4. Statement of cash flows for the period. This financial statement shows the movements of
cash during a period. Movements means inflow and outflow of cash which may be classified
as operating, financing and investing.

5. Notes, comprising significant accounting policies and other explanatory information;


6. Statement of financial position as at the beginning of the preceding period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements, or when it reclassifies items in its financial statements.

THE ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements are as follows:

Asset is a resource controlled by the entity arising from past transactions or events and
from which future economic benefits are expected to flow to the entity.

Liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic
benefits.

Owner’s claim or Equity is the residual interest in the assets of the entity after deducting
all its liabilities

Income is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.

Expense is a decrease in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants.

THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENT

The qualitative characteristics of useful financial information identify the types of


information that are likely to be most useful to the existing and potential investors, lenders and
other creditors for making decisions about the reporting entity on the basis of information in its
financial report (financial information).

Qualitative characteristics are classified into two: fundamental and enhancing.


FUNDAMENTAL CHARACTERISTICS

The fundamental qualitative characteristics are relevance and faithful representation.

Relevance
Relevance is the ability of the information to influence a decision. Relevant financial
information is capable of making a difference in a decision if it has predictive value, confirmatory
value or both.

Financial information has predictive value if it can be used as an input to processes


employed by users to predict outcomes, although it need not be a prediction or a forecast.
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Financial information, on the other hand, has confirmatory value if it provides feedback
(confirms or changes) about previous evaluations.

Faithful Representation
To be useful, financial information must not only present relevant phenomena, but it must
also faithfully represent the phenomena that it purports to represent.

It should be complete, neutral and free from error.

Completeness
Complete depiction includes all information necessary for a use to understand the
phenomenon being depicted, including all necessary descriptions and explanations.

Neutrality
A neutral depiction is without bias in the selection or presentation of financial information.
It is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the
probability that financial information will be received favorably or unfavorably by users.

Free from Error


Free from error means there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has been selected and
applied with no errors in the process.

ENHANCING CHARACTERISTICS

The enhancing qualitative characteristics are relevance and faithful representation.

Comparability
Comparable information enables comparisons within the entity and across entities. When
comparisons are made within the entity, information is compared from one accounting period to
another.

Verifiability
Verifiability helps to assure users that information represents faithfully what it purports to
represent. Financial information is supported by evidence and independent individuals can check
them to see whether such information is faithfully represented. In other words, information is
verifiable if it can be audited.

Timeliness
Timeliness means providing information to decision-makers in time to be capable of
influencing their decisions. It shouldn't be significantly delayed or else it will be of little or no
value.

Understandability
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Understandability requires financial information to be understandable or comprehensible
to users with reasonable knowledge of business and economic activities. To be understandable,
information should be presented clearly and concisely. However, it is improper to exclude complex
items just to make the reports simple and understandable.

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