Summary FAC - Learning Unit 1 - 11 - Notes

Purpose of financial reporting:



 Provides financial information useful to:
o Investors
o Lenders
o Other creditors
 What to Report:
o Economic resources and claims
o Changes in Economic resources and claim from financial performance and other
events
o Financial performance reflected by accrual (Overtime) accounting
o Financial performance reflected by past cash flows



Statement of Financial position:

 Assets are the economic resources that meet the asset definition. (Goodwill, equipment,
trade receivables and cash)
 Liabilities are the claims against an entity that meets the liability definition. (Borrowings,
trade payables and bank overdrafts).
 Equity reflects the claims against an entity that meets the entity definition.

If an economic resource meets the definition of an asset and if a claim meets either the definition of a
liability or equity, and the recognition criteria are met, it will appear in the statement of financial
position. If it meets the definitions but does not meet the recognition criteria, but is considered to be
useful information, it will only be presented in the notes to the statement of financial position



Statement of financial performance:

 Income reflects the changes in the resources and claims that meet the income definition.
(sales, rent and interest earned).
 Expenses reflects the changes in the resources and claims that mee the expense definition.
(cost of sales, rent expense and interest incurred).

,Summary comparison: Financial statement versus financial
reports:




Financial Statements and reporting entity:



The reporting entity:

Definition: An entity that is required/chooses to prepare Financial Statements.

,If the reporting entity is a group of entities in which:

 One of the entities has control over the others, statements are consolidated.
 There is no control involved, the financial statements are called combined financial
statements.

Statement of financial position

 Assets, liabilities, equity


Statement of financial performance

 Income, expenses



Other Statements

 Info about elements
 Cash flows
 Contributions / distributions
 Assumptions, estimates

Reporting Period

 assets, liabilities and equity will be presented and disclosed whether they existed at the
end of or during the reporting period
o existing at the end of the reporting period. Those are recognised have closing
balances.
o Existing during the reporting period: information about these will appear in the notes
within the reconciliations between the opening and closing balances.
 Income and expenses are presented and disclosed if they arose during the entire reporting
period.

Going Concern

“Is a going concern that will continue in operations for the foreseeable future”



Qualitative Characteristics:

Fundamental:

 Relevance (materiality)
 Faithful Representation

Enhancing:

 Comparability
 Verifiability
 Timeliness
 Understandability

, Elements:


Asset

 A present economic resource
 Controlled by the entity
 Resulting from past events
o Economic resource is defined as:
 A right that has
 The potential to produce economic benefits

Liability

 A present obligation
 To transfer an economic resource
 Resulting from past events
o Obligation is:
 A duty that entity has
 No practical ability to avoid

Equity

 The residual interest in the entity’s assets
 After deducting all its liabilities



Expense

 A decrease in assets or increase in liabilities
 Resulting in decreases in equity
 Other than distributions to holders of equity claims



Income

 An increase in assets or decrease in liabilities
 Resulting in increases in equity
 Other than contributions from holders of equity claims