Chapter 1: conceptual framework and financial
statements
how is a financial phenomenon recognized, measured and disclosed to users
4 kinds of financial statements:
Statement of performance (= income statement/ profit and loss statement)
Statement of financial position
Statement of cash flow
Statement of changes in equity
Learning objective 1.1
Business decisions
Shareholders and potential investors: should buy, sell or hold their investment.
by assessing the profitability, efficiency, liquidity and cash flow
Company: sources of funding and capital
costing and pricing decisions
Accounting is the language of business
Shareholders: double-entry system
Accounting is necessary so we can understand our finances, our business and our
investments
Two perspectives of accounting: financial accounting and
management accounting
Financial accounting: provides information to decision makers outside the
reporting entity (investors, creditors,…)
Management accounting: provides information to managers.
budgets, forecasts, projections
Organizing a business
1. Proprietorship: single owner (=proprietor)
a. Ex: small retail store, attorneys, software programmers
b. Personally liable for businesses debt
c. Distinct entity, separate from it proprietor
2. Partnership: two or more parties as co-owners
a. Income and loss is divided according to an agreed-upon percentage.
b. Not a taxpaying entity each partner takes a share of the entity’s
taxable income and pays tax according to that partners individual or
corporate rate
c. Unlimited liability
d. Limited-liability partnerships: when one owner makes a mistake the
other person is not liable
3. Corporation: owned by shareholders (they elect board od directors)
, a. More business, larger terms of assets, income and number of
employees
b. Legally distinct from its owner
c. Limited liability: shareholders have no obligation for the corporations
debts
Role of accounting standards
In accounting, we assign monetary amounts to represent elements of financial
statements in accordance to some accounting standards
International financial reporting standards (IFRS)
o Formulated by the international accounting standards board (IASB)
o Accepted everywhere
Generally accepted accounting principles (GAAP)
o Formulated by the financial accounting standards board (FASB)
o Per country
Learning objective 1.2
The conceptual framework
Describes the nature, boundaries and function within which financial accounting
and reporting operates.
Lays the foundation for resolving big issues
Used as a foundation for reviewing existing and developing new accounting
standards
1. Why is financial reporting important?
To make financial decisions for the company. This can be for investors, do
they want to buy a share? This can also be for the company if they should
buy another machine, hire more people,…
2. Who are the users of financial reporting?
a. Investors: buying, selling or holding their shares.
b. Employees: job security, salary increment (increase), compensation
bonusses
c. Creditors (bankers, financial institutions)
i. Grand additional loans
d. Suppliers and trade creditors: can they pay the credit terms back
statements
how is a financial phenomenon recognized, measured and disclosed to users
4 kinds of financial statements:
Statement of performance (= income statement/ profit and loss statement)
Statement of financial position
Statement of cash flow
Statement of changes in equity
Learning objective 1.1
Business decisions
Shareholders and potential investors: should buy, sell or hold their investment.
by assessing the profitability, efficiency, liquidity and cash flow
Company: sources of funding and capital
costing and pricing decisions
Accounting is the language of business
Shareholders: double-entry system
Accounting is necessary so we can understand our finances, our business and our
investments
Two perspectives of accounting: financial accounting and
management accounting
Financial accounting: provides information to decision makers outside the
reporting entity (investors, creditors,…)
Management accounting: provides information to managers.
budgets, forecasts, projections
Organizing a business
1. Proprietorship: single owner (=proprietor)
a. Ex: small retail store, attorneys, software programmers
b. Personally liable for businesses debt
c. Distinct entity, separate from it proprietor
2. Partnership: two or more parties as co-owners
a. Income and loss is divided according to an agreed-upon percentage.
b. Not a taxpaying entity each partner takes a share of the entity’s
taxable income and pays tax according to that partners individual or
corporate rate
c. Unlimited liability
d. Limited-liability partnerships: when one owner makes a mistake the
other person is not liable
3. Corporation: owned by shareholders (they elect board od directors)
, a. More business, larger terms of assets, income and number of
employees
b. Legally distinct from its owner
c. Limited liability: shareholders have no obligation for the corporations
debts
Role of accounting standards
In accounting, we assign monetary amounts to represent elements of financial
statements in accordance to some accounting standards
International financial reporting standards (IFRS)
o Formulated by the international accounting standards board (IASB)
o Accepted everywhere
Generally accepted accounting principles (GAAP)
o Formulated by the financial accounting standards board (FASB)
o Per country
Learning objective 1.2
The conceptual framework
Describes the nature, boundaries and function within which financial accounting
and reporting operates.
Lays the foundation for resolving big issues
Used as a foundation for reviewing existing and developing new accounting
standards
1. Why is financial reporting important?
To make financial decisions for the company. This can be for investors, do
they want to buy a share? This can also be for the company if they should
buy another machine, hire more people,…
2. Who are the users of financial reporting?
a. Investors: buying, selling or holding their shares.
b. Employees: job security, salary increment (increase), compensation
bonusses
c. Creditors (bankers, financial institutions)
i. Grand additional loans
d. Suppliers and trade creditors: can they pay the credit terms back
