Finance and accounting
WEEK 1 - Conceptual Framework And Financial Statements
7.1 Understand the Role of Accounting In Communicating Financial Information
Accounting helps businesses, managers, investors, and other stakeholders make informed
decisions by providing financial information about performance and financial position. It is often
called the language of business because it records, measures, and communicates business
activities through financial statements such as the income statement.
Both external and internal users of financial information exist. Therefore, we can classify
accounting into two branches.
Financial accounting provides information to decision makers outside the reporting entity.
These are investors, creditors, government agencies, and the public. This text focuses on
financial accounting.
Management accounting provides information for Logitech’s managers. Examples of
management accounting information include budgets, forecasts, and projections that are used
in making strategic decisions for the entity. > week 6
Accounting is an information system
that:
▪ Measures and records business activities
▪ Processes data into reports (financial statements)
▪ Communicates results to decision makers
Role of Accounting Standards
Developed countries like the United States, the United Kingdom, Japan, Germany,and Australia
follow their own professional frameworks for measurement and disclosure of financial
information, usually called Generally Accepted Accounting Principles (GAAP). As investors
seek to compare financial results across entities from different countries, they have had to
restate and convert accounting data from one country to the next in order to make them
comparable. This takes time and can be expensive, especially in a globalized world with
multinationals operating across many countries.
The solution to this problem lies with the International Accounting Standards Board (IASB)
and International Financial Reporting Standards (IFRS). The IASB was formed in 2001 to
replace the International Accounting Standards Committee (IASC) with the objective of
developing a single set of high-quality, understandable, and enforceable accounting standards
to help participants in the world’s capital markets and other users make economic decisions.
While the IASB now sets IFRS, the previously issued International Accounting Standards (IAS)
by the IASC continue to remain effective.
,7.2 Understand The Underlying Accounting Concepts In The Ifrs Conceptual
Framework
The Conceptual Framework provides the foundation for financial accounting and reporting by
defining the purpose, scope, and principles used to develop and apply accounting standards.
The current framework (updated in 2018) guides the IASB in reviewing existing standards and
creating new ones.
It focuses on general purpose financial statements, which are prepared annually and
intended to meet the common information needs of a wide range of users. Special-purpose
reports, such as tax reports, are outside its scope.
The main objective of financial reporting is to provide useful financial information that helps
users make decisions about providing resources to an entity, such as investing, lending, or
assessing management performance. Financial statements help evaluate financial health and
performance but do not determine a company’s overall value.
Primary users of financial reports are investors, lenders, and creditors, who rely on this
information to assess returns, risks, liquidity, and solvency. Other users—such as employees,
suppliers, customers, governments, and the public—may also use financial statements, but they
are not the main focus of the Conceptual Framework.
Overall, the Conceptual Framework ensures consistency, transparency, and usefulness in
financial reporting by focusing on the needs of the most important decision-makers.
Assumption in financial reporting:
Going concern assumption:
- The business is expected to continue
operating in the foreseeable future, not
liquidate or shut down.
- This affects how assets and liabilities are
valued (they’re not recorded at liquidation
value).
- Example: Assets like machinery are
depreciated over their useful life instead of
being valued at sale price.
Accrual basis assumption:
- Revenues and expenses are recorded when they are earned or incurred, not when cash
is actually received or paid. When goods are delivered, services are performed and the
customer becomes obligated to pay.
- This provides a more accurate picture of performance during a period.
- Example: Revenue from a sale made on credit is recorded when the sale occurs, not
when the payment is received.
,Items are recognized in financial statements when they provide relevant and faithfully
represented information. Financial position is shown in the Balance Sheet, while performance
is shown in the Income Statement.
7.3 Obtain Insights Into Business Operations Through Financial Statements
Financial statements present a company’s financial position and performance to the public for a
specific period or date. Investors mainly want to know how profitable the company is, what it
owns and owes, how owners’ equity changes, and how cash moves through the business.
These questions are answered by the four main financial statements, which are connected and
flow in a specific order.
1) Income statement (Statement of financial performances)
The income statement shows the company’s revenues and expenses for a specific
periodIncome is an increase in assets or a decrease in liabilities that increases equity,
excluding transactions with shareholders.
It is divided into:
Revenue: from the ordinary course of business (e.g., sales or service revenue)
Gains: from activities outside ordinary business (e.g., selling a subsidiary), reported net of costs
Expense is a decrease in assets or an increase in liabilities that reduces equity, excluding
transactions with shareholders.
It is divided into:
Expenses: from normal business operations (e.g., salaries, rent)
Losses: from activities outside ordinary business (e.g., selling a long-term asset at a loss),
reported net of costs
Net income = Total Revenue > Total Expenses Net loss = Total Revenue < Total Expenses
Formula: Revenues (Sales)
− Cost of Goods Sold (COGS)
= Gross Profit
− Operating Expenses:
- Depreciation / Amortization
= Income Before Tax (EBT)
− Income Tax Expense
= Net Income (or Net Profit)
, 2) Balance Sheet (Statement of Financial Position) = The Balance Sheet shows the
company’s financial position at a specific date.
Formula: Assets = Liabilities + Equity
An asset = Resources expected to produce future benefit/ Examples of assets include cash,
inventory, account receivables (money owed to the entity by its debtors), machinery, equipment,
property, plant and equipment (or PPE, for short).
Current assets = Assets that are expected to be used, sold, or converted to cash within
one business cycle (usually one year).
> Examples: cash and cash equivalents, accounts receivable, inventories
Long-term (Noncurrent) assets = Assets that are not expected to be used, sold, or
converted to cash within one business cycle (usually more than one year).
> Examples: property, plant, and equipment (PPE), intangible assets
Liability = a present obligation of the entity to transfer an economic resource as a result of past
events. A present obligation is an unavoidable duty or responsibility to do something. debts
payable to outsiders
Liabilities
Current liabilities = debts due within one year
> Examples: accounts payable, salaries payable, short-term notes
Payable
Long-term (Noncurrent) liabilities = debts payable after one year
> Examples: long-term notes payable, long-term bonds payable
Balance sheet Equity (Shareholders’ Equity)
- Represents the shareholders’ ownership of the business’s assets
> Examples: capital (paid-in capital), retained earnings,
accumulated other comprehensive income (loss)
Equity= the owners’ claim on a company’s assets after all liabilities are paid. It includes share
capital (money invested by shareholders) and retained earnings (profits kept in the business).
WEEK 1 - Conceptual Framework And Financial Statements
7.1 Understand the Role of Accounting In Communicating Financial Information
Accounting helps businesses, managers, investors, and other stakeholders make informed
decisions by providing financial information about performance and financial position. It is often
called the language of business because it records, measures, and communicates business
activities through financial statements such as the income statement.
Both external and internal users of financial information exist. Therefore, we can classify
accounting into two branches.
Financial accounting provides information to decision makers outside the reporting entity.
These are investors, creditors, government agencies, and the public. This text focuses on
financial accounting.
Management accounting provides information for Logitech’s managers. Examples of
management accounting information include budgets, forecasts, and projections that are used
in making strategic decisions for the entity. > week 6
Accounting is an information system
that:
▪ Measures and records business activities
▪ Processes data into reports (financial statements)
▪ Communicates results to decision makers
Role of Accounting Standards
Developed countries like the United States, the United Kingdom, Japan, Germany,and Australia
follow their own professional frameworks for measurement and disclosure of financial
information, usually called Generally Accepted Accounting Principles (GAAP). As investors
seek to compare financial results across entities from different countries, they have had to
restate and convert accounting data from one country to the next in order to make them
comparable. This takes time and can be expensive, especially in a globalized world with
multinationals operating across many countries.
The solution to this problem lies with the International Accounting Standards Board (IASB)
and International Financial Reporting Standards (IFRS). The IASB was formed in 2001 to
replace the International Accounting Standards Committee (IASC) with the objective of
developing a single set of high-quality, understandable, and enforceable accounting standards
to help participants in the world’s capital markets and other users make economic decisions.
While the IASB now sets IFRS, the previously issued International Accounting Standards (IAS)
by the IASC continue to remain effective.
,7.2 Understand The Underlying Accounting Concepts In The Ifrs Conceptual
Framework
The Conceptual Framework provides the foundation for financial accounting and reporting by
defining the purpose, scope, and principles used to develop and apply accounting standards.
The current framework (updated in 2018) guides the IASB in reviewing existing standards and
creating new ones.
It focuses on general purpose financial statements, which are prepared annually and
intended to meet the common information needs of a wide range of users. Special-purpose
reports, such as tax reports, are outside its scope.
The main objective of financial reporting is to provide useful financial information that helps
users make decisions about providing resources to an entity, such as investing, lending, or
assessing management performance. Financial statements help evaluate financial health and
performance but do not determine a company’s overall value.
Primary users of financial reports are investors, lenders, and creditors, who rely on this
information to assess returns, risks, liquidity, and solvency. Other users—such as employees,
suppliers, customers, governments, and the public—may also use financial statements, but they
are not the main focus of the Conceptual Framework.
Overall, the Conceptual Framework ensures consistency, transparency, and usefulness in
financial reporting by focusing on the needs of the most important decision-makers.
Assumption in financial reporting:
Going concern assumption:
- The business is expected to continue
operating in the foreseeable future, not
liquidate or shut down.
- This affects how assets and liabilities are
valued (they’re not recorded at liquidation
value).
- Example: Assets like machinery are
depreciated over their useful life instead of
being valued at sale price.
Accrual basis assumption:
- Revenues and expenses are recorded when they are earned or incurred, not when cash
is actually received or paid. When goods are delivered, services are performed and the
customer becomes obligated to pay.
- This provides a more accurate picture of performance during a period.
- Example: Revenue from a sale made on credit is recorded when the sale occurs, not
when the payment is received.
,Items are recognized in financial statements when they provide relevant and faithfully
represented information. Financial position is shown in the Balance Sheet, while performance
is shown in the Income Statement.
7.3 Obtain Insights Into Business Operations Through Financial Statements
Financial statements present a company’s financial position and performance to the public for a
specific period or date. Investors mainly want to know how profitable the company is, what it
owns and owes, how owners’ equity changes, and how cash moves through the business.
These questions are answered by the four main financial statements, which are connected and
flow in a specific order.
1) Income statement (Statement of financial performances)
The income statement shows the company’s revenues and expenses for a specific
periodIncome is an increase in assets or a decrease in liabilities that increases equity,
excluding transactions with shareholders.
It is divided into:
Revenue: from the ordinary course of business (e.g., sales or service revenue)
Gains: from activities outside ordinary business (e.g., selling a subsidiary), reported net of costs
Expense is a decrease in assets or an increase in liabilities that reduces equity, excluding
transactions with shareholders.
It is divided into:
Expenses: from normal business operations (e.g., salaries, rent)
Losses: from activities outside ordinary business (e.g., selling a long-term asset at a loss),
reported net of costs
Net income = Total Revenue > Total Expenses Net loss = Total Revenue < Total Expenses
Formula: Revenues (Sales)
− Cost of Goods Sold (COGS)
= Gross Profit
− Operating Expenses:
- Depreciation / Amortization
= Income Before Tax (EBT)
− Income Tax Expense
= Net Income (or Net Profit)
, 2) Balance Sheet (Statement of Financial Position) = The Balance Sheet shows the
company’s financial position at a specific date.
Formula: Assets = Liabilities + Equity
An asset = Resources expected to produce future benefit/ Examples of assets include cash,
inventory, account receivables (money owed to the entity by its debtors), machinery, equipment,
property, plant and equipment (or PPE, for short).
Current assets = Assets that are expected to be used, sold, or converted to cash within
one business cycle (usually one year).
> Examples: cash and cash equivalents, accounts receivable, inventories
Long-term (Noncurrent) assets = Assets that are not expected to be used, sold, or
converted to cash within one business cycle (usually more than one year).
> Examples: property, plant, and equipment (PPE), intangible assets
Liability = a present obligation of the entity to transfer an economic resource as a result of past
events. A present obligation is an unavoidable duty or responsibility to do something. debts
payable to outsiders
Liabilities
Current liabilities = debts due within one year
> Examples: accounts payable, salaries payable, short-term notes
Payable
Long-term (Noncurrent) liabilities = debts payable after one year
> Examples: long-term notes payable, long-term bonds payable
Balance sheet Equity (Shareholders’ Equity)
- Represents the shareholders’ ownership of the business’s assets
> Examples: capital (paid-in capital), retained earnings,
accumulated other comprehensive income (loss)
Equity= the owners’ claim on a company’s assets after all liabilities are paid. It includes share
capital (money invested by shareholders) and retained earnings (profits kept in the business).
