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[CHAPTER]
[HEADER] [TERM/ESSENTIALS] [EXPLANATION, DEFENITION]
Chapter 1: Introduction to accounting and finance
General: Accounting: collecting, analyzing and communicating Main users: Customers, competitors, employees/representatives, government,
financial information to help people make informed community representatives, investment analysts, suppliers, lenders, managers,
decisions. owners.
Financial management: is concerned with the ways in Information must be: relevant, faithful representation, comparable, verifiable,
which funds for a business are raised and invested. Timeless, understandable
Chapter 2: Measuring and reporting financial position
Financial statements: 1. Statement of cash flows What cash movements take place in a certain period?
2. Income statement How much wealth was generated in a certain period?
3. Statement of financial position What is the accumulated wealth of the business at the end of the period and what
form does it take?
The statement of financial position (SOFP): Assets Resources held by the business
- A probable future economic benefit must exist
- The benefit must arise from some past transaction or event
- The business must have the right to control the resource
- The asset must be capable of measurement in monetary terms
- Does not have to be a physical item
--> Physical: tangible asset
--> Non-physical: intangible asset
Claims Obligation of the business to provide cash to an outside party.
From the owner: Equity. From outside: Liabilities
Accounting equation Assets = equity + liabilities
Trade payables Goods that have been bought but have not been paid for yet
Current assets Short term:
- Held for sale/consumption within normal operating cycle
- Expected to be sold within a year
- Held for trading
- Cash, inventories, trade receivables
Non-current assets Held for long-term operations. Can be tangible or intangible
Current liabilities Amounts due for settlement in short term (< 1 year): Trade payables and bank
overdrafts
Non-current liabilities Amounts due for settlement in long term (> 1 year) (can become current)
Accounting conventions and rules Business entity convention Business and owner are treated separately
Historic cost convention Value of the assets show on the SOFP should be based on historic cost (purchase
price)
, Prudence convention All losses should be recorded
Going concern convention Financial statements should be prepared on the assumption that the business
will continue operations for the foreseeable future
Dual aspect convention Each transaction has two aspects and both will affect the SOFP
Valuing assets Finite Provide benefits for the business for a limited period of time. Depreciation must be
measured for each reporting period for which the assets are held
Indefinite No annual depreciation (i.e. property)
Chapter 3: Measuring and reporting financial performance
The income statement Measures and reports how much profit a business had Revenue must be measured, as well as the expenses of each period must be
generated over a certain period identified
Revenue (omzet) Inflow of economic benefits arising from the ordinary operations of a business
Expenses Outflow of economic benefits arising from the ordinary operations of a business
Equation for the period (FTP) Profit FTP = total revenue FTP – total expenses incurred in generating that revenue
Difference with SOFP: Income statement is concerned with the flow of wealth, SOFP sets out the wealth
held by the business at a single moment in time
è Profit or loss that is derived in the income statement adjusts the equity part of
the SOFP
Plain layout: Gross profit = sales revenue – cost of sales
Operating profit = gross profit – operating expenses
Profit FTP = operating profit + non-operating income – non-operating expenses
Operating profit EBIT: Earnings before interest and taxes
EBITDA: Earnings before interest, taxes, depreciation and amortization
Cost of sales Identification: each item of sales revenue is matched with the relevant cost, or
identify cost of sales after the end of the reporting period
Only represents the costs of the goods that were sold during the period
Only limited companies have rules for classification
Matching convention Expenses should be matched to the revenue that they helped to generate
Depreciation For non-current assets that have limited lives
Attempt to measure that portion of the cost of a non-current asset that has been
depleted un generating the revenue in a particular period
Four factors are needed for calculation:
1. The cost of the asset (purchase price)
2. The useful life of the asset (economic life)
3. The residual value of the asset
4. The depreciation method: Straight line- or reducing balance-
Costing inventories - FIFO: first in, first out
- LIFO: last in, first out
- AVCO: weighted average cost (Use weighted average cost of inventories)
Bad debt When products are sold on credit and it becomes reasonably certain that customer
will not pay --> Reduce trade receivables on the SOFP and increase expenses in the
income statement
[CHAPTER]
[HEADER] [TERM/ESSENTIALS] [EXPLANATION, DEFENITION]
Chapter 1: Introduction to accounting and finance
General: Accounting: collecting, analyzing and communicating Main users: Customers, competitors, employees/representatives, government,
financial information to help people make informed community representatives, investment analysts, suppliers, lenders, managers,
decisions. owners.
Financial management: is concerned with the ways in Information must be: relevant, faithful representation, comparable, verifiable,
which funds for a business are raised and invested. Timeless, understandable
Chapter 2: Measuring and reporting financial position
Financial statements: 1. Statement of cash flows What cash movements take place in a certain period?
2. Income statement How much wealth was generated in a certain period?
3. Statement of financial position What is the accumulated wealth of the business at the end of the period and what
form does it take?
The statement of financial position (SOFP): Assets Resources held by the business
- A probable future economic benefit must exist
- The benefit must arise from some past transaction or event
- The business must have the right to control the resource
- The asset must be capable of measurement in monetary terms
- Does not have to be a physical item
--> Physical: tangible asset
--> Non-physical: intangible asset
Claims Obligation of the business to provide cash to an outside party.
From the owner: Equity. From outside: Liabilities
Accounting equation Assets = equity + liabilities
Trade payables Goods that have been bought but have not been paid for yet
Current assets Short term:
- Held for sale/consumption within normal operating cycle
- Expected to be sold within a year
- Held for trading
- Cash, inventories, trade receivables
Non-current assets Held for long-term operations. Can be tangible or intangible
Current liabilities Amounts due for settlement in short term (< 1 year): Trade payables and bank
overdrafts
Non-current liabilities Amounts due for settlement in long term (> 1 year) (can become current)
Accounting conventions and rules Business entity convention Business and owner are treated separately
Historic cost convention Value of the assets show on the SOFP should be based on historic cost (purchase
price)
, Prudence convention All losses should be recorded
Going concern convention Financial statements should be prepared on the assumption that the business
will continue operations for the foreseeable future
Dual aspect convention Each transaction has two aspects and both will affect the SOFP
Valuing assets Finite Provide benefits for the business for a limited period of time. Depreciation must be
measured for each reporting period for which the assets are held
Indefinite No annual depreciation (i.e. property)
Chapter 3: Measuring and reporting financial performance
The income statement Measures and reports how much profit a business had Revenue must be measured, as well as the expenses of each period must be
generated over a certain period identified
Revenue (omzet) Inflow of economic benefits arising from the ordinary operations of a business
Expenses Outflow of economic benefits arising from the ordinary operations of a business
Equation for the period (FTP) Profit FTP = total revenue FTP – total expenses incurred in generating that revenue
Difference with SOFP: Income statement is concerned with the flow of wealth, SOFP sets out the wealth
held by the business at a single moment in time
è Profit or loss that is derived in the income statement adjusts the equity part of
the SOFP
Plain layout: Gross profit = sales revenue – cost of sales
Operating profit = gross profit – operating expenses
Profit FTP = operating profit + non-operating income – non-operating expenses
Operating profit EBIT: Earnings before interest and taxes
EBITDA: Earnings before interest, taxes, depreciation and amortization
Cost of sales Identification: each item of sales revenue is matched with the relevant cost, or
identify cost of sales after the end of the reporting period
Only represents the costs of the goods that were sold during the period
Only limited companies have rules for classification
Matching convention Expenses should be matched to the revenue that they helped to generate
Depreciation For non-current assets that have limited lives
Attempt to measure that portion of the cost of a non-current asset that has been
depleted un generating the revenue in a particular period
Four factors are needed for calculation:
1. The cost of the asset (purchase price)
2. The useful life of the asset (economic life)
3. The residual value of the asset
4. The depreciation method: Straight line- or reducing balance-
Costing inventories - FIFO: first in, first out
- LIFO: last in, first out
- AVCO: weighted average cost (Use weighted average cost of inventories)
Bad debt When products are sold on credit and it becomes reasonably certain that customer
will not pay --> Reduce trade receivables on the SOFP and increase expenses in the
income statement
