Chapter 1: Conceptual Framework and Financial Statements by Maximilian Schillings

Chapter 1: Conceptual Framework and Financial Statements

4 Financial Statements

(Comprehensive) Income Statement

The Income Statement shows a company's financial performance.

Revenues

Expenses

Net Income

Statement of Changes in Equity

Balance Sheet

List of an entity's assets, liabilities and owners' equity as at a specific date. Also called the statement of financial position.

Assets, Current Assets, Non-Current Assets

Total Shareholders' Equity

Liabilities, Current Liabilities, Non-Current Liabilities

Statement of Cash Flows

Reports cash receipts and cash payments classified according to the entity's major activities: operating, investing, and financing.

Operating Activities

Investing Activities

Financing Activities

Forms of Entity

Proprietorship

A business with a single owner. The single owner has the full liability.

Partnership

A business with two or more owners. General partners share the liability, limited partners have no liability.

Corporation

A business owned by shareholders. A corporation is a legal entity, an 'artificial person' in the eye of the law.

Kinds of Accounting

Financial Accounting

The branch of accounting that provides information to people outside the firm.

Management Accounting

The branch of accounting that generates information for the internal decision makers of a business, such as top executives.

Accounting Standards

GAAP

Generally accepted accounting principles - accounting guidelines, usually in reference to US standards as formulated by the Financial Accounting Standards Board (FASB). By 2014, US GAAP is expected to converge with IFRS.

IFRS

Accounting guidelines, formulated by the International Accounting Standards Board (IASB).

IFRS Framework

Objective

Provide information to various user groups that is useful for their economic decision making.

Qualitative Characteristics

What makes accounting information useful?

Understandability

Relevance

Reliability

Comparability

Constraints

Timeliness

Balance between Qualitative Characteristics

Benefits vs. Costs

Assumptions

Accrual Accounting

Going Concern

Elements

Asset, Property, Plant and Equipment (PPE)

Liability

Equity

Income

Expense

Accounting Equations

Assets = Liabilities + Equity

Net Income = Total Revenue and Gains - Total Expenses and Losses

Beginning Balance of Retained Earning + (Revenues for the Period - Expenses for the Period = Net Income) - Dividends for the Period = Ending Balance of Retained Earnings