Lecture Intermediate accounting (IFRS/e) - Chapter 3: The statement of financial position and financial disclosures

Chapter 3 - The statement of financial position and financial disclosures. The purpose of this chapter is to provide an overview of the balance sheet and financial disclosures and to explore how this information is used by decision makers.

The Statement of Financial Position

Limitations:

 The Statement of Financial

Position does not portray the

market value of the entity as

a going concern nor its

liquidation value.

 Resources such as

employee skills and

reputation are not recorded

in the Statement of Financial

Position.

Limitations:

 The Statement of Financial

Position does not portray the

market value of the entity as

a going concern nor its

liquidation value.

 Resources such as

employee skills and

reputation are not recorded

in the Statement of Financial

Position.

Usefulness:

 The Statement of Financial Position describes many of the resources a company has for generating future cash flows.

 It provides liquidity information useful in assessing a company’s ability to pay its current obligations.

 It provides long-term solvency information relating

to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Usefulness:

 The Statement of Financial Position describes many of the resources a company has for generating future cash flows

 It provides liquidity

information useful in assessing a company’s ability to pay its current obligations.

 It provides long-term solvency information relating

to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Reports a company’s financial position on a particular date.

Claims against resources (Liabilities)

Remaining claims accruing to owners (Owners’ Equity)

Remaining claims accruing to owners (Owners’ Equity)

The Statement of Financial Position

past events and from which future economic benefits are

expected to flow to the entity.

past events and from which future economic benefits are

expected to flow to the entity.

Slide 5

Cash Cash Equivalents Short-term Investments

Receivables Inventories Prepaid Expenses

Cash Cash Equivalents Short-term Investments

Receivables Inventories Prepaid Expenses

Current

Assets

Cash equivalents

include certain negotiable items such as commercial paper, money market funds, and Treasury

bills.

Operating Cycle of a Typical Manufacturing Company

Use cash to acquire raw materials

Convert raw materials to finished

product

Deliver product to customer

Collect cash from customer

Slide 7

Noncurrent Assets

Investments Property, Plant, &

Equipment Intangibles Other Assets

Investments Property, Plant, &

Equipment Intangibles Other Assets

Not expected to

be converted to

cash or consumed within

one year or the

one year or the

Noncurrent Assets

Other Assets

1 Include long-term prepaid

expenses and any noncurrent assets not falling in one of the other classifications

Investments

1 Not used in the operations of the

business

2 Include both debt and equity securities of

other corporations, noncurrent

receivables, and cash set aside for

special purposes

Property, Plant, and Equipment

1 Are tangible, long-lived, and used in the

operations of the business

2 Include land, buildings, equipment,

machinery, and furniture

3 Reported at original cost less

accumulated depreciation

Intangible Assets

1 Used in the operations of the

business but have no physical substance

2 Include patents, copyrights, and

franchises

3 Reported net of accumulated

amortization

©

Liabilities are present obligations of the entity arising form past events, the settlement

of which is expected to result in outflow from the entity of resources embodying economic benefits

Liabilities are

present

obligations of the entity arising form past events, the settlement

of which is expected to result in

outflow from the entity of resources embodying economic benefits

Current Liabilities

Accounts Payable Notes Payable Accrued Liabilities Unearned Revenues Current Maturities

of Long-Term Debt

Accounts Payable Notes Payable Accrued Liabilities Unearned Revenues Current Maturities

of Long-Term Debt

Obligations expected to be

satisfied through current

assets or creation of other

current liabilities within one

year or the operating cycle,

whichever is longer.

Obligations expected to be

satisfied through current

assets or creation of other

current liabilities within one

year or the operating cycle,

whichever is longer.

Current Liabilities Current Liabilities

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Long-term Liabilities

Long-term Notes

Mortgages Long-term Bonds Pension Obligations Lease Obligations

Long-term Notes

Mortgages Long-term Bonds Pension Obligations Lease Obligations

Obligations that

will not be satisfied within

one year or operating cycle,

whichever is longer.

Obligations that

will not be satisfied within

one year or operating cycle,

whichever is

longer.

Long-Term Liabilities Long-Term Liabilities

Shareholders’ Equity is residual interest in the assets

of the entity after deducting all its liabilities

Shareholders’ Equity is residual interest in the assets

of the entity after deducting all its liabilities

Slide 13

Shareholders’ Equity

Issued Capital

Issued Capital

Retained Earnings

Retained Earnings

Treasury shares, capital reserve, translation

reserve and other reserves, and other

comprehensive income items

Treasury shares, capital reserve, translation

reserve and other reserves, and other

comprehensive income items

Slide 15

Management Discussion and Analysis

Provides a biased but

informed perspective of

a company’s operations, liquidity,

and capital resources.

Provides a biased but

informed perspective of

a company’s operations, liquidity,

and capital resources.

 Preparing the financial statements and other information in the annual report.

 Included in annual reports to assert the

responsibility of management and directors

Auditors’ Report

Expresses the auditors’ opinion

as to the fairness of presentation of the financial statements in conformity with

Issued when the financial statements present fairly the financial position, results of operations, and cash flows are in conformity with accounting

standards.

Qualified

Issued when there is an exception

to the standard unqualified opinion but is not of sufficient seriousness

to invalidate the financial statements as a whole.

Adverse Issued when the exceptions are so serious that a qualified opinion is

not justified.

Disclaimer information on which to express an Issued when there is insufficient

opinion.

sent each year to all shareholders,

usually in the same mailing with the

annual report

Comparative Financial

Statements

Allow financial statement users to compare year-to-year financial position, results of operations, and

cash flows.

Horizontal Analysis

Expresses each item in the financial statements as a percentage of that same item in the financial statements of another

year (base amount).

Vertical Analysis

Involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year.

Ratio Analysis Allows analysts to control for size differences over time and among

firms.

Indicates the extent of reliance on creditors, rather than owners, in providing

resources

=

Times interest earned ratio

Net income + Interest expense + Taxes Interest expense

Indicates the margin of safety provided to

creditors

Appendix 3: Reporting by Operating Segment

Reportable Operating Segment Characteristics

Engages in business activities

from which it may earn revenues

and incur expenses.

Many companies operate in several business segments as a strategy to achieve growth and to reduce operating risk through diversification

statement analysis of diversified companies.

Operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.

Discrete financial information is

available.

General information about

the operating segment.

Segment profit or loss, segment assets, segment liabilities, and the basis of

measurement.

Reconciliations of the totals of segment revenues,

reported segment profit or loss, segment assets, segment

liabilities and other material segment items.

Information About

Major Customers

Revenues from customers generating 10% or more of the revenue of an entity must be

disclosed.

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