MEASURING AND REPORTING FINANCIAL POSITION Part One FINANCIAL ACCOUNTING Chapter 2 MEASURING AND REPORTING FINANCIAL POSITION

Explain the nature and purpose of the three major financial statements LEARNING OUTCOMES You should be able to: Prepare a simple statement of financial position and interpret the information that it contains Explain the nature and purpose of the three major financial statements Discuss the uses and limitations of the statement of financial position for decision-making purposes Discuss the accounting conventions underpinning the statement of financial position

The major financial statements – an overview Income statement Statement of financial position Statement of cash flows

The relationship between the major financial statements Income statement Statement of cash flows Statement of financial position Time Period 2 Period 1 Figure 2.1 The relationship between the major financial statements

Decision chart for identifying an accounting asset Is there a probable future benefit? Is there a right to control the resource? Does the economic benefit arise from a past transaction or event? Can the resource be reliably measured in financial terms? Accounting asset Not an accounting asset Yes No Figure 2.2 Decision chart for identifying an accounting asset

Claims Equity Liabilities

The accounting equation Liabilities Assets Equity = +

The effect of trading transactions on the accounting equation The accounting equation can be extended as follows: Profit (Loss) Assets Equity Liabilities = + + (−)

The classification of assets The classification of assets may vary according to the nature of the business: Current assets Non-current assets

Current assets Expected to be sold within the next year Held principally for trading Held for sale or consumption during the business’s operating cycle They are cash or near equivalents to cash

Do not meet the definition of current assets Non-current assets Do not meet the definition of current assets

The circulating nature of current assets Cash Trade receivables (trade debtors) Inventories (stock) Figure 2.3 The circulating nature of current assets

The classification of claims Current liabilities Non-current liabilities

Current liabilities Held principally for trading purposes Due to be settled within a year after the statement of financial position date Expected to be settled within the business’s normal operating cycle No right to defer settlement beyond a year after the statement of financial position date

Non-current liabilities Do not meet the definition of current liabilities

Brie Manufacturing Statement of financial position as at 31 December 2013 £000 ASSETS Non-current assets Property 45 Plant and equipment 30 Motor vans 19 94 Current assets Inventories 23 Trade receivables 18 Cash at bank 12 53 Total assets 147

Brie Manufacturing Statement of financial position as at 31 December 2013 (Continued) £000 EQUITY AND LIABILITIES Equity 60 Non-current liabilities Long-term borrowings 50 Current liabilities Trade payables 37 Total equity and liabilities 147

Non-current liabilities Non-current liabilities Standard layout Alternative layout equals Non-current assets Current assets Total assets plus Equity Equity + liabilities Non-current liabilities Current liabilities Non-current assets Current assets Total assets plus equals minus Non-current liabilities Current liabilities Equity Figure 2.4 Layouts for the statement of financial position

Accounting conventions influencing the statement of financial position Business entity convention Dual aspect convention Prudence convention Historic cost convention Going concern convention Statement of financial position Figure 2.5 Accounting conventions influencing the statement of financial position

Money measurement Key measurement problems: Goodwill and brands Human resources Monetary stability

Uses of the statement of financial position Can provide a basis for assessing the value of the business Relationships between assets and claims can be assessed Shows how the business is financed and how funds are deployed Performance can be better assessed