© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.1 Measuring and reporting financial position OBJECTIVES You should be able to: Prepare a simple balance sheet and interpret the information that it contains Explain the nature and purpose of the three major financial statements Discuss the limitations of the balance sheet in portraying the financial position of a business Discuss the accounting conventions underpinning the balance sheet

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.2 The major financial statements – an overview Profit and loss account Balance sheet Cash flow statement

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.3 Relationship between the balance sheet, profit and loss account and cash flow statement Profit and loss account 1 Balance sheet at the beginning of Period 1 Profit and loss account 2 Cash flow statement 2 Time Period 1 Period 2 Cash flow statement 1 Balance sheet at the end of Period 1 Balance sheet at the end of Period 2

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.4 Assets Major characteristics A probable future benefit exists The business has an exclusive right to control the benefit The benefit must arise from some past transaction or event The asset must be capable of measurement in monetary terms

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.5 Claims There are essentially two types of claim against a business: Capital Liabilities

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.6 The balance sheet equation equals Liabilities Assets Capital plus

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.7 The effect of trading operations on the balance sheet equals Profit (Loss) Assets Capital plus (minus) Liabilities plus The balance sheet equation can be extended as follows:

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.8 The classification of assets The classification of assets may vary according to the nature of the business: Fixed assets Current assets

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.9 Cash Trade debtors Stock The circulating nature of current assets

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.10 The classification of claims Long-term liabilities Current liabilities

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.11 The equation for the horizontal layout Fixed assets = Capital Long-term liabilities Current liabilities ++ Current assets + Fixed assets

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.12 Fixed assets Current assets Current liabilities -+ Long-term liabilities - = Capital The equation for the vertical layout

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 2.13 Accounting conventions and the balance sheet Accounting conventions Money measurement Historic cost Going concern Dual aspect Prudence Stable monetary unit Objectivity Business entity