Notes Financial Accounting PDF PDF

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Terminology • Income: “Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims • Expenses: “Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.” • Accounts receivable (A/R): claim to future payments from customers for goods sold and services rendered, outstanding invoices • Property, plant, and equipment (PP&E): tangible long-term assets of a company e.g. machinery • Accounts payable (A/P): the obligation of future payments to suppliers for received goods or services • Revenues: gross inflow of economic benefits from operating activities (e.g. sales proceeds of products and services) • Expenses: Outflow of economic benefits that results from operations • Revenue and expenses are recorded irrespective of the timing of the cash flows that might be associated! (Accrual basis of accounting) • Retained Earnings (R/E): part of equity, profit from past reporting periods adjusted for cash dividends (+/- other adjustments) • Cash Dividends: Cash paid out to stockholders, reduces R/E • Asset: “A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.” • Liability: “A present obligation of the entity to transfer an economic resource as a result of past events.“

• Equity: “The residual interest in the assets of the entity after deducting all its liabilities.” ________________________________________________________________ • The accounting equation has to hold at all times. Assets = Equity + Liabilities • Any transaction impacts at least two items in the equation. • A trial balance is prepared to check for errors and as an overview. • To close an account, debits and credits are totaled. The balance is the plug required on the smaller side to „balance“ both sides. ________________________________________________________________________________________________

The accrual basis of accounting uses the definition of assets, liabilities, expenses and revenue to time the recognition of transactions regardless whether cash has been paid at that time. This can result in timing differences that have to be recorded. Accruals are recorded if cash is paid after the recognition of an expense Deferrals are recorded if cash is paid before the recognition of expenses or revenues After all adjustments have been posted, the information is used to generate the financial report for the reporting entity. The gross profit is used to further analyze the ability to generate profits by a company. ________________________________________________________________ VAT VAT = Value added tax, also called sales tax VAT is a consumption tax. When buying goods or services the consumer pays the tax to the seller who transfers the money to the tax authorities (output tax). When purchasing goods and services qualified companies can collect a refund of the paid VAT (input tax).

Regularly, VAT is not a business expense, as the amount is reimbursed. Before payment it is a receivable or a liability. Depending on the local tax regulations only the net amount is transferred. ________________________________________________________________ • The Conceptual Framework provides information about the purpose and the elements of financial reporting. • The objective of financial statements is to provide useful information to users in making financial decisions. • Information has to be relevant and a faithful representation • Some qualities can enhance the usefulness of information in financial reporting • IFRS allows the use of different measurement bases that have different characteristics. ________________________________________________________________ Statement of Cash Flows • The statement of cash flows classifies the changes in cash based on the underlying transaction as from either operating, investing or financing activities. • Cash flow from operating activities • Cash mostly generated by the regular business of the company, e.g. cash flow from sales, payment of suppliers and employees • Cash flow from investing activities • Investing activities include purchase and sale of PP&E and some financial investments • Cash flow from financing activities • Financing activities include issuing and settling debt and raising capital through the sale of shares _______________________________________________________________

Statement of Cash Flows • The indirect method reconciles the net income to operating cash flow. Any item that is included in net income but does not exactly correspond to operating cash flow is adjusted. • This includes • Non-cash expenses such as depreciation • Revenue that has not been collected yet, i.e. parts of A/R • Expenses that have not been paid yet, i.e. parts of A/P • Items paid but not expensed, e.g. parts of inventory • Expenses and income that results in cash flows from investing or financing activities...