Conceptual Framework of Accounting Terms – identify & describe ...

Conceptual Framework of Accounting  

Collection of concepts – guide accounting Accounting – identifying/communicating economic info to make informed decisions

Terms – identify & describe economic info Assets – Own, economic resource, provide future economic benefit Current – convert into cash within 1 yr Non-current – use in operations for 1yr+  Cash  Property/plant/equipment  Inventories  Intangible assets – no physical substance e.g. patent, trademark,  Account Receivable copyright and goodwill  Prepaid rent, insurance Liability – Owe, obligation, sacrifice of economic resource in future Current – pay within 1 yr Non-current – pay over 1yr  Account payable – suppliers  Note payable  Salaries payable – employees  Mortgage payable  Taxes payable – taxing authorities  Bond/debentures payable Equity – Difference between assets and liabilities  Contributed capital – Investors contribute resources for ownership interest  Retained Earnings (Profits) Revenue – ↑ in assets resulting from G/S Expense – ↓ in assets resulting from G/S Dividend – distribution of profits to owners

Principles – measure economic info Cost Principle – Assets are recorded and maintained at their historical costs Revenue Recognition Principle – revenue recorded when earned Matching Principle – expenses are recorded in period they generate revenue

Assumptions – made when communicating economic info Economic Entity – business financial activities are separate from owner Time Period – communicate info over short periods of time - ½/1 yr FS Monetary Unit – $ = effect way to communication (stable – inflation/deflation) Going Concern – company will continue to operate into foreseeable future

Qualitative Characteristics Comparability – compare financial activities of DIFFERENT companies  Must disclose accounting methods used Consistency – Compare financial activities of SAME entity over time  Use same methods & disclose when change Conservatism – uncertainty = choose the least optimistic alternative  Guards against overstating revenues or assets Materiality – threshold over which an item could begin to affect decisions Relevance – capacity to affect decisions

 Timely  Feedback value – assess past performance  Predictive value – form expectations about future performance Reliability – info is free from error, faithful representation & neutral Understandability – understandable by users willing to study info with diligence

Financial Statements Statement of Comprehensive Income  Single step – Revenues/expenses over specific time period e.g. yr ended June 30th Revenue – Expenses = Net Profit/Loss 

Multistep – groups certain revenues & expenses together & calculates several subtotals of income  Gross Profit Sales Revenue – Cost of Sales (COGS) = Gross Profit  Profit before income tax expense Gross Profit – Operating Expenses = Profit before income tax expense  Other comprehensive income – gains/losses not included in standard items  Total Comprehensive income – profit after considering all profit/expenses

Statement of Financial Position (Balance Sheet)  Company’s assets, liabilities and equity at a given date Accounting Equation A=L+E 

Consolidated – groups accounts together under a few major classifications  Assets – current or non-current  Liability – current or non-current  Equity – retained earnings or contributed equity

Statement of Changes in Equity  Changes in a company’s retained earnings over a specific period of time  Mainly - ↑ in equity from profits & ↓ from withdrawals or dividends Beginning Retained Earnings +/– Profit/Loss – Dividends = Ending Retained Earnings

Link Between Statements  CI NP  CE Profit  CE ending retained earnings  RE in FP

Statement of Cash Flows Operating Cash Flows +/– Financing Cash Flows +/– Investing Cash Flows = Net change in cash

Types of info usually disclosed along with financial statements Notes to Financial Statements – extra info immediately following the financial statements: 1. Disclose accounting methods used 2. Disclose additional detail and explanation of account balances 3. Provide information not recognised in financial statements Independent Auditors Report – prepared by a certified public account for the shareholder  Opinion on fair representation in conformance with AAS of financial position  In all annual reports (public company) Management’s Discussion and Analysis (MD&A) – D&A of financial activities  Precedes (before) financial statements i  Comments on:  Expansion plans  Ability to satisfy current obligations  Results of operations Governance Information Sustainability Report – e.g. commitment to safety & wellbeing, community & environment

3 Major Forms of Business Sole Proprietorship  Owned and operated (makes all decisions) by one person  Retains all profits/bears any loss  Most common type of business (small) ADV DIS  Simple formation &  Unlimited liability – personal assets used to pay debt dissolution  Limited expertise & capital  Control  Security for funds Partnership  2+ proprietors join together to own a business  Established by written or oral agreement  Reasons formed:  Different skills  Combine resources  Spread financial risk among people