Professional Documents
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Financial accounting
Financial accounting is the process by which financial information is prepared and communicated to users
Prepared and communicated by whom? How? Limited companies are required to provide shareholders with an audited set of accounts, or financial statements
Information useful for economic decision-making Corporate reporting Annual Reports Financial Statements e.g. Statements of financial performance Statement of financial position Cash flow statement Notes Accompanying the financial statements e.g. OFR Other means of communication by the company e.g. Investor and analyst briefings Websites Other market information e.g. Analysts' reports
Industry journals
Figure 1: The communication of decision-useful information Scoil Ghn U Chuinn UCD UCD Quinn School of Business Source: Inside Out: Reporting on shareholder value, ICAEW, 1999
The IASB states that the objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
Investors
Employees Lenders Customers
Public
UCD Quinn School of Business
Management
Shareholders/ Investors
Are concerned with the risk Financial inherent in, and return provided statements by, their investments: Information to help them determine whether they should buy, hold or sell Information to assess the ability of the enterprise to pay dividends
Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition, ISBN 1-4080-2113-2
Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition, ISBN 1-4080-2113-2
Competitors
Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition, ISBN 1-4080-2113-2
Employees
Information about the stability and profitability of their employers. Information to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities Are interested in resource allocation and, therefore, want to know about the activities of enterprises. Also use information in decisions to stimulate the economy, to determine taxation policies and assessments. Also use some or all the information in the calculation of national economic statistics
Financial statements, often recast in a pre-defined tax-based format possibly following different rules Financial statements
General public Enterprises affect members of the public individually and collectively. For example, enterprises may make a substantial contribution to the local economy in many ways, including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities
Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition, ISBN 1-4080-2113-2
Equity
Non-current Assets
Current Assets
Motor Vehicles
Plant and Machinery Furniture Long Term Investments
UCD Quinn School of Business
Glanbia plc Non-current Assets Section of the Group statement of financial position (SoFP)
ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in associates Investments in joint ventures Trade and other receivables Deferred tax assets Available for sale financial assets Derivative financial instruments Notes 14 15 16 17 19 27 18 32 2010 000 369,346 356,830 11,757 58,945 23,084 7,388 14,127 1,643 843,120 2009 000 363,152 342,112 10,041 58,276 50,555 12,022 20,397 2,718 859,273
Current Assets
Receivables (amounts due to the entity from outside the business)
Bank and Cash (amounts owned by the entity) Prepaid Expenses - any guesses? Inventory
Underlying assumptions
Items included in financial statements (e.g., assets) are defined in terms of their relationship to the business
The business is the reporting entity Typically, this is a year SFP is a snap-shot as at a particular date
Glanbia plc Current Assets Section of the Statement of Financial Position (SFP)
Notes 20 19 32 21 Current assets Inventories Trade and other receivables Derivative financial instruments Cash and cash equivalents Total current assets Total assets 2010 000 303,991 246,831 3,912 229,101 783,725 1,626,845 2009 000 201,577 204,326 7,501 152,789 566,193 1,425,466
Current Liabilities
UCD Quinn School of Business
Non-current Liabilities
Scoil Ghn U Chuinn UCD
Current Liabilities
Payables (amounts owed by the organisation to outsiders)
Bank Overdrafts Taxes Accrued Expenses - any guesses?
Glanbia plc Current Liabilities Section of the Statement of Financial Position (SFP)
Notes Current liabilities Trade and other payables Current income tax liabilities Borrowings Derivative financial instruments Provisions for liabilities and charges Total liabilities 31 26 32 29 2010 000 366,246 2,538 972 6,487 21,105 397,348 1,202,441 2009 000 295,481 2,816 945 10,615 27,311 337,168 1,128,078
Non-current Liabilities
When liabilities are not due for payment within one year from the Statement of Financial Position date (balance sheet date), they are classified as non-current liabilities
Equity
Represents owners stake in the business
Amount of assets not funded by liabilities Equity can also be called:
Net Worth (US) Capital Shareholders funds (UK) Stockholders equity (US)
Underlying assumptions
Items included in financial statements (e.g., assets) are defined in terms of their relationship to the business
The business is the reporting entity Typically, this is a year
Glanbia plc Equity Section of the Group statement of financial position (SoFP)
EQUITY Issued capital and reserves attributable to equity holders of the Parent Share capital and share premium Other reserves Retained earnings Non-controlling interests Total equity Notes 2010 000 2009 000
23 22 24 25
Accounting Equation
Assets = Liabilities + Equity(or Capital/Net
Worth/Shareholders Funds)
Simple example:
At 31st December 2010, ABC plc
Has cash in the bank of 1,000 (had 2,000 at end 2009) Owes 300 to DEF plc (owed 500 at end 2009)
How much equity have the owners of ABC plc in the business at 31 December?
ABC plc
31.12.2010
Assets -
31.12.2009
2,000 500
Minus
1,000 300
700
1,500
ABC plc
Suppose the shareholders in ABC plc had originally invested 300 in exchange for all of the issued share capital of ABC plc
Analyse equity of 700 and 1,500 on 31 December 2010 and 2009, respectively, to show original share capital separately
ABC plc
Why?
Verifiable (can look at documents to establish cost and realizable value) Expect to recover at least the amount included in the SFP through regular trading
Underlying assumptions
Accounting entity
The business is the reporting entity
Accounting period
Typically, this is a year
Accounting equation
Assets equal (liabilities + equity)
The IASB states that the objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
Accruals/matching principle
10 10 11
25
12 12
Basic earnings per share (cents) Diluted earnings per share (cents)
UCD Quinn School of Business
36.86 36.63
38.46 38.35
Under this principle, the effects of transactions and other events are recognized in accounts when they occur (and not as cash or its equivalent is received or paid) and
they are recorded in the accounting records and reported in the financial statements of the periods to which they relate
IASB Definition
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