Financial Assignment
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*The objective of the ‘statement of comprehensive income’*
“Statement of comprehensive income” provides information concerning revenue and expenses that is beneficial to the users of the company’s commercial statements. It provides information showing the company’s performance during a specified time. Financial performance shows the profitability of a company. Handlers of financial statements want information in assessing the company’s potential ability to generating cash (Mark, 2018). The statement of comprehensive income can be presented as a single statement or presented in two ways that is an income statement and a statement of comprehensive income. Two separate statements show income statement which shows profit and loss and statement of comprehensive income which starts with profit and loss and shows other income which is not reflected in profit and loss (Mark, 2018)
*Why we prepare an income statement*
The income statement is prepared by companies to disclose the financial information of the company. An income statement shows a prompt of the company’s revenues and expenses. Expenses and revenues are usually in operating activities. An income statement is useful in helping the company to evaluate the past financial performance. The information in the income statement helps the company in predicting possible future performance. The information of expenses, total revenue and total income can be used by the company in assessing and predicting all the possible risks that the company is likely to face. The information on loss and profit in the financial statement is useful in expounding the company’s current sate in terms of the going concern and liquidity. The information in the income statement can be used for equity research, valuation and ratio analysis. The research, analysis and valuation can be used by the company in predicting forthcoming economic decision (Mark, 2018).
*What is performance and what does it mean*
Performance refers to the point at which the company has achieved its set financial objectives. Financial performance denotes to the method of evaluating the outcomes of a corporation’s procedures and policies in financial terms. Financial performance is used by the corporation to weigh its financial health during a specified time. Financial performance can be used as a center of comparing similar firms in the same industry (Mark, 2018).
*Users of financial statements*
*Investors*
Investors use the ‘income statement’ to check if the corporation is making consistent profits. Consistent profits show that the company is viable for making investments in the company. The investors use the income statement in analyzing the corporation’s financial performance. Potential stockholders can use the ‘income statements’ in analyzing the profitability of the company and make the best economic decisions and determine whether they will invest in the company or not. Investors are interested in the profitability and the net sales of the company.
*Lenders*
Lenders are interested in the company’s profits so that they can assess and evaluate if the company can pay all the interest expenses on the loaned amount and be in a position to repay all the loan on time. Lenders are interested in the company’s capital resources and liquidity.
*Income*
It refers to the escalation in assets or a reduction in liabilities increasing the company’s equity. The income arises as a result of enhancement of assets, cash inflows and decrease in liabilities. Income of a company does not include the contributions taken from equity members (Roberts, 2018).
*Recognition of income*
Income is recognized when there is a decrease in a liability or an increase in income. Income is recognized when an escalation in the economic benefits in the future can be measured as a result of a decrease in a liability or an increase in the asset (Roberts, 2018).
*The distinction between revenue and gains.*
Revenue takes place in the progress of the normal business events of a company. Revenues are earned by the company through fees, rent, royalties, dividends, sales and interests. Gains denote an escalation in the economic benefits. Gains may or may not occur in ordinary business activities. Gains include gains on the revaluation of marketable securities and the dumping of non-current properties. Gains are documented in the income statement as net linked expenses while revenues are recorded as the gross amount (Roberts, 2018).
*Expenses*
Expenses refer to a reduction in the economic benefits of a company at a certain accounting period. Expenses occur as a result of depletion of assets, cash outflows, incurrences of liabilities which lead to a decrease in the company equity. Expenses result in a reduction in the corporation’s equity. Expenses of a corporation do not include payments to equity members (Roberts, 2018)
*Recognition of expenses*
Expenses are recognized in the income statement when a reduction in the economic benefits of a company in future can be measured as a result of an escalation in liability or a reduction in an asset (Roberts, 2018).
*The distinction between expenses and losses*
Expenses occur in the progress of normal business events of a company. Expenses as usually in the form of depletion of assets or cash outflows. Expenses include wages, inventory, depreciation, cost of sales and plant and equipment. Losses refer to items that lead to a decrease in the economic benefits of a company. Losses may or may not occur as a result of ordinary business activities of a company. Expenses include rent expense, delivery expense, rent expense and advertising expense. Example of a loss includes the sale of a long-lived asset at an amount that is less than the asset’s book value (Roberts, 2018).
*Measurement*
“The basis of measurement is the fair value, current cost and value in use” (Robert, 2018). Historical cost is applicable if the financial liabilities and financial assets are evaluated at amortized cost. Fair value shows the expectations of the current market participants concerning the uncertainty, timing and amount of probable cash flows. Current cost shows the current amount that will be paid to acquire an asset (Roberts, 2018).
*The general purpose of ‘the statement of financial position’*
The “purpose of the statement of financial position” to show the current status of the company as at a stated date. The information the “statement of financial position” can be used in estimating the funding, debt position and the liquidity position of a company (Mark, 2018).
*Objective*
The “statement of financial position” shows data reflecting the basic accounting guidelines and principles including full disclosure principle, matching principle as well as cost (Mark, 2018).
*What information does it show?*
The ‘statement of financial position’ shows the information on the corporation’s equity, assets and liabilities.
*Two users and how they use the information*
*Investors*
Investors can use the data in the “statement of financial position” to check the corporation’s current monetary performance with the past financial performance and to check if the company is growing in the right manner and if the financial health of the company is worth investing in.
*Creditors*
Creditors are more concerned with the creditworthiness of a company. They are more concerned with the capacity of the corporation to pay its credits. They use the data in “the statement of financial position” to analyze the debt levels, leverage levels and the overall risk of the company.
*Assets*
An asset refers to a resource of a company that is controlled by the company due to past events and the possible future benefits from that asset are expected to stream into the company (Roberts, 2018).
*Recognition of assets*
Assets are documented in the “statement of financial position” when the possible future benefits from that asset will stream into the company (Roberts, 2018).
*Current and Non-current assets*
Assets can be categorized into non-current and present properties. Currents properties are the properties that enable the company to realize its economic benefits within twelve months. Non- currents assets deliver the set of economic benefits to a company in more than twelve months (Roberts, 2018).
*Examples current assets*
Inventories
Cash and cash equivalents
Trade receivables
*Examples Non-current assets*
Intangible assets
Goodwill,
Plant, property and equipment.
*Liabilities*
Liabilities of a company refer to the current obligation resulting from past events and the payments for those liabilities is likely to result in cash outflows from the company resources. Liabilities reduces the company’s future economic benefits (Roberts, 2018).
*Recognition of liabilities*
Liabilities are documented in the “statement of financial position” when the possible cash outflows from the company resources used to settle the liabilities resulting from past events can be measured (Roberts, 2018).
*Current and non-current liabilities*
Liabilities of a company can be categorized into present and non-current obligations. Current obligations are those obligations that a company can pay within twelve months. Non- currents obligations are those obligations whose period of settlements take more than one year (Roberts, 2018).
*Examples Current liabilities*
Current tax payable
Short-term borrowing
Trade payables
Accounts payable
Accrued expenses
*Examples non-currents liabilities*
Long term borrowing
*Equity*
The equity segment in the ‘balance sheet’ shows the investments that are made in the corporation. “Equity is the remaining interest in the assets of a company after withholding all the liabilities” (Robert, 2018). Equity include capital contributions by owners and the profit retained in the company (Roberts, 2018).
*Form different forms of business*
*Sole proprietorship*
A sole proprietorship is a system of commercial operations owned by a single person. The equity segment for a sole proprietor in “the statement of financial position” consists of only one element that is the capital account. The capital consists of the owner initial investment in the company. An owner can make any contributions to the company in terms of assets and cash at any time during the business operations (Douglas, 2017).
*Partnership*
A partnership is a form of business that is made of two or more owners. The equity segment of a partnership is denoted as the capital account. Partners in the partnership use the capital account to check the progress of the reserves of each partner. Each partner in the partnership has a capital account. For instance, a partnership with four members has four capital accounts (Douglas, 2017).
*Limited company*
A limited company refers to a private corporation in which the owners are dully responsible for all the corporation debts and capital. The equity section shows the investments contributed by the owners towards financing the business operations. The equity section of a limited company consists of a section of a common share and the retained earnings. The retained earnings are used to keep the corporation accounts on track and the payments to the shareholders. The equity segment of a limited company is denoted as the shareholder’s equity (Douglas, 2017).
*Measurement*
“According to IFRS, items in the statement of financial position should be measured using the fair value. Fair value refers to the price that a company will receive when an asset is sold or the price paid to settle an obligation is done in an orderly transaction among market applicants at the measurement dates” (Kulikova et al, 2015).
*Accrual basis explains contrast to the cash basis. Explain the matching concept*
According to the matching principle, the kind of expenses incurred at a certain accounting period should be matched with the revenues that a company recognizes at that accounting period. According to this principle recognizes revenues on all the sales made is wrong. The company should all charge expenses on the sales since cash is collected on those sales till that specific period. Matching concept is an accrual concept since it neglects the number of actual cash outflows and cash inflows and timing but only concentrates on the occurrence of expenses and revenues. According to this principle, not all the expenses charged need to relate to the revenues recognized at a certain period. Matching concept appeals for adjustments to be made in accrued revenues, outstanding expenses and prepaid expenses (James, 2019).
*Time period principle*
This principle involves the recording of financial results of the company activities at a standard time. The time is normally, annually, monthly and quarterly. All the financial statements should have time recorded at the top page (James, 2019).
*Revenue recognition principle*
It is mainly concerned with the revenue documented in the “statement of comprehensive income” of a company. Revenue is the cash inflows that result from ordinary business activities. Revenues can arise as a result of the sale of goods. This principle excludes revenues collected in the form of taxes on behalf of third parties. According to this principle, revenue is the total commission. It is not gross cash inflows and receivables (James, 2019).
*Expense recognition principle*
According to this principle expenses and revenues that relate should be recognized at the same time. “This principle is a key element of the accrual basis of accounting which states that revenues and expenses should be recognized at the time they are incurred “(James, 2017).
*Historical cost principle*
According to this principle, an asset is normally documented in the accounting records at the initial acquisition cost. The purchase cost of the asset recorded in the accounting records is used as the basis of accounting for that asset at the period of acquisition and the other preceding accounting periods (James, 2019).
*Which are the basis on which accrual is applied*
Accrual basis relies on the recognition of losses, gains, expenses, revenues, and increase in asset and decrease in assets at the time the accounting transactions occur. Accrual basis relies on matching principle and revenue recognition principle since these principles mind a time in recognizing business events and transactions.
*Cost of sales adjustment*
‘Cost of goods sold’ is recorded in the ‘income statement’ as an expense at that accounting period.in the same manner, the ‘cost of goods sold’ is harmonized with the revenues received from the goods sold thus accomplishing the matching principle which clearly explains the accrual basis of accounting.
References
Douglas, K. (2017). Equity of Proprietors, Partnerships and Corporations on the Balance Sheet. Retrieved from www.businessplanhut.com/equity-proprietors-partnerships-and-corporations-balance-sheet
James, D. (2019, June 16). 5 Principles of Accounting. Retrieved from iedunote.com/accounting-principles
Mark, L. (n.d.). Conceptual Framework for Financial Reporting 2018. Retrieved from www.iasplus.com/en/standards/other/framework
Roberts, K. (2018, March). Conceptual framework of financial reportion. Retrieved from www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-and-feedback-statement/conceptual-framework-project-summary.pdf
Kulikova, L. I., Samitova, A. R., & Aletkin, P. A. (2015). Investment property measurement at fair value in the financial statements. *Mediterranean Journal of Social Sciences*, *6*(1 S3), 401.
