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Measuring and reporting financial position

OBJECTIVES. You should be able to:. Explain the nature and purpose of the three major financial statements. Prepare a simple balance sheet and interpret the information that it contains. Discuss the accounting conventions underpinning the balance sheet.

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Measuring and reporting financial position

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  1. OBJECTIVES You should be able to: Explain the nature and purpose of the three major financial statements Prepare a simple balance sheet and interpret the information that it contains Discuss the accounting conventions underpinning the balance sheet Discuss the limitations of the balance sheet in portraying the financial position of a business Measuring and reporting financial position

  2. Cash flow statement Profit and loss account Balance sheet The major financial statements – an overview

  3. Balance sheet at the end of Period 2 Balance sheet at the beginning of Period 1 Balance sheet at the end of Period 1 Profit and loss account 1 Profit and loss account 2 Cash flow statement 2 Cash flow statement 1 Period 1 Period 2 Time Relationship between the balance sheet, profit and loss account and cash flow statement

  4. 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 Assets

  5. There are essentially two types of claim against a business: Capital Liabilities Claims

  6. plus equals Assets Capital Liabilities The balance sheet equation

  7. The balance sheet equation can be extended as follows: equals plus (minus) plus Capital Assets Liabilities Profit (Loss) The effect of trading operations on the balance sheet

  8. The classification of assets may vary according to the nature of the business: Fixed assets Current assets The classification of assets

  9. Stock Trade debtors Cash The circulating nature of current assets

  10. Long-term liabilities Current liabilities The classification of claims

  11. = + + Current liabilities + Fixed assets Current assets Long-term liabilities Capital The equation for the horizontal layout Fixed assets

  12. + - - Current liabilities Long-term liabilities = Fixedassets Current assets Capital The equation for the vertical layout

  13. Accounting conventions Money measurement Dual aspect Prudence Historic cost Stable monetary unit Going concern Business entity Objectivity Accounting conventions and the balance sheet

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