(a) This question will cover the statement of comprehensive income, users, the general purpose of such information and also explain income and expenses according to the Conceptual framework for Financial Reporting.
The statement of comprehensive income is part of the set of external financial statements, which consists of five statements. The statement of comprehensive income and the income statement cover he same accounting period. Unlike the income statement, however, it will provide details of how the company’s net assets varies over a certain period of time. It consists of two key elements which are the net income or earnings from the organisation’s income statement, which will cause an increase in the Retained Earnings. The other element is other comprehensive income which is made up of positive and/or negative amounts, used mainly for foreign currency translation, hedges and others which will cause an increase in the Accumulated Other Comprehensive Income. By adding the 2 components as above, the comprehensive income can be derived. The statement of comprehensive income is only needed if one or more entries meet the criteria of comprehensive statement, and for those that do it is presented right after the income statement.
The statement of comprehensive income has some purposes but the most general one would be is to provide information on the company’s financial performance over the fiscal period to users and potential users. It is crucial for users to understand an enterprise’s financial performance as it is about the agency’s profitability to evaluate future changes in its financial and economic resources and the ability to generate funding from its resources. It will give information on how to maximise profits and Users will also require this tool to assess how to use additional resources appropriately. Examples of general users of the statement are investors and suppliers. The information from the statement will be useful to investors to know when and how much to invest, so as to maximise their profits. The other set of users are suppliers who will utilise the statement to determine whether the company is able to pay them on time.
The conceptual framework of financial accounting is an accounting theory, prepared to mainly help the IASB in reviewing current IFRSs and in its development of new IFRSs. It assists preparers in creating policies that are not covered by existing standards.
Income refers to the rises in economic benefits during the accounting period. These increases come in the form of inflows or enhancements of assets, or decreases in liabilities that will lead to an increases in equity, excluding contributions from equity participants. F 4.25(a) The definition of income consists of revenue and gains. Revenue arises in the course of the ordinary activities of an entity Examples of revenue are sales, fees, interest, dividends, royalties and rent. Gains include other articles that adhere to the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Both have increases in the economic benefit and thus, they are not regarded as constituting a separate element in the IFRS Framework. F 4.29 and F 4.30
Expenses represent decreases in economic benefits during the fiscal period in the form of outflows or assets depleting or incurrences of liabilities that cause decreases in equity excluding those relating to distributions to equity participants. F 4.25(b) The definition of expenses involves losses and expenses that arise in the course of the ordinary activities of the entity. Such expenses include, for instance, the cost of sales, wages and depreciation. They mostly come in the form of an outflow or depletion of assets like cash and cash equivalents, inventory, property, plant and equipment. Losses include extra items that adhere to the definition of expenses and may, or may not, arise in the course of the ordinary activities of the entity. Both show decreases in economic benefit and thus, they are not seen as separate elements in this Framework. F 4.33 and F 4.34
In this question, the general purpose of the statement of financial position will be explained in detail, together with the users and how effective it is. Another thing that will be covered is asset, liability and equity, according to the conceptual framework for financial reporting.
The statement of financial position, also known as the balance sheet, is one of the crucial financial statements and the report includes the assets of an entity, liabilities, and the difference in the totals. The amounts reported as of the last moments of the fiscal period are from the statement of financial position. The statement of financial position has to adhere to the basic accounting principles and guidelines in order to be accurate and ethical. These guidelines encompasses of the cost, matching, and full disclosure principle. To make sure that it is more meaningful, it should prepared using the accrual method of accounting. The main users of the statement of financial position would be the customers and competitors. Before considering which supplier a company is going to select for a contract, customers will first take a look at their financial statements, in order to gauge whether the supplier has the financial ability to stay in the business for as long as the contracts states. As for competitors, by gaining the information from the financial statements, they will be able come up with competitive strategies upon evaluation of the company’s financial state. Internally, it can be used to come plan for the future in order to maximise profits.
The conceptual framework for financial reporting is mentioned in part (a). According to the framework, we know that, an asset is controlled by the entity resorting from events that occurred in the past. The future economic benefits are expected to flow and it is acknowledged in the statement of financial position when it is likely that the future economic benefits will flow to entity and the asset consists of a cost or value that can be measured dependably.
A liability, as said in the framework, is a current obligation as a result of past events, the settlement of which is forecasted to end up in an outflow from the entity of resources which will embody economic benefits. Liabilities will also be presented on the statement of financial position as noncurrent or current. A liability should be recognised in the balance sheet only when it is likely that the future sacrifice of economic benefits will be needed and the amount of the liability can be accounted for in a reliable manner.
Finally, an equity is the residual interest in the assets of the entity after the deduction of all its liabilities. Some of equity accounts will consist of common stock, preferred stock and contributed surplus. Common stock represents the owners’ or shareholders’ investment in the company as a capital contribution. It represents the shares that entitle the share owners to vote and their residual claim on the organisation’s assets.
This question covers what an accrual basis of accounting is, followed by a simple example on how it works.
The accrual basis of accounting refers to a method which records revenues and expenses at the moment that they are incurred, regardless of when cash is exchanged.
Revenues will be reported on the income statement whenever they are earned, according to the accrual basis of accounting whereas, under the cash basis of accounting, such revenues will be reflected on the income statement as soon as the cash is received. Expenses as per the accrual basis of accounting, will be matched with any relevant revenues and/or will be reported when the expense is incurred, instead of when the cash is paid. An important advantage of using the accrual basis of accounting is that the result of accrual accounting is an income statement which will be able to measure a company’s profitability effectively over a certain time period. This will help to maximise the organisation’s profits over time. An example of the cost of sales adjustment in the statemen of comprehensive income with be provided below.
For instance, if I start providing an accounting service in the month of December and provide $10,000 of accounting services in this month, but am not receiving any of the cash from the customers up till January, there will definitely be a difference in the income statements for December and January, under both the accrual and cash basis of accounting. As per the accrual basis, my income statements will report $10,000 of revenues in December and 0 of such services will be refected as revenues in January. On the other hand, according to the cash basis, my December income statement will show 0 revenues. However, the services provided in December will be reported as January revenues, under the cash method.
There will be a discrepancies on the balance sheet, as well. According to the accrual basis, December’s statement of financial position will report accounts receivables of $10,000 and the real estimated profits are added to owner’s equity and/or retained earnings. Under the cash basis, on the other hand, the accounts receivables of $10,000 will not be reported as an asset, and the forecasted true profit will not fall under owner’s equity or retained earnings.
To show a difference in expenses, we can assume that the electricity expenses that I used in my accounting service is measured by the utility on the last day of every month. Whatever utilities that I made use of in the month of December will appear on the utilities bill that will be sent in January and payment is due on February 1st. Under the accrual basis of accounting, the utilities that used in December will be estimated and will be reported as an expense and a liability on the December financial statements. Under the cash basis of accounting, the utilities used in December will be recorded as an expense on February 1st, when the utility bills are paid.