In order that the financial statements are able to provide the information which is useful in the decision making by the providers of capital, the conceptual framework provides that the financial information must be faithfully and relevant represent what it purports to represent, and that the usefulness of the financial information is enhanced if it is comparable, verifiable, timely, and understandable.
Therefore, the Conceptual Framework lists out two fundamental qualitative characteristics which are relevance and faithful, and also lists four enhancing qualitative characteristics of “comparability”, “verifiability”, “timeless”, and “understandability”. Besides that, it also provides for the “cost constraint”, it is the cost of providing
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The level of accounting and business knowledge that the user possesses, the methods of they employ, the ability to process the information that they already possess and their ability to obtain additional information, differ. It is assumed that the users of financial information have a reasonable knowledge.
The Conceptual Framework has identified five elements of financial statements, namely assets, liabilities, equity, income, and expenses. The elements that relate to financial position are assets, liabilities, and equity while income and expenses is relate to performance. (Lazar & Choo, 2014)
An asset is a resource that controlled by an enterprise or an entity as a result of the past events and from which the future benefits are expected to flow to the enterprise. The keyword shows in the definition of an asset is “control”, so means that the resource that has been controlled, even though not owned, it should be accounted for as an asset. An asset can be recognized in the statements of financial position (balance sheet) when the asset probable that the future economic benefits will flow to the entity. In addition, when it has a value or a cost that can be measured reliably then it will be recognized in the statements of financial position. The future benefits may flow into the enterprise or the entity when the asset to be used for settles the liabilities, to be exchanged
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However, it is including both revenue and gain. Income and gains are giving rise to an increase in the economic benefits during the accounting period. Revenue arises in the course of the ordinary activities of an entity or an enterprise. Gain represent other items, it may not arise from the ordinary activities of an entity or an enterprise. Income is recognized in the statement of profit or loss and other comprehensive income (income statement) when the amount can be measured reliably, and an increase in the future economic benefit related to an increase in an asset or a decrease in liability
The purpose of an income statement is to report the revenue generated and the expenses incurred by a corporation for the past year. (Melicher, 2014) The gross revenue is the first item on the financial statement followed by several expenses and then the net revenue. One of the expenses a corporation incurs is the cost of goods sold, which is the amount of money it costs a corporation to produce or manufacture the items sold to generate a profit. The second expense on a financial statement is the cost of record keeping, preparing financial statements, advertising, and salaries grouped under the heading “Selling, general, marketing expenses”. The other expenses on an income statement are depreciation, interest expense, and the unavoidable income tax. (Melicher, 2014) Once all of these expenses haven been deducted from the gross revenue a company has an accurate depiction of their net
The Conceptual Framework (CF) is not a standard or interpretation and does not override any specific standard or interpretation (CF discussion paper). A CF is a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements. The CF was formed with the intention of providing the backbone for principle-based accounting standards (...
...e an income statement needs to be looked at to show if the business is making a profit and if the expenses are too high or what has change in revenue from year to year. This is just an example of many other sources need to be looked at before deciding on the financial position of the entity.
B. General Mills Consolidated Balance Sheets: 7. A company has assets so that they have a location and equipment to operate/create a business. Assets are resources that are controlled by a business. Without assets, one cannot produce and/or run a company. The purpose of assets are to keep track of expenses, what a company owns, like equipment, inventory, cash etc., and creates value for the company.
According to IAS 18, revenue is defined as “the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants” (2012).
It outlines the interconnection of a company’s financial and non-financial elements and aims to combine them and show value creation and maintenance. It identifies resources and their effective and responsible usage. It intends to create a dialogue between the shareholders and other stakeholders and provides them with detailed information.
FASB Statement of Financial Accounting Concepts (CON) 5, Recognition and Measurement in Financial Statements of Business Enterprises, set forth the historic guiding principle to revenue recognition. Pursuant to paragraph 83, for revenue to be recognized it must be (a) realized or realizable and (b) earned. Revenues are “realized” when products, goods, services, or other assets are exchanged for cash or claims to cash. They are “realizable” when related assets received or held are readily convertible to known amounts of cash or claims of cash. Revenue is “earned” when an entity has “substantially accomplished what it must do to be entitled to the benefits represented by the revenues.” SEC Staff Accounting Bulleting (SAB) 104, Revenue Recognition issued in December 2003 provided additional guidance to when revenue is realized or realizable and earned setting forth four basic criteria: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonable assured.
References Financial Accounting Standards Board. 2006, July 6 -. Conceptual Framework for Financial Reporting. Financial Accounting Series, 1-55. Wolk, H., Dodd, J., & Tearney, M. (2003).
Assets are useful or valuable things that an individual or organisation has. This could include certain skills, abilities or personal qualities that an individual may possess and the organisations and resources they have access to within their community. An asset-based approach focuses on what people have and can do rather than what they are lacking and cannot do. Organisations work with individuals focusing on their valuable qualities in order to takes steps in working towards a positive outcome for the future.
Four theorems that are characterized by an accounting or a financial background can be considered as factors that created a need for the segmentation of information. In the following paragraphs, a brief description of these theorems will be given.
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
Peasnell, KV 1982, ‘The function of a conceptual framework for corporate financial reporting’, Accounting & Business Research, vol. 12, issue. 48, pp. 243-256, viewed 05 May 2014
The statement of profit or loss is also known as income statement and it’s equation is revenue minus expenses equals profit or loss. The statement of profit or loss summarize the revenues and expenses of a business and also shown the ability of a business to generated business. The total profit or loss that generated in an organization during an accounting period can be seen through the income statement. For example, if the expenses of the company are higher than revenues, the company will get a loss in the business. However, the company will generate a profit when the revenues are greater than the
The revenue/cost period-: Revenue and the cost period in accounting that the company get income from normal business activities. It’s referred to normal business income that the company got by selling their product and service.
Nowadays with the implementation of new emerging technologies, the way businesses keep this financial information has become computerised. At the moment businesses use computers with a computerised accounting system in order to perform many other new activities than what they were able to do in the past. Businesses can access financial information from different department in the organisation, access to the information through computers and find financial data very fast, being more efficient. (Beliss, 2013)