Financial accounting - Appunti

The Conceptual Framework Focus on Primary Users of Financial Statements

THE CONCEPTUAL FRAMEWORK FOCUS ON PRIMARY USERS OF FINANCIAL STATEMENTS, which include existing and potential investors, lenders and creditors.

What Makes Financial Information Useful?

1. To be useful information the data has to be faithfully and relevant according to the reality.
2. Also there are some qualitative characteristics:
• Relevance
• Faithfully
• Comparable
• Verifiability
• Timeless
• Understandability

What Constraints Do We Face in Providing Useful Information?

1. In providing information that can be useful to our users, a pervasive constraint we face is costs because financial information is not produced without costs.

What Are Our Assumptions in Financial Reporting?

1. In order to make a useful financial reporting there are some assumption that we need to make; firstly we prepare a financial statement on a ACCRUAL BASIS (transition and other events are recognized when they occur and not when cash is received or paid). Also we assume that the entity will

continue to operate long enough to use existing assets. (GOING CONCERN) - the firm does not have the intention to liquidate everything. This is how a business can buy assets with the expectation to derive benefits from the use of the assets beyond the current period.

What exactly are we accounting for?

Elements of the financial statement:

ASSETS: economic resources controlled by the entity that are expected to produce a benefit in the future

• cash
• inventory
• account receivables (money owed to the entity by its debtors)
• machinery
• equipment
• properties

LIABILITIES: present obligations of the entity that are expected to result in an outflow of economic benefit from the entity

• bank loans
• account payable (money owed by the entity to its creditors)
• other obligations

EQUITY: what is left of the assets after deducting liabilities.

• share capital
• retained earnings

It is divided into two:

• share capital
• retained earnings

Is the amount earned by shareholders have.

income-producing activity and invested in the entity kept form use in the business

INCOME: refers to increases in economic benefits during an accounting period. It can be:

• REVENUES: gains derived from the ordinary course of business. Ex. Sales revenues from subsidiary

EXPENSES: are decreased in economic benefits during an accounting period and can be:

• incurred in the ordinary course of the business, such as salaries, wages, rent, and other expenses

LOSSES: may not be in the ordinary course of the business, such as loss on disposal of a long-term asset

The conceptual framework provides guidance on how and when to recognize items on the financial statement. An item is recognizable if:

1. It will flow to or from the entity
2. It can be measured

BALANCE SHEET: Information about financial position (assets, liabilities, equity)

INCOME STATEMENT: Information about financial performance (income and expenses)

Objective: To provide

financial terms? In financial terms, the term "assets" refers to resources that are expected to produce future benefits for the entity. These resources can include cash, inventory, property, equipment, and investments. Assets are recorded on the balance sheet of a company's financial statements and are categorized as either current assets (expected to be converted into cash within one year) or non-current assets (expected to provide benefits for more than one year).

the 1.b) Liabilities: outsider claims, debts that must be payed to financial report? outsiders

Definition of items

2.a) Owner's Equity = Assets - Liabilities (Balance Sheet)

Insiders claims composed by:

• Share capital: money invested in the company
• Retained earnings: profits that are not divides for shareholders and owners = revenues - expenses
• Revenues: inflow of resources from delivering goods or services. They increase the retained earnings
1. They increase in assets
2. They decrease in liabilities
• Expenses: outflow of resources due to the cost of operations. They decrease the retained earnings
1. They decrease in assets
2. They increase in liabilities
• Dividends: distribution of assets to stockholders. They decrease the retained earnings NO EXPENSES !!!!!!!

When to recognize items?

THE BALANCE SHEET (=bilancio)

A: LEFT SIDE

Assets:

• Current: they will be sold, consumed, collected in 12 months

RIGHT SIDE

Liabilities:

• Current: they will be paid in 12 months

Current: they will be paid• Not Current: they will be after 12 months• collected, sold, consumed after 12 months Equity :DEBT SIDE Share capital: money invested in the ⇒ • company Retained earnings: profits that are • not divided for shareholders and owners = revenues – expenses CREDIT SIDE ⇒+ dividends: to shareholders as a return on their investments (it will never affect net income) THE BALANCE SHEET ASSETS ▪ Notes receivable (cambiali): it’s a legal document that protects the creditor ▪ Property, plant and equipment: tangible, they have a long-term useful life for the business activity ▪ Long-term investments: investments carried out for a strategy ▪ Intangible assets: THE BALANCE SHEET LIABILITIES " Accounts payable and accrual" Long-term bank borrowings: long term for pay 7 INCOME STATEMENT B: (=conto economico) Second Accounting Equation REVENUES (gains) – EXPENSES (losses) = NET PROFIT ▪ We talk about revenues and expenses whenwe talk about core business operations. We talk about gain and losses when we talk about no core activities. CONSEQUENCES⇒ Net income: revenues bigger than expenses⇒ Net loss: expenses bigger than revenues Double entry book keeping BALANCE SHEET & INCOME STATEMENT Which is the link between these two statements? Net income & Net loss in the income statement flow into returned earnings into the balance sheet (Net income will be added to the returned earnings while the Net loss will be subtracted)⇒ Every transaction must be recorded in both the documents: it has consequences for both the parts of the balance sheet Income statement Revenues 1500 – Expenses 500 = Net Income 1000 Balance Sheet Assets Liabilities & Equity 2000 Liabilities: 1000+ Share capital: 200 Cash 1000 Returned earnings: 200+Net income 1000 8 THE COMPONENTS OF RETAINED EARNINGS: 1. Start of the period: Opening balance of retained earnings, A picture of all the items of the balance sheet 2. During the

1. Financial year: Revenues/expenses, paying cash in order to calculate net loss or net income
2. End of the period: ending balance retained earnings after having paid dividends
3. 2 more documents in the Financial Statements
   • STATEMENT OF CHANGES IN EQUITY
   • STATEMENT OF CASH FLOWS
4. NOTES TO THE ACCOUNTS (nota integrative)

   The accountant breaks down each single item in order to clarify it

5. Gross profit margin = revenues - cost of goods sold (Efficiency of the production)
6. Operating profits = revenues - operating expenses
7. Account receivable: amount of money that a company excepts to collect from third parties
8. STATEMENT OF CHANGE IN EQUITY:

   C: = It show a company's transaction with its owner

   EQUITY = ASSETS - LIABILITIES

9. THE STATEMENT OF CASH FLOWS:

   We do this to underline the activity that increase the final value: 3 different type of activities:

   • Operating activities: cash flows from selling goods and services to customers, it is the core of the company activities

1. cash flows from purchasing and selling long-term assets
2. Investing activities: borrowing, repaying funds
3. cash flows from equity or financing transactions

After identifying the three different activities, we are able to create a statement of cash flow and determine the income and inflow of cash. For example:

CEST. -100

OPERATING activities:
Raw materials and finished goods 300
NET CASH FLOW from operating activities 200-1500

INVESTING activity:
Plant and fixtures 800
NET CASH FLOW from investment activity: -700

FINANCING ACTIVITY:
Bank 2000
Interest expense -100
Dividends
Increase in share capital 500
NET CASH FLOW from financing activity: 2.2001700

Cash has increased by:

Before the statement of cash flow, we already know the increase in cash, but thanks to the statement of cash flow, we are able to analyze the outflow/inflow of cash within the different activities.

Questions to answer:

1. Financial statement: What does it represent?
2. How well did the company perform during the income statement (conto economico) of non-financial resources?

Durante l'anno, il costo delle merci vendute / ricavi: spese solo per produrre beni / servizi + Spese operative: relative solo alla produzione dei beni. Qual è il bilancio della società alla fine dell'anno finanziario? Ogni importo di attività, passività e patrimonio netto che indica la posizione finanziaria. Mostra il saldo di chiusura in un momento specifico. Perché il conto delle variazioni del patrimonio netto della società cambia durante l'anno? - Si concentra su ciò che accade nel capitale degli azionisti durante l'anno. Quanto denaro ha generato e speso l'azienda durante l'anno? Domanda: STATO FINANZIARIO RISPOSTA 1. Come si è comportata l'azienda durante l'anno? - Rendiconto economico: ricavi - spese = reddito netto (o perdita netta) +/- Due parti: altro reddito complessivo.come = beginning equity + total comprehensive income - dividends - share repurchases 3. The company's equity change during the year can be attributed to various factors such as: - Net income: If the company generates a profit during the year, it will increase its equity. Net income is calculated by subtracting expenses from revenues. - Other comprehensive income: This includes gains or losses that are not included in the net income calculation, such as changes in the value of investments or foreign currency translation adjustments. - Dividends: If the company pays out dividends to its shareholders, it will decrease its equity. - Share repurchases: If the company buys back its own shares from the market, it will decrease its equity. By considering these factors, the company's equity can change throughout the year. The statement of changes in equity provides a detailed breakdown of these changes.