FAR LESSON 1

• Financial reporting and analysis problems use financial statements of companies or other sources, such as journals, for further practice in understanding and interpreting financial reporting
• Types of problems used in each chapter

  • Financial reporting problem
  • Comparative analysis problem
  • Research cases
  • Interpreting financial statements problems
  • Global focus or Real-world problem
• Financial accounting


  The preparation and presentation of financial reports for external users
• Both financial accounting and management accounting draw on the same information system used to record and summarize the financial implications of transactions and events
• Primary function of accounting

  To provide reliable and relevant financial information for decision making
• Accounting


  The 'language of business' as it is a means of common communication where information flows from one party to others
• Accounting

  1. Identifying

  2. Measuring

  3. Recording

  4. Communicating
• Identifying


  Determining which economic events represent transactions
• Measurement


  The process of quantifying transactions in monetary terms
• Recording


  Resulting in a systematic record of all of the transactions of an entity and provides a history of business activities
• Communicating


  Preparing accounting reports for potential users of the information
• There are many reasons for maintaining accurate financial accounting records, including legal and other reporting requirements
• Monetary principle


  Only those things that can be expressed in money be included in the accounting records
• Accounting entity concept


  Every entity can be separately identified and accounted for
• Accounting period concept


  The life of a business can be divided into artificial periods and that useful reports covering those periods can be prepared for the business
• Going concern principle


  The business will remain in operation for the foreseeable future
• Cost principle


  All assets are initially recorded in the accounts at their purchase price or cost
• Full disclosure principle


  All circumstances and events that could make a difference to the decisions financial statement users might make be disclosed
• Relevance


  Information is considered relevant if it is capable of making a difference in the decisions made by users
• Faithful representation


  Information is a faithful representation of the economic phenomena it purports to represent if it is complete, neutral and free from material error
• Enhancing qualitative characteristics


  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
• Consistency


  The use of the same accounting policies between entities, at the same point in time, or the same entity over time
• Verifiability


  Information represents the economic phenomena without bias or material error and has been prepared with appropriate recognition and measurement methods
• Timeliness


  Information is available to users before it ceases to be relevant
• Understandability


  The quality of information that assists users to understand the meaning of the information provided
• Ratio


  A mathematical relationship between one quantity and another
• Types of ratios


  • Profitability ratios
  • Liquidity ratios
  • Solvency ratios
• Accounting transactions and events

  Occurrences which must be recorded because they have an effect on the assets, liabilities or equity items of a business
• Transaction


  An external exchange of something of value between two or more entities
• Event


  Includes price increases in business assets during an accounting period or the allocation of the cost of the long-lived assets of a business to different accounting periods
• Transaction analysis


  Identifying the specific effects of transactions and events on the accounting equation
• The accounting equation must always balance
• Share capital


  Issued in exchange for the owners' investment, increased by credits and decreased by debits
• Retained earnings


  Profit that is retained in the business, represents the portion of equity that has been accumulated through the profitable operation of the business, increased by credits (e.g. profit) and decreased by debits (e.g. losses)
• Dividend


  A distribution by a company to its shareholders in an amount proportional to each investor's percentage ownership, results in a reduction of the shareholders' claims on retained earnings
• Prepayments


  Prepaid expenses: Amounts paid in cash and recorded as assets until the economic benefits are used or consumed

  Revenues received in advance: Amounts received from customers and recorded as liabilities until the services are performed or the goods are provided and revenue is recognised
• Accruals


  Accrued revenues: Amounts not yet received and not yet recorded for which the goods or services have been provided

  Accrued expenses: Amounts not yet paid and not yet recorded for which the consumption of economic benefits has occurred
• Depreciation


  The process of allocating the cost of an asset to expense over its useful life
• Useful life of the asset


  The estimated total service potential or estimated period of time over which the future economic benefits are expected to be consumed by the entity
• Accumulated depreciation


  A contra asset account, offset against the asset on the statement of financial position, normal balance is a credit