Elements of Financial Statements&

The Recognition criteria forAssets & Liabilities

By Deepraj Naiko

• Financial statements are often described as the language of business. These statements tell the condition and performance of a business historically, currently and prospectively.

• The objective of financial statements is to provide information about the financial position, financial performance, and cash flows of an entity used in making economic decisions.

http://businessaccent.com/2009/01/10/elements-and-components-of-a-complete-set-of-financial-statements/

A complete set of financial statements should include:

• 1. A statement of financial position at the end of the period (also referred to as balance sheet). A statement of financial position is a formal statement showing the financial position of an entity as of a particular date. The balance sheet presents the three elements of financial position namely assets, liabilities and equity.

• 2. A statement of comprehensive income for the period (also called as profit and loss statement. A statement of comprehensive income is a formal statement showing the performance of the entity for a given period of time. The performance of the entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of its purpose.

• 3. A statement of changes in equity for the period. A Statement of changes in equity explains the changes in an entity’s equity over the reporting period. This statement shows the profit or loss for the period, item of income and expense for the period that is recognized directly in equity, showing, the effects of changes in accounting policies and corrections of errors recognized & capital transactions with owners.

• 4. A statement of cash flows for the period. A cash flow statement reports on a company’s cash flow activities, particularly its operating, investing and financing activities.

http://businessaccent.com/2009/01/10/elements-and-components-of-a-complete-set-of-financial-statements/

• To meet that objective, financial statements provide information about the following elements:

• 1. Assets. • 2. Liabilities. • 3. Equity. • 4. Income and expenses, including gains and losses. • 5. Other changes in equity. • 6. Cash flows.

• The elements directly related to the measurement of financial position are assets, liabilities and equity.

http://businessaccent.com/2009/01/10/elements-and-components-of-a-complete-set-of-financial-statements/

• Assets are defined as “resources controlled by the entity as a result of past or events from which future economic benefits are expected to flow to the entity”.

• An asset can be recognised when:

• (a) The firm owns or controls the right to use the item.

• (b) it is probable that the future economic benefits embodied in the asset will eventuate; and

• (c) the asset possesses a cost or other value that can be measured reliably.

www.aasb.com.au/admin/file/content102/c3/SAC4_3-95.pdf

Current Assets• It is an asset with less than a 12-month life, or

that is readily convertible into cash to be used to satisfy current liabilities.

• Examples of current assets are cash in hand, short-term investments, accounts receivable, and inventory.

• http://www.investorwords.com/19048/current_asset.html

Non-Current Assets• Fixed assets, also known as a non-current asset or as property,

plant, and equipment (PP&E), cannot easily be converted into cash. In most cases, only tangible assets are referred to as fixed.

• A non-current asset can also be defined as an asset not directly sold to a firm's consumers/end-users. As an example, a baking firm's non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc.

• These are items of value which the organization has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery.

• Liabilities are “present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”. E.g. taken a loan from bank…

• A liability can be recognised when:

a) The entity has a present obligation.

b) It is probable that an outflow of resources will be required to settle the obligation.

c) A reliable estimate can be made of the amount of the obligation.

http://www.iasb.org/NR/rdonlyres/60043C02-8A40-4A53-970E-0FFAE07A5C0C/0/Recognisingliabilitiesinlawsuits.pdf

Current Liabilities• A company's debts or obligations that are due within one

year.

• Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

• Investopedia explains Current Liabilities as, bills that are due to creditors and suppliers within a short period of time.

•http://www.investopedia.com/terms/c/currentliabilities.asp#axzz1dmpEqR62

Non-Current Liabilities• Noncurrent liabilities represent obligations of the firm that

generally are due more than one year after the balance sheet date.

•Noncurrent liabilities represent money the company owes one year or more in the future.

• Although you'll see a variety of line items in this category, the most important one by far is long-term debt.

•http://www.investopedia.com/terms/c/currentliabilities.asp#axzz1dmpEqR62

Examples

• Equity is the “residual amount in the assets of the entity after deducting all of its liabilities” or the amount of undistributed profits that the corporation decides to document. Equity is also usually defined as the value of the assets contributed by the owners

• Income is “increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution or investment by owners”.

• Expense is “decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution or dividend paid to owners.

http://businessaccent.com/2009/01/10/elements-and-components-of-a-complete-set-of-financial-statements/

Conclusion

• So, at the bird’s eye view, it is crystal clear that one should imperatively be familiar to all the elements of financial statements and should be able to differentiate between Non-Current Assets & Current Assets and Current Liabilities & Non-Current Liabilities.

© Deepraj NAIKO, November 2011