Financial Accounting II
To describe life of a business entity. Managerial accounting no rules, FA has rules.
Missions: facilitate value creation by supporting decision making, measure and report the amount of value
created.
Conceptual framework:
Establish concepts that support preparation and presentation of financial statements. Purpose to help
prepare FS in application of standards, help form opinion on compliance of such and to help users interpret
info in FS. ALICE
n
Assets Liab
Income
Capital/equity
Expense
Balance sheet (real flows on that day), financial position, obligations to pay and rights to receive.
Income statement, performance, related to expenses in production and sale of goods and services.
Revenue- expenses= net profit.
Cash flow inflows (receipts) and outflows (payments).
Objectives of these is to provide information of an entity that is useful to wide range of users in making
decisions, aids users in predicting entity’s future cash flows and their timing and certainty. FS must be
present fairly (faithful and fair representation).
1. Accrual principle (economic periodization)
Entity prepares FS (except cash flow) using this principle.
Measures performance and position of a company by recognizing economic events regardless of when
cash transactions occur. Revenue or expenses right when it happens not when you receive the money. If
we know business is closing, we do not apply this principle. (do slide exercises)
2. Continuity (going concern principle)
FS are prepared assuming business entity will continue to operate in the foreseeable future
without need or intention to liquidate the entity or to significantly reduce operational activities.
Uncertainty if company is closing must be disclosed. If this is not a concern the FS should not be
prepared on a going concern basis. (Requires series of disclosures).
FS must be relevant- predictive value confirmatory and link w materiality (all info which can be expected to
affect decisions is material).
Faithful (reflect accurate, reliable, and verifiable financial position)- completeness, neutrality (info
contained in FS must be free from bias, should be balanced). and prudence and free from error.
Useful- compare, verify, timeliness, understandability.
Need to understand these but do not need to memorise. he gives definition we give word.
, Assets = equity + liabilites
Fact- operation that causes any variation in the composition and or the value of equity. Qualitative-
changes composition of equity but not its value. Quantitative- changes composition and value of equity.
Can be positive (income including gains) or negative (expenses including losses).
Topic II
Tangible Fixed Assets
The cost of an item of property, plant and equipment shall be recognised as an asset if:
a) It is probable that future economic benefits associated with the item will follow the entity and
b) The cost of the item can be measured reliably.
Carrying amount- amount which asset is recognized after deducting any accumulated depreciation and
impairment losses.
Depreciable amount- cost of asset, amount substituted for cost - residual value.
Depreciation- tangible fixed assets. = acquisition cost – residual value / useful life
Recoverable amount- assets fair value – cost to sell.
Residual value- estimated amount that an entity would currently obtain from disposing an asset. After
deducting costs of disposal.
Useful life- period which asset is expected to be available for use or the number of productions expected
to obtain from asset.
Depreciation methods:
1. Straight-line method - results in a constant charge over the useful life if the asset’s residual value
does not change.
Depreciation per year= acquisition cost – residual amount (depreciable amount) / useful life
or depreciation = depreciable amount / useful life or depreciable amount x depreciation rate
2. Diminishing balance method - results in a decreasing charge over the useful life.
Depreciation expense for one year= (number of remaining years of life / sum of digits) x
depreciable amount.
3. Units of production method - results in a charge based on the expected use or output.
Depreciation per year= depreciation amount x (units produced / total units of output (useful life)).
As on expense and reduces the value of tangible fixed assets.
Depreciable amount= acquisition cost – residual value.
Example: (straight line method)
Acquisition cost laptop 3000.
Useful life 3 years
To describe life of a business entity. Managerial accounting no rules, FA has rules.
Missions: facilitate value creation by supporting decision making, measure and report the amount of value
created.
Conceptual framework:
Establish concepts that support preparation and presentation of financial statements. Purpose to help
prepare FS in application of standards, help form opinion on compliance of such and to help users interpret
info in FS. ALICE
n
Assets Liab
Income
Capital/equity
Expense
Balance sheet (real flows on that day), financial position, obligations to pay and rights to receive.
Income statement, performance, related to expenses in production and sale of goods and services.
Revenue- expenses= net profit.
Cash flow inflows (receipts) and outflows (payments).
Objectives of these is to provide information of an entity that is useful to wide range of users in making
decisions, aids users in predicting entity’s future cash flows and their timing and certainty. FS must be
present fairly (faithful and fair representation).
1. Accrual principle (economic periodization)
Entity prepares FS (except cash flow) using this principle.
Measures performance and position of a company by recognizing economic events regardless of when
cash transactions occur. Revenue or expenses right when it happens not when you receive the money. If
we know business is closing, we do not apply this principle. (do slide exercises)
2. Continuity (going concern principle)
FS are prepared assuming business entity will continue to operate in the foreseeable future
without need or intention to liquidate the entity or to significantly reduce operational activities.
Uncertainty if company is closing must be disclosed. If this is not a concern the FS should not be
prepared on a going concern basis. (Requires series of disclosures).
FS must be relevant- predictive value confirmatory and link w materiality (all info which can be expected to
affect decisions is material).
Faithful (reflect accurate, reliable, and verifiable financial position)- completeness, neutrality (info
contained in FS must be free from bias, should be balanced). and prudence and free from error.
Useful- compare, verify, timeliness, understandability.
Need to understand these but do not need to memorise. he gives definition we give word.
, Assets = equity + liabilites
Fact- operation that causes any variation in the composition and or the value of equity. Qualitative-
changes composition of equity but not its value. Quantitative- changes composition and value of equity.
Can be positive (income including gains) or negative (expenses including losses).
Topic II
Tangible Fixed Assets
The cost of an item of property, plant and equipment shall be recognised as an asset if:
a) It is probable that future economic benefits associated with the item will follow the entity and
b) The cost of the item can be measured reliably.
Carrying amount- amount which asset is recognized after deducting any accumulated depreciation and
impairment losses.
Depreciable amount- cost of asset, amount substituted for cost - residual value.
Depreciation- tangible fixed assets. = acquisition cost – residual value / useful life
Recoverable amount- assets fair value – cost to sell.
Residual value- estimated amount that an entity would currently obtain from disposing an asset. After
deducting costs of disposal.
Useful life- period which asset is expected to be available for use or the number of productions expected
to obtain from asset.
Depreciation methods:
1. Straight-line method - results in a constant charge over the useful life if the asset’s residual value
does not change.
Depreciation per year= acquisition cost – residual amount (depreciable amount) / useful life
or depreciation = depreciable amount / useful life or depreciable amount x depreciation rate
2. Diminishing balance method - results in a decreasing charge over the useful life.
Depreciation expense for one year= (number of remaining years of life / sum of digits) x
depreciable amount.
3. Units of production method - results in a charge based on the expected use or output.
Depreciation per year= depreciation amount x (units produced / total units of output (useful life)).
As on expense and reduces the value of tangible fixed assets.
Depreciable amount= acquisition cost – residual value.
Example: (straight line method)
Acquisition cost laptop 3000.
Useful life 3 years
