Event Technology
& Finance Lecture
Financial statements from the
accounting equation &
Ensuring the quality of financial
s...
Event Technology
& Finance
Today we will be focusing on the following topics,
1. Chapter 3: Financial statements from the
...
Financial statements
from the accounting
equation
CHAPTER 3
Weetman, P (2013), Financial Accounting, An
Introduction, Sixt...
Primary Financial Statement Purpose...to report
the…
Balance Sheet
(A statement of financial position)
Financial position ...
The Purpose of Financial Statements
Owners and long-term lenders
regarded as primary users but all
potential users are int...
The Balance Sheet:
“A financial statement which
summarises a companies
assets, liabilities and ownership
interest at a spe...
How to use a balance sheet to assess the
financial position of an entity…
The Accounting Equation
Assets – Liabilities = O...
A balance sheet includes all of the elements of the
accounting equation and demonstrates the financial
position of a compa...
The Structure of a Balance Sheet
FIXED
ASSETS
CURRENT
ASSETS
CURRENT
LIABILITIES
LONG-TERM
LIABILITIES
Capital at start of...
The Structure of a Balance Sheet
£100,000 £20,000
£10,000 £70,000
£40,000
Fixed Assets Current Assets
Current Liabilities ...
Profit and Loss Account
“A financial statement that
measures a company's financial
performance over a specific
accounting ...
Profit and Loss Account
(Income statement)
Revenue – Expenses = Profit
Revenue
(Income)
Expenses
(Expenditure)
Profit
£200...
Statement of Cash Flows
“shows the amount of cash generated and
used by a company in a given period. Cash
flow can be attr...
Statement of Cash Flows
Cash Inflows – Cash Outflows = Change in Cash
& Similar Liquid Assets
Cash
Inflows
Cash
Outflows
C...
Profit does not always equal cash
Working capital
• Some sales are made on credit where
customers pay later.
• Some purcha...
• Cash is used to buy more current
assets.
• Cash is used to buy other
investments
• Cash is used to repay loans.
• Cash i...
Subdivisions of Cash Flow
• Operating activities:
Provision of services, and the manufacturing,
buying and selling of good...
Practical illustrations
See Mason (2013) for illustrations/examples
in Chapter 3 for:
1. Statement of financial position.
...
Ensuring the quality
of financial
statements
CHAPTER 4
Weetman, P (2013), Financial Accounting, An
Introduction, Sixth Edi...
Qualitative characteristics
Understandability
• The significance of the information can be
perceived by the user.
Relevanc...
Reliability
• Information that is a complete and faithful
representation.
Comparability
• Similarities and differences can...
Relevance and Reliability
Relevant
• Information should be relevant to the decision making
needs of the user
• Enabling th...
Measurement principles
There are 4 measurement principles:
1. Going concern
2. Accruals
3. Consistency
4. Prudence
NB: Goi...
Consistency
• Use similar policies from one year to next
or explain reason for and effect of change.
Prudence – see later....
Materiality
• Threshold for considering an item. Would a
user’s decision change if the information were
omitted or misstat...
Prudence
The inclusion of a degree of caution in
accounting judgements under conditions of
uncertainty.
For example:
• The...
Prudence
Avoid
• Overstatement of assets
• Understatement of liabilities
• Because both of these will lead to overstatemen...
Regulation
Financial statements
• Information that is useful to a wide range
of users.
Annual reports
• Mixture of regulat...
Regulation
International Accounting Standards
(IAS) Regulation
• Overrides national company law.
• Requires all listed gro...
Regulation
Financial Reporting Council
• Authorised by UK government to make
arrangements for accounting standards, auditi...
Regulation
Auditing Practices Board
• Sets auditing standards (based on
International Standards on Auditing) and a
code of...
Regulation
Financial Reporting Review Panel
• Monitors compliance with true and fair view.
• May ask companies to correct ...
Regulation
Committee on Corporate Governance
• Sets Code on Corporate Governance for
directors running a company.
Financia...
Regulation
Auditors
• Report to shareholders.
• Use auditing standards.
• Give opinion on true and fair view from financia...
Is regulation necessary?
For regulation
• Supply and demand do not meet unless a
regulator intervenes.
• Stakeholders may ...
Is regulation necessary?
Against regulation
• Market forces ensure information flow.
• Lenders will ensure they have good
...
Look at key figures in highlighted statements.
1. Sales
2. Gross profit
3. Profit before tax
4. Profit after tax
• Trends ...
Reviewing published financial
statements
• What kinds of assets are held?
• What kind of liabilities are held?
(Notes on t...
Financial Statement Terminology
• Balance Sheet
• Asset
• Liability
• Fixed Asset
• Current Asset
• Limited Liability
• Lo...
You Tube:
• What is a Balance sheet?
http://youtu.be/ixCPM5HznRU
• What is a Profit & Loss Statement?
http://youtu.be/ulpX...
Reference:
Weetman, P (2013), Financial
Accounting, An Introduction, Sixth
Edition, Pearson, Harlow, England
p. 51 - 105
C...
Asset:
Assets are subdivided into:
1. Fixed assets
2. Current assets
“Resources available
to the business”
Liability:
Liabilities are subdivided into:
1. Current liabilities (due within one year)
2. Long-term liabilities (due aft...
Ownership Interest:
• The owner(s) typically provide the capital with which the
business is started, this capital is used ...
Fixed Asset:
“A long-term tangible piece of
property that a firm owns and uses
in the production of its income and
is not ...
Current Asset:
“A balance sheet account that
represents the value of all
assets that are reasonably
expected to be convert...
Current Liabilities:
“A company's debts or obligations
that are due within one year.
Current liabilities appear on the
com...
Long-term Liabilities:
“In accounting, a section of the balance
sheet that lists obligations of the
company that become du...
Capital:
“Capital” can mean many things. In
general, it refers to financial
resources available for use.
Companies and soc...
Revenue:
“The amount of money that a
company actually receives during a
specific period. It is the "top line" or
"gross in...
Expenses:
“The economic costs that a business incurs
through its operations to earn revenue. In
order to maximize profits,...
Liquid Assets:
“An asset that can be converted into
cash quickly and with minimal impact
to the price received. Liquid ass...
Working Capital:
A measure of both a company's
efficiency and its short-term financial
health, which indicates whether a
c...
Operating Activities:
Operating Activity:
“An activity that directly affects an
organization's cash inflows and
outflows, ...
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Event Finance and Technology Lecture Week 4

  1. 1. Event Technology & Finance Lecture Financial statements from the accounting equation & Ensuring the quality of financial statements Jonathan Sibley j.sibley@leedsmet.ac.uk
  2. 2. Event Technology & Finance Today we will be focusing on the following topics, 1. Chapter 3: Financial statements from the accounting equation: p. 51 – 73 2. Chapter 4: Ensuring the quality of financial statements: p. 74 – 105 Weetman, P (2013), Financial Accounting, An Introduction, Sixth Edition, Pearson, Harlow, England
  3. 3. Financial statements from the accounting equation CHAPTER 3 Weetman, P (2013), Financial Accounting, An Introduction, Sixth Edition, Pearson, Harlow, England
  4. 4. Primary Financial Statement Purpose...to report the… Balance Sheet (A statement of financial position) Financial position of an entity at a specific time Profit and Loss Account (Income statement) Performance of an entity over a specified time Cash Flow (Statement of Cash Flows) Financial adaptability of an entity for a period of time Financial Statements There are three main financial statements which are used for different purposes when presenting financial information.
  5. 5. The Purpose of Financial Statements Owners and long-term lenders regarded as primary users but all potential users are interested in financial performance and financial position of the reporting entity. Reference: Week 1 Lecture
  6. 6. The Balance Sheet: “A financial statement which summarises a companies assets, liabilities and ownership interest at a specific point in time. These three segments show what the company owns and owes as well as the amount invested by the owner”
  7. 7. How to use a balance sheet to assess the financial position of an entity… The Accounting Equation Assets – Liabilities = Ownership Interest Assets Liabilities Ownership Interest £100,000 £75,000 £25,000
  8. 8. A balance sheet includes all of the elements of the accounting equation and demonstrates the financial position of a company by highlighting the relationship between what is owned how much is owed and how much is owned by the owners. A change in any of these segments will have an impact on the other in order to maintain balance. How to use a balance sheet to assess the financial position of an entity… Assets Liabilities Ownership Interest (Equity)
  9. 9. The Structure of a Balance Sheet FIXED ASSETS CURRENT ASSETS CURRENT LIABILITIES LONG-TERM LIABILITIES Capital at start of year plus/minus Capital contributed or withdrawn plus Profit of the period
  10. 10. The Structure of a Balance Sheet £100,000 £20,000 £10,000 £70,000 £40,000 Fixed Assets Current Assets Current Liabilities Long-term liabilities Capital/Owner ship Interest/Equity
  11. 11. Profit and Loss Account “A financial statement that measures a company's financial performance over a specific accounting period.” • Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. • It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.
  12. 12. Profit and Loss Account (Income statement) Revenue – Expenses = Profit Revenue (Income) Expenses (Expenditure) Profit £200,000 £110,000 £90,000
  13. 13. Statement of Cash Flows “shows the amount of cash generated and used by a company in a given period. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength”
  14. 14. Statement of Cash Flows Cash Inflows – Cash Outflows = Change in Cash & Similar Liquid Assets Cash Inflows Cash Outflows Change in Cash & Similar Liquid Assets £500,000 £300,000 £200,000
  15. 15. Profit does not always equal cash Working capital • Some sales are made on credit where customers pay later. • Some purchases are made on credit where pay suppliers later. • Cash is used to buy inventory (stock) which is sold later.
  16. 16. • Cash is used to buy more current assets. • Cash is used to buy other investments • Cash is used to repay loans. • Cash is raised from issuing shares. • Cash is raised from borrowing. Profit does not always equal cash
  17. 17. Subdivisions of Cash Flow • Operating activities: Provision of services, and the manufacturing, buying and selling of goods for resale. • Investing activities: Buying and selling fixed assets for long-term purposes. • Financing activities: Raising and repaying the long-term finance (loans) of the business.
  18. 18. Practical illustrations See Mason (2013) for illustrations/examples in Chapter 3 for: 1. Statement of financial position. 2. Income statement. 3. Statement of cash flows. 4. Comparison of profit & loss and cash flow.
  19. 19. Ensuring the quality of financial statements CHAPTER 4 Weetman, P (2013), Financial Accounting, An Introduction, Sixth Edition, Pearson, Harlow, England
  20. 20. Qualitative characteristics Understandability • The significance of the information can be perceived by the user. Relevance • Information that has the ability to influence decisions.
  21. 21. Reliability • Information that is a complete and faithful representation. Comparability • Similarities and differences can be discerned and evaluated. Qualitative characteristics
  22. 22. Relevance and Reliability Relevant • Information should be relevant to the decision making needs of the user • Enabling the user to make predictions about future trends (Predictive value) • As well as confirming or correcting past decisions (Confirmatory value) Reliable • Free from material error • Faithful representation • Neutral • Complete • Prudent
  23. 23. Measurement principles There are 4 measurement principles: 1. Going concern 2. Accruals 3. Consistency 4. Prudence NB: Going Concern and Accruals: Discuss these definitions within your workshop.
  24. 24. Consistency • Use similar policies from one year to next or explain reason for and effect of change. Prudence – see later. Measurement principles
  25. 25. Materiality • Threshold for considering an item. Would a user’s decision change if the information were omitted or misstated? For example: • An error of £10m in an expense item when overall profit £500m is not material as this is only 2% of profit. • Whereas an error of £10m in an expense item when the overall profit is £20m is material as this is 50% of profit.
  26. 26. Prudence The inclusion of a degree of caution in accounting judgements under conditions of uncertainty. For example: • The undertaking of an Inventory (stock) Valuation and the uncertainty caused if that stock is not yet sold.
  27. 27. Prudence Avoid • Overstatement of assets • Understatement of liabilities • Because both of these will lead to overstatement of profit. Assets – liabilities = Capital (incl. profit) • If you overstate the value of an asset how does the equation balance? • Answer: Create profit. • If you decrease the cost of a liability. How does the equation balance? • Answer: Create profit.
  28. 28. Regulation Financial statements • Information that is useful to a wide range of users. Annual reports • Mixture of regulated and non-regulated contents. Regulated section is audited.
  29. 29. Regulation International Accounting Standards (IAS) Regulation • Overrides national company law. • Requires all listed groups to prepare financial statements using the International Financial Reporting Standards (IFRS). UK Company law • Requires true and fair view. • Accounting rules apply to companies not following IAS Regulation. • Contains other rules for management and the auditing of a company.
  30. 30. Regulation Financial Reporting Council • Authorised by UK government to make arrangements for accounting standards, auditing standards, oversight of professional bodies and firms, enforcement of standards. UK Accounting Standards Board • Independent standard-setting body. • Sets accounting standards for use in UK (by companies not applying the IAS Regulation).
  31. 31. Regulation Auditing Practices Board • Sets auditing standards (based on International Standards on Auditing) and a code of ethics for auditors. Professional Oversight Board • Has oversight of professional bodies and accountancy firms.
  32. 32. Regulation Financial Reporting Review Panel • Monitors compliance with true and fair view. • May ask companies to correct wrong accounts. Accountancy and Actuarial Discipline Board • Investigates complaints against accountants and applies penalties.
  33. 33. Regulation Committee on Corporate Governance • Sets Code on Corporate Governance for directors running a company. Financial Services Authority (will change in future to a new body/bodies) • Regulates market for shares. • Has accounting rules for fair market.
  34. 34. Regulation Auditors • Report to shareholders. • Use auditing standards. • Give opinion on true and fair view from financial statements. Tax system • Companies pay corporation tax. • Taxable profit is based on accounting profit but with additional rules, for example, depreciation rates fixed.
  35. 35. Is regulation necessary? For regulation • Supply and demand do not meet unless a regulator intervenes. • Stakeholders may lose confidence, or may need protection. • Scandals result where there is inadequate regulation.
  36. 36. Is regulation necessary? Against regulation • Market forces ensure information flow. • Lenders will ensure they have good information for reassurance. • Costs may exceed benefits.
  37. 37. Look at key figures in highlighted statements. 1. Sales 2. Gross profit 3. Profit before tax 4. Profit after tax • Trends in key figures Reviewing published financial statements
  38. 38. Reviewing published financial statements • What kinds of assets are held? • What kind of liabilities are held? (Notes on the Balance Sheet) • What is the cash flow? • Inflow or outflow?
  39. 39. Financial Statement Terminology • Balance Sheet • Asset • Liability • Fixed Asset • Current Asset • Limited Liability • Long-Term Liability • Ownership Interest • Relevance • Reliability • Measurement Principles • Materiality • Prudence • IAS Regulation • Working Capital • Capital
  40. 40. You Tube: • What is a Balance sheet? http://youtu.be/ixCPM5HznRU • What is a Profit & Loss Statement? http://youtu.be/ulpX3jX_UT0 Further Sources of Information The following resources are available to view on YouTube only: Click on the links within the slides to view alternatively cut and paste the links into a web browser.
  41. 41. Reference: Weetman, P (2013), Financial Accounting, An Introduction, Sixth Edition, Pearson, Harlow, England p. 51 - 105 CHAPTERS 3 & 4 Jonathan Sibley j.sibley@leedsmet.ac.uk www.slideshare.net/Jonathan_Sibley
  42. 42. Asset: Assets are subdivided into: 1. Fixed assets 2. Current assets “Resources available to the business”
  43. 43. Liability: Liabilities are subdivided into: 1. Current liabilities (due within one year) 2. Long-term liabilities (due after one year). “The obligations of the business to persons other than the owner”
  44. 44. Ownership Interest: • The owner(s) typically provide the capital with which the business is started, this capital is used to purchase assets and the payment of liabilities. • Ownership Interest may also be subdivided to show the capital contributed or withdrawn and the profit for the period. • Ownership Interest is the residual claim after liabilities to 3rd parties have been paid “an interest of the owner in the assets of the business”
  45. 45. Fixed Asset: “A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time”
  46. 46. Current Asset: “A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business”
  47. 47. 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.”
  48. 48. Long-term Liabilities: “In accounting, a section of the balance sheet that lists obligations of the company that become due more than one year into the future. Long-term liabilities include items like debentures, loans, deferred tax liabilities and pension obligations.”
  49. 49. Capital: “Capital” can mean many things. In general, it refers to financial resources available for use. Companies and societies with more capital are better off than those with less capital”
  50. 50. Revenue: “The amount of money that a company actually receives during a specific period. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income.”
  51. 51. Expenses: “The economic costs that a business incurs through its operations to earn revenue. In order to maximize profits, businesses must attempt to reduce expenses without also cutting into revenues. Because expenses are such an important indicator of a business's operations, there are specific accounting rules on expense recognition.”
  52. 52. Liquid Assets: “An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market”
  53. 53. Working Capital: A measure of both a company's efficiency and its short-term financial health, which indicates whether a company has enough short term assets to cover its short term debt. Current Assets – Current Liabilities = Working Capital
  54. 54. Operating Activities: Operating Activity: “An activity that directly affects an organization's cash inflows and outflows, and determines its net income” Non Operating Activity: “An expense incurred by activities not relating to the core operations of the business”
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