UNIT 3: FINANCIAL STATEMENTS

Financial Statements

Financial Statements

General purpose reports providing financial information about a reporting entity's economic resources, claims, and changes useful for decision-making.

Objective of Financial Statements

To provide useful financial information for assessing future net cash inflows and management's stewardship of economic resources.

Scope of Financial Statements

Financial information about the reporting entity for a specified period, including necessary post-period events.

Going-concern Assumption

The assumption that an entity will continue to operate in the foreseeable future.

Economic Resource

An asset controlled by the entity that has the potential to produce economic benefits.

Liability

A present obligation of the entity to transfer an economic resource due to past events.

Equity

The residual interest in the assets of the entity after deducting all liabilities.

Income

Increases in assets or decreases in liabilities that result in increases in equity, excluding contributions from equity holders.

Expenses

Decreases in assets or increases in liabilities that result in decreases in equity, excluding distributions to equity holders.

Statement of Financial Position

A position statement reporting the financial condition of an entity at the end of a period, listing assets, liabilities, and equity.

Usefulness of Statement of Financial Position

Provides information to assess future cash flows, liquidity, and long-term solvency.

Current Assets

Assets expected to be realized or consumed within the entity's normal operating cycle or within twelve months.

Non-current Assets

Assets expected to be used for more than one period, including Property, Plant, and Equipment (PPE).

Current Liabilities

Liabilities expected to be settled within the entity's normal operating cycle or within twelve months.

Owner's Equity

The residual interest in the assets of the entity after deducting all liabilities, representing the owner's financial interest.

Basic Accounting Equation

Assets = Liabilities + Owner’s Equity.

Statement of Financial Performance

A change statement summarizing profit-generating transactions and reporting net profit or loss for the period.

Statement of Other Comprehensive Income

A change statement summarizing income and expenses not recognized in the Statement of Profit or Loss.

Income

Inflow of resources from services provided or goods sold, resulting in increases in equity.

Expenses

Outflow of resources incurred for generating income, resulting in decreases in equity.

Statement of Changes in Owner’s Equity

A change statement disclosing events that caused changes in owner’s equity for the period.

Capital

The financial investment of the owner in the business, including contributions and distributions.

Statement of Cash Flows

A change statement disclosing events that caused cash to change for the period.

Notes to Financial Statements

Additional information about the basis of preparation, accounting policies, and relevant disclosures not presented elsewhere.