Internal And External Financial Reporting (HSA14A)
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Internal and External Financial Reporting
Belgian Chart of Accounts ..................................................................................................................................................................... 1
Financial accounting ............................................................................................................................................................................. 2
1. Conceptual framework and financial statements ............................................................................................................... 2
2. Commercial and financial transactions .............................................................................................................................. 8
3. Assets ................................................................................................................................................................................ 9
4. Ownership interest and liabilities ..................................................................................................................................... 16
Cost accounting .................................................................................................................................................................................. 28
1. Introduction and cost classifications ................................................................................................................................ 28
2. Absorption / full costing ↔ Direct / variable costing ......................................................................................................... 29
3. Cost volume profit (CVP analysis) – Break-even analysis (BE analysis) ......................................................................... 31
4. Activity based costing (ABC) ............................................................................................................................................ 33
5. Standard costing and variance analysis .......................................................................................................................... 34
,Belgian Chart of Accounts
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,Financial accounting
1. Conceptual framework and financial statements
Two types of accounting
• Financial accounting: external reporting to investors, creditors, the public.
• Management accounting: internal reporting to managers of the company.
Types of businesses
• Proprietorship / sole trader
o formation: an individual who enters into business alone to sell goods or to provide services.
o liability: personal and unlimited liable.
o status in law: separate economic entity for accounting purposes; not a separate legal entity.
o accounting information: no disclosure obliged but (limited) need for accounting information (eg. taxation).
o remark: doesn’t mean you have to work all alone. You enter into business alone, but if your business grows you
can hire people and pay them wages to work in the business.
o examples: baker, electrician, hairdresser,… all self-employed persons.
• Partnership
o formation: two or more persons enter into business; usually legal agreement (= partnership deed). Could be an
expansion of a sole trader
o liability: jointly and unlimited liable.
o status in law: separate economic entity for accounting purposes; not separate legal entity.
o accounting information: no disclosure obliged but (limited) need for accounting information (eg. taxation).
o remark: risk losing personal property if business fails. Also, one partner may be required to meet all the
obligations of the partnership if the other partner does not have sufficient personal property, possessions or cash
(this is described in law as: joint and several liability).
o examples: Wasbar in Antwerp.
• Corporation / limited liability company
o formation: two or more persons registering the company following legal formalities. The owners are called
shareholders. Shareholders will receive a share in the form of a cash dividend. If the owners (the shareholders)
do not run the business themselves, they can appoint directors to run the business (= paying someone else to
run the business).
o liability: limited to their share in the company’s capital. To encourage the development of larger business entities,
owners need the protection of limited liability.
o status in law: separate economic entity and separate legal entity (= the limited liability company is seen as a
separate person from the owners).
o accounting information: requirement to disclose accounting information (Annual Financial Statements) and large
need for accounting information.
o remark: a limited liability company can carry out only the activities that are set out in the memorandum (= the
deed of formation; the document that governs the relationship between the company and the outside world) and
in the articles of association (= a document in which, along with the memorandum of association (in cases
where the memorandum exists), forms the company’s constitutions, defining the responsibilities of the directors,
the kind of business to be undertaken , and the means by which the shareholders exert control over the board of
directors).
o examples: Bekaert, Coca-Cola, Colruyt, Delhaize.
o three types of limited liability companies:
§ private limited liability company (Ltd): prohibited by law from offering its shares to the general public
(family-controlled business).
§ public limited company (plc): permitted to offer its shares to the general public (stricter regulation).
§ listed company: shares of a public limited company are bought and sold on a stock exchange.
o advantages of a limited liability company:
§ limited liability: the owners’ liability is limited to their share in the company’s capital.
§ separation of ownership and management and ease of transfer of ownership: possibility to appoint
directors to run the business on a day-to-day basis.
§ ease in raising capital: shares can eb sold, new shares can be issued.
§ continuity of existence: even if the shareholders die, the company keeps existing.
Accounting standards
• The regulatory framework of accounting: refers to legislation and other rules that govern financial statements. This
framework provides rules regarding the format of the financial statements, the items that have to be disclosed, the way
these items have to be valued (or calculated),…
• Accounting standards: enhance both the understandability and comparability of financial statement data.
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, • Global accounting standards: The International Accounting Standards Board –
IASB, which is a private sector body that aims at developing high-quality global
accounting standards (i.e. International Financial Reporting Standards – IFRS,
formerly known as International Accounting Standards – IAS) and promoting the
application of these standards. As from 2005 on, these IFRS have become mandatory
for all public firms in the European Union (EU).
At the top of the organization structure is the IASC foundation, which is an umbrella
organization that exists since July 2010. This body appoints members of the
underlying organs, keeps the overview, and collects funds to support the organization.
All underlying organs report to the IASC foundation, which itself contains different
types of members.
Two important committees are:
o The SAC (Standards Advisory Council): includes 40 members from 25 countries and 7 international
organizations. It advises and informs the IASB.
o The IFRIC (International Financial Reporting Interpretations Committee) – formerly SIC: consists of 12
members. It interprets the application of IAS’s and IFRS’s (= principle based and wide interpretable). It works
closely with national regulators to ensure convergence between national standards and IAS’s and IFRS’s. It also
publishes draft interpretations. The approval process includes IFRS’s drafts and hearings.
Advantages:
o The financial statements of EU public firms from different countries can be compared rather easily.
o EU firms that are cross-listed in another EU country do not need any longer to prepare two sets of financial
statements.
Conceptual framework: why? who? what? how?
• Conceptual framework: lays the foundation for resolving the “big” issues in accounting, meaning the why, who, what, and
how of financial reporting.
o Why is financial reporting important: the objective of financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders, and other creditors.
o Who are the users of accounting information: they are called the stakeholders:
§ Internal stakeholders: employees (will we work in the company?), managers, owners.
§ External stakeholders: suppliers (will we give credit to the company? – called unsecure creditors as they
have very little protection if the company goes bankrupt), creditors (will we lend money to the company?
– may impose loan convenants), shareholders (will we provide capital to the company?), customers (will
we buy from the company?), governments and public interest (will we tax the company?).
o What makes accounting information useful: qualitative characteristics refer to the attributes that will most likely
make the information provided in financial statements useful to users.
§ Fundamental qualitative characteristics:
• Relevance: information must be capable of making a difference to the decision maker. Typically,
this happens when financial information is used to help users in making their own predictions of
future outcomes (predictive value) or in assessing previous evaluations (confirmatory value).
The degree of relevance may be influence by the materiality (= meaning, the information must
be important enough to the user to make a difference to his/her decision if it were omitted or
erroneously declared) of the information.
• Reliability: faithful representation: the information is complete, free from material error, prudent
and can be expected to faithful represent the economic substance of the underlying event or
transaction.
§ Enhancing qualitative characteristics:
• Comparability: like things must look alike and different things must look different. This in order
to be able to identify trends.
• Verifiable
• Timeliness: the information must be made available to users early enough to help them make
decisions. In doing this, it is often necessary to report information before all aspects of a
transaction are known, which may reduce the degree of reliability (tradeoff).
• Understandable: the accounting information must be sufficiently transparent so that it makes
sense to users of the information.
§ In order to meet the objectives of financial reporting, there are assumptions we need to make:
• We prepare financial statements on an accrual basis: transactions and other events are
recognized when they occur and not when cash is received or paid.
• The going concern assumption: The entity will continue to operate long enough to use existing
assets for its intended purposes. The business has neither the intention not the need to liquidate
its operations.
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