Exam (elaborations)
Fundamentals of Finacial Reporting BMAN10621 Revision
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- The University Of Manchester (UOM)
Fundamentals of Finacial Reporting BMAN10621
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Fundamentals of Financial ReportingBalance Sheet
The accounting equation
1. Where the entity gets the money from
Two types of claims:
i) equity
ii) debt
2. How does the entity spend the money
Accounting (or balance sheet) equation:
Assets = liabilities + share capital (or equity)
Statement of fi nancial position
Shows the financial position of a business at a point in time – a
snapshot of the business
Shows information about the assets, liabilities and resulting
owners’ interest (also known as equity or capital) in the
business; more on these later…
Governed by the accounting equation:
ASSETS = CLAIMS (i.e. Equity + Liabilities)
Assets:
Inventory = value of goods purchased by the business for trading
purposes
Trade Receivables = money owed to the business by its clients,
arising from past sales made to clients on credit
Cash = money in the bank and/or in the cash register
Prepaid expenses = money paid in advance by the business for
expenses it will incur in the future (e.g. money paid for next year’s
rent or next year’s insurance)
Liabilities:
Borrowings (loans) = money the business owes to banks or other
third parties arising from cash borrowings
Trade Payables= money that the business owes to its suppliers,
arising from past purchases of inventory made on credit
Accrued Expenses = money the business owes because of unpaid
expenses it has incurred during the current accounting period.
Cash Overdraft (negative cash balance) = this is a short-term
loan from the bank to the business; when cash is negative it needs
to be recorded as a liability, instead of an asset
Equity:
, Original Capital = represents the original contribution of the
owner to the business (for plcs you will see “Share Capital”)
– NOTE that his contribution could be anything that can be
valued in monetary terms, e.g. cash, a PC, a van etc.
Retained Profit = represents the accumulated profits or losses
throughout the years since the business started trading.
– The Retained Profit is the profit that the business retains (i.e.
keeps), in order to help it grow and prosper (it is a good
source of financing for funding future growth)
– If the owner withdraws money from the business, retained
profits will decrease.
Classifi cation of Assets and Liabilities as Current vs. Non-Current
Current Assets:
Assets held for the short term (usually less than 1 year)
Assets meeting ANY of the following characteristics:
– Held principally for trading
– Held for sale/consumption in normal operating cycle
– Expected to be sold within the next year
– Cash or near cash
Non-Current Assets:
Assets that are held for the long term (longer than 1 year) and DO
NOT meet the definition of a current asset.
Current Liabilities:
Amounts owed that are to be paid in the short term (usually within 1
year)
Liabilities meeting ANY of the following criteria:
– Held principally for trading purposes
– Expected to be paid during the normal operating cycle
– Expected to be paid within the next year
– No right to defer payment beyond 1 year
Non-Current Liabilities:
Liabilities that are expected to be paid after 1 year and DO NOT
meet the definition of a current liability.
NOTE: Non-current liabilities will eventually be re-classified as
current liabilities.
Simple Balance Sheet Layout / Order of Presentation
NON-CURRENT ASSETS
……
CURRENT ASSETS
…...
TOTAL ASSETS XX
EQUITY
……
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