Qualitative Characteristics of Financial statement, Fundamental, Assumptions08/12/2022 1 By indiafreenotes
Qualitative Characteristics of Financial statement
Comparability is the degree to which accounting standards and policies are consistently applied from one period to another. Financial statements that are comparable, with consistent accounting standards and policies applied throughout each accounting period, enable users to draw insightful conclusions about the trends and performance of the company over time. In addition, comparability also refers to the ability to easily compare a company’s financial statements with those of other companies.
- Financial statement of an enterprise through time to identify trends in financial position and performance
- Financial statement of different enterprise to evaluate financial position, performance and change in financial position.
- Consistent measurement and display of financial effect of like transactions and other events
- Implementation users must be informed of accounting policies employed, any changes in those policies an defects of such changes
- Annual statements must show corresponding information for preceding periods.
The predictive and conformity role of information is interrelated. The information has the quality of relevance when it influences the economic decision making of the users by helping them:
- Evaluate past, present or future events.
- Confirming or correcting their past evaluations.
Users must be able to depend on it being faithful representation.
The information has the quality of reliability when:
- Financial statement are free from material error and bias
- Can be depended by the users
- Reliability comprises
- Faithful representation
- Substance over form: Substance and economic reality, not merely the legal form
- Neutrality free from biasness
- Prudence: Including a degree of caution in making estimates under conditions of un-certainty such that assets or income are not overstated and liabilities or expenses are not understated.
Users must be able to understand the financial statements
For this user are assumed to have reasonable knowledge of business and economic activities and accounting and a willingness to study information with reasonable diligence. Understandability is the degree to which information is easily understood. In today’s society, corporate annual reports are in excess of 100 pages, with significant qualitative information. Information that is understandable to the average user of financial statements is highly desirable. It is common for poorly performing companies to use a lot of jargon and difficult phrasing in its annual report in an attempt to disguise the underperformance.
Financial statement Fundamental
Financial Statement: Statement of Changes in Equity
If you are interested in how much of the income a shareholder retains in the company, this is the place to be. The Statement of changes in equity describes the change in owner’s equity over an accounting period. The main things included on this statement are net income or losses that will be added or subtracted from the equity, any dividend payments to owners, as well as the previous and new shareholder equity balance.
Financial Statement: Cash Flow Statement
Where did the organization’s cash and cash equivalents go? That’s what you are likely to see in the statement of cash flow (or cash flow statement). It’s derived from the balance sheet and income statement. It shows how each balance sheet account and income affects a company’s cash flow.
When prepared using the direct method, the cash flow statement is divided into operating, investing and financing activities. This way you’re able to determine which type of activity generates or consumes the most cash.
Financial Statement: Income Statement
The income statement is perhaps one of the most common financial statements that you will be encountering in fundamental analysis. An income statement encompasses the organization’s revenue and expenses together with its gains/profits and losses. Unlike the balance sheet that’s a snapshot of financial health in time, the income statement is more like a change in financial health over a specific time period. The standard is that there are monthly, quarterly, annual income statements. However, technically a company can create an income statement for any time period.
For non-accountants, revenue and income may seem the same but they are not.
Revenue is the gross amount that a company earns from its principal operations such as a bakery selling bread and pastries. It includes all the funds that are coming in from these operations without accounting for any expenses.
Expenses are the costs of conducting business. Some examples include cost of goods sold, administrative costs, legal fees, insurance costs, office supplies, rent, repair, maintenance costs, and many more. When you subtract all expenses from revenue you arrive at the net profit or net income.
Net Income is the net of everything or revenue minus all expenses, including taxes.
Financial Statement: Balance Sheet
The balance sheet, otherwise known as the statement of financial position, shows the financial standing of a company. It’s a snapshot in time of a company’s financial health. This financial statement is organized into three sections, including assets, liabilities, and equity.
Assets = liabilities + equity.
Assets Section on a Balance Sheet
The assets section on a balance sheet includes the totals of all types of assets. Assets are the property and items that a company owns. There are three main types of assets. They include current assets, fixed assets, and intangible assets. Current assets are cash and other assets that can easily be converted into cash within a year. Current assets include cash equivalents, marketable securities, inventory, account’s receivables, and other liquid assets. Fixed assets are property plant and equipment that cannot be easily liquidated or sold. Intangible assets are not physical items such as patents, goodwill, company recognition, trademarks, copyright, and other similar things.
Liabilities Section on a Balance Sheet
Liabilities are debts and obligations a company owes to its creditors and customers. Every company incurs liabilities at one point of its operations. They can be broken down into current liabilities and long-term liabilities. Current liabilities are those debts and obligations which are due within a year. Examples include accounts payable, customer deposits, interest payable, the current due portion of long term debt and other short term debt. Whereas, long-term liabilities are those that are due after one year. They include multi-year loans, bonds payable, deferred revenue, pension obligations, mortgages, and other long term debt.
The important thing to remember for company health analysis is that the company should be able to meet its short-term and long-term obligations in a timely manner. If a company is unable to meet these obligations, it has a risk of becoming insolvent and could go bankrupt.
Equity Section on a Balance Sheet
Equity is the owner’s interest or residual claim in the business after deducting the company’s liabilities from its total assets. The amount of equity in the balance sheet will give you an idea of the net worth of a company or its value to its owners. Though, often it’s merely just book value in the balance sheet, especially for publicly traded companies (i.e. stocks).
Financial statement Assumptions
The period assumption
This assumption describes the time interval between financial statement reports.
The financial statements are prepared under the going concern basis, which assumes that the business will continue its operations as normal into the foreseeable future.
The financial statements are prepared under the accrual basis, which is a method of financial reporting that measures all cash relating to the business as it comes in and as it goes out, called ‘cash accounting’.
Fair presentation is an assumption to ensure that the financial statements are prepared and presented fairly the financial position, performance and cash flows in accordance with all relevant International Accounting Standard (IASs)/International Financial Reporting Standard (IFRSs). This means that an entity need to disclose about the compliance with the IASs/IFRSs and all relevant IASs/IFRSs must be followed if the entity is in compliance with IASs/IFRSs.
The economic entity
The financial statements are prepared under the economic entity assumption, meaning that the business itself is separate from the owners of the business and any other businesses.
Consistency of presentation refers to the presentation and classification of items in the financial statements should be in the same way from one period to another. There are two exceptions where an entity can depart from this consistency principle. First, when there is a significant changes in the nature of operations or a review of financial statements indicate to be more appropriate presentation. Last but not least, when the changes in presentation is required by IFRS.