Financial Statements
eBook - ePub

Financial Statements

Analysis and Reporting

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eBook - ePub

Financial Statements

Analysis and Reporting

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About This Book

Through a mixture of concepts and examples, this book demystifies the variety of elements of financial accounting and uncovers the need-to-know information for certification in this field. This book covers the two aspects of financial statement analysis, namely quantitative and non-quantitative analysis. Concluding with helpful case studies, the book will appeal to students and academics of financial accounting.

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Information

Year
2018
ISBN
9783319999845

Part IOverview of Financial Statements and the Statement of Financial Position

In the USA, financial statements are prepared and presented in accordance with the GAAP. However, correspondence between accounting numbers and the events/transactions those numbers purport to represent is far from giving the real picture.1 Despite these inherent flaws, the statements as delivered to its readers still deserve considerable amount of scrutiny and analysis.
ASC 210-10 provides a general overview of the aspects of the balance sheet, which is also commonly referred to as a statement of financial position. The balance sheets of most entities show separate classifications of
ā€¢ Current assets and current liabilities;
ā€¢ Long-term assets and long-term;
ā€¢ Shareholdersā€™ equity.
ASC 210-20 describes the concept of offsetting assets and liabilities in the balance sheet and notes the limited circumstances when it is allowed. ASC 210-20 includes the overview of the Subtopic.
This Subtopic provides criteria for offsetting amounts related to certain contracts and provides guidance on presentation. It is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper except if a right of setoff exists. The general principle that the offsetting of assets and liabilities is improper except where a right of setoff exists is usually thought of in the context of unconditional receivables from and payables to another party. That general principle also applies to conditional amounts recognized for contracts under which the amounts to be received or paid or items to be exchanged in the future depend on future interest rates, future exchange rates, future commodity prices, or other factors.
Footnotes
1
Lawrence Revsine (1991): ā€œThe Selective Financial Misrepresentation Hypothesis,ā€ Accounting Horizons, pp. 16ā€“27.
Ā© The Author(s) 2018
Felix I. LessamboFinancial Statementshttps://doi.org/10.1007/978-3-319-99984-5_1
Begin Abstract

1. Overview of Financial Statements

Felix I. Lessambo1
(1)
Central Connecticut State University, New Britain, CT, USA
Felix I. Lessambo
End Abstract

1.1 General

Financial reporting is essentially a way of following standard practices to give to the readers of the financial statements an accurate depiction of a firmā€™s finances, including its revenues, expenses, profits, capital, cash flows. Financial reporting is also a building block of a market-based monitoring of companies, which allows shareholders and the public at large to assess management performance.1 In the wake of the international financial crisis of the 1990s, the international community embarked on a range of initiatives to strengthen the international financial architecture.2 Financial reporting plays a crucial role in supporting the efficient functioning of the capital markets. Robust financial reporting increases investorsā€™ confidence, which in turn leads to better capital allocation decisions and economic growth.

1.2 The International Accounting Standard Board: IFRS

The concept of convergence first arose in the late 1950s in response to post-World War II economic integration and related increases in cross-border capital flows. Initially, the focus was put on harmonization. That is, reducing differences among the accounting principles used in major capital markets around the world. By the 1990s, the notion of harmonization was replaced by the concept of convergence. The International Accounting Standards Committee, formed in 1973, was the first international standards-setting body. It was reorganized in 2001 and became an independent international standard setter, the International Accounting Standards Board (IASB). As of 2013, the European Union and more than 100 other countries either require or permit the use of international financial reporting standards (IFRSs) issued by the IASB or a local variant of them. By 2016, approximately 120 countries and jurisdictions, including Hong Kong, Egypt, Canada, Australia, and the countries in the European Union, require or permit the use of IFRS or a local variant of IFRS.
The FASB and the IASB have been working together since 2002 to improve and converge USA generally accepted accounting principles (GAAP) and IFRS. As of 2013, Japan and China were also working to converge their standards with IFRSs. The Securities and Exchange Commission (SEC) consistently has supported convergence of global accounting standards. However, the Commission has not yet decided whether to incorporate IFRSs into the US financial reporting system. The Commission staff issued its final report on the issue in July 2012 without making a recommendation.

1.3 European Financial Reporting Advisory Group (EFRAG)

EFRAG is an advisory body that participates in the European endorsement process of IFRS Standards. The European Union (EU) is not a single jurisdiction but, rather, an economic and political partnership between 28 European countries that together cover much of the continent of Europe. With respect to accounting, the European Union has enacted some laws, known as (ā€œDirectivesā€) that all EU and EEA members must comply with. Some of those Directives address accounting issues. The most notable is Directive 2013/34/EU of the European Parliament and of the Council of June 26, 2013 on the annual financial statements, consolidated financial statements, and related reports. EU and EEA member states may enact additional accounting laws and regulations that add to the requirements of the Directives, but they cannot override the requirements of the Directives.
EFRAG serves the European public interest by developing and promoting European views in the field of financial reporting and ensuring these views are properly considered in the IASB standard-setting process and in related international debates. EFRAG ultimately provides advice to the European Commission on whether newly issued or revised IFRS meet the criteria in the IAS Regulation for endorsement for use in the EU, including whether endorsement would be conducive to the European public good. EFRAG seeks input from all stakeholders, and obtains evidence about specific European circumstances, throughout the standard-setting process and in providing our endorsement a...

Table of contents

  1. Cover
  2. Front Matter
  3. Part I. Overview of Financial Statements and the Statement of Financial Position
  4. Part II. The Statement of Income
  5. Part III. The Statements of Cash Flows and Financial Ratios
  6. Part IV. Pro-Forma Financial Statements
  7. Part V. Consolidated Financial Statements
  8. Part VI. Case Study
  9. Back Matter