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Summary: Corporate Financial Reporting
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This is a summary of the course Corporate Financial Reporting
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Summary: Corporate Financial Reporting2024
Revision material
Session 1 – Financial statements
Information to include in the most extensive reporting requirements:
1. Statement of Financial Performance -> income statement (IS) or profit &
loss (P&L)
= information on the net income of a business during a certain period
2. Statement of Financial Position (SOFP) -> balance sheet (BS)
= information on the financial condition of a business at a certain moment
3. Statement of Cash Flows
= information on the origin and use of cash in the company during a certain
period
4. Statement of Shareholders’ Equity
= information on the individual components of equity and the changes during the
year
5. Notes
= information on the criteria, principles, and norms used to prepare the financial
statements
Usefulness of Statement of Financial Performance
▪ evaluating the past performance of the company
▪ providing a basis for predicting future performance
▪ helping assess the risk or uncertainty of achieving future cash flows
Limitations of Statement of Financial Performance
▪ companies omit items that they cannot reliably measure from the income
statement
▪ income numbers are affected by the accounting methods employed
▪ income measurement involves judgment
Elements of the Income Statement (IS):
1. Income
-> Revenues = arise from ordinary activities of a company
-> Gains = other items that meet the definition of income and may or may not
arise in the ordinary activities of a company
2. Expenses
-> Expenses = arise from ordinary activities of a company
-> Losses = other items that meet the definition of expenses and may or may
not arise in the ordinary activities of a company
Revenue recognition = income generated through the sale of a product or a
service is recognized when ownership and control of the good are transferred to
the customer
Cost of goods sold (COGS) = costs directly incurred when producing the
product or service that is sold during the period
,Total comprehensive income = the change in equity during a period resulting
from transactions and other events, other than those changes resulting from
transactions with owners in their capacity as owners
-> = profit & loss + other comprehensive income
Usefulness of Statement of Financial Position
▪ assessing a company’s liquidity
▪ assessing a company’s solvency
▪ assessing a company’s financial flexibility
Limitations of Statement of Financial Position
▪ most assets and liabilities are reported at historical cost
▪ companies use judgments and estimates to determine many of the items
reported in the statement of financial position
▪ omission of many items that are of financial value but that a company cannot
record objectively
Asset = a present economic resource (potential to produce economic benefits)
controlled by the entity as a result of past events
Liability = a present obligation to transfer an economic resource as a result of
past events
Equity = the residual interest in the assets after deducting all liabilities
What counts as cash / cash equivalents?
- Cash
- Banks (accounts)
- Bonds about to mature (3 months or less)
-> any item that is highly liquid
Two ways to prepare the Statement of Cash Flows
1. Direct method (most common for entrepreneurs/small firms)
-> simply add up all the cash posts in the relevant categories
2. Indirect method (most common for medium/large firms)
-> five steps:
1. Obtain Balance Sheet of two consecutive years, Income Statement of the
current year, and selected transaction data
2. Compute differences in Balance Sheet
3. Transfer differences in Cash Flow format and incorporate selected Income
Statement and transaction data
4. Make sure net changes in cash match Balance Sheet change in Cash & Cash
equivalents
5. Comment on cash flows
Cash flows are classified in three categories:
1. Operating activities
= cash inflows and outflows directly related to earnings from normal operations
2. Investing activities
= cash inflows and outflows related to the acquisition or sale of productive
facilities and investments in the securities of other companies
3. Financing activities
= cash inflows and outflows related to external sources of financing for the
, enterprise
Session 2 – Accounting concepts and assumptions
Double-entry system = for every debit, there must be a credit
-> Assets = Liabilities + Equity
Accrual-basis accounting = transactions that change a company’s financial
statements are recorded in the periods in which the events occur (not when the
cash is received)
Matching principle = product costs should be recognized whenever the product
is sold
-> products costs: materials, labour, overhead
-> period costs: salaries, administrative costs (recognized as expense when
incurred)
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