OHT 2.

1 Measuring and reporting financial position

OBJECTIVES
You should be able to:

Explain the nature and purpose of the three major

financial statements

Prepare a simple balance sheet and interpret the

information that it contains

Discuss the accounting conventions underpinning the

balance sheet

Discuss the limitations of the balance sheet in

portraying the financial position of a business

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.2 The major financial statements – an
overview

Cash flow statement

Profit and loss account

Balance sheet

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.3 Relationship between the balance
sheet, profit and loss account and
cash flow statement

Balance sheet at the Balance sheet at Balance sheet at

beginning of Period 1 the end of Period 1 the end of Period 2

Profit and loss Profit and loss

account 1 account 2

Cash flow statement 1 Cash flow statement 2

Period 1 Period 2 Time

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.4 Assets

Major characteristics

A probable future benefit

exists

The business has an exclusive

right to control the benefit

The benefit must arise from some

past transaction or event

The asset must be capable of

measurement in monetary terms

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.5 Claims

There are essentially two

types of claim against
a business:

Capital

Liabilities

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.6 The balance sheet equation

equals plus

Assets Capital Liabilities

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.7 The effect of trading operations on
the balance sheet

The balance sheet equation can be extended as follows:

equals plus plus

(minus)

Capital Profit
Assets Liabilities
(Loss)

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.8 The classification of assets

The classification of
assets may vary
according to the nature
of the business:

Fixed assets

Current assets

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.9 The circulating nature of current
assets

Stock

Trade
Cash
debtors

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.10 The classification of claims

Long-term liabilities

Current liabilities

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.11 The equation for the horizontal layout

Current
Fixed
assets
assets +
Current
assets = Capital + Long-term
liabilities + liabilities

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.12 The equation for the vertical layout

Fixed
assets + Current
assets - Current
liabilities - Long-term
liabilities = Capital

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
 OHT 2.13 Accounting conventions and the
balance sheet

Accounting conventions

Money measurement Dual aspect

Historic cost Prudence

Going concern Stable monetary unit

Business entity Objectivity

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition