This chapter is a small introduction to the types of business organizations,
GAAP, IFRS, the 4 financial statements and stakeholders and shareholders.
FFA
Accounting Cycle
Bookkeeping
Just recording
Double Entry
Accounting
Financial Statements
SFP. Liabilities are current when payment cannot be deferred for more than
12 months at the reporting date.
SPL & OCI. These 2 can be combined, since OCI BEGINS with the net profit
or loss and then continues to account for incomes not generally recorded by the
SPL. E.g. surplus upon reevaluation of property. Find others and why they’re not
included in SPL.
Statement of changes in equity explains the differences between the opening
equity and the one being recorded into the SFP at reporting date.
SCF is a historical statement that shows cash flows in these 3 classifications:
operating (running cash flows); investing (cash flows related to non-current
assets); and financing (related to loans, and other methods of funding (Even
equity? Obviously, what other category could it fall into?). This information may
seem useless, but it can actually be used in a myriad of ways. It allows users to
make key insights into what sorts of activities generally have the highest cash
flow, liquidity and financial health.
Non-Financial Statements
These would also be included in the annual report along with the financial
ones. They include: chairman report, director’s report, employee reports, value
added report, financial review, five-year financial report, analysis of properties
and sustainability reports (what are IFRS-S1 & IFRS-S2?). IFRS-S1 focuses on
general environmental disclosures while IFRS-S2 focuses more on climate issues.
Reporting
GAAP
Generally Accepted Accounting Principles (my ass, its mainly used in the US).
Anyway, it’s considered more rule-based and less useful for international reporting.
However, it is still widely used in the US and internationally. Released by the FASB.
IFRS
More open to interpretation, making it more flexible and principle-based. Generally
logical. Used internationally. Released by the IASB.
Stakeholders
Can be internal or external.
Internal: employees, owners, managers, shareholders, etc.
Shareholders
Can be preference shareholders or common holders. The common ones are usually
more committed to the organization and can vote. However, they usually have lower
long-term returns. Preference shareholders have an earlier claim to assets in case of
failure (BUT NOT BEFORE CREDITORS), cannot vote and usually receive yearly
dividends. Higher long-term returns.
External: customers, suppliers, bondholders, creditors, bank, tax authorities,
environment/sustainability groups, auditors, potential investors, etc.
Types of Business
Organizations
Sole traders don’t generally need to publish their financial statements, the same
applies to partnerships. However, they would need to prepare them for tax purposes.
Both would end if an owner decides to leave. Unless of course the company is sold, or a
new partner is brought in, or an arrangement was made beforehand. Tax charged
personally. They tend to lead towards short-term finance since long-term is generally
difficult to obtain.
Limited liability companies are separate from their owners and thus shareholders are
generally only considered liable based on the value of their shares. Continuity is
guaranteed, regardless of pull outs. Tax can be on individual shares and corporations
too.