7_B.Sheet - Week 6-7: The Statement of Financial Position...

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1 Week 6-7: The Statement of Financial Position (aka the ‘Balance Sheet’) Text: Ch.6 (LO 1-7; excluding LO 8 ) Lecture Demos: Dyesol and Dulhunty balance sheet extracts, P6.7, P6.11, P6.8, P6.16 Self-Study Exercises: 6.1, E6.2, E6.3, E6.12, E6.13, P6.1, P6.3, P6.12 Announcements: The mid-semester exam is scheduled for Wednesday 21 April and covers material from weeks 1-7 inclusive The lecture of week 7 will have a Q&A session and will provide a quick overview of weeks 1-6 Outline Nature and purpose of the Statement of Financial Position ( aka Balance Sheet) Definition and recognition criteria for: Assets Liabilities Equity components Valuation of assets and liabilities The statement of financial position The purpose of the Statement of Financial Position (aka the Balance Sheet) is to report on an entity’s assets, liabilities and equity at a particular point in time That is to say, to report on the accounting equation: A ! L + E Financial position ’ gives information on: The nature and value of resources controlled The external claims on assets (due to liabilities) The residual claims on assets (equity)
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2 Start with the heading. Indicate for which company and at which point in time the balance sheet is prepared. (1) Facilitate comparison on how financial position has changed; make sure to designate the unit of measurement (2) Financial position is reported at the ‘parent’/‘the entity ’ level, and if the firm has controlled subsidiaries, then position is also reported at the ‘consolidated’/‘the group’ level (i.e. any transactions between the parent and the subsidiary cancel out at the consolidated level) Assets Financial position also explains the investment decisions of the business, i.e. the choice of resources: Mining firms need minerals, equipment and transport Retailers need inventory and a good supply chain Manufacturers need three types of inventories (raw material, work-in-progress, finished goods) Energy firms need substantial infrastructure Biotech firms need R&D and patents Service firms (e.g. financial institutions) need offices and employees Asset recognition test A firm is allowed to report an asset on the balance sheet if and only if: It is probable to yield future economic benefits It resulted from a past event It controls the asset (not necessarily owns) Its cost or value can be measured in monetary terms Control does not always mean ownership. It refers to the proprietary use of an asset and the right to deny or regulate the access of others to the use of that particular resource
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3 Example of control: leases Control of an asset may also mean legal ownership but not necessarily, e.g. consider the case of leases: Operating leases : the lessor transfers only the right to use an asset for the operating needs of the lessee. The lessor maintains control and can cancel the contract any time. The lessee does not assume any risk and treats the rental fee as expense. The operating lease is an ‘off-balance sheet’ asset
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This note was uploaded on 09/06/2011 for the course ECON 1001 at University of Sydney.

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7_B.Sheet - Week 6-7: The Statement of Financial Position...

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