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ACCOUNTING FOR DECISION MAKERS – LECTURES 7 & 8 (DRAFT 1) FINANCIAL POSITION PART 2 – CLASSIFICATIONS OF COMPENENTS OF THE BALANCE SHEET AND WORKING CAPITAL MANAGEMENT Overview Consider: o Classifications of assets/liabilities in the balance sheet (different classifications convey information about different types of risks/rewards). o Introduction to the measurement of balance sheet items: Example: How to measure accounts receivable; inventories; impairment. o Introduction to working capital and management of short-term liquidity. Classification, presentation and disclosure of elements on the balance sheet Accounting standards exist that prescribe the presentation, classification and disclosure requirements for assets, liabilities and equity n the balance sheet. o Classification: What kind of assets or liabilities do we have? o Presentation: How do we structure our financial statements to convey the information in those classifications? o Disclosure: What details do we need to know about the various classifications so others will understand Even though not legally required, some entities with no public accountability voluntarily adopt similar classification, presentation and disclosure practices as required by IFRSs. Classifications – What types of assets and liabilities do we have? The way items are classified conveys important information about the risks/rewards associated with the different items. Some of these are based on the characteristics of each asset or liability, so assets and liabilities with similar characteristics are put together. o Eg: Short-term v long-term; tangible v intangible – It reflects on the risk, obligations and pattern of benefits. Intangible assets tend to have more risk. o See reclassification of debt from short-term to long-term in ABC Learning videos. Misclassification of certain debts as long-term or short-term. If debt is needed to be paid sooner, then there is more risk to consider.
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Centro: Directors in the company were guilty of the same mistake of misclassification as ABC Learning Centre, as the company could not pay the sum due to misclassification in short-term and long-term debt. Current and non-current assets and liabilities Distinction between current and non-current classifications is based on timing. o If the economic benefits (of asset) or outflow of resources (for liability) are expected to be realised in the next reporting period, the asset or liability is categorised as current. o If economic benefit (of asset) or outflows of resources (of liability) are expected beyond next the reporting period, the classification is non-current. On the balance sheet, an entity will usually show total amounts for o Current assets – Eg: Cash, accounts receives, inventory o Non-current assets o Current liabilities o No-current liabilities Sub-categories are also shown on face of the balance sheet but the real detail is disclosed in the notes to the financial statements. As information is aggregated, information starts to become lost, so footnotes
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This note was uploaded on 09/25/2011 for the course ECON 101 taught by Professor Drpearce during the Three '11 term at University of Adelaide.

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