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Company must match expenses with revenues in an accounting periodExpenses classifiedA.Nature of expense method-Items aggregated according to their nature (depreciation, employee benefits etc.) and are not reallocatedamong various functions within the entityB.Function of expense method-Classifies expenses according to theirfunction as part of cost of sales or distribution of administrative costs-Disclose cost of sales under this method separately-Provide more relevant information, but allocation costs to functions may
require arbitrary allocationsIncome StatementFollowing line items must be disclosed separately on the face of income statement-Revenues-Expenses-Financing costs expense-Shares of net profits or losses-Income tax expense-Profit or loss; attributable to equity interest, parent entity or income taxSignificant itemsWhen a revenue or expense item is extraordinary in terms of size, nature or incidence in explaining the financial performance of a company, it must be disclosed separately in thenotes in the financial report.-Write-down of assets-Litigation settlements-Operation restricting-Investment disposalsStatement of Changes in Owner’s EquitySummarises transactions affecting OE during an accounting periodBridges the gap between Income statement and Balance sheetProvides an overall better picture of the company’s financial activities for an accounting periodAccording to 106 AASB 101:An entity shall present a statement of change in equity showing in the statement:a)Total comprehensive income, separately showing total amounts of attributable to owners of interestsb)Each component of equity highlights the effects of retrospective applicationc)For each component, a reconciliation between the carrying amount at the beginning and end of the period‘What if’ analysisAnalysing accounting information to tell stakeholders what difference accounting policy choices make to financial statementsCompared to other entities with different policies (analysts and bankers)
Deciding upon accounting policies and particular business decisions (managers)Examples:-What if I used FIFO instead of LIFO-What if I depreciated over 20, not 10, yearsManagers would be interest on effect on net profit, balance sheet figures, and particular ratiosCASH FLOW STATEMENT AND ANALYSIS: DIRECT METHODContents of a statement of cash flowsCASH FLOWSTATEMENT: INDIRECT METHODIndirect MethodAdjust Net Profit After Tax to derive Cash Flow Operations (ONLY)AASB 107-Disclose a noteshowing a reconciliation of net profit and cash from operations Investing activitiesBuying and selling of NCA lending/collecting money, PPEInflows: Receipts from selling non-current assetsOutflows: Purchasing non-current assetsOperating activitiesGeneral operations buying, selling, delivery e.g. adminInflows: receipts, receivables, payablesOutflows: purchasing inv., paying taxes, utilities, interestFinancing activitieschange in capital structure Owner invest., borrowingInflows: