CRF L1

1. Lecture 1
Corporate Reporting & Finance
External Financial Reporting

2. By the end of this lecture and related work you should:
• Understand the objective of external financial reporting and know about
users and their needs
• Know in outline what is in a set of financial statements
• Be able to explain the accounting equation and to construct a simple
statement of financial position
• Understand the qualitative characteristics of financial information
Learning outcomes

3. To provide financial information about the reporting entity to users of the
financial statements that is useful in making decisions about providing
resources to the entity, as well as other financial decisions
Primary purpose
of external financial
reporting:
The objective of external financial
reporting
Decision
making
Decision
making

4. Users of financial statements
Source: Kaplan, ACCA F3,
page 8 (2015)

5. Different types of business organisation
and their user groups
Sole trader
Partnership
Limited
company -
unlisted
Limited
company -
listed
Management, lenders, government (HMRC)
Management, lenders, government (HMRC)
Investors, management, suppliers, customers,
lenders, government (HMRC), competitors
Investors, management, suppliers, customers,
lenders, government (HMRC), competitors, the
public

6. Financial statements
• Statement of profit or loss – presents results of the business for a period of
account, usually one year
• Statement of financial position – presents the position of a business at a
given point in time, usually the year end
• Statement of changes in equity – presents movements in owners’ capital for
a period of account, usually one year
• Statement of cash flows – presents movements in cash flows for a period of
account, usually for one year

7. Financial statements (continued)
ALSO:
• Disclosure notes
• Directors’ report (for companies)
• Auditor’s report (if applicable)
• Other information, e.g. Five-year summary

8. Example: Pearson plc
Most recent annual financial statements: 31 December 2014
https://www.pearson.com/ar2014.html#sec5

9. Example: Pearson plc (continued)
Financial summary information about sales:

10. Accounting regulatory framework
 International standards and regulation
• International financial reporting standards
(IASB – International Financial Standards board)
• EU legislation
 National standards and regulation
• UK Generally Accepted Accounting Practice (UK GAAP)
• Companies Act, 2006
• UK Corporate Governance Code

11. Accounting basics
Financial statements comprise five key elements:
• ASSETS – A resource controlled by a business
• LIABILITIES – An obligation to transfer economic benefit
• EQUITY – The residual interest in the business – capital that is due to be
returned to the owners when the business ceases
• INCOME – The inflow of economic benefit within an accounting period
• EXPENSES – The outflow of economic benefit within an accounting period

12. How financial statements work
INCOME
LESS
EXPENSES
=
PROFIT
• Statement of profit or loss • Statement of financial position
ASSETS
LESS
LIABILITIES
=
EQUITY
INCREASES

13. The accounting equation
- =
= +
ASSETS LIABILITIES EQUITY
ASSETS LIABILITIES EQUITY

14. Example – Jeff (1)
Jeff Bright starts a sole trader business on 1 January 2015 with £10,000 that
he
has been left in a will.
• Jeff opens a bank account - ‘Jeff – trading as Bright Printers’ and deposits
£10,000
There are two sides to the transaction from the point of view of the business:
• ASSETS increase by £10,000
• EQUITY (also known as CAPITAL) increases by £10,000

15. The business entity concept
Jeff is a sole trader – his business trades as ‘Bright Printers’
Legally, the business is not a separate entity
BUT
THE BUSINESS ENTITY CONCEPT
means that Jeff is regarded as separate from his business

16. Example – Jeff (2)
Here is Jeff’s statement of financial position after the first transaction:
ASSETS = EQUITY (there are no liabilities)
£
ASSETS 10,000
EQUITY (CAPITAL) 10,000

17. Example – Jeff (3)
On 2 January 2015 Jeff buys a computer for £2,000
The business bank account is reduced by £2,000, but Jeff’s business has
acquired a new asset for £2,000, so the total of assets is still £10,000:
Computer £2,000
Bank account £8,000
£10,000
BUT: the computer will be used in the business for more than one accounting
period so it is classified as a NON-CURRENT ASSET

18. Example – Jeff (4)
Here is Jeff’s statement of financial position after the second transaction:
£
ASSETS
NON-CURRENT ASSETS 2,000
CURRENT ASSETS 8,000
10,000
EQUITY (CAPITAL) 10,000

19. Example – Jeff (5)
On 3 January 2015 Jeff buys office supplies for £100.
The supplier allows him credit terms of 30 days – this means that Jeff’s
business will have to pay £100 in 30 days’ time.
The office supplies are a CURRENT ASSET of £100 (they will probably be used
up within a year), but there is an equal liability of £100.

20. Example – Jeff (6)
Here is Jeff’s statement of financial position after the third transaction:
£
ASSETS
NON-CURRENT ASSETS 2,000
CURRENT ASSETS (8,000 + 100) 8,100
10,100
EQUITY (CAPITAL) 10,000
LIABILITIES
CURRENT LIABILITIES 100
10,100

21. Qualitative characteristics of financial
statements
The IASB Conceptual Framework:
FUNDAMENTAL characteristics
• Relevance
• Faithful representation
ENHANCING characteristics
• Comparability
• Verifiability
• Timeliness
• Understandability