Understanding Financial Statement Notes

This assignment delves into the crucial role of notes accompanying financial statements. It emphasizes how these notes offer explanations and clarifications on individual line items presented in the main financial statements. The assignment highlights the significance of notes in providing a comprehensive understanding of a company's financial health, going beyond the basic information conveyed by the core statements. It also discusses the criteria outlined by the AASB (Australian Accounting Standards Board) for ensuring that financial reports are clear, accurate, and accountable.

REPORT ON THE PROCESS OF FINANCIAL STATEMENT PREPARATION
Introduction
The concept of financial reporting and the processes of accounting cycle are focused on
providing the users with useful information in the form of financial statements. I.e. They are
the end product of the accounting system in any company. Therefore it is
obligatory/mandatory for an existent and legal businesses to prepare financial statements.
Investors and regulators may make decisions about a business based on the information
provided by financial statements. Financial statements must be prepared in sequence because
the information in one is needed for the next. The sequence followed in writing a financial
statements is; income statement, statement of retained earnings, balance sheet, statement of
cash flows and additional notes to financial statements.
HISTORY OF THE DEVELOPMENT OF STANDARDS BOARD (AASB)
From 1996 the professional bodies jointly operated the Australian Accounting Research
Foundation(AARF),which encompassed Accounting Standards Board (AcSB) and Public
Sector Accounting Standard Board (PSASB).in 1984, the Accounting Standard Review
Board (ASRB) was established by the ministerial council. It operated under companies Act
1981. The ASrb and the AcBS merged in 1988 with the ASRB continuing to work with
PSASB. The ASRB was re-established under Act 1989 and was renamed to Australian
Accounting Standard Board (AASB) in 1991.It applied under corporations law. In 2000,
AASB merged with PSASB and was re-established under the Australian securities and
investment commission. FRC was established to oversee AASB. Act 2001 and AASB
continues to operate under Australian Securities and investment commission Act 2001.It
offered the development of International Accounting Standards Committee (IASC)
established in 1973 which became International Accounting Standards Board (IASB) in
2001.AASB converged its standards with IASB and assist PSC of international federations
account. PSC is now called International Public Sector Accounting Standards Board
(IPSASB).in 2002,FRC gave direction to AASB to adopt issues on the IASB-
(IFRs).Australian equivalents of IFRs apply to annual reporting periods commencing on
1/1/2005.in 2003, FRC also directed AASB in relation to harmonisation of Government
finance statistics(GFS) and generally Accepted Accounting Principles(GAAP)(AASB 2016)
WRITING THE INCOME STATEMENTS
The income statements measure a company’s financial performance over a specific
accounting period. The implementation of the budget is assessed by a summary given

regarding how the business incurs its revenues and expenses through both operating and non-
operating activities.
According to IAS1(international accounting standards), income statement was a term used
before its amendment in 2007, it was later amended to a statement of comprehensive income,
but is to be retained regarding a two statement approach(presentation of financial statements
2016).It also shows the net profit or loss incurred over a particular accounting period, mostly
a quarter of a year. It is also known as profit and loss statement or the statement of revenue
and expenses.(types of taxes 2016)
It is divided into two parts; the operating section and the non-operating section. The working
items section discloses information about revenues and expenses that are a direct result of the
regular business operations. For example, if a business creates sports equipment, then the
operating items section would talk about the revenues and expenses involved with the
production of sports equipment. Also, The non-operating items section discloses income and
expense information about activities that are not tied directly to a company's regular
operations. That is other revenues or gains - profits and gains from other than primary
business activities (e.g., rent, income from patents).
Or other expenses or losses - expenses or losses not related to primary business operations,
(e.g., foreign exchange loss).
Income and expenses may be presented in the income statement in different ways so as to
provide information that is relevant for economic decision-making. For example, it is
common practice to distinguish between those items of income and expenses that arise in the
course of the ordinary activities of the entity and those that do not. This distinction is made
on the basis that the source of an item is relevant in evaluating the ability of the entity to
generate cash and cash equivalents in the future(AASB 2004 pg.17).
The income statements can be represented in 2 steps; multi-steps or single steps. They both
conform to GAAP standards and they yield the same net income figure. They are however
formatted differently. The different entries found on the income statement are sales, the cost
of goods sold, operating expenses, other income, and expenditure and revenue taxes. Also,
the Net income has different components, and they include; operating income from
continuing operations, recurring income before interest and taxes from continuing operations,
recurring income from continuing operations and pre-tax earnings from continuing operations

the reported statement should include nonrecurring items. It entails discontinued operations,
extraordinary items, and accounting changes which are all reported on a separate item in the
income statement.
WRITING THE STATEMENT OF RETAINED EARNINGS
The statement of retained earnings reconciles changes in the earnings accounting during a
reporting period. A Statement of Retained Earnings should have a three-line header. The first
line is the name of the company. The second line is simply, "Statement of Retained
Earnings." The third line is "For the Year Ended." For the word "year," any accounting period
can be entered. In a corporate entity, funds contributed by shareholders, retained earnings,
reserves representing appropriations of retained earnings and reserves representing capital
maintenance adjustments may be shown separately.(AASB 2004 pg.14)
The statement of retained earnings is also known as the retained earnings statement, the
statement of shareholders' equity, the statement of owners' equity, and the equity statement. It
was known as equity holders before the 2007 revision by the IAS1 but was later referred to as
owners(exception for ‘ordinary equity holders’). The statement begins with the beginning
balance in the retained earnings account, and then adds or subtracts such items as profit and
dividend payments to arrive at the ending retained earnings balance. The general calculation
structure of the statement is;
Beginning retained earnings + Net income =Ending retained earnings.
The statement of retained earnings is most commonly presented as a separate statement, but
can also be appended to the bottom of another financial statement. It is also possible to
provide a significantly expanded version of the statement of retained earnings that discloses
the various elements of retained earnings. For example, it could separately identify the par
value of common stock, additional paid-in capital, retained earnings, and treasury stock. It is
most commonly used when issuing financial statements to entities outside of business, such
as investors and lenders. When financial statements are developed strictly for internal use,
this statement is usually not included, because it is not needed from an operational
perspective. (Bragg 2016).
When filling out any financial statements, you should always check with your accountant or
your business's financial planner to make sure you are in compliance with the most updated
forms and procedures.
WRITING THE BALANCE SHEET

A balance sheet represents the net worth of a company at a given time, such as the end of the
year. It represents the company’s assets, liabilities, and individual equity. In this way, the
balance sheet shows how the resources controlled by the business (assets) are financed by
debt (liabilities) or shareholder investments (equity). Investors and creditors look at the
statement of financial position for insight as to how efficiently a company can use its
resources and how effectively it can finance them. The balance sheet was a term used before
the revision of IAS in 2007 but was later referred to as the statement of financial position,
and it is used to track the growth of the business. As the term implies, a balance sheet is a
two-column account of items that are equal: both columns should balance each other. The
first column is a list of assets. The second column is the sum of a list of liabilities and the
owner’s equity in the business. An asset is recognized in the balance sheet when it is probable
that the future economic benefits will flow to the entity and the asset has a cost or value that
can be measured reliably(AASB 2004 pg.21). When expressed as an equation;
Assets =liabilities + owner’s equity
The balance sheet helps in showing the worth of an investment in business. I.e.
Owner’s equity= assets – liabilities.
This statement can be reported in two different formats: account form and report form. The
account form consists of two columns displaying assets in the left column of the report and
liabilities and equity on the right column. You can think of this like debits and credits. The
debit accounts are displayed on the left and credit accounts are on the right.
The report form, on the other hand, only has one column. This form is more of an anecdotal
report that is issued by companies. Assets are always present first followed by liabilities and
equity.(balance sheet 2016)
In both formats, assets are categorized into current and long-term assets. Current assets
consist of resources that will be used in the current year, while long-term assets are resources
lasting longer than one year. Liabilities are also separated into current and long-term
categories.
To create a balance sheet manually, use two columns for entries of the items discussed
earlier. The left column is for listing your assets, with a total of property at the end of the
column. The right column is for listing liabilities, which are completed and then added to the
owners’ equity. When the sum of liabilities and owners’ equity are totalled, the amount
should be equal to the total amount of assets in the left column.

Your balance sheet is an important financial statement (along with the income statement and
the cash flow statement) to help you monitor the health of your company. It’s also a required
document when applying for commercial financing.(how to prepare a balance sheet 2016)
WRITING THE STATEMENT OF CASH FLOWS
A statement of cash flow is a monetary proclamation which condenses money exchanges of
business amid a given bookkeeping period. It was called cash inflows before the 2007
amendment by IAS1 and was later called a statement of cash flows. It is grouped under three
heads, in particular, cash flows from operating, investing and financing activities.
This statement demonstrates financial specialists and leasers what exchanges influenced the
money records and how viable and productively an organization can utilize its money to back
its operations and extensions. This is especially essential since speculators need to know the
organization is monetarily substantial while lenders need to know the organization is
sufficiently fluid to pay its due. Assets are carried at the present discounted value of the
future net cash inflows that the item is expected to generate in the ordinary course of
business. Liabilities are carried at the present discounted value of the future net cash outflows
that are expected to be required to settle the liabilities in the ordinary course of business.
(AASB 2004 pg.23)
It demonstrates how money moved amid the period by showing whether a specific detail is a
trade out a stream or a money out-stream. The term trade as utilized out the announcement of
money streams alludes to both money and money counterparts. Income explanation gives
applicable data in evaluating an organization's liquidity, nature of profit and dissolvability.
(statement of cash flows 2016)
It comprises of 3 sections;
Cash Flows from Operating Activities
This section includes cash flows from the principal revenue generation activities such as sale
and purchase of goods and services. Cash flows from operating activities can be computed
using two methods. One is the Direct Method and the other Indirect Method.
Cash Flows from Investing Activities

Cash flows from investing activities are cash inflows and outflows related to activities that
are intended to generate income and cash flows in future. This includes cash inflows and
outflows from sale and purchase of long-term assets.
Cash Flows from Financing Activities
Cash flows from financing activities are the cash flows related to transactions with
stockholders and creditors such as the issuance of share capital, purchase of treasury stock,
dividend payments, etc.
WRITING THE SUPPLEMENTARY NOTES FOR FINANCIAL STATEMENTS
Because the financial statements are relied upon heavily by potential creditors and investors,
as well as current creditors and investors, the Financial Accounting Standards Board (FASB)
wanted to ensure that all interested individuals have reliable information on company
performance. eg The FASB is the governing board for accounting practice in the United
States. It was because of this that the notes to the financial statements became a part of
financial reporting. The IAS also incorporated this into the system and thus it was adopted.
(the purpose of notes in financial statements 2016)
Notes to financial statements can include information on debt, going concern criteria,
accounts, contingent liabilities, or contextual information explaining the economic numbers
(for example, if the company is facing a lawsuit).
These notes help explain specific items in the financial statements. They also provide a more
comprehensive assessment of a company's financial condition.The notes clarify individual
statement line items.
Notes to financial statements are added to the end of financial statements. These notes help
explain specific items in the financial statements. They also provide a more comprehensive
assessment of a company's financial condition.(boundless 2016)
An item that possesses the essential characteristics of an element but fails to meet the criteria
for recognition may nonetheless warrant disclosure in the notes, explanatory material or in
supplementary schedules. This is appropriate when knowledge of the item is considered to be
relevant to the evaluation of the financial position, financial performance and cash flows of
an entity by the users of financial statements(AASB 2004 pg.21)

Therefore a successful financial report should include the following criteria clearly stated in
the AASB, in order to fully convey the message to the both the investors, the workers and the
owners of the company. Failure to do so will lead to less relevant information and inaccuracy
and faults in presentation, whereby there will be less accountability of both words and data.

References;
AASB, A., 2004. Framework for the Preparation and Presentation of Financial
Statements. AASB (AASB) . viewed 30 May. 2016 from
http://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf
AASB 2016,’what is the history of Accounting Standard Setting in Australia?’.(AASB).viewed 31
october 2016 from http://www.aasb.gov.au/About-the-AASB/For-students.aspx#
Boundless. 26 May 2016 Financial Statement Notes. Boundless Accounting. Boundless,.viewed 31
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october 2016.from < http://www.accountingtools.com/about-accountingtools/>
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prepare-a-balance-sheet/
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http://accountingexplained.com/financial/statements/cash-flow-statement
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