Comprehensive Financial Statement Analysis for Managers

This document presents a comprehensive solution to an accounting for managers assignment. It addresses three key questions: the general purpose of the comprehensive income statement, the elements of the statement of financial position, and the assumptions underlying financial statements, particularly accrual accounting. The solution defines the comprehensive income statement's role in presenting changes in an entity's economic resources and equity, highlighting the impact on owner's interest and its use in evaluating profitability. It details the components of the statement of financial position, including assets, liabilities, and equity, and explains their classification and recognition criteria, emphasizing the importance of relevant and reliable information for decision-making. The assignment also explores accrual accounting, explaining how it recognizes transactions and events when they occur, providing a more complete picture of an entity's financial performance and position, and illustrating the impact of accounting errors like inventory overstatement on financial reporting. The solution includes references to academic sources.

Running head: ACCOUNTING FOR MANAGERS
Accounting for managers
Name of the Student
Name of the University
Author Note

ACCOUNTING FOR MANAGERS
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................2
Answer to question 3:.................................................................................................................2
References list:...........................................................................................................................2

ACCOUNTING FOR MANAGERS
Answer to question 1:
The general purpose of the comprehensive income statement is defined as the
statement presenting the changes in the claim and economic resources of any entity. That is it
represents change in the equity of owner and does not account for the amount which the
owner contributes. The change in net assets or equity is given by the total change in the
expenses, unrealized loss and gains, gains, revenue and losses. The objective of preparing the
comprehensive income statement is to identify the impact on the owner’s interest by
reporting all the financial and operating items (Zhao, 2020). In nutshell, it can be said that the
profitability of any company or the total profits generated for any particular financial year is
represented in the comprehensive income statement.
Statement of comprehensive income provides information on the revenue and losses
incurred by the organization for accounting purpose and facilitates information decision
making by the users. Users of the statement such as investors, shareholders and government
seeks information from such statement as it is used as an analysis tool for evaluating the
profitability position of the company. Total comprehensive income for any particular year of
entity can be represented either in a single statement or two statements comprising of
statement of comprehensive income and income statement. All the items of expenses and
income for a particular period is represented in the comprehensive income statement. Income
statement recognizes all the items of expenses and income except for all such items that are
recognized outside the loss and profit in the total comprehensive income statement (Kim,
2017).
Income is defined as the increment in the economic benefits due to enhancement or inflow of
the assets or any decline in the liabilities value which contributes to the increase in equity.

ACCOUNTING FOR MANAGERS
Expenses on other hand is fall in the economic benefits value due to incurrences of liabilities
and assets depletion and thereby causing a fall in the value of equity.
Recognition of income is done in the comprehensive income statement when a
decrease in liability and increase in the assets has resulted in increasing future benefits and
they can be measured reliably. The mirror of income recognition criteria is the recognition
criteria of expenses. Income is recognized in the statement of comprehensive income when
there is an increase in liability and decrease in assets which can be measured reliably. All the
losses and the expenses that is incurred in the ordinary course of activities is encompassed in
the expenses (Setiyawati et al., 2018).
Expenses and income are the elements that are related directly to the profit
measurement and an analysis of expenses is presented by the entity based on the

ACCOUNTING FOR MANAGERS
classification on either the function or nature of expenses. Item of income and expenses
recognized in the statement of comprehensive income include employee benefits and changes
in the fair value of financial instruments. Example of expenses include tax expense, finance
cost, share of profit and loss on investment in associates and the item of income include
revenue, net gain in valuation of investment, fluctuation in exchange on foreign operations
and recognition of tax. Direct recognition of hedging of the cash flow of foreign currency
done by changes in the fair value is done in the comprehensive income statement. The
conceptual reporting framework instead of focusing on the expenses and revenue takes the
liability and assets approach. For the presentation of income and expenses in the
comprehensive income statement, it is required to make significant estimates and judgement.
It is required by the entity to assess the items and line of items that are relevant to the
comprehensive income statement.
Answer to question 2:
Statement of the financial position of an entity represents the total amount of the
assets and liabilities and equates the amount of all such items reported under the liabilities
and assets. Assets comprise of current assets and non-current assets and liabilities on other
hand include current and non-current liabilities. Classification of liabilities an assets of the
company is done into sub categories that is classification of liabilities and assets is done by
the function and nature of the entity. The objective of general purpose financial statement
such as statement of financial position is to provide the creditors and potential investors with
the relevant and reliable information to assist them in decision making and thereby focusing
on the information needs of the users of such statements (Flannery, 2017). Preparation of the
financial statements are done at the historical cost and the net amount of financial assets and
financial liabilities is represented in the financial position statement.

ACCOUNTING FOR MANAGERS
Liability, equity and assets are the elements related to the statement of the financial
position prepared by the entity. Assets are defined as the resource which the entity controls
which results in generating the economic benefits due to any results of the past events.
Liability of any organization can be defined as the current obligations on part of entity
resulting from any past events. Any liabilities being settled results in the outflow of the
resources from the entity accompanying the economic benefits. Recognition of any assets is
done in the financial position statement when there exist the probability of the resources
outflow along with the economic benefits and also the value and costs of the assets can be
measured reliably. On other hand, recognition of liabilities is done in the financial position
statement when the present obligation settlement results in the resources outflow along with
the economic benefits. In addition to this, the measurement of the settlement amount can be
done reliably. Any changes in the claims and economic resources of the entity is given by the
transaction such as issuing of the equity shares (Schroeder et al., 2019).
The residual amount that is left after the deduction of the total amount of liabilities
from the total assets of the entity represents the equity. Classification of equity in the
financial position statement can be done into several types of reserves and capital such as
retained earnings, shareholder capital, tax reserves and statutory reserves. Classifying the
equity can be relevant to the users in the process of their decision making. Measurement of
the assets in the financial position statement as per the conceptual framework can be done at
using different basis such as current cost, historical cost, present value and reliable value. The
most common methods adopted by the entity for the basis of measurement in the preparation
of financial statements is historical cost. Basis of historical measurement is used in
combination with other basis of measurement (Banks et al., 2018). For instance, valuation of
inventories are done at the lower of net realizable value and cost. Determination of cost is
done primarily based on the average cost.

ACCOUNTING FOR MANAGERS
Recognition of current assets such as trade receivables is done initially at the fair
value and at amortized cost subsequently. Basis of current costing is adopted by the entity
due to the inability of the model of historical cost accounting. Plant, equipment and property
is identified and recorded under the non-current assets in the statement of financial position.
Measurement of such assets is done at the cost by deducting the amount of impairment
charges and depreciation (iasplus.com, 2020). Measurement of cash and cash equivalent is
done at the carrying value of such assets due to the short term to their maturity. Furthermore,
recognition of all the financial liabilities and assets is done at the fair value initially of the
amount received and considered. Subsequently, such financial, asset and liabilities are carried
at amortized cost or fair value and this is done based on the business model of the group and
whether cash flows arise from the contractual terms of the financial assets (Goel, 2016). In
addition to this, the new lease standard requires the entity to recognize the leased assets and
liabilities in the statement of financial position.

ACCOUNTING FOR MANAGERS
The market value of equity is the assessment of the investors and the managerial skills
and growth options where the definition of assets are not met. That is all the items of the
assets except liabilities forms the equity. Any movement in the varying value of liabilities
and assets represents the gain, expenses and equity. The decision of the investors to buy, hold
and sell the equity share of the company is dependent upon the information provided in the
financial statement is prepared according to the framework of general purpose financial
statements (singtel.com 2020).
Answer to question 3:
The financial statements of any organization is prepared under the two assumptions,
of which accrual basis of accounting is one basis. Preparation of the financial statements of
the reporting entity is done on the principle of accrual basis of accounting. The basis of
accrual accounting recognizes the effects of transactions and any events when such events

ACCOUNTING FOR MANAGERS
occur. It is after taking place of such transactions, recording of the information is done in the
accounting book and they are mentioned in the financial statements. Preparation the financial
statements using the accrual basis provides the users and investors with the detailed
information of the past events which has given rise to receipt of cash and making payment.
IN addition to such information, such basis of accounting also inform the users about the
future obligation of the entity to meet the payment obligation and also represents the
resources from which the cash would be generated. Therefore, users of the financial
statements are provided with not only the past information but also the future events that are
relevant to the financial and investment decision making of the users (Albrecher et al., 2018).
Hence, it can be inferred that such basis of preparing the financial statements is better as it
helps in assessing the past and future performance of the financial position.
This particular system of accounting is regarded as the most valid for the investors
that helps in ascertaining the financial position, operations and cash flow of business. In
certain areas, it is required to make use of estimates under the accrual basis of accounting.
His can be explained with the help of an example, the amount of estimated bad debts which
has not been incurred yet should also be recorded as expense (Black, 2016). In doing so,
company would account for all the expenses related to the transaction of revenue in the same
reporting year.
Following cost of goods sold is reported by company ABC Ltd and it has been
realized later on that the inventory recorded has error. $ 32000 is the correct inventory
amount and it is assumed that overstatement of the inventory was by $ 5000.

ACCOUNTING FOR MANAGERS
This overstatement of the cost of goods sold would cause the total amount of gross
profit and net income reported in the income statement to be understated.
Cost of sales is the total amount of the costs incurred in producing the product that has
been sold. Cost of sales is represented in the income statement and it is subtracted from the
total revenue or the sales generated. Such cost of sales has sub categories which includes
direct material, direct labour and overhead expenses and computation of cost of sales is done
by adding the total amount of purchase to the opening balance of inventory and subtracting
the closing balance of inventory from it. Calculation of the net income or the gross profit
would be wrongly done due to the incorrect balance of inventory. When the cost of goods
sold is overstated, then this would result in understating the gross profit and net income and
vice versa. Errors in the valuation of the ending inventory is highlighted by the interactions
between the expense and assets of the inventory. Both the income statement and balance
sheet is affected by the errors in inventory reported at the end of any financial year (Moselhe
et al., 2018). This is so because the cost of goods sold would be understated due to
overstatement of the inventory and this in turn results in overstating equity, assets and net
income.

ACCOUNTING FOR MANAGERS

ACCOUNTING FOR MANAGERS
References list:
Albrecher, H., Bauer, D., Embrechts, P., Filipović, D., Koch-Medina, P., Korn, R., ... &
Wagner, J. (2018). Asset-liability management for long-term insurance
business. European Actuarial Journal, 8(1), 9-25.
Annual Reports & Shareholder Meetings - Singtel. (2020). Singtel.com. Retrieved 31 March
2020, from https://www.singtel.com/about-Us/investor-relations/annual-reports#
Banks, L., Hodgson, A., & Russell, M. (2018). The location of comprehensive income
reporting–does it pass the financial analyst revision test?. Accounting Research
Journal.
Black, D. E. (2016). Other comprehensive income: a review and directions for future
research. Accounting & Finance, 56(1), 9-45.
Conceptual Framework for Financial Reporting 2018. (2020). Iasplus.com. Retrieved 31
March 2020, from https://www.iasplus.com/en/standards/other/framework
Flannery, M. J. (2017). Stabilizing large financial institutions with contingent capital
certificates. In The Most Important Concepts in Finance. Edward Elgar Publishing.
Goel, D. (2016). The earnings management motivation: Accrual accounting vs. cash
accounting. Australasian Accounting, Business and Finance Journal, 10(3), 48-66.
Kim, J. H. (2017). Value Relevance of Other Comprehensive Income after Accounting
Standards Update 2011-05. Academy of Accounting and Financial Studies Journal.
Moselhe, A. K., Mohamed, M. O., Musa, M., Mohamed, M., & Yassin, Y. K. (2018). Is
Accrual Basis Accounting Better Than Cash Basis Accounting in Evaluating the
Financial Performance?.