Accounting for Managers: Financial Reporting and Analysis

This report provides an analysis of key accounting concepts relevant for managers. It begins by defining and explaining the Statement of Comprehensive Income (OCI), its components (net income, foreign currency translation, hedges), and its purpose in providing a broader view of a business's financial performance. The report then delves into the balance sheet, detailing its purpose in revealing a company's financial position, and defining its components: assets, liabilities, and equity. Finally, the report explores accrual accounting, highlighting its importance in matching revenues and expenses, and comparing it to cash-based accounting. The report also discusses the advantages and disadvantages of accrual accounting, providing a comprehensive overview of these essential accounting principles.

Running head: ACCOUNTING FOR MANAGERS
Accounting for managers
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Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................3
Question 3..................................................................................................................................5
Reference....................................................................................................................................7

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Question 1
Statement of comprehensive income (OCI) one of 5 financial statements presented as
the complete set of financial statements to the shareholders. 2 major components of OCI is
net income from the income statements and other comprehensive income that generally
includes amounts from foreign currency translation and hedges. Major purpose of OCI is
providing information regarding the financial performance of the business over the period
under concern (Jahmani et al., 2017). Users require information related to the financial
performance of any entity for analysing potential changes in the economic resources and the
capability in context of generating cash from the resources. Financial performance associated
with the business’s profitability and OCI offers more expansive view of bottom line profit
that is net profit. In other words, OCI provide additional information in context of equity
section of balance sheet for representing what are the events those changed shareholder’s
equity beyond traditional net income provided through the income statement. Further, as
income statement reports only the incomes and expenses while those are earned or are
incurred (Khan, Bradbury & Courtenay, 2018). However, number of other sources for
expenses and incomes are not considered under income statements as those items have not
yet been realized. Creditors and shareholders are interested in knowing how these items
impacted the equity accounts even though the items have not been considered in the bottom
line. It is notable that comprehensive item is not those changes that has been caused by the
owner. However, it just considers the changes in net asset owing to sources and events
associated with non-owner. For example, purchase of the treasury shares or sale of the stick
will not be considered as an item to be included under OCI as these transactions are generated
from the owners of the entity (Casabona & Coville, 2014).

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Income – in accordance with Para 4.48 of conceptual framework the term income is defined
as the increase in the assets or decrease in the liabilities that will lead to increase in the equity
except those associated with contribution from the holders of claims for equity (Aasb.gov.au
2019).
Expenses – in accordance with Para 4.49 of conceptual framework the term expense is
defined as reduction in assets or growth in the liabilities that will lead to decrease in the
equity except those associated with distribution to the holders of equity claims (Aasb.gov.au
2019).
It can be determine from the definition of expense and income that with the claims of
equity holders acting under capacity does not give rise to expense or income. Expenses and
income include the amount that is generated though the transaction and other events
involving changes in liability or asset’s carrying value. Expenses and incomes are the
elements from the financial performance of the entity. Financial statement users require
information regarding both financial performance as well as financial position. Hence, even if
the expenses and income has been defined in context of changes in the liabilities and assets,
information regarding expense and is as valuable as the information delivered by liabilities
and assets (Aasb.gov.au 2019).
Question 2
Balance sheet or statement of the financial position or is the financial statement that is
used to report the liabilities, shareholder’s equity and assets of the firm at particular point of
time. It offers the base for computing the return rates and analysing the capital structure.
Major purpose of balance sheet is revealing financial status of the business at particular point
of time (Kršeková & Pakšiová, 2015). It reveals what is owned by the entity and how much it
owes to others along with the amount invested by the investors that is in form of equity.

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Information provided by balance sheet is considered as more valuable while the balance sheet
for past few years are presented together as it enables the analyst to analyse the trends. It is
considered as of great utility for the stakeholders as it reveals the actual financial status of the
entity as it delivers details regarding the debt acquired by the entity to satisfy its financial
needs. It further reveals the company’s net worth, liquidity status, availability of funds and
cash for supporting the growth in future (Wahlen, Baginski & Bradshaw, 2014).
Assets – in accordance with Para 4.5 of conceptual framework the term asset is defined as the
economic resources in existence that is controlled by the organisation as an outcome of the
past events. Economic resource here is the potential right for producing economic benefits.
Rights here may arise from the rights created though legislation, contract or similar means,
rights created through constructive obligation of any other party or other rights that provides
potential right to receive the future economic benefits (Aasb.gov.au 2019). For instance,
services or goods those are received as well as consumed immediately are considered as
momentary rights for obtaining economic benefits until the same are consumed. Current
assets are cash, accounts receivable and inventories whereas long term assets includes, plant,
machinery, building and equipment.
Liability – in accordance with Para 4.24 of conceptual framework the term liability is defined
as the obligation in existence for the entity for transferring the economic resources that is the
liability as an outcome of the past events. If any one party has the obligation for transferring
the economic resources, it follows that the other party has the right for receiving the same
economic resources that is the assets (Aasb.gov.au 2019). For example, current liabilities
include accounts payable, loans and deferred revenues whereas the non-current liabilities
include long term borrowings and debt securities.

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Equity – in accordance with Para 4.43 of conceptual framework the term equity is defined as
the residual interest in firm’s assets after deducting the liabilities. Claims for equity are the
claims on residual interest in firm’s assets after subtracting all the liabilities. To be more
specific, equities are the claims against the organisation that is not able to meet definition for
liability. Such types of claims can be established through legislation, contract or any similar
means and includes different types of shares and right on account of receiving equity claims
(Aasb.gov.au 2019). For instance, if a car is owned worth $ 20000 however, owes $ 12,000 of
loan against the same, equity on account of the car is $ (20,000 – 12,000) = $ 8,000
(Entwistle, 2015).
Question 3
Accrual basis is the accounting approach that identifies time lag between purchase
and sales in one side and payments and collection on other side. It forms crucial part of
GAAP and allows meaningful comparison on the basis of business’s accrual operation that is
undisturbed by payment timings. Under this approach, revenues are reported under income
statement while they are earned instead of while cash is received. In accordance with accrual
basis of accounting the expenses are matched with the revenues under income statements
while expenses expire or the titles has been shifted to purchaser instead of the time while the
payment for expenses are made (Adamyk & Adamyk, 2017). As per the principle of accrual
basis of accounting, impacts of transactions as well as other events along with the
circumstances on the economic resources of the entity and claims under the period in which
these impacts take place even when the resulting payments and cash receipts takes place
under different period. This is crucial as information regarding the economic resources of the
entity as well as the claims for the concerned period offers better basis to carry out the
analysis for future and past performance of the entity rather than the information only

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regarding the cash payments and receipts during the concerned period. General principles of
accrual accounting are as follows –
 It recognizes the expenses, revenues, losses and gains and associated decrease or
increase in the assets or decrease in the liabilities under the period in which the events
take place. Both IFRS as well as US GAAP requires the financial statements to be
prepared in accordance with the accrual approach of accounting.
 It depends on revenue recognition and the matching principle that considers
recognition timing for the business events and transactions (Maimunah, 2016).
Here, recognition is the procedure that involves formal recording of business events
or transactions in the financial records of the entity. On the other hand, realisation involves
the procedure for converting the rights and non-cash resources into money that is achieved
through selling of the assets for getting cash or converting the claims into cash. Conversely,
recognition is recording the business events or transactions (Newberry, 2014). It is widely
accepted method under accounting and is used by most of the business owners. Major
advantages of accrual approach of accounting are – (i) if delivers accurate picture for
company’s overall cash flows (ii) investors always prefer this approach of accounting and
(iii) it is preferred method as per IFRS and GAAP. However, the disadvantages associated
with this method is that small entities may find it difficult due to lack of the staff knowledge
and it requires frequent generation of report at least on monthly basis (Kieso, Weygandt &
Warfield, 2019).
For example, ABC Ltd has payable salaries amounting to $ 22,000. This transaction
will be recorded in 2 places. 1st it will be reported as the salary expense under income
statements and will be reported under balance sheet as current liability.

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Reference
Aasb.gov.au. (2019). Retrieved 17 October 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
Adamyk, O., & Adamyk, B. (2017). Accounting methods for public sector entities. Czech
journal of social sciences, business and economics.–2017.
Casabona, P. A., & Coville, T. (2014). Statement of comprehensive income: new reporting
and disclosure requirements. Review of Business, 35(1), 23.
Entwistle, G. (2015). Reflections on teaching financial statement analysis. Accounting
Education, 24(6), 555-558.
Jahmani, Y., Choi, H. Y., Park, Y., & Jiayun Wu, G. (2017). The value relevance of other
comprehensive income and its components. Revista Internacional Administracion &
Finanzas, 9(1), 1-11.
Khan, S., Bradbury, M. E., & Courtenay, S. (2018). Value Relevance of Comprehensive
Income. Australian Accounting Review, 28(2), 279-287.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting. John Wiley
& Sons.
Kršeková, M., & Pakšiová, R. (2015). Financial reporting on information about the financial
position and financial performance in the financial statements of the public
sector. Finance and risk 2015, 14(1), 136-145.
Maimunah, M. (2016). Implementation of accrual accounting: Review of readiness and
arising problem. Procedia-Social and Behavioral Sciences, 219, 480-485.

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Newberry, S. (2014). The use of accrual accounting in New Zealand’s central government:
Second thoughts. Accounting, Economics and Law, 4(3), 283-297.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial
statement analysis and valuation. Nelson Education.