Financial Statements: Recognition, Measurement, and Key Concepts
CLOSURE OF LIABILITY
May Occur Through:
- Disbursement of cash
- Transfer of other assets
- Provision of services
- Replacement with a similar requirement
- Capitalization
RESULTS
The utility is often used as a measure of the transaction, or as the basis for other measurements such as return on investment or earnings per share.
INCOME
Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or liabilities, resulting in capital increase.
COSTS
Decreases in economic benefits during the reporting period in the form of outflows or depletion of assets or incurrence of liabilities, resulting in capital decrease.
RECOGNITION OF FINANCIAL STATEMENTS
The process of incorporating on the balance sheet or income statement an item that meets the definition of an element and satisfies the recognition criteria. A transaction acknowledges the following:
PROBABLE BENEFIT
It is likely that any future economic benefit associated with the transaction, in particular, will flow to the company.
RELIABLE COST
The item has a cost or value that can be measured reliably.
RECOGNITION CRITERIA FOR UNCERTAINTY
LIKELIHOOD OF FUTURE ECONOMIC BENEFIT
This refers to future economic uncertainty associated with the transaction flowing into the enterprise. For example, it is likely that an account receivable is paid by the customer, and is justifiable.
MEASUREMENT RELIABILITY
This means the item has a cost or value that can be measured reliably. In many cases, the cost or value must be estimated. However, if an estimate cannot be made on reasonable grounds, that party should not be recognized on the balance sheet.
Recognition of Assets
An asset is recognized on the balance sheet when it is likely to flow into the company’s future economic benefits, and the asset possesses a cost or value that can be measured reliably.
Recognition of Liabilities
A liability is recognized on the balance sheet when it is probable that an outflow of resources will occur, involving economic benefits resulting from the settlement of a present obligation, and the amount to which such liquidation occurs can be measured reasonably.
REVENUE RECOGNITION
Revenue is recognized in the income statement when an increase in future economic benefits associated with an increase in an asset or a decrease in a liability has been derived and can be reasonably measured.
RECOGNITION OF EXPENSES
Expenses are recognized in the income statement when a decrease in future economic benefits related to a decrease in an asset or a liability increase arises, which can be measured on a reliable basis.
MEASUREMENT OF FINANCIAL STATEMENTS
The process of determining the monetary amounts to which elements of the financial statements will be recognized and maintained in the balance sheet and income statement includes the following:
HISTORICAL COST
The original value; assets are recorded according to the amount of cash or cash equivalents paid. Liabilities are recorded at the amount of exchanged goods received for the obligation.
ACTUAL COST
Market value today; assets are recorded at the amount of cash and cash equivalents that could have been paid if the same were acquired at the present time. Liabilities are recorded at the undiscounted amount of cash.
REALIZATION OR SETTLEMENT VALUE
Value of sales; assets are recorded at the amount of cash that was available, and liabilities are recorded at the amount of cash not discounted.
PRESENT VALUE
The value of marketing on the present condition; assets are recorded at their discounted value related to the net cash inflows, and liabilities are recorded at their discounted value, related to future net cash outflows.
ACCOUNTING ASSUMPTIONS
The preparation of financial statements rests on fundamental accounting assumptions. If not avoided, it is necessary to reveal them, as well as the reasons for this.
BUSINESS IN MOTION
The company is regarded as a going concern, i.e., as an operation to continue in the future.
CONSISTENCY
It is assumed that policies are consistent from period to period.
ACCRUAL
Payment of an account is given recognition as earned.
FINANCIAL STATEMENT USERS
Financial statements provide information used by various users, especially shareholders, creditors, employees, suppliers, customers, unions, economists, and statisticians.
INVENTORIES
Inventories are:
- Assets held for sale in the ordinary course of business.
- Assets in the process of production for such sale.
- Assets in the form of materials or supplies to be consumed in the production process.
NET REALIZABLE VALUE
The estimated selling price in the ordinary course of business, less the estimated costs of completion and other necessary costs.
QUANTIFICATION OF INVENTORIES
Inventories should be measured at the lower of cost and net realizable value.
COST OF INVENTORY
This must include the costs of purchases (purchase price, import duty, and other taxes) and conversion costs (costs related to production units).
Examples of Costs Excluded from the Cost of Inventory
- Amounts of wasted goods, labor, and others
- Storage costs
- Administrative overheads that do not contribute to bringing inventories to their present cost of sales
COST OF INVENTORY SERVICE PROVIDER
Consists primarily of labor and other costs of personnel directly engaged in providing the service, including supervisory personnel and overhead.
FUNDAMENTAL ERRORS
These are errors discovered in the current period that affect the development of financial statements. Subtracting them affects the reliability and transparency of the statements.
EXTRAORDINARY ITEMS
: These are revenue or expenses arising from events or transactions that are clearly different from the daily business and therefore not expected to make frequent or regular basis. Expropriation of assets, an earthquake or natural disaster.