The document provides an overview and summary of key topics from chapters 3 and 4 of the textbook "Financial Accounting, An Introduction" by Weetman. It discusses financial statements including the balance sheet, income statement, and statement of cash flows. It explains how these statements are used, their purposes, and how the accounting equation relates to the balance sheet. The document also summarizes key concepts around ensuring quality in financial statements such as qualitative characteristics, measurement principles, materiality, prudence, and regulation.

1. Event Technology
& Finance Lecture
Financial statements from the
accounting equation &
Ensuring the quality of financial
statements
Jonathan Sibley
j.sibley@leedsmet.ac.uk

2. Event Technology
& Finance
Today we will be focusing on the following topics,
1. Chapter 3: Financial statements from the
accounting equation: p. 51 – 73
2. Chapter 4: Ensuring the quality of financial
statements: p. 74 – 105
Weetman, P (2013), Financial Accounting, An
Introduction, Sixth
Edition, Pearson, Harlow, England

3. Financial statements
from the accounting
equation
CHAPTER 3
Weetman, P (2013), Financial Accounting, An
Introduction, Sixth Edition, Pearson, Harlow, England

4. Primary Financial Statement Purpose...to report
the…
Balance Sheet
(A statement of financial position)
Financial position of an
entity at a specific time
Profit and Loss Account
(Income statement)
Performance of an entity
over a specified time
Cash Flow
(Statement of Cash Flows)
Financial adaptability of
an entity for a period of
time
Financial Statements
There are three main financial statements which are used for
different purposes when presenting financial information.

5. The Purpose of Financial Statements
Owners and long-term lenders
regarded as primary users but all
potential users are interested in
financial performance and financial
position of the reporting entity.
Reference: Week 1 Lecture

6. The Balance Sheet:
“A financial statement which
summarises a companies
assets, liabilities and ownership
interest at a specific point in time.
These three segments show what
the company owns and owes as
well as the amount invested by the
owner”

7. How to use a balance sheet to assess the
financial position of an entity…
The Accounting Equation
Assets – Liabilities = Ownership Interest
Assets Liabilities
Ownership
Interest
£100,000 £75,000 £25,000

8. A balance sheet includes all of the elements of the
accounting equation and demonstrates the financial
position of a company by highlighting the relationship
between what is owned how much is owed and how
much is owned by the owners. A change in any of these
segments will have an impact on the other in order to
maintain balance.
How to use a balance sheet to assess the
financial position of an entity…
Assets Liabilities Ownership Interest
(Equity)

9. The Structure of a Balance Sheet
FIXED
ASSETS
CURRENT
ASSETS
CURRENT
LIABILITIES
LONG-TERM
LIABILITIES
Capital at start of year plus/minus
Capital contributed or withdrawn plus
Profit of the period

10. The Structure of a Balance Sheet
£100,000 £20,000
£10,000 £70,000
£40,000
Fixed Assets Current Assets
Current Liabilities Long-term liabilities
Capital/Owner
ship
Interest/Equity

11. Profit and Loss Account
“A financial statement that
measures a company's financial
performance over a specific
accounting period.”
• Financial performance is assessed by giving a summary of
how the business incurs its revenues and expenses through
both operating and non-operating activities.
• It also shows the net profit or loss incurred over a specific
accounting period, typically over a fiscal quarter or year.

12. Profit and Loss Account
(Income statement)
Revenue – Expenses = Profit
Revenue
(Income)
Expenses
(Expenditure)
Profit
£200,000 £110,000 £90,000

13. Statement of Cash Flows
“shows the amount of cash generated and
used by a company in a given period. Cash
flow can be attributed to a specific project, or
to a business as a whole. Cash flow can be
used as an indication of a company's
financial strength”

14. Statement of Cash Flows
Cash Inflows – Cash Outflows = Change in Cash
& Similar Liquid Assets
Cash
Inflows
Cash
Outflows
Change in Cash
& Similar Liquid
Assets
£500,000 £300,000 £200,000

15. Profit does not always equal cash
Working capital
• Some sales are made on credit where
customers pay later.
• Some purchases are made on credit
where pay suppliers later.
• Cash is used to buy inventory (stock)
which is sold later.

16. • Cash is used to buy more current
assets.
• Cash is used to buy other
investments
• Cash is used to repay loans.
• Cash is raised from issuing shares.
• Cash is raised from borrowing.
Profit does not always equal cash

17. Subdivisions of Cash Flow
• Operating activities:
Provision of services, and the manufacturing,
buying and selling of goods for resale.
• Investing activities:
Buying and selling fixed assets for long-term
purposes.
• Financing activities:
Raising and repaying the long-term finance
(loans) of the business.

18. Practical illustrations
See Mason (2013) for illustrations/examples
in Chapter 3 for:
1. Statement of financial position.
2. Income statement.
3. Statement of cash flows.
4. Comparison of profit & loss and cash
flow.

19. Ensuring the quality
of financial
statements
CHAPTER 4
Weetman, P (2013), Financial Accounting, An
Introduction, Sixth Edition, Pearson, Harlow, England

20. Qualitative characteristics
Understandability
• The significance of the information can be
perceived by the user.
Relevance
• Information that has the ability to influence
decisions.

21. Reliability
• Information that is a complete and faithful
representation.
Comparability
• Similarities and differences can be
discerned and evaluated.
Qualitative characteristics

22. Relevance and Reliability
Relevant
• Information should be relevant to the decision making
needs of the user
• Enabling the user to make predictions about future
trends (Predictive value)
• As well as confirming or correcting past decisions
(Confirmatory value)
Reliable
• Free from material error
• Faithful representation
• Neutral
• Complete
• Prudent

23. Measurement principles
There are 4 measurement principles:
1. Going concern
2. Accruals
3. Consistency
4. Prudence
NB: Going Concern and Accruals:
Discuss these definitions within your workshop.

24. Consistency
• Use similar policies from one year to next
or explain reason for and effect of change.
Prudence – see later.
Measurement principles

25. Materiality
• Threshold for considering an item. Would a
user’s decision change if the information were
omitted or misstated?
For example:
• An error of £10m in an expense item when
overall profit £500m is not material as this is only
2% of profit.
• Whereas an error of £10m in an expense item
when the overall profit is £20m is material as this
is 50% of profit.

26. Prudence
The inclusion of a degree of caution in
accounting judgements under conditions of
uncertainty.
For example:
• The undertaking of an Inventory (stock)
Valuation and the uncertainty caused if that
stock is not yet sold.

27. Prudence
Avoid
• Overstatement of assets
• Understatement of liabilities
• Because both of these will lead to overstatement of
profit.
Assets – liabilities = Capital (incl. profit)
• If you overstate the value of an asset how does the
equation balance?
• Answer: Create profit.
• If you decrease the cost of a liability. How does the
equation balance?
• Answer: Create profit.

28. Regulation
Financial statements
• Information that is useful to a wide range
of users.
Annual reports
• Mixture of regulated and non-regulated
contents. Regulated section is audited.

29. Regulation
International Accounting Standards
(IAS) Regulation
• Overrides national company law.
• Requires all listed groups to prepare financial statements
using the International Financial Reporting Standards (IFRS).
UK Company law
• Requires true and fair view.
• Accounting rules apply to companies not following IAS
Regulation.
• Contains other rules for management and the auditing of a
company.

30. Regulation
Financial Reporting Council
• Authorised by UK government to make
arrangements for accounting standards, auditing
standards, oversight of professional bodies and
firms, enforcement of standards.
UK Accounting Standards Board
• Independent standard-setting body.
• Sets accounting standards for use in UK (by
companies not applying the IAS Regulation).

31. Regulation
Auditing Practices Board
• Sets auditing standards (based on
International Standards on Auditing) and a
code of ethics for auditors.
Professional Oversight Board
• Has oversight of professional bodies and
accountancy firms.

32. Regulation
Financial Reporting Review Panel
• Monitors compliance with true and fair view.
• May ask companies to correct wrong accounts.
Accountancy and Actuarial Discipline Board
• Investigates complaints against accountants and
applies penalties.

33. Regulation
Committee on Corporate Governance
• Sets Code on Corporate Governance for
directors running a company.
Financial Services Authority
(will change in future to a new body/bodies)
• Regulates market for shares.
• Has accounting rules for fair market.

34. Regulation
Auditors
• Report to shareholders.
• Use auditing standards.
• Give opinion on true and fair view from financial
statements.
Tax system
• Companies pay corporation tax.
• Taxable profit is based on accounting profit but with
additional rules, for example, depreciation rates fixed.

35. Is regulation necessary?
For regulation
• Supply and demand do not meet unless a
regulator intervenes.
• Stakeholders may lose confidence, or may
need protection.
• Scandals result where there is inadequate
regulation.

36. Is regulation necessary?
Against regulation
• Market forces ensure information flow.
• Lenders will ensure they have good
information for reassurance.
• Costs may exceed benefits.

37. Look at key figures in highlighted statements.
1. Sales
2. Gross profit
3. Profit before tax
4. Profit after tax
• Trends in key figures
Reviewing published financial
statements

38. Reviewing published financial
statements
• What kinds of assets are held?
• What kind of liabilities are held?
(Notes on the Balance Sheet)
• What is the cash flow?
• Inflow or outflow?

39. Financial Statement Terminology
• Balance Sheet
• Asset
• Liability
• Fixed Asset
• Current Asset
• Limited Liability
• Long-Term Liability
• Ownership Interest
• Relevance
• Reliability
• Measurement
Principles
• Materiality
• Prudence
• IAS Regulation
• Working Capital
• Capital

40. You Tube:
• What is a Balance sheet?
http://youtu.be/ixCPM5HznRU
• What is a Profit & Loss Statement?
http://youtu.be/ulpX3jX_UT0
Further Sources of Information
The following resources are available to
view on YouTube only: Click on the links
within the slides to view alternatively cut
and paste the links into a web browser.

41. Reference:
Weetman, P (2013), Financial
Accounting, An Introduction, Sixth
Edition, Pearson, Harlow, England
p. 51 - 105
CHAPTERS 3 & 4
Jonathan Sibley
j.sibley@leedsmet.ac.uk
www.slideshare.net/Jonathan_Sibley

42. Asset:
Assets are subdivided into:
1. Fixed assets
2. Current assets
“Resources available
to the business”

43. Liability:
Liabilities are subdivided into:
1. Current liabilities (due within one year)
2. Long-term liabilities (due after one year).
“The obligations of the
business to persons other
than the owner”

44. Ownership Interest:
• The owner(s) typically provide the capital with which the
business is started, this capital is used to purchase
assets and the payment of liabilities.
• Ownership Interest may also be subdivided to show the
capital contributed or withdrawn and the profit for the
period.
• Ownership Interest is the residual claim after liabilities
to 3rd parties have been paid
“an interest of the owner in the
assets of the business”

45. Fixed Asset:
“A long-term tangible piece of
property that a firm owns and uses
in the production of its income and
is not expected to be consumed or
converted into cash any sooner
than at least one year's time”

46. Current Asset:
“A balance sheet account that
represents the value of all
assets that are reasonably
expected to be converted into
cash within one year in the
normal course of business”

47. Current Liabilities:
“A company's debts or obligations
that are due within one year.
Current liabilities appear on the
company's balance sheet and
include short term debt, accounts
payable, accrued liabilities and
other debts.”

48. Long-term Liabilities:
“In accounting, a section of the balance
sheet that lists obligations of the
company that become due more than
one year into the future. Long-term
liabilities include items like
debentures, loans, deferred tax
liabilities and pension obligations.”

49. Capital:
“Capital” can mean many things. In
general, it refers to financial
resources available for use.
Companies and societies with more
capital are better off than those with
less capital”

50. Revenue:
“The amount of money that a
company actually receives during a
specific period. It is the "top line" or
"gross income" figure from which
costs are subtracted to determine
net income.”

51. Expenses:
“The economic costs that a business incurs
through its operations to earn revenue. In
order to maximize profits, businesses must
attempt to reduce expenses without also
cutting into revenues. Because expenses
are such an important indicator of a
business's operations, there are specific
accounting rules on expense recognition.”

52. Liquid Assets:
“An asset that can be converted into
cash quickly and with minimal impact
to the price received. Liquid assets are
generally regarded in the same light as
cash because their prices are
relatively stable when they are sold on
the open market”

53. Working Capital:
A measure of both a company's
efficiency and its short-term financial
health, which indicates whether a
company has enough short term
assets to cover its short term debt.
Current Assets – Current Liabilities = Working Capital

54. Operating Activities:
Operating Activity:
“An activity that directly affects an
organization's cash inflows and
outflows, and determines its net income”
Non Operating Activity:
“An expense incurred by activities not
relating to the core operations of the
business”