FINANCIAL REPORTING

For the exam you have to know how to prepare balance sheet and income statement and cashflow
statement. All lectures from moodle and this script.

1. Explain the term accounting.

Accounting is the skill of recording, sorting, summarizing and interpreting monetary events in the
form of business events.
Accounting is - a skill, technique or skill
                              - scientific discipline
                              - business entity service function
                              - part of a business entity's management information system.

2. Provide the underlying financial statements.

- Balance sheet
- Profit and loss account,
- Cash flow statement,
- Report on changes in equity, i
- Notes to the financial statements.

3. Users of financial statements.

External users - financial accounting - oriented to owners, creditors, the state
Internal users - management accounting and cost accounting (management)

4. What is a balance sheet?

Balance sheet shows the current value of assets, liabilities and equity on a specific day. The balance
sheet is the basic financial statement and its main feature is the balance sheet equation.

5. Basic accounting equation.

ASSET = SOURCES OF ASSET
ASSETS = LIABILITIES + EQUITY
6. According to which two criteria are classified items in the balance sheet.
Balance sheet positions are classified by two principles:
a) assets with increasing liquidity - liabilities with decreasing maturity (Europe)
b) assets with decreasing liquidity - liabilities with increasing maturity. (USA)

7. Income statement.
Income statement (P&L account) is a report that provides information to users of information about
the success of a company in one accounting period (between two balance sheet dates - 1.01.-31.12),
the income statement relates to the entire period.
It contains the categories of success: REVENUES, EXPENSES and BUSINESS (financial) RESULT (PROFIT
OR LOSS).
The objective of the income statement is to provide users with information on the increase (or
decrease) in earned capital between the two balance sheet dates.
The main link between the balance sheet and the profit and loss account is precisely the changes in
equity.

8. Cash flow statement.

It is a report that provides users with information about cash flow (cash receipts and expenditures)
over a single accounting period.
Provides information that the balance sheet and income statement do not provide to users, based on
cash and cash equivalents.
Its purpose is to assess future cash flow, to evaluate the company's ability to pay dividends, to
evaluate the company's ability to invest and to need external financing, and to evaluate the causes of
the difference between net profit and cash flow.
There are 2 methods of compiling a cash flow statement - direct and indirect
DIRECT -> cash flow statement always covers a period
It consists of 3 actvities:
a) business activities - show cash receipts and expenditures
 cash receipts: from receivables collection, cash sales, dividends, interest
 cash expenditures: purchase of raw materials and goods, salaries, insurance, interest, suppliers
b) investment activities - show cash receipts and expenditures
 receipts: from the sale of fixed assets, securities on the secondary market,
 expenditures: investments in fixed assets, investments in securities
c) Financing activities - financing activities of enterprises
 receipts: from issue of shares, bonds, received loans
 expenditures: from repayment of the principal of the loan, for redemption of shares, for dividends
-> net cash flow = A + B + C (sum of all cash flows)

INDIRECT - Different from direct only in the content of business activities

 Cash flow from operating activities is compiled as follows:
                                        + Net profit
                                        + depreciation
+ decrease in credit claims
- increase in credit claims
+ increase in credit obligations
- reduction of credit liabilities
+ decrease in inventory
- Increase in inventory
= cash flow from operating activities
 It is based on the opening and closing balance sheets and the gross profit statement
 Useful for investors, shareholders, creditors

9. Statement of changes in equity.

It is drawn up between the two balance sheet dates and provides information on the causes of the
increase or decrease in equity.
Changes in equity may be:
- from transactions with shareholders (issue of shares, purchase of treasury shares, payment of
dividends)
- from the activities of the company (profit, loss, etc.)

10. Notes to the financial statements

They are part of financial statements and consist of 2 parts:
 a) Significant accounting policies - contain the most important principles, methods and procedures
used by the company to prepare and publish the financial statements
b) notes - contain all the details that offset the financial statements and relate to, for example:
inventory structure, investments, income, expense, etc.

11. The relationship between the balance sheet and the income statement.
The link is the profit that is entered in the balance sheet as retained earning increase. The link is
changes in equity - profit or loss that is recorded in equity.

12. Business Event = Book Event.

Bookkeeping has strict requirements when choosing which business events to record and which ones
to not. There are 4 conditions that a business event must satisfy in order to be subject to accounting
records:
- that the business event happened
- that it can be valued
- to change the balance of assets and liabilities and to affect revenues and expenses
- that there is a justification document which can prove the occurrence of the change
13. Accounting document.
Bookkeeping documents serve as evidence of the occurrence of a business event and as a basis for
entering information in the books of account. Accounting documents are holders of business events
data.
Types of accounting documents by:
- place of origin: internal (invoices, invoices, invoices to the buyer) and external (invoices delivered
and executed by the acorn)
- Purpose: ordering (payment order), justifying and combined (travel order, work order)
- data coverage: original and summary (payroll)
14. What are business books?
Business books are a set of records maintained by a business entity to provide the necessary
information about its business and record everything that has happened.

15. What types of business books are there?

Basic - journal and main ledger
Subledgers or analytical business books - cash register, inventory, entry and exit accounts, analytical
accounting

16. List the characteristics of fixed assets.

Fixed assets are those assets whose life expectancy exceeds one year and will be used for a period
longer than one year, that is, they will not be spent in one normal production cycle.

17. List the fixed assets.

- intangible assets
- tangible assets
- financial assets
- long-term receivables

18. Explain and list Intangible assets. - intangible assets

- R&D expenditure
- patents
- licenses
- concessions
- Trademarks
- other rights
- goodwill
- advances for intangible assets

19. Explain and list Tangible assets. - tangible assets

- land and forests
- construction objects
- plants, equipment, tools
- office and office inventory, furniture
- means of transport
- residential buildings
- long-lived biological assets (perennial crops and basic flock)
- advances for tangible assets
- tangible assets in preparation
- other tangible assets

20. Explain depreciation.

Depreciation is the gradual consumption of long-term intangible and tangible assets (whereby the
spent value appears as an integral part of the value of the products or services provided) - write-off
of the value of the property
AMORTIZED ASSETS must meet the following conditions:
- these assets are expected to be used for more than one accounting period (more than 1 year)
- these assets must have a limited life span (useful life)
- the property is held by the company for use in the production or sale of goods and services, for rent
to others or for administrative purposes

21. What assets are not subject to depreciation and why?

Non-depreciable assets are those assets that have an indefinite useful life and whose economic
benefits are not wasted, such as LANDS, FORESTS AND ART WORKS we own.

22. Explain and list Financial assets.

Non-current financial assets represent long-term investments or placements with other entities for
the purpose of earning profit. These placements are made for a period of more than one year.
- Interests in affiliates
- investments in securities
- loans given, deposits
- redemption of own shares
- other long-term investments

23. List the characteristics of current assets.

Short-term assets are those assets that are expected to be realized within one year or during one
business cycle, whichever is longer.

24. List the current assets.

- supplies /inventories
- receivables
- financial assets
- money

24a. Cost principle means: that all costs involved in aquisition of asset is giving the value of that
asset. So it is purchasing price plus dependabe costs minus discounts.
For example ACQUISITION COST of LTTA when purchased comprehend:
1. Purchasing price including custom and excise duties after all discounts,
2. Cost includes all costs necessary to bring the asset to working condition for its intended use.
3. This would include not only its original purchase price but also costs of site preparation,
delivery and handling, installation, related professional fees for architects and engineers, and
the estimated cost of dismantling and removing the asset and restoring the site.

25. Explain and list invetories.

Inventories are a tangible form of current assets
Inventory types:
- supplies of raw materials
- supplies of merchandise
- finished goods inventories
- inventories of work in progress and semi-finished products
- supplies of spare parts
- supplies of small inventory, packaging and tires
26. Explain and list receivables.
Receivables are current assets and are expected to be transformed into cash in a period of up to one
year.
- Receivables from affiliated companies
- trade receivables
- receivables from employees
- claims on the state and other institutions
- other claims
27. Explain and list financial assets.
It is a fast-cash asset placed with other businesses, with the money being returned within one year.
- Shares in affiliated companies
- loans to affiliates
- investments in securities
- loans given, deposits, bail
- other short-term investments

28. What is equity?

Equity (equity) is the rest of the assets that belong to the owners after settlement of the liabilities.
Equity expresses the carrying amount of a business entity.

29. Shareholdings of a joint stock company?

1) Paid-in or invested capital (not subject to distribution until the liquidation of the company),
consisting of: nominal value donations and a premium on the issued shares

2) Earned capital (generated from the activities of the company and distributed) consisting of:
reserves, retained earnings from previous years and retained earnings for the current year

30. List the securities.

bonds, stocks, commercial papers, treasury bills and treasury bills

31. State their division by maturity?

They are divided into long-term (bonds, stocks) and short-term (commercial, treasury and treasury
bills). DEBT securities an stocks are OWNERSHIP securities with no maturity.
32. How are securities recorded if you are investing cash?
As non-current ir current financial assets (assets).- INVESTMENT
33. How are you recording if you issue a security?
As long-term liabilities (liabilities) or increase in equity for stocks.
34. Define the terms cost.
COST are consumed raw materials, asset, wages and other necessary investment in production
process shown in money.
Generally, product costs are all costs regarding the manufacturing function of a company. These are
manufacturing costs which are directly or indirectly involved in producing products. Product costs are
related to the finished product and that way affect future economic value. So, from accounting point
of view, these costs are capitalised as inventory and held as unexpired until the finished products are
sold. Product costs are not charged as expenses in the period in which they are incurred, but in the
period in which the finished products will be sold.

Period costs are costs that are charged as expenses in the period in which they are incurred. These
costs have no future economic benefit because they are related to the nonmanufacturing functions
of company. Period costs become expenses in the same period in which they are incurred and are
matched to revenues of the particular accounting period. That way, period costs have immediate
impact on financial result in the period of their appearance. Period costs include selling costs and
administrative costs. These costs are not related to the production function of the company.

35. Explain and define expenses.

Expense is one element of measuring the performance of an entity.
Expenses are reductions in economic benefits through the accounting period in the form of outflows
or the exhaustion of assets or the creation of liabilities, resulting in a decrease in capital.
Expense is not considered as a decrease in assets or an increase in liabilities directly related to the
distribution of capital. Expenditure features have only those reductions in assets or increases in
liabilities that result in diminished economic benefits.
Expenses are divided into business, financial and extraordinary.

36. Define and describe the process of accounting for revenue.

Revenues are considered to be an increase in economic benefits during the accounting period in the
form of an increase in assets or a decrease in liabilities resulting in an increase in capital. Revenue is
not considered an increase in assets or a decrease in liabilities directly related to capital payments.
Revenue accruals are recorded at the same time as an increase in assets or a decrease in liabilities.
This indicates a direct link between the balance sheet and the profit and loss account, that is, the
relation between assets, liabilities and equity in the balance sheet with income, expenses and results
of operations. Revenues are recognized in the income accounts at the time they are created or
recognized.
We divide our revenues into business, financial and extraordinary.

37. How the financial result is determined.

The financial result is determined in such a way that it combines revenues and expenses from all
activities of the company - business, financial and extraordinary, and if the revenues are higher than
the expenses we are operating with a positive financial result and if the expenses are greater than
the revenues then we have a negative financial result.
38. How does profit affect equity?
Profit increases capital
39. How does loss affect equity?
Loss reduces capital