Review of Basic Concept Accounting - What is Accounting - Both Science and Art o Science as it has a systematic process o Art as financial datas are presented in an understandable manner (presented in a systematic manner) - PURPOSE OF ACCOUNTING Main Purpose - Definition International Based Organization AICPA (Association of International Certified Public Accountant) - Accounting is the art of recording, classifying, summarizing in a significant manner and in terms of money, transactions, and events, which are in the part at least, of a financial character, and interpreting the results thereof. AAA (Association of American Accountants) - Accounting is the process of identifying, measuring and communicating economic information to permit informed judgement and decisions by users of information. National Based Organization ASC (Accounting Standards Council) - Accounting is a service entity. It’s function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. GAAP (Generally Accepted Accounting Principles) A collection of commonly followed accounting rules, standards and procedures for financial reporting Its specifications includes definition of concepts and principles, as well as industry-specific rules. To provide quantitative financial information about economic entities that is intended to be useful in making economic decisions. (for the users) USER OF FINANCIAL INFORMATION Internal Users - - Those who make decisions directly affecting the internal operations of the entity Managers, VP, Presidents and employees Within the company External Users - - Those who make decisions concerning their relationship to the entity Investors, creditors, suppliers, labor union, government regulatory bodies Outside the company Primary Users of Financial Information (Financial Accounting) - Existing and potential investors and creditors (Capital Providers) Secondary Users - Residual Enumeration Managers within the company are secondary users due to the fact that these people prefer MANAGEMENT ACCOUNTING to generate more detailed (special) and specific reports that they can use LIMITATIONS TO FINANCIAL ACOUNTING - - - - - - It permits alternative treatments o Not all things (transactions) are provided by the standards It is designed to supply past information o At the end of an accounting period, we create financial reports (informations) o Deciding for the future but do not have information about the future but instead uses past information. o Information related to the past o Calendar Year: (Jan 01 – Dec 31) o Fiscal Year: (Any month and day – ends at one day before) ▪ Ex. Aug 1 to Jul 31 It influenced by personal judgements o Sometimes management decides the treatment to items It ignores important non-monetary information o It does not generate or provide information about ex. Market share, operations. o It only provides information strictly on the financial aspect It does not provide detailed analysis o Financial information do not reflects all the transactions rather it only summarizes. It does not disclose present value of business o Absence of monetary information o It is created for third parties, gives the information to the users for them to have their own perception of the value of the company. BRANCHES OF ACCOUNTING Business Accounting - Financial Accounting Managerial Accounting Cost Accounting Tax Accounting Not-for-Profit Accounting - Government Accounting Institutional Accounting (NGO) (non profit) AUDITING - - External Auditing Internal Auditing o Done to improve entity’s operation Forensic Accounting o Crime; related to criminal law Fiduciary Accounting (trust and confidence between 2 entity) - - - Estate Accounting o Involves the affairs for the dead o Estate; the property of the dead Trust Accounting o Trustee o Trustor o Beneficiary Receivership Accounting o Bankruptcy ▪ To liquidate ▪ - - - TYPES OF BUSINESS ACTIVITIES Service Firms - Those that perform services for a fee Merchandising Firms - Those that will buy and sell merchandise or goods that are in salable for to its customers. Manufacturing Firms - Those that buy raw materials, covert them into finished goods and sell the manufactured products to other companies or individual customers. HISTORICAL DEVELOPMENTS - - Make a report for these capital providers to use Florentine Approach (1700s) o Development of General Journals (Journal Entries) Venetian Approach o Development of General Ledger (posting) Savary Commercial Code o Provide historical cost Napoleon Commercial Code o Provide current cost or per market value Eugen Schmalenbach o Chart of Accounts Luca Pacioli o Father of Accounting Classical Notion of Stewardship o Stewardship of Management ▪ God provided all things, an man is accountable to take care of this and count these blessings o The management has the duty to account all the funds that is provided by the capital providers RA 9298 – PHILIPPINE ACCOUNTANCY ACT OF 2004 Serve as the regulating law for the certified public accountants (CPAs) in the Philippines 1. The scope of the profession’s practice 2. The creation of the Regulatory Body for CPAs known as the Professional Regulatory Board of Accountancy (BOA) 3. The admittance and licensure if qualified candidates for the CPA profession 4. The guiding rules and law in the practice of accountancy which includes prohibitions, limitations, accreditations and the continuing professional education (CPE) 5. The Penal and Final Provisions. FIELDS OF SPECIALIZATIONS - Public Practice Commerce and Industry - Government Education/Academe ACCOUNTING STANDARDS SETTING BODIES FRSC (Financial Reporting Standard Council) - - 1. The Accounting Standards (PFRS, PAS) 2. In the absence of standards, the preparer will use judgement and shall consider the ff: - requirement in other PFRS dealing with similar transactions - conceptual framework Successor of the ASC whose main function is to establish GAAP. Established by the BOA Monitors the technical activities of the IASB and issues invitations to comment on exposure drafts of proposed IFRS and IFRIC. Revised an improvised a standards ASC (Accounting Standards Council) - HIERARCHY GUIDE Created by PICPA (Philippine Institute of Certified Public Accountants) to established GAAP. - management may consider ff: o o PURPOSES OF FRAMEWORK - - IASB (International Accounting Standards Board) - Sole responsibility for setting International Financial Reporting Standards. - CONCEPTUAL FRAMEWORK - - Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users An attempt to provide an overall theoretical foundation for accounting NOT A PFRS, hence it does not define standards for any particular measurement or disclosure issue. pronouncement issued by other standard setting bodies other accounting literature and industry practices - assist the FRSC in the development of future FRS and in its review of existing PAS assist preparers if FS in applying PFRS and in dealing with topics that have yet to form the subject of the PFRS assist auditors in forming an opinion as to whether FS conform with the PFRS assist users of financial information in interpreting the information contained in FS prepared b conformity with PFRS provide those who are interest in the work of FRSC with information about its approach to the formulation of the PFRS. PERVASIVE CONSTRAINTS Materiality - materiality threshold information is material if its omission or misstatement could influence the decisions that users make on the basis of an entity’s financial information. Cost-Benefit - the benefits of providing the financial reporting information should justify the costs of providing that information. QUALITATIVE CHARACTERISTICS (under CF) - - are attributes that make the information provided in FS useful to users. There are 2 kids of qualitative characteristics o Fundamental ▪ Focus Content o Enhancing ▪ How it is presented to users FUNDAMENTAL QUALITATIVE CHARACTERISTICS 1. Relevance - To be useful, information must be relevant to decision-making needs of the users. o faithful Value ▪ Must influence the economic decisions of users by helping then evaluate past present and future events o Confirmatory Value ▪ Must influence the economic decisions of users by helping them confirm or correct past evaluation. 2. Faithful Representation - Implies that financial information represents faithfully the economic phenomenon that it purports to represent or could reasonably be expected to represent o Completeness ▪ Relevant information should be presented in a way that facilitates understanding and avoids erroneous implications ▪ Standard of Adequate Disclosure • A significant and relevant information leading to the preparation of financial statements shall be clearly reported. o Neutrality ▪ A neutral (no bias) depiction in the preparation or presentation of financial information o Free from error ▪ There are no material errors or omissions in the description of the phenomenon or transactions. SUBSTANCE OVER FORM If information is to represent faithfully the transactions and other events it purports to represent, it is necessary that the transactions and events are accounted in accordance with their substance and reality and not merely their legal form. CONSERVATISM OR PRUDENCE - - When alternatives exist, the alternative which has the least effect on equity should be chosen Choose the lesser income Choose the greater expense Manager, investors and accountants have generally preferred that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets. ENHANCING QUALITATIVE CHARACTERISTICS (VCUT) a) Verifiability - Consensus - Implies knowledgeable an independent observer could reach a general consensus that the information does represent faithfully the economic phenomena it purports to represents. b) Comparability - The ability to identify similarities and differences between two sets of economic phenomena o Consistency ▪ Use the same accounting policies and procedures within an entity from period to period, or a single period across entities o Intra-comparability/Horizontal Comparability ▪ User compare FS through diff time to identify trends in CIS and Balance Sheet o Inter- comparability/ Dimensional Comparability ▪ Users compare diff entities in order to evaluate their relative financial position and performance. c) Understandability - Quality of information that enables users to comprehend its meaning and likewise enable users who have reasonable knowledge of business and economic and financial activities and financial reporting, and who study with reasonable diligence to comprehend the information. - Users must understand the content (within the comprehension) d) Timeliness - Information must be available when the users needs it - Making of Financial reports annually UNDERLYING ASSUMPTIONS/POSTULATE - A basic notion serves as the understructure of accounting in order to prevent misunderstanding of the use of the financial statements. 1. Going Concern o The FS are normally prepared on the assumption that the entity will continue in operation for the foreseeable future. 2. Economic Entity Assumption o Assumes that the entity is separate and distinct from the owners or other business units 3. Monetary o Quantifiability ▪ Accounts should be stated in terms of a unit of measure (peso) o Stability of the Peso ▪ Purchasing power of the peso is stable or constant 4. Periodicity Assumption o Life span of an entity can be divided into time periods for the purpose of providing periodic reports. ACCRUAL ACCONTING - - Depicts the effects of transactions and other events and circumstances on an entity’s economic resources and claims in the periods in which those effects occur even if the resulting cash receipts and payment occur in different period AR and AP - Is the process of capturing for inclusion in the statement of financial position or the statement of financial performance an item that meets the definition of the financial statements. Carrying Amount - - At which the asset, liability, or equity is recognized in the statement of financial position Book value ((-) depreciation) An item that meets the definition of an element should be recognized if: - - It is PROBABLE that ay future economic benefit associated with the item will flow to or from the entity The item has a cost or value that can be MEASURED RELIABLY FINANCIAL STATEMENTS (5) • • • • • Statement of Financial Position Statement of Financial Performance Statement of Owner’s Equity Statement of Cash Flows Notes to Financial Statements o RULES AND DETAILS ELEMENTS OF THE FINANCIAL STATEMENTS • • • • • Assets Liability Equity Income Expense RECOGNITION AND DERECOGNITION FOR EXPENSES Matching Principle - - Systematic and Rational Allocation - A. RECOGNITION AND DERECOGNITION Recognition recognized on the basis of a direct association between costs incurred and the earning pf specific items of income there is income then there is expense ex. Sales and COS - recognized when economic benefits are expected to arise over several accounting periods and the association with income can be broadly or indirectly determined. depreciation Immediate Recognition - - recognized immediately when expenditures produces no future economic benefits or when, and to the extent that, future economic benefits do not qualify, or cease to qualify, for recognition. Ex. Building destroyed (no more benefit) recognized the expense and lost B. MEASUREMENT - The process of determining or assigning monetary amounts at which the elements of the Financial Statements are to be recognized and reported. • Historical Cost • Current Cost • Realizable Value • Discounted Value 10-step Process 1. Analysis of business transactions and sourced documents 2. Entering of entries in general journal 3. Posting of entries to the general ledger 4. Preparation of unadjusted trial balance 5. Journalizing and posting of adjusting entries 6. Preparation of adjusted trial predicbalance 7. Preparation for the financial statements 8. Closing entries 9. Preparation for the postclosing trial balance 10. Reversing entries (optional) • Only applicable if Expense and Income method is used during adjusting entries) FINANCIAL STATEMENTS • • Financial Statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Financial Statements are the end product or main output of the financial accounting process. GENERAL PURPOSE FINANCIAL STATEMENTS • • Those statements intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. The basis for the preparation of GPFS is to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. COMPONENTS OF FINANCIAL STATEMENTS • • • • • Statements of Financial Position Income Statement/ Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to Financial Statements, comprising a summary of significant accounting policies and other explanatory information. OBJECTIVE OF FINANCIAL STATEMENTS • The objective of general purpose financial statements is to provide information about the financial position, financial performance, and • cash flows of an entity that is useful to wide range of users in making economic decisions. Financial Statements show the results of the stewardship of management of the resources entrusted to it. FINANCIAL POSTION • The financial position comprises the assets, liabilities and equity of an entity at a particular moment in time • Financial position pertains to liquidity, solvency, and the need of the entity for additional financing. • This is portrayed in the Statement of Financial Position. FINANCIAL PERFORMANCE • The financial performance comprises the revenue, expenses and net income or loss of an entity for a period of time. • Performance is the level of income earned by the entity through the efficient and effective use of its resources. • This is portrayed in the Statement of Comprehensive Income. CASH FLOWS • Cash flows are the cash receipts and cash payments arising from the operating, investing and financing activities of the entity. • Cash flow information is useful in assessing the ability of the entity to generate cash. • This is portrayed in the Cash Flows Statements. !!!TAKE NOTE!!! Financial Statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide nonfinancial information. • FINANCIAL REPORTING (ANNUAL REPORTING) • The provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the effectiveness of the entity’s management. • Also includes non-financial information. • Financial reports include not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of FS and significant ratios. OBJECTIVE OF FINANCIAL REPORTING • The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. TARGET USERS OF FINANCIAL REPORTING • General purpose financial reporting is directed primarily (1) existing and potential investors and (2) lenders and other creditors which compose the primary group. The have the most critical and immediate need for information in financial reports. • As matter of fact, the primary users of financial information are the parties that provide resources to the entity. SECONDARY USERS • By residual definition, “others users” are users of financial information other than the existing and potential investors, lender and other creditors. They include such, but not limited to: o Employees o Customers o Government o Public SPECIFIC OBJECTIVES OF FINANCIAL REPORTING • To provide information useful in making economic decisions about providing resources to the entity. • To provide information useful in assessing the prospects of future net cash flows to the entity. • To provide information about the entity resources, claims and changes in resources and claims. LIMITATION OF FINANCIAL REPORTING • GPFR do not and cannot provide all of the information that existing and potential investors, lenders and creditors need. • GPFR are not designed to show the value of a reporting entity but these reports provide information to help the primary users estimate the value of the entity, • GPFR are intended to provide common information to users and cannot accommodate every specific request for information. • GPFR are based on estimate and judgement to a large extend rather than exact depiction. GENERAL FEATURES OF FINANCIAL STATEMENTS • Fair presentation and compliance with PFRS • Going Concern • Accrual Basis • Materiality and Aggregation • Offsetting • Frequency of Reporting • • Comparative information Consistency of presentation 1. FAIR PRESENTATION • Defined as faithful presentation of the effects of transactions and other events in accordance with the definitions and recognition criteria as laid down in the conceptual framework. • Fair presentation is achieved if the financial statements are prepared in accordance with the PFRS which represent GAAP in the PH. • Fair representation requires an entity: o To select and apply accounting policies in accordance with PFRS o To present information, including accounting policies, in a manner that provides relevant and faithfully represented financial information o To provide additional disclosures necessary for the users to understand the entity’s financial statements. !!!TAKE NOTE!!! An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory information. 2. GOING CONCERN • means that the accounting entity is viewed as continuing in operation indefinitely in the absence of evidence to the contrary. • Otherwise known as the continuity assumption. • In making an assessment about going concern, management shall take into account all available information about the future at least 12 months from the end of the reporting period. 3. ACCRUAL BASIS • The effects of transactions and other events are recognized when they occur and not as cash is received or paid, and they are recorded in the financial statements if the perios to which they relate. • Income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid. 4. MATERIALTY AND AGGREGATION • An entity shall present separately each material class of similar items. • An entity shall present separately items of dissimilar nature or function unless they are immaterial. • The final stage in the process if aggregation and classification is the presentation of condensed and classified ate which form line items in the financial statements. When is an item material? • There is no strict or uniform rule for determining whether an item is material or not. • An item is material if knowledge of it would affect the decision of informed users of the financial statements. • Relativity; What is material for one entity may be immaterial for another. 5. OFFSETTING • Assets and liabilities, and income an expense, when material, shal not be offset against each other. • Offsetting may be done when it is required or permitted by another PFRS. 6. FREQUENCY OF REPORTING • An entity shall present a complete set of financial statements at least annually. • An entity can opt to choose the calendar year or the fiscal year as the basis for annual reporting • Balance Sheet o AS OF DECEMBER 31, 2020 • The rest of FS o FOR THE YEAR ENDED DECEMBER 31, 2020 7. COMPARABLE INFORMATION • Normally, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period’s financial statements. • Users shall benefit from information that an uncertainty existed at the end of the immediately preceding reporting period, and steps have been taken during the current period to resolve the uncertainty. 8. CONSISTENCY OF PRESENTATION • The principle of consistency requires that the accounting methods and practices shall be applied on a uniform basis from period to period. • Consistency is desirable and essential to achieve comparability of financial statements. !!!TAKE NOTE!!! Taking into consideration the principle of consistency, It is inappropriate for an entity to leave accounting policies unchanged when better and acceptable alternatives exist. ELEMENTS OF THE FINANCIAL STATEMENTS • Asset o A resource controlled by the entity as a result of a past • • • • event and from which future economic benefits are expected to flow to the entity. Liability o A present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity o Residual interest in the assets of the entity after deducting all the liabilities. Income o Increase in economic benefit during the accounting period in the form of inflow or increase in assets or decrease in liability that results in increase in equity, other than contribution from equity participants. Expense o Decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution to equity participants. RECOGNITION OF ELEMENTS • Recognition means the process of reporting an asset, liability, income or expense on the face of the Financial statements of an entity. • An item that meets the definition of an elements shall be recognized if: o It is PROBABLE that any future economic benefit associated with the item will flow to or from the entity o The item has a cost or value that can be MEASURE REALIABLY. transaction between market participants at the measurement date. MEASUREMENT OF ELEMENTS • Measurement is the process of determining the monetary amounts at which the elements of the financial statements are recognized and carried in the statement of financial position and income statement. • Measurement bases include: o Historical Cost o Current Cost o Realizable Value o Present Value PRESENTATION AND DISCLOSURE • A reporting entity communicates information about its assets, liabilities, equity, income, and expenses by presenting an disclosing information in its financial statement. • Effective communication makes the information more relevant and contributes to faithful representation, and it enhances understandability and comparability of information. A. HISTORICAL COST • Past Purchase Exchange Price • The amount of cash paid or the fair value of the consideration given to acquire an asset at the time of acquisition. B. CURRENT COST • Current Purchase Exchange Price • The amount of cash that would have to be paid of the same or an equivalent asset was acquired currently. C. REALIZABLE VALUE • Current Sale Exchange Price • The amount of cash that could currently be obtained by selling the asset In an orderly disposal D. PRESENT VALUE • Future Exchange Price • The discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. E. FAIR MARKET VALUE (FMV) • Fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly EFFECTIVE COMMUNICATION OF INFORMATION • Requirements: o Focusing in presentation and disclosure objectives and principles rather than focusing on rules. o Classifying information in a manner that groups similar items and separates dissimilar items o Aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation. STATEMENT OF FINANCIAL POSITION • A formal statement showing the three elements comprising financial position, namely ASSETS, LIABILITIES AND EQUITY. • Investors, creditors and other users analyze the Statement of financial position to evaluate factors such as liquidity, solvency, and the need of the entity for additional financing. CURRENT AND NONCURRENT DISTINCTION • • • An entity shall present current and noncurrent assets, a current and noncurrent liabilities, as separate classifications in the statement of financial position. Assets classifies and presented in decreasing order of liquidity. Liabilities are generally classified and presented based on the time of maturity. CURRENT ASSETS • The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. • The entity holds the asset primarily for the purpose of trading. • The entity expects to realize the asset within twelve months after the reporting period. • The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle. PRESENTATION OF CURRENT ASSETS • Cash and Cash Equivalents • Financial Assets at Fair Value, such as trading securities and other investments in quoted equity instruments. • Trade and other receivables • Inventories • Prepaid Expenses • Other current assets PRESENTATION OF NONCURRENT ASSETS • Property, Plant and Equipment • Long-term investments • Intangible Assets • Other noncurrent assets CURRENT LIABILITIES • • • • The entity expects to settle the liability within the entity’s normal operating cycle. The entity holds the liability primarily for the purpose of trading. The liability is due to be settles within twelve months after the reporting period. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. PRESENTATION OF CURRENT LIABILITIES • Trade and other payables • Current provisions • Short-term borrowing • Current portion of long-term debt • Current tax liability NONCURRENT LIABILITIES • Noncurrent liabilities also hold a residual definition. • In other words, what is not include in the definition of current liabilities is deemed excluded. Therefore, all others are classified as noncurrent liabilities. PRESENTATION OF NONCURRENT LIABILITIES • Noncurrent portion of a long-term debt • Finance lease liability • Deferred tax liability • Long-term obligations to entity officers • Long-term deferred revenue. EQUITY • The residual interest n the assets of entity after deducting all of the liabilities. • Equity is increased by profitable operations and contrition by owners. It is decreased by unprofitable operations and distribution to owners. !!!TAKE NOTE!!! The equity reflected in the Statement of Financial Position is based on the amount provided for in the capital ending balance of the Statement of Changes in Owner’s Equity. FORMAT • Report form o Vertical sequence • Account form o Asset; left o Liabilities and OE; right • Either balance sheet format acceptable. is STATEMENT OF COMPREHENSIVE INCOME • The change in equity during a period resulting from transactions and other events, other than the changes resulting from transactions with owners in their capacity as owners. • Includes o Components of Profit and Loss o Components of Other Comprehensive income. PROFIT OR LOSS • The total income less expenses excluding the components of other comprehensive income. • This is the “bottom line” in the traditional income statement • An entity may use other terms to describe this amount as long as the meaning is clear. OTHER COMPHREHENSIVE INCOME • Consists of items of income and expense including reclassification adjustments that are not recognized in profit or loss as required or permitted by PFRS. • They may at times be reclassified as Profit or Loss when certain conditions are met. PRESENTATION OF COMPREHENSIVE INCOME • Two-statement approach o An income statement showing the components of profit and loss o A statement of comprehensive income beginning with profit or loss a shown in the income statement plus or minus the components of other comprehensive income. • Singe statement approach o This is the combined statement showing the components of profit or loss and components of other comprehensive income in a single statement of comprehensive income. SOURCES OF INCOME • Sales of merchandise to customers o Sales of goods • Rendering of services o Service fees, professional fees etc. • Use of entity resources o Rent, royalty, interest etc. • Disposal of resources other products o Gains !!!TAKE NOTE!!! The efinition of Income encompasses both Revenue and Gains. • • Revenue o Arises in the course of ordinary and regular activities of an entity. Gains o Represent other items that do not arise in the course of ordinary and regular activities. EXPENSES • The decreases in economic benefit during the accounting period in the form of outflow or decrease in asset and increase in liability that results in decrease in equity, other than distribution to equity participants. • Technically includes o Cost of Goods Sold o Distribution or Selling Cost o General and Administrative Expenses o Other Expenses o Finance Cost FORMS OF INCOME STATEMENT • An entity shall present in the face of the income statement an analysis of expenses using a classification based on either the function of expenses or their nature within the entity, whichever provides information that is reliable and more relevant. • Accordingly, the income statement may be presented using the functional presentation and the natural presentation. FUNCTIONAL PRESENTATION • Also known as the COST OF SALES METHOD. • This form classifies expenses according to their function as part of cost of sales, distribution costs, administrative activities and other activities. • This form is commonly used by merchandising and manufacturing. NATURAL PRESENTATION • Under this form, expenses are aggregated according to their nature and not allocated among various functions within the entity. • Natural expenses is not classified as cost of goods sold, distribution cost etc…. • This form is commonly used by service entities. STATEMENT OF CASH FLOW • Component of financial statements summarizing the operating, investing and financing activities of an entity. • It provides information about cash receipts and cash payments of an entity during a period. PURPOSE OF STATEMENT OF CASH FLOWS • The primary purpose is to provide relevant information about cash receipts and cash payments of an entity. • It is useful assessing the ability of th entity to generate cash. • Entities need cash to conduct their operations, pay their obligations, and provide returns to their investors. A. OPERATIING ACTIVITIES • Are the cash floes derived primarily from the principal revenue producing activities of the entity. • Generally, result from transactions and other events that enter into the determination of net income or loss. o Cash receipts from sale of goods and rendering of services o o o o o o o o Cash receipts from royalties, rents, fees, commissions and other revenue. Cash payments to suppliers for goods and services Cash payments for selling administrative and other expenses Cash receipts and payments for securities held for trading Cash receipts (also be investing) and payments (also be financing) for interest. Payment for Income Taxes Receipt of Dividends INVESTING ACTIVITIES • Are the cash flows derived from the acquisition and disposal of long term assets and other investments. • It includes making and collecting loans, acquiring and disposing of equity and debt securities and obtaining and selling of property and equipment and other productive assets. o Cash payments to acquire and cash receipts from sales property, plant and equipment and other long-term assets. o Cash payments to acquire and cash receipts from sales of equity or debt securities issued by other entities. o Cash advances and loans to other parties o Cash receipts from repayment of advances and loans made to other parties. FINANCING ACTIVITIES • Are cash flows derived from the equity capital and borrowings of the entity • • It results from transaction between the entity and its owners and the entity and its creditor Normally includes transactions involving non-operating and nontrade liabilities and equity. o Cash receipts from additonal investment of owner o Cash receipts from non-trade or long-term borrowing o Cash payments made to owners in form of withdrawals o Cash payments to the amount borrowed. PRESENTATION OF THE STATEMENT OF CASH FLOWS • An entity shall report cash flows from operating activities, either using direct method or indirect method. • In essence, the statement of cash flows can be considered as the “cash basis” income statement. DIRECT METHOD • Shows in detail or itemizes the major classes of gross cash receipts and gross cash payments. • Obtained by adding the individual operating cash inflows and then subtracting the individual operating cash outflows. INDIRECT METHOD • The net income or loss is adjusted for the effects of transactions of a noncash nature, any deferrals or accruals of operating cash receipts and payments, and items of income or expense associated with financing and investing activities.
