Financial Accounting chapter 1
Accounting standards council
Accounting is a service activity. Its
function to provide quantitative information,
primarily financial in nature, about economic
entities, that is intended to be useful in making
economic decisions.
AICPA
Accounting is the art of recording,
classifying, and summarizing in a significant
manner and in terms of money, transactions
and events which are in part at least of a
financial character and interpreting the results
thereof.
American Accounting Association
Accounting is the process of identifying,
measuring and communicating economic
decisions to permit informed judgment and
decision by users of the information.
3 important points
1. It is about QUANTITATIVE INFORMATION
2. The information is likely to be FINANCIAL
IN NATURE
3. The information should be USEFUL IN
DECISION MAKING.
A. IDENTIFICATION
Is the recognition or nonrecognition
of business activities as ACCOUNTABLE events.
Accountable/quantifiable - Has an effect on
A = L + OE
Subject matter of accounting – Economic
activity or the measurement of economic
resources and economic obligations
Transactions - economic activities of an
entity.
External Transactions – Economic events
involving one entity and another.
Internal Transactions – Economic events
involving the entity only.
Production – the process by which resources
are transformed into products.
Casualty – is any sudden or unanticipated
events termed as Acts of God.
B. MEASURING
Is the assigning of peso amounts to
the accountable economic transactions and
events.
C. COMMUNICATING
Is the process of preparing and
distributing accounting reports to potential
users of accounting information.
Recording/Journalizing - the process of
systematically maintaining a record of all
economic business transactions after they
have been identified and measured.
Classifying - the sorting or grouping of similar
and interrelated economic transactions into
their respective classes.
Ledger – group of accounts.
Summarizing – the preparation of FINANCIAL
STATEMENTS.
Financial statements – the documents that
report financial information about an entity to
decision makers.
OBJECTIVE of accounting
To provide quantitative financial
information about a business that is useful to
statement users particularly owners and
creditors, in making economic decisions.
Accountant’s objective
To supply financial information so that
the statement users could make informed
judgment and better decisions.
REPUBLIC ACT 9298 or PHILIPPINE
ACCOUNTANCY ACT OF 2004 is the law
regulating the practice of accountancy in the
Philippines.
BOARD OF ACCOUNTANCY is the body
authorized by law to promulgate rules and
regulations affecting the practice of the
accountancy profession in the Philippines.
Single practitioners and partnerships for the
practice of public accountancy shall be
registered CPA in the Philippines
CERTIFICATE OF ACCREDITATION – shall be
issued to CPAs in public practice only upon
showing in accordance with rules and
regulations promulgated by the BOARD OF
ACCOUNTANCY and approved by the
PROFESSIONAL REGULATION COMISSION
that such registrant has acquired a MINIMUM
OF 3 YEARS of meaningful experience in any
of the areas of public practice.
1. PUBLIC ACCOUNTING
Composed of individual practitioners,
small accounting firms and large multinational
organizations that render independent and
expert financial services to the public.
A. External Auditing / Auditing
- Primary service.
Examination of financial statements by
independent CPAs for the purpose of
expressing an opinion as to the fairness with
which the financial statements are prepared
budgeting, forecasting, design or modification
of retirement plans and even entity mergers
and takeovers.
EXEMPTIONS:
2. PRIVATE ACCOUNTING
TEMPORARY EXEMPTIONS:
OBJECTIVE: to assist management in
planning and controlling the entity’s operation.
1. The CPA is practicing the profession
or furthering studies abroad.
2. The exemption is for the duration of
stay abroad.
3. The CPA has been out of the country
for at least 2 years immediately prior
to the date of renewal of license and
accreditation.
Includes maintaining the records,
producing the financial reports, preparing the
budgets and controlling and allocating the
resources of the entity.
Controller - Highest accounting officer.
3. GOVERNMENT ACCOUNTING
FOCUS: the study and administration of
public funds.
Encompasses the process of
analyzing, classifying, summarizing and
communicating ball transaction involving
the receipt and disposition of
government funds and property and
interpreting the results thereof.
B. Taxation Service
Includes the preparation of annual
income tax returns and determination of tax
consequences of certain proposed business
endeavors.
C. Management Advisory Services
Include advice on installation of
computer system, quality control, installation
and modification of accounting system,
1. 65 years old
4. CONTINUING PROFESSIONAL
DEVELOPMENT (CPD)
Refers to the inculcation, assimilation
and acquisition of knowledge, skill, proficiency,
and ethical and moral values after the initial
registration of the CPA.
CPD credit units shall be 60 credit units
for three years.
ACCOUNTING VS AUDITING
Broad
sense
Limite
d
Sense
ACCOUNTIN
G
Embraces
auditing.
CONSTRUCT
IVE Ceases
when
financial
statements
are prepared.
AUDITING
One of the
areas of
Accounting
specialization.
ANALYTICAL
Work starts
when the work
of the
accountant
ends.
AUDITOR – examines the financial
statements to ascertain whether they
are in conformity with the GAAP.
ACCOUNTING VS BOOKKEEPING
ACCOUNTING
BOOKKEPING
CONCEPTUAL
Concerned with
reason or
justification or any
action adapted.
PROCEDURAL
Concerned with
development and
maintenance of
accounting record.
‘HOW’
ACCOUNTING VS ACCOUNTANCY
ACCOUNTANCY
Refers to the
profession of
accounting practice.
ACCOUNTING
Used in reference only
to a particular field of
accountancy
The accumulation and preparation of
financial reports for INTERNAL USERS ONLY.
Emphasizes developing accounting
information for use WITHIN AN ENTITY.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Represent the rules, procedures, practice
and standards followed in the preparation and
presentation of financial statements.
PURPOSE OF ACCOUNTING STANDARDS
To identify proper accounting practices
for the preparation and presentation of
financial statements.
FINANCIAL ACCOUNTING VS MANAGERIAL
ACCOUNTING
FINANCIAL ACCOUNTING
Primarily concerned with the recording of
business transactions and the eventual
preparation of financial statements.
Intended for EXTERNAL AND
INTERNAL USERS.
Emphasizes reporting to CREDITORS
AND INVESTORS.
MANAGERIAL ACCOUNTING
FINANCIAL REPORTING STANDARDS
COUNCIL
The accounting standard setting body
created by the PROFESSIONAL REGULATION
COMMISSION upon recommendation of the
BOA to assist the BOA in carrying out it’s
powers and functions provided under RA act
9298.
MAIN FUNCTION – establish and improve
ACCOUNTING STANDARS THAT WILL be
generally accepted in the Philippines.
PAS and FRSC – approved statements of the
FRSC.
1 CHAIRMAN – had been or is presently a
senior accounting practitioner.
BOA
SEC
BSP
BIR
COA
FINEX
PUBLIC PRACTICE
COMMERCE AND
INDUSTRY
ACADEME
GOVERNMENT
1
1
1
1
1
1
2
2
2
2
*3 years term renewable for another term
*any member of the ASC shall not be
disqualified from being appointed to the FRSC
PHILIPPINE INTERPRETATIONS COMMITTEE
Formed by the FRSC (AUG 2006) and
replaced the Interpretations committee
(formed by the ASC in MAY 2000)
Role: to prepare interpretations of PFRS
for approval by the FRSC and in the context of
the conceptual framework, to provide timely
guidance on financial reporting issues not
specifically addressed in the PFRS.
INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE (June 1973)
An independent private sector body,
with the objective o achieving uniformity in the
accounting principles which are used by
business and other organizations for financial
reporting around the world.
(INTERNATIONAL ACCOUNTING
STANDARDS)
OBJECTIVES:
1. To formulate and publish in the public
interest accounting standards to be
observed in the presentation of financial
statements and to promote their
worldwide acceptance and observance.
2. To work generally for the improvement
and harmonization of regulations,
accounting standards, and procedures
relating to the presentation of financial
statements.
The conceptual framework for financial
reporting only mentions one assumption,
GOING CONCERN.
4 BASIC ASSUMPTIONS
1.GOING CONCERN
Means that in the absence of evidence in
the contrary, the accounting entity is viewed as
continuing in operation indefinitely.
be stated in terms of a unit of measure which is
the PESO IN THE PHILIPPINES.
STABILITY OF THE PESO ASSUMPTION –
the purchasing power of the pesos stable or
constant and that its instability is insignificant
and therefore may be ignored.
STABLE PESO POSTULATE – an amplification
of the going concern assumption so much so
that adjustments are unnecessary to reflect
any changes in purchasing power.
2. ACCOUNTING ENTITY
INTERNATIONAL ACCOUNTING
STANDARDS BOARD
Replaced the IASC.
Intended to bring about greater
TRANSPARENCY and a higher degree of
COMPARABILITY in financial reporting.
The entity is separate from the owners,
managers and employees who constitute the
entity.
To have fair presentation of financial
statements.
3. TIME PERIOD
(INTERNATIONAL FINANCIAL
REPORTING STANDARDS)
PHILIPPINE FINANCIAL REPORTING
STANDARDS
1. IFRS=PFRS
2. IAS = PAS
3. IC = PI
Requires that the indefinite life of an
entity is subdivided into time periods or
accounting periods which are usually of equal
length for the purpose of preparing financial
reports on financial position, performance and
cash flows.
Calendar year - 12 month period that ends on
December 31
Natural business year – 12 month period
that ends on any month when the business is
at the lowest or experiencing slack season.
FINANCIAL ACCOUNTING CHAPTER 2
ACCOUNTING FUNCTION
To account for nominal pesos only and
no for constant peso or changes in purchasing
power.
PAS 16
an entity shall choose either the cost
model or revaluation model as an accounting
policy to an entire class of ppe.
Conceptual framework for financial
reporting is promulgated by the IASB
CONCEPTUAL FRAMEWORK – is the
summary of the terms and concepts that
underlie the preparation and presentations of
financial statements for external users.
Purposes of conceptual framework
1. To assist the FRSC in developing accounting
standards that will represent the Philippines
GAAP
4. MONETARY UNIT
ACCOUNTING ASSUMPTIONS/ POSTULATES
are the basic notions or fundamental premises
on which the accounting process is based.
2 aspects – quantifiability and stability of
peso.
QUANTIFIABILITY ASPECT – The assets,
liabilities, equity, income, and expenses should
2. To assist preparers of financial statements in
applying accounting standards and in dealing
with issues not yet covered by GAAP
3. To assist the FRSC in review and adoption of
IFRS
4. To assist auditors in forming an opinion as to
whether financial statements conform with
Philippine GAAP
5. To provide information to those interested in
the work of the FRSC in the formulation of PFRS
USERS OF FINANCIASL INFORMATION
1. PRIMARY USERS
The parties to whom general purpose
financial reports are primarily directed.
Include the existing and potential
investors, lenders and other creditors.
INVESTORS – need information to help
them determine whether they should buy,
hold, or sell.
SHAREHOLDERS – need information to
assess the ability of the entity to pay
dividends.
LENDERS and CREDITORS – need
information to determine whether their
loan, interest thereon and other amounts
owing to them will be paid when due.
2. OTHER USERS
Are users of financial information other
than the existing and potential investors,
lenders and other creditors.
Include the employees, customers,
government and their agencies, and the
public.
EMPLOYEE – needs information about
the stability and profitability of the entity to
assess the ability of the entity to provide
remuneration, retirement benefits and
employment opportunities.
CUSTOMERS - need information about
the continuance of an entity especially
when they have a long term involvement
with or are dependent on the entity.
GOVERNMENT AND THEIR AGENCIES
– need information to regulate the activities
of the entity, determine taxation policies
and as a basis for national income and
similar statistics.
PUBLIC – providing information about
the trend and the range of its activities.
FINANCIAL REPORTING
ACCRUAL ACCOUNTING
Transactions and other events are
recognized when they occur and not as cash is
received or paid.
*income recognized when earned
*expense recognized when incurred
Financial Accounting chapter 3
QUALITATIVE CHARACTERISTICS are the
qualities or attributes that make financial
accounting information useful to the users.
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.
Fundamental qualitative characteristics
Objective of financial reporting
Financial information has PREDICTIVE
VALUE if it can be used as an input to
processes employed by users to predict future
outcome.
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.
Financial position – information about the
entity’s economic resources and the claims
against the reporting entity.
LIQUIDITY - the availability of cash in the near
future to cover currently maturing obligations.
SOLVENCY – the availability of cash over a
long term to meet financial commitments when
they fall due.
Financial performance – results of
operations
1. Relevance
The capacity of the information to
influence a decision.
Financial information has
CONFIRMATORY VALUE if it provides
feedback about previous evaluations.
MATERIALITY or doctrine of
convenience is a practical Rule in accounting
which dictates that strict Adherence to GAAP is
not required when the items are not significant
enough to affect evaluation, decision and
fairness of the financial statements.
2. Faithful representation
Financial reports represent economic
phenomena or transactions in words or
numbers
INGREDIENTS OF FAITHFUL
REPRESENTATION
A. COMPLETENESS
Requires that relevant information
should be presented in a way that facilitates
understanding and avoids erroneous
implications.
STANDARD OF ADEQUATE
DISCLOSURE
Disclosure of any financial facts
significant enough to influence the
judgment of informed users.
NOTES TO FINANCIAL STATEMENTS
Provide narrative description or
disaggregation of the items presented in
the financial statements and information
about items that do not qualify for
recognition.
B. NEUTRALITY or PRINCIPLE OF
FAIRNESS
The information contained in the
financial statements must be free from bias.
C. FREE FROM ERROR
There are no errors or omissions in the
description of the phenomenon or
transaction, and the process used to
produce the reported information has been
selected and applied with no errors in the
process.
SUBSTANCE OVER FORM
If information is to represent faithfully
the transactions and other events it purports to
represent, it is necessary that transactions and
events are accounted in accordance with their
substance and reality and not merely their
legal form.
CONSERVATISM
In case of doubt, record any loss and do
not record any gain.
CONTINGENT LOSS – recognized as a
provision if the loss is probable and the amount
can be reliably measured.
CONTINGENT GAIN – not recognized
but disclosed only.
PRUDENCE
The desire to exercise care and caution
with dealing with the uncertainties in the
measurement process such that assets or
income are not overstated and liabilities or
expenses are not understated.
ENHANCING QUALITATIVE
CHARACTERISTICS
Relate to the presentation and from of
financial statements. Intended to increase the
usefulness of the financial information that is
relevant and faithfully represented.
a. COMPARABILITY
The ability to bring together for the
purpose of noting points of likeness and
difference.
COMPARABILITY WITHIN AN ENTITY
or HORIZONTAL COMPARABILITY or
INTRACOMPARABILITY
The quality of information that allows
comparisons within a single entity through time
or from one accounting period to the next.
COMPARABILITY BETWEEN AND
ACROSS ENTITIES or DIMENSIONAL
COMPARABILITY or INTERCOMPARABILITY
The quality of information that allows
comparisons between two are more entities
engaged in the same industry.
CONSISTENCY
The accounting methods and practices
should be applied on a uniform basis from
period to period.
b. UNDERSTANDABILITY
Financial information must be
comprehensible or intelligible if it is to
be most useful.
c. VERIFIABILITY
Different knowledgeable and
independent observers could reach
consensus, although not necessarily
complete agreement, that a particular
depiction is a faithful representation.
DIRECT VERIFICATION – verifying an
amount or other representation through
direct observation.
INDIRECT VERIFICATION – checking
the inputs to a model, formula or other
technique and recalculating the inputs
using the same methodology.
d. TIMELINESS
Financial information must be available
or communicated early enough when a
decision is to be made.
COST CONSTRAINT
Cost – a pervasive constraint on the
information that can be provided by financial
reporting.
FINANCIAL ACCOUNTING CHAPTER 4
Refers to the quantitative information
reported in the statement of financial position
and income statement.
from which future economic benefits are
expected to flow to the entity.
2 conditions that must be present for the
recognition of an asset
1. It is probable that future economic benefits
will flow to the entity.
2. The cost or value of the asset can be
measured reliably.
The ELEMENTS directly related to the
measurement of FINANCIAL POSITION in the
statement of financial position are :
FUTURE ECONOMIC BENEFIT
The potential to contribute directly
or indirectly to the flow of cash and
noncash equivalents to the entity.
a. ASSET
b. LIABILITY
c. EQUITY
COST PRINCIPLE
Asset should be recorded initially at
original acquisition cost.
The ELEMENTS directly related to the
measurement of FINANCIAL PERFORMANCE
in the income statement are :
In a CASH TRANSACTION, cost is equivalent
to cash payment.
a. INCOME
b. EXPENSE
EQUITY is the residual interest in the assets of
the entity after deducting all of the liabilities.
In NONCASH or an EXHANGE TRANSACTION,
the cost is equal to the fair value of the asset
given or fair value of the asset received, which
is clearly evident.
In the absence of fair value, the cost is equal to
the carrying amount of the asset given.
B. LIABILITY RECOGNITION PRINCIPLE
RECOGNITION OF ELEMENTS
RECOGNITION means the reporting of an
asset, liability, Income or expense n the face of
the financial statements of an entity.
LIABILITY – a present obligation arising
from past events the settlement of which is
expected to result in an outflow from the
entity of resources embodying economic
benefits.
1. It is probable that an outflow of economic
benefits will be required for the settlement of a
present obligation.
2. The amount of obligation can be measured
reliably.
Obligations may be LEGALLY
ENFORCEABLE as a consequence of a
binding contract or statutory requirement.
CONSTRUCTIVE OBLIGATIONS arise from
normal business practice, custom and a
desire to maintain good business relations
or act in an equitable manner.
Ways to settle present obligations
A. payment of cash
B. transfer of noncash assets
C. provision of services
D. replacement of the obligation with another
obligation
E. conversion of the obligation into equity
INCOME – increase in economic benefit during
the accounting period in the form of inflow or
increase in asset or decrease in liability that
results in increase in equity, other than
contribution from equity participants.
REVENUE – arises in the course of ordinary
regular activities and is referred to by a variety
of different names including sales, fees,
interest, dividends, royalties and rent.
GAINS – represent other items that meet the
definition of income and do not arise in the
course of the ordinary regular activities.
A. ASSET RECOGNITION PRINCIPLE
ASSET – a resource controlled by the
entity as a result of past events and
2 conditions that must be present for
the recognition of a liability
C. INCOME RECOGNITION PRINCIPLE
Income shall be recognized when earned.
2 conditions that must be present for
the recognition of income
1. It is probable that future economic benefits
will flow to the entity as a result of an increase
in an asset or a decrease I a liability.
2. The economic benefits can be measured
reliably.
POINT OF SALE
Point of income recognition, point of
delivery
REVENUE FROM SALE OF GOODS
The following conditions should be present for
the revenue from sale of goods
A. The entity has transferred to the buyer the
significant risks and rewards of ownership of
the goods.
B. the entity retains neither continuing
managerial involvement nor effective control
over the goods sold.
C. the amount of revenue can be measured
reliably.
D. it is probable that economic benefits
associated with the transaction will flow to the
entity.
E. the costs incurred or to be incurred in
respect of the transaction can be measured
reliably.
REVENUE FROM RENDERING OF SERVICES
The following conditions should be present for
the revenue from rendering of services
A. the amount of revenue can be measured
reliably.
B. it is probable that economic benefits
associated with the transaction will flow to the
entity.
C. the stage of completion of the transaction at
the end of reporting period can be measured
reliably.
D. the costs incurred for the transaction and
the costs to complete can be measured
reliably.
EXCEPTIONS TO THE POINT OF SALE
1. INSTALLMENT METHOD
Revenue is recognized at the point of
collection.
AMT OF REVENUE = GROSS PROFIT RTE x
AMOUNT OF COLLECTION
2. COST RECOVERY METHOD or SUNK
COST METHOD
Revenue is recognized at the point of
collection.
3. CASH METHOD
Revenue is recognized when received
regardless of when earned.
4. PERCENTAGE OF COMPLETION METHOD
When the outcome of a construction
contract can be estimated reliably,
contract revenue and contract costs
associated with the construction contract
shall be recognized as revenue and
expenses, respectively, by reference to
the stage of completion of the contract
activity.
5. PRODUCTION METHOD
Revenue is recognized at the point of
production
OTHER INCOME RECOGNITION
INTEREST REVENUE
Recognized on a time proportion basis
that takes into account the effective yield of
the asset
ROYALTIES
Recognized in an accrual basis in
accordance with the substance of the relevant
agreement.
DIVIDENDS
Recognized when the shareholder’s right
to receive payment is established, when
dividends are declared.
INSTALLATION FEES
Recognized over the period of
installation by reference to the stage of
completion.
SUBSCRIPTION REVENUE
Recognized on a straight line basis over
the subscription period.
ADMISSION FEES
Recognized when the event takes place.
TUITION FEES
Recognized over the period in which
tuition is provided.
EXPENSE
Decrease in economic benefit during the
accounting period in the form of an outflow or
decrease in asset or increase in liability that
result in decrease in equity, other than
distribution to equity participants.
Expenses that arise in the course of
ordinary regular activities include cost of
sales, wages and depreciation.
LOSSESS do not arise in the course of ordinary
regular activities and include losses resulting
from disasters
D. EXPENSE RECOGNITION PRINCIPLE
Expenses are recognized when incurred.
Conceptual framework: expenses are incurred
when it is probable that a decrease in future
economic benefits related to decrease in an
asset or an increase in liability has occurred
and that the decrease in economic benefits can
be measured reliably.
1. CAUSE AND EFFECT ASSOCIATION
Expense is recognized when revenue is
recognized.
2. SYSTEMATIC AND RATIONAL
ALLOCATION
Some costs are expensed by simply
allocating them over the periods benefited.
3. IMMEDIATE RECOGNITION
The cost incurred is expensed outright
because uncertainty of future economic
benefits or difficulty of reliably associating
certain costs with future revenue.
An expense is recognized immediately
when:
C. REALIZABLE VALUE or CURRENT
SALE EXCHANGE PRICE
The amount of cash or cash equivalent that
could currently be obtained by selling the
asset in an orderly disposal.
E. PRESENT VALUE or FUTURE
EXCHANGE PRICE
The discounted value of the future net cash
inflows that the asset is expected to
generate in the normal course of business.
FIANANCIAL ACCOUNTING CHAPTER 5
FINANCIAL STATEMENTS are the means
by which information accumulated and
processed in financial accounting is
communicated to the users.
MEASUREMENT OF ELEMENTS
MEASUREMENT is the process of determining
the monetary amounts at which the elements
of the financial statements are to be
recognized and carried in the statement of
financial position and income statement.
2 conditions that must be present for
the recognition of income
1. It is probable that a decrease in future
economic benefits has occurred as a result of a
decrease in an asset or an increase in a
liability.
2. The decrease in economic benefits can be
measured reliably.
MATCHING PRINCIPLE
Those costs and expenses incurred in
earning a revenue shall be reported in the
same period.
33 APPLICATIONS
1. When an expenditure procedure
produces no future economic benefit.
2. When cost incurred does not qualify or
ceases to qualify for recognition as an
asset.
OBJECTIVE OF FINANCIAL STATEMENTS
To provide information about the
financial position, financial performance,
and cash flows of an entity that is useful to
a wide range of users in making economic
decisions.
MEASUREMENT BASES
A. HISTORICAL COST or PAST
PURCHASE EXCHANGE PRICE
The amount of cash or cash equivalent paid
or the fair value of the consideration given
to acquire an asset at the time of
acquisition.
B. CURRENT COST or CURRENT
PURCHASE EXCHANGE PRICE
The amount of cash or cash equivalent that
would have to be paid if the same or
equivalent asset was acquired currently.
COMPONENTS OF FINANCIAL
STATEMENTS
1. Statement of financial position
Formal statement showing the three
elements comprising financial position,
namely assets, liabilities
and equity.
ASSET
Resource controlled by the entity as a
result of past events and from which future
economic benefits are expected to flow the
entity.
Essential characteristics of an asset
1. The asset is controlled by the entity
2. The asset is the result of a past transaction
or event.
3. The asset provides future economic benefits
4. The cost of the asset can be measured
reliably.
Classifications of asset
CURRENT ASSETS
PAS 1 paragraph 66 provides that an
entity should classify asset as current asset
when:
a. The asset is cash or cash equivalent unless
the asset is restricted from being exchanged or
used to settle a liability for at least 12 months
after the reporting period.
b. The entity holds the asset primarily for the
purpose of trading.
c. The entity expects to realize the asset within
twelve months after the reporting period.
D. the entity expects to realize the asset or
intends to use or consume it within the entity’s
operating cycle.
PAS 1 paragraph 54, the line items under
current assets are:
A. cash and cash equivalents
B. financial assets at fair value such as
trading securities and other investments
in quoted equity instruments.
C. trade and other receivables
D. inventories
E. prepaid invent
PAS 1 paragraph 66 states that an
entity shall classify all other assets not
classified as current as noncurrent.
NONCURRENT ASSETS include
A. PROPERTY, PLANT AND EQUIPMENT
PAS 16 paragraph 6, tangible assets
which are held by an entity for use in
production or supply of goods and services, for
rental to others, or for administrative purposes,
and are expected to be used during more than
one period.
B. LONG-TERM INVESTMENTS
IASC defines investment as an asset
held by an entity for the accretion of wealth
through capital distribution, such as interest,
royalties, dividends and rentals, for capital
appreciation or for other benefits to the
investing entity such as those obtained through
trading relationships.
C. INTANGIBLE ASSETS
An identifiable nonmonetary asset
without physical substance.
D. DEFERRED TAX ASSETS
E. OTHER NONCURRENT ASSETS
Assets that do not fit in the definition of
noncurrent assets.
LIABILITY
Present obligation of an entity arising
from past events, the settlement of which is
expected to result in an outflow from the entity
of resources embodying economic benefits.
Essential characteristics of a liability
NONCURRENT ASSETS
a. The liability is the present obligation of a
particular entity.
b. The liability arises from past transaction or
event.
C. the settlement of the liability requires an
outflow of resources embodying economic
benefits.
CURRENT LIABILITIES
PAS 1 paragraph 69 provides that an
entity should classify a liability as current
when:
A. The entity expects the liability to settle
within the entity’s normal operating cycle.
B. the entity holds the liability primarily for the
purpose of trading.
C. the liability is due to be settled within 12
months after the reporting period.
D. the entity does not have an unconditional
right to defer settlement of the liability for at
least 12 months after the reporting period.
PAS 1 paragraph 54, the line items under
current liability are:
a. Trade and other receivables
B. current provisions
c. Short term borrowing
D. current portion of long term debt
E. current tax liability
NONCURRENT LIABILITIES
PAS 1 paragraph 69 states that an entity
shall classify all liabilities not classified as
current are classified as noncurrent.
A. noncurrent portion of a long term debt
B. finance lease liability
C. deferred tax liability
D. long term obligations to company
officers
E. long term deferred revenue.
EQUITY
Residual interest in the assets of the
entity after deducting all of its liabilities.
PAS 1 paragraph 7
The holders of instruments classified as
equity are OWNERS.
SHAREHOLDER’S EQUITY
Is the residual interest of owners in the
net assets of a corporation measured by the
excess of assets over liabilities.
PHILIPPINE TERM
Capital Stock
Subscribed Capital
Stock
Preferred Stock
Common Stock
Additional Paid In
Capital
Retained Earnings
(deficit)
Retained Earnings
Appropriated
Revaluation Surplus
Treasury Stock
IAS TERM
Share Capital
Subscribed Share
Capital
Preference Share
Capital
Ordinary Share Capital
Share Premium
Accumulated Profits
(Losses)
Appropriated Reserve
Revaluation Reserve
Treasury Share
NOTES TO FINANCIAL STATEMENTS
Provide narrative description or
disaggregation of items presented in the
financial statements and information about
items that do not qualify for recognition.
Purpose: to provide the necessary disclosures
required by PFRS.
FORMS OF FINANCIAL POSITION
A. REPORT FORM
This form sets form the three major sections in
a downward sequence of assets, liabilities and
equity.
B. ACCOUNT FORM
The assets are shown on the left side and the
liabilities and equity on the right side of the
balance sheet.
PAS 1, paragraph 54, balance sheet line
items
1. Cash and cash equivalents
2. Financial assets
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by
the equity method
7. Intangible assets
8. Investment property
9. Biological asset
10. Total assets classified as held for sale and
assets included in disposal group classified as
held for sale
11. Trade and other payables
12. Current tax liabilities
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities
16. Liabilities included in disposal group
classified as held for sale
17. Noncontrolling assets
18. Share capital and reserves
2. Statement of comprehensive income
COMPREHENSIVE INCOME
The change in equity during a period
resulting from transactions and other events,
other than changes resulting from transactions
with owners in their capacity as owners.
Includes:
A. components of profit or loss
Profit or loss
The total income less expenses,
excluding the components of other
comprehensive income.
B. components of other comprehensive
income
OTHER COMMPREHENSIVE INCOME
Comprises items of income and
expenses including reclassification adjustments
that are not recognized in profit or loss as
required or permitted by PFRS.
Components:
A. OCI that will be reclassified subsequently to
profit or loss when specific conditions are met.
1. Unrealized gain or loss on equity
investment measured at fair value
through other comprehensive income.
2. unrealized gain or loss on debt
investment measured at fair value
through other comprehensive income.
3. Gain or loss from translation of the
financial statements of a foreign
operation.
B. OCI that will not be reclassified subsequently
to profit or loss
4. revaluation surplus during the year.
5. Unrealized gain or loss from derivative
contracts designated as cash flow
hedge.
6. “remeasurements” of defined benefit
plan, including actuarial gain or loss.
7. Change in fair value attributable to
credit risk of a financial liability
designated at fair value through profit or
loss.
Presentation of other comprehensive income
PAS 1 paragraph 82A, provides that the
statement of comprehensive income shall
present line items for amounts of other
comprehensive income during the period
classified by nature.
The line items for amounts of OCI shall be
grouped as follows.
PRESENTATION OF COMPREHENSIVE
INCOME
3. Income statement
A formal statement showing the financial
performance of an entity for a given period of
time.
SOURCES OF INCOME
Sales of merchandise to customers
Rendering of services
Use of entity resources
Disposal of resources other than products
COMPONENTS OF EXPENSE
A. Cogs or cos
B. Distribution costs or selling expenses
C. Administrative expenses
D. Other expenses
E. Income tax expense
DISTRIBUTION COSTS constitute costs which
are directly related to selling, advertising and
delivery of goods to customers.
1. TWO STATEMENTS
A. An income statement showing the
components of profit or loss.
B. A statement of comprehensive
income beginning with profit or loss
as shown in the income statement
plus or minus the components of
other comprehensive income
2. SINGLE STATEMENT OF
COMPREHENSIVE INCOME
This is the combined statement showing
the components of profit or loss and
components of other comprehensive
income in a single statement.
ADMINISTRATIVE EXPENSES constitute cost
of administering the business. These ordinarily
include all operating expenses not related to
selling and cost of goods sold.
OTHER EXPENSES are those expenses which
are not directly related to the selling and
administrative function.
PAS 1 paragraph 87
An entity shall not present any items of
income and expense as extraordinary items,
either on the face of the income statement or
the statement of comprehensive income or in
the notes.
PAS 1 paragraph 82, Income statement and
statement of comprehensive income line items.
A. Revenue
B. Gain and loss from the derecognition of
financial asset measured at amortized cost as
required by PFRS 9
C. Finance Cost
D. Share in income or loss of associate and
joint ventures accounted for using equity
method
E. Income tax expense
F. A single amount comprising discontinued
operations
G. Profit or loss for the Period
H. Total Other Comprehensive income
I. Comprehensive incoe for the period being the
total of profit or loss and other comprehensive
income.
The following items shall b disclosed on the
face of the income statement and statement of
comprehensive income:
A. profit or loss for the period
attributable to noncontrolling interest and
owners of the parent
B. total comprehensive income for the
period attributable to noncontrolling interest
and owners of the parent.
FORMS OF INCOME STATEMENT
PAS 1 paragraph 99. An entity shall present
an analysis of expenses recognized in profit or
loss using in classification based on either the
function of expenses or their nature within the
entity, whichever provides information that is
more reliable and more relevant.
2 ways to present an income statement
1. FUNCTIONAL PRESENTATION/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.
2. NATURAL PRESENTATION/NATURE
OF EXPENSE METHOD
Expenses are aggregated according to
their nature and not allocated among
the various functions within the entity.
PAS 1 paragraph 105
Because each presentation has merit for
different types of entities, management is
required to select the presentation that is
reliable and more relevant.
STATEMENT OF RETAINED EARNINGS
Shows the changes affecting directly the
retained earnings of an entity and relates the
income statement to the statement of financial
position.
Should be disclosed in the statement of
retained earnings:
A. Profit or loss for the period
B. prior period errors
C. dividends declared and paid to shareholders
D. effect of change in accounting policy
E. appropriation of retained earnings
4. Statement of changes in equity
Shows the movements in the elements
or components of the shareholders equity
5. Statement of cash flows
Summarizes the operating, investing and
financing activities of an entity.
6. Notes, comprising a summary of
significant accounting policies and
other explanatory notes