Financial Accounting Valix summary 1-7

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