Studied by 3 peoplepurpose of conceptual framework
to narrow differences in financial reporting of different entities through regulations, accounting standards, and procedures in preparation
IASB
International Accounting Standards Boards
IFRS
International Financial Reporting Standards, set by IASB
primary users
existing and potential investors, lenders, creditors, they are able to make appropriate economic decisions given the information
other users
employees, government agencies, the public
necessary information in financial statements
financial position, financial performance, cash flows, changes in equity, other supplementary information
financial position
data on economic resources controlled by enterprise and its capacity to modify these resources; includes company liquidity and solvency
assets, liabilities, and equity
financial performance
data on profitability which provide evaluation on potential changes in economic resources and information on company capacity to generate cash flows
cash flows
helps assessing the company’s investing, financing, and operating activities
changes in equity
changes in asset and liability balances and the effect on the equity balance of operational activities
two fundamental qualitative characteristics of use financial information
relevance and faithful representation
two values from the relevance of a financial statement
confirmatory value and predictive value
three qualities of faithful representation
completeness, neutrality, freedom from error
predictive value
if the information can help users predict future outcomes
confirmatory value
if the information confirms or changes previous evaluations (predictions)
materiality
information that influences decisions of the primary users; entity-specific aspect of relevance based on the nature and/or magnitude
complete depiction
includes all information necessary for a user to understand the phenomenon being depicted
neutral depiction
without bias in the selection or presentation of financial information; supported by prudence
prudence
exercise of caution when making judgements under conditions of uncertainty, assets and income are not overstated and liabilities and expenses are not understated
freedom from error
no errors or omissions in the description of the phenomenon
four ways to enhance qualitative characteristics of financial statements
verifiability, comparability, understandability, timeliness
direct verification
through direct observation, counting cash
indirect verification
checking inputs to a model, formula, or other technique and recalculating the outputs using the same methodology
verifiability
assures users that information faithfully represents the economic phenomena it purports to represent
comparability
enables users to identify and understand similarities in, and differences between items
consistency
not the same as comparability; use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities
Comparability is the goal; consistency helps to achieve that goal.
understandability
Classifying, characterizing and presenting information clearly and concisely makes it understandable.
problem with understandability
complex phenomena cannot be made easy to understand
omission of reports to make it understandable could make it misleading
financial reports are made for users knowledgeable though they may still even need an adviser
timeliness
having information available to decision-makers in time to be capable of influencing their decisions.
The Cost Constraint Principle
Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information
cost<=benefits
Materiality Constraint
information that is significant enough to affect a user’s decision making. The level of materiality is relative to each user. the constraint is in making informed decisions, one should only consider using an information if it is material enough to be included in making informed decisions.
what are provided in financial statements in a specified reporting period
Assets and liabilities (including unrecognized assets and liabilities) and equity that existed at the end of the reporting period, and income and expenses for the reporting period
fiscal year vs calendar year
accounting period of twelve (12) months ending on the last day of any month other than December
accounting period of twelve (12) months ending on December 31
The Going Concern Principle
assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future.
elements of financial statements under “statements of financial positions”
assets, liabilities, equity/capital
asset
resource controlled by the entity as a result of past events from which future benefits would flow to the entity
liabilities
present obligations arising from past events which its settlement would cause outflow of resources
financial obligation that a entity has to pay at the end of an accounting period to a person or a business as a result of past events
equity/capital
residual interest in the assets of the entity after deducting all its liabilities.
elements of financial statements under “statement of comprehensive income”
income and expenses
income
increase in economic benefits 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.
includes revenues and gains
expense
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.
includes expenditures and losses
t-accounts
illustration of basic accounting equation, representing increase and decreases of each account, and its total balance
to aid in preparation for financial statements
what does the left and right portion of the account contain?
left: debit (asset, expense)
right: credit (liabilities, equity, income)
normal balance
Account balance- difference between total debits and total credits
Usual balance assuming proper accounting has been made
If total debits exceed total credits, the account balance is called a debit balance, otherwise, it is called a credit balance.
journal vs ledger
journal- systematic and chronological record of all transactions; “Books of Original Entry”
ledger- entire set of accounts where transactions are summarized in individual accounts; “Book of Final Entry”
steps of the accounting cycle
transactional analysis
journal entry
ledger posting
trial balance
adjusting entries
10-column worksheet
financial statement
closing entry
post-closing trial balance
transaction analysis
involves analysis of proper selection and classification of the accounts involved, possible effects of transactions on a business' assets, liabilities, equity
journalizing transaction
summarizes the normal balances on each element of the financial statement
- ex: purchase of assets on account result to increase in asset and increase in liability
double-entry bookkeeping system
dual effects of a business transaction is recorded
for every debit entry, there must be a corresponding credit entry
business entity
businesses are considered distinct and separate from the owners of the business
accounting entity
an organization or section of an organization that is accounted for as a separate economic unit
matching principle
profit or loss that is computed by deducting the expenses incurred from the income earned during an accounting period
monetary unit
assumes that the business events are quantifiable in those terms
historical cost
most commonly and objectively used measurement,
cash or its equivalents that was given up to acquire the assets
amount of proceeds, cash or its equivalents in exchange for the obligation that is expected to be paid to satisfy the liability
revenue recognition principle
method to determine whether or not income has met conditions of being earned and realized
sale of goods- revenues recorded at date of delivery or receipt
sale of service- revenue recorded at completion of service or important progress if service is meant for a long period
materiality principle
information is material if omitting or misstating it could influence the decision of users
cost-constraint
cost must be justified by the perceived benefits from reporting and using the information
simple vs compound journal entry
simple entry- only one account is debited; one account is credited
compound entry- more than one account is involved in either both the debit and credit
chart of accounts
list of all accounts and their respective account numbers
six basic end-of-period adjustments
accrued expense
accrued income
prepaid expense
unearned income
depreciation
doubtful accounts
accrual method
recognize the asset and liability; only recognize expense and income once there is the delivery of goods or service
deferral method
recognize when payment is given or provided, make adjustments for when goods and services are delivered
prepayment
in the perspective of the customer to receive the goods or service; either asset or expense method; accrued expense and deferred expense
precollection
in the perspective of the seller to deliver the goods or service; accrued income and deferred expense
depreciation
normal wearing out or loss of usefulness of a long-term asset
residual value
at the end of the economic useful life of the asset, it may still command a price
straight line method
method for determining depreciation,
annual depreciation = (cost-residual value)/useful life
accumulated depreciation
contra-asset account, provides retainment of the cost of depreciation while allowing for continual depreciation
carrying value or book value
difference between asset’s cost and the accumulated depreciation
doubtful accounts or bad debts
existing customer credits which a company doubts would ever be settled and rather considers it as uncollectible in the future
direct write-off method
expense attributed to the doubtful account is recorded by direct transfer from asset to expense account
allowance method
allowance as contra-account for doubtful accounts to accumulate uncollectible accounts
worksheet
columnar device to facilitate preparation of financial statements to transfer data from trial balance to the financial statements
content statement of comprehensive income
revenues, expenses, miscallenous expense, finance cost (interest expense, interest income, income tax expense)
content of statement of changes in equity
beginning of balance of equity, additional investments, profit or loss, withdrawals, ending balance of equity
contents of statement of financial position
formal statement of the assets, liabilities, and owner’s equity as of given date
closing entries
separate accounts for income, expense, and withdrawal are set to facilitate in preparation of income statement (profit or loss) and would be closed to the equity account
procedure for closing nominal accounts
income summary
debit income and credit income summary
credit expense and debit income summary
closing income summary
conclude whether it is a profit or loss balance
profit: debit withdrawal
loss: credit withdrawal
capital accounting
debit withdrawal; credit to capital (would increase equity)
credit withdrawal; debit to capital (would decrease equity)
post-closing trial balance
to check equality of debits and credits in the ledger after adjusting and closing entries
business
organization formed to engage in commercial transactions and exchange of goods and/or services with the primary objective of earning profit
forms of business enterprise
service, merchandising, manufacturing
service business
sale of services to customers; main way of generating revenue is through charging fees
merchandising business
trading of goods by simply buying the goods and selling the same to its customers; they earn revenue by imposing mark-ups from the supplier
manufacturing business
sale of finished goods which were processed by the enterprise itself; involves purchase of material and labor with the transformation
legal forms of businesses
sole proprietorship, partnership, corporation
sole proprietorship
owned by proprietor, minimal regulatory from Department of Trade and Industry (DTI)
partnership
owned by partners, regulated by Securities and Exchange Commission (SEC), involves 2 or more persons, profit is divided according to agreement, can dissolve through agreement, withdrawal, death or incapacity
limited partnership
lower share to business profit and lower risk of business loss
general professional partnership
partnership for exercise of profession are exempt from income tax, while general partnerships are taxable as a corporation
corporation
owned by stockholders or shareholders (min. of 2), created by operation of law and its purposes provided, regulated by Securities and Exchange Commission (SEC), managed by Board of Directors, greatest capacity to raise capital, distribution of profit to stockholders through dividends
one person corporation
corporation with one person as stockholders
inventories
assets of an enterprise that are:
held for sale in the ordinary course of business
in the form of production for such sales, or
in the form of materials or supplies to be consumed in the production process or in the rendering of services
property, plant, equipment (PPE)
tangible items that are:
held for use in the production or supply of goods and services, for rental to others or for administrative purposes
expected to be used during more than one period
supplies
items used to carry out tasks in a company’s operations outside of manufacturing, production, or plant
current assets consumed within a 1 year period
inventory accounts maintained by merchandising entities
inventory of goods for sale (merchandise inventory)
inventory accounts maintained by manufacturing entities
inventory of raw materials (materials or raw materials inventory)
inventory of goods undergoing manufacturing (work-in-progress inventory)
inventory of goods ready and available for sale (finished goods inventory)
how can inventory of a service business be presented
inventories referring to direct materials usable in rendition of services (although some companies refer to them as supplies instead)
cost of inventory
purchase cost
conversion costs
other costs
what are the other costs of inventory
those costs necessary to bring inventories to their present location and condition
storage costs after delivery or completion
insurance costs after delivery or completion
costs of purchase
purchase price
import duties and other direct taxes
transport and handling costs
Note
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