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City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e Program: Bachelor of Science in Accountancy Course Code: ACC 106 Course Title: Financial Accounting and Reporting Course Description: This course provides an introduction to accounting, within the context of business and business decisions. Students obtain knowledge of the principles and concepts of accounting as well as their application that will enable them to appreciate the production of accounting data. Emphasis is placed on understanding the reasons underlying basic accounting concepts and providing students with an adequate background on the preparation and presentation of financial statements as well as interpreting the contents thereof. Exposure through the use of practice sets, either manual or computerized system (MS Excel) in recording and reporting transactions for service trading firm is a requirement in this course. Course Learning Outcomes:
- Identify the components of the complete set of financial statements.
- Identify, categorize and explain the elements of the financial statement.
- Review the students’ basic knowledge in the preparation and presentation of financial statements.
- Preparation and presentation of financial statements.
- Preparation and presentation of a five-year projection of financial statements with supporting notes and schedules. Teaching and Learning Materials and Resources:
- Financial Accounting and Reporting by Aduana
- Conceptual Framework and Accounting Standards by Valix
- Partnership and Corporation by Ballada
- Basic Accounting by Ballada Learning Task:
- Read all chapters stated (TBA) from the prescribed book.
- Review with the powerpoint provided.
- Answer all activities to be given (TBA). Reference: The Accounting Cycle Explained:https://www.youtube.com/watch?v=aGSXZ6RHMnA IAS I Presentation of Financial Statements - https://www.youtube.com/watch?v=DlfQWi9T Statement of Financial Position - https://www.youtube.com/watch?v=GfLxnD7gDoE Statement of Comprehensive Income - https://www.youtube.com/watch?v=f4-2f7T4rp Statement of Changes in Equity - https://www.youtube.com/watch?v=x3bjr3JPedE IAS 7: Statement of Cash Flows - https://www.youtube.com/watch?v=NMubNKCQV0A
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e ACCOUNTING: It’s Nature and Concepts Accounting is:
- A service activity.
- An information system that measures, processes and communicates financial information about an economic entity.
- A process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.
- An art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of a financial character and interpreting the results thereof. Forms of Business Organizations Sole Proprietorship Partnership Corporation Ownership Single Owner called the proprietor. Owned by two or more persons Owned by stockholder Manner of Creation May operate without any formal organizing / operating procedure. Partner’s agreement Created by Law Funding Proprietor’s contribution Partner’s Contribution (money, property or industry) to a common fund. Through sales of shares of stocks. Extent of Liability Personally liable for all debts of the business. Personally liable for all debts of the business. Not personally liable for the corporation’s debts. Transfer of Ownership Must have consent from all partner’s Exercise right of succession. Conceptual Framework:
- Serves as a guide to in developing future x and as a guide to resolving issued.
- Not Philippine Financial Reporting Standards (PFRS).
- Does not define standards for any particular measurement or disclosure issue.
- In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e b. Systematic and Rational Allocation c. Immediate Recognition d. Non – Matching Principle Measurement
- Historical cost
- Current cost
- Realizable value
- Present value Concept of Capital
- Transaction approach
- Capital maintenance approach a. Financial Capital b. Physical Capital Presentation of Financial Statements Concept and Nature ➢ Philippine Accounting Standards (PAS 1) ➢ Became effective in the Philippines for annual periods beginning on or after January 1, 2005. ➢ Shall be applied to all general – purpose financial statements prepared and presented in accordance with the PFRS. Objectives of PAS 1
- To basis prescribe the for presentation of general – purpose financial statements.
- To ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities.
- To set out overall requirements for the presentation of financial statements, guidelines for their structures, and minimum requirements for their content. Scope
- Standard shall be applied by:
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e ✓ Entities that prepare and present general – purpose financial statements in accordance with the International Financial Reporting Standards. ✓ Entities whether or not they need to prepare consolidated financial statements or separate financial statements.
- General purpose financial statements ✓ It does not apply to special purpose financial statements. ✓ It does not apply to the structure and content of condensed interim financial statements prepared in accordance with PAS 34, Interim Financial Reporting. ✓ It does not deal with recognition, measurement, and disclosure of specific transactions and other events. Those concerns are dealt with in other standards and interpretations. ✓ It uses terminology that is suitable for profit – oriented entities, including public sector business entities. ✓ In the event with not – for – profit activities in the private sector, public sector, or government seek to apply PAS 1, they may need to amend the descriptions used for particular line-item s in the financial statements for the financial statement themselves. Purpose of Financial Statements Financial statements are structure representation of the financial position, financial performance, and cash flows of an entity. It also includes the notes which contains additional information. The Basic Objective : Communication
- Providing information about the following:
- Financial position
- Financial performance
- Cash flows
- Management stewardship of resources Complete Set
- Statement of Financial Position
- Statement of Comprehensive Income
- Statement of Changes in Equity
- Statement of Cash Flow
- Notes comprising a summary of significant accounting policies and other explanatory notes.
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e ✓ That for each period presented, financial impact of the departure from each item in the financial statements will have been reported in complying with the requirement. Framework prohibits Departure
- The entity shall disclose: ✓ The title of the standard in questions, the nature of the requirement, and the reason why management has concluded that complying with the requirements is misleading that it conflicts with the objectives of the financial statements. ✓ The adjustment to each item in the financial statements that management has concluded are necessary to achieve fair presentation. Management Consideration
- When assessing whether complying with a specific requirement in a standard or an interpretation will be so misleading that it will conflict with the objective of financial statements set out in the Framework, the management considers: ✓ Why the objective of the financial statement is not achieved in the particular circumstances. ✓ How the entity’s circumstances differ from those of other entities that comply with the requirement. Going Concern Guidelines:
- The management shall make an assessment of an entity’s ability to continue as a going concern.
- When there is significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed.
- When financial statements are not prepared on a going concern, that fact shall be disclosed along with the basis and reason
- Take into account all available information in assessing going concern assumption
- When an entity has a history of profitable operation and ready access to financial resources in times of need, a conclusion that the going – concern basis of accounting is appropriate without detailed analysis.
- The management should consider: ✓ Current and expected profitability ✓ Debt repayment schedules ✓ Potential sources of replacement financing
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e Accrual Basis Effects of transactions and events are recognized when they occur and not as cash that is received or paid and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Consistency of Presentation
- Instances of Change Statement Presentation: ➢ The principle of consistency is abandoned when: 1. Another presentation or classification will be more appropriate 2. Standard or an interpretation requires a change in presentation
- Conditions for change in presentation: ➢ The changed presentation provides information that is reliable and is more relevant to users of the financial statements. ➢ The revised structure is likely to continue, so that comparability is not impaired. Materiality and Aggregation
- Guidelines for materiality and aggregation:
- Omission or misstatement of items are material if they could influence (individually or collectively) the economic decision of the user.
- Materiality depends on the size and nature of the omission or misstatement.
- Each material class of similar items shall be presented separately in the financial statements.
- If a line item is not individually material, it is aggregated with other items.
- An item that is not sufficiently material to warrant separate presentation on the face of the financial statements may be sufficiently material to be presented separately in the note.
- The specific disclosure requirement need not be satisfied if the information is not material. Offsetting Assets, and liabilities, and income and expenses shall not be offset unless required or permitted by the standard. Comparative Information
- Comparison shall be included for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.
- Comparative information shall be disclosed with respect to the previous period for all amounts reported in the financial statements except when a standard or an interpretation permits or requires otherwise.
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e Selection and Application:
- When a standard or an interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the standard or interpretation.
- In the absence of a standard or an interpretation that specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. Factors to consider in the absence of a Standard:
- Adopt the accounting policy that result in information that is relevant to the economic decision – making needs of users.
- Apply the accounting policy that results in reliable financial statements.
- Consider the applicability of: ✓ The requirements and guidance in standard and interpretations dealing with similar and related issues. ✓ The definitions, recognition criteria, and measurement concepts of assets, liabilities and income and expenses.
- Consider the most recent pronouncement of other standard setting bodies. Changes in Accounting Policies:
- An entity shall change an accounting policy only if the change ✓ Is required by the standard or an interpretation. ✓ Results in the financial statement providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance, and cash flows.
- Application: ✓ An entity shall account for an change in accounting policy resulting from initial application of a standard in accordance with a specific transitional provision. ✓ An entity that changes an accounting policy upon initial application of a standard that does not include specific transitional provision applying to that change, or changes on accounting policy voluntarily, shall apply the changes retrospectively. ➢ Limitations of Retrospective application:
- Change in accounting policy should be handled retrospectively except:
- When it is impracticable to determine the period – specific effect on comparative information for one or more prior periods
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e
- presented
- When it is impracticable to determine the cumulative effect at the beginning of the current period to all prior periods. ✓ When an accounting policy is applied retrospectively, the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. Accounting Estimates An approximation of the number of items. Change in Accounting Estimates:
- An adjustment of the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset that results from the assessment of the present status of and expected future benefits and obligations associated with assets and liabilities. Treatment:
- The effect of change in accounting estimate is recognized prospectively by including it in profits or loss in:
- The period of change, if the change affects that period only.
- The period of the change and future period, if the change affects both. Disclosure:
- An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect in future periods when it is impracticable to estimate that effect. Accounting Errors Effect of mathematical mistakes, mistakes in applying accounting policies, oversight or misinterpretations facts and frauds. Prior Period Errors:
- Are omissions from, and misstatements in the entity’s financial statements for one or more prior periods arising from a failure to use, or a misuse of reliable information that: a. Was available when financial statements for those periods were authorized for issue.
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e Statement of Financial Position
- Shows the assets liabilities and equity of business entity as of a given date.
- Shows the entity’s financial condition as at a certain date. It includes line items that present the following amounts.
- Evaluates an entity’s liquidity, financial flexibility, ability to generate profits and its solvency.
- Liquidity: refers to the availability of cash in the near future after taking account of the financial commitment of the period.
- Financial Flexibility: ability to take effective actions to alter the amounts and timings of cash flows so that it can respond to unexpected needs and opportunities.
- Solvency: Availability of cash over the longer term to meet financial commitment as they fall due. Elements of Statement of Financial Position
Asset Liabilities Equity
Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Present obligations of the entity arising from past events, the settlement of which are expected to result in an outflow from the entity of resources embodying economic benefits. Residual interest in the assets of the entity after deducting all its liabilities. Recognition
- Is the process of incorporating in the statement of financial position an item that meets the definition of an element and satisfies the criteria for recognition set out in the framework.
- Criteria for recognition: ➢ It is probable that any future economic benefit associated with the item has a cost or value that can be measured with reliability. ➢ The item has a cost or value that can be measured with reliability. Line Items a. Property, plant and equipment b. Investment property c. Intangible assets
d. Financial assets (other than e,h, and i) e. Investment accounted for using the equity method f. Biological assets
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e g. Inventories h. Trade and other receivables i. Cash and cash equivalents j. Trade and other payables k. Provisions l. Financial liabilities m. Liabilities and assets for current tax
- The statement of financial position shall also include line items that present the following amounts: a. The total assets classified as held for sale and assets included in disposal groups properly classified as held for sale. b. Liabilities included in disposal groups properly classified as held for sale
- Additional line items shall be presented when such presentation is relevant to understanding the entity’s financial position. a. The nature and liquidity of assets b. The function of assets within the entity c. The amounts, nature, and timing of liabilities Assets Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Classification:
- Current Assets: ➢ It is expected to realize in, or is intended for sale or consumed in the entity’s normal operating cycle. ➢ It is held primarily for the purpose of being traded. ➢ It is expected to be realized within twelve months after the date of the statement of financial position. ➢ It is cash or cash equivalents unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the date of the statement of financial position ➢ Line Items: a. Cash and Cash Equivalents Cash ✓ Money - Includes undeposited cash collections in the form of bills and coins. On hand or in bank. Included only if they are considered legal tender and in circulation.
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e Categories: ➢ Financial Assets at Fair Value
- Classified as current assets
- Held for trading
- Those whose designation at initial recognition are at fair value through profit or loss
- investment in quoted equity instruments ➢ Financial Assets at Amortized Cost
- Classified as non-current assets
- It is intended to hold and collect contractual cash flows on a specified date.
- The contractual cash is solely for payment of principal and interest on the principal amount outstanding. c. Trade and other receivables Non derivative financial assets with fixed or determinable payments that are not quoted in an active market. Credit balances should not be offset and classified as liabilities. ✓ Trade Receivables - Arise from the ordinary course of business operations; collectible within one year or normal operating cycle of the business whichever is longer. ✓ Non - trade Receivables - Claims that do not arise from ordinary course of business operations. Disregards the one-year test. d. Inventories Classes of Inventories: ✓ Trading Business: Merchandise Inventory ✓ Manufacturing Business: Finished goods inventory; goods in process inventory; raw materials inventory PAS 2 defines inventories as assets: ✓ Held for sale in the ordinary course of business. ✓ In the process of production for such sale. ✓ In the form of materials or supplies to be consumed in the production process or in the rendering of service. Cost of Inventories
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e
- All cost of purchase, conversion, and other costs incurred in bringing the inventories to their present location and condition. ✓ Cost of purchase
- Includes purchase price, import duties, freight in, business taxes and other incidental cost to acquisition. Decreased by discounts, trade allowances and rebates. ✓ Cost of Conversion
- Includes direct materials, direct labor, and manufacturing overhead. Exclude abnormal amounts of wasted materials, labor and production cost. Storage cost unless necessary in the production before proceeding to the next stage of production.
- Administrative cost that do not contribute to bringing inventories to their present location and condition. ✓ Net Realizable Value
- Equal to the estimated selling price minus the estimated cost of completion and estimated cost to sell. ✓ Determination of Cost of Inventories e. Prepaid expenses Includes all prepayments made that are expected to be consumed within one year from the date of the statement of financial position. f. Miscellaneous Topics Foreign Currency ✓ Valued at current exchange rate; can be presented as current or non-current.
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e ✓ An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of PPE. ✓ Cost Model
- Carried at cost less any accumulated depreciation and any accumulated impairment loss. ✓ Revaluation Model
- Carried at revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment loss.
- Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ materially form that which will be determined using fair value at the date of the statement of financial position. Class of Property, Plant, and Equipment ✓ A grouping of assets of similar nature and sue in an entity’s operation. ✓ If an asset’s carrying amount is increased as a result of revaluation, the increase shall be credited directly to equity under revaluation surplus. ✓ Increases shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. ✓ If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. ✓ However, the decrease shall be debited to equity under revaluation surplus to the extent of any existing credit balance with respect to asset. b. Long – term investments Are assets held by an entity intended to accumulate wealth or resources by means of capital distribution in the form of royalties, interests, dividends, rentals, capital appreciation, or other benefits obtained through trading relationships with the intention of holding the investments for more than one year. c. Intangibles
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City Tel. No. (047) 224- 2089 loc. 314 T h i s L e a r n i n g M o d u l e i s E x c l u s i v e l y f o r G o r d o n C o l l e g e PAS 38 defines an intangible asset as an identifiable non – monetary asset without physical substance. Identifiability criterion: ✓ Is separable, arises from contractual or other legal rights. The definition of an intangible asset requires an intangible asset to be identifiable to distinguish it from goodwill. Recognition ✓ An intangible asset shall be recognized if:
- It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity.
- The cost of the asset can be measured reliably. ✓ An entity shall assess the probability of expected future expected economic benefits using reasonable and supportable assumptions that represent the management’s best estimate of the set of economic conditions that will exist over the useful life of the asset. Measurement ✓ Measure initially at cost. ✓ Subsequent measurement:
- Cost model or revaluation model as its accounting policy.
- If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there are no active market for those assets. Class of Intangible Assets ✓ Grouping of assets of similar nature and use in any entity’s operation. ✓ Broadly classified as identifiable and unidentifiable. ✓ The classes of intangible assets are disaggregated (aggregated) into smaller (larger) classes if these results in more relevant information for the users of the financial statements. d. Other non-current assets
