Financial Accounting chapter 1
measurement of economic resources and economic
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
STATEMENTS.
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
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.
 Controller - Highest accounting officer. ACCOUNTING VS AUDITING

1. PUBLIC ACCOUNTING 3. GOVERNMENT ACCOUNTING ACCOUNTING AUDITING

Broad Embraces One of the areas of
Composed of individual practitioners, small sense auditing. Accounting
accounting firms and large multinational organizations FOCUS: the study and administration of public specialization.
that render independent and expert financial services to funds. Limited CONSTRUCTIVE ANALYTICAL
the public. Encompasses the process of analyzing, Sense Ceases when Work starts when
classifying, summarizing and communicating ball financial the work of the
A. External Auditing / Auditing statements are accountant ends.
transaction involving the receipt and disposition of
- Primary service. prepared.
government funds and property and interpreting
Examination of financial statements by the results thereof.
independent CPAs for the purpose of expressing an AUDITOR – examines the financial statements to
opinion as to the fairness with which the financial ascertain whether they are in conformity with the
4. CONTINUING PROFESSIONAL DEVELOPMENT (CPD) GAAP.
statements are prepared
Refers to the inculcation, assimilation and ACCOUNTING VS BOOKKEEPING
B. Taxation Service acquisition of knowledge, skill, proficiency, and ethical and
Includes the preparation of annual income tax moral values after the initial registration of the CPA. ACCOUNTING BOOKKEPING
CONCEPTUAL PROCEDURAL
returns and determination of tax consequences of certain CPD credit units shall be 60 credit units for three Concerned with reason Concerned with development
proposed business endeavors. years. or justification or any and maintenance of
action adapted. accounting record.
C. Management Advisory Services
EXEMPTIONS: ‘HOW’
Include advice on installation of computer system,
1. 65 years old
quality control, installation and modification of accounting ACCOUNTING VS ACCOUNTANCY
system, budgeting, forecasting, design or modification of TEMPORARY EXEMPTIONS:
retirement plans and even entity mergers and takeovers. ACCOUNTANCY ACCOUNTING
1. The CPA is practicing the profession or Refers to the profession of Used in reference only to a
2. PRIVATE ACCOUNTING furthering studies abroad. accounting practice. particular field of
2. The exemption is for the duration of stay accountancy
OBJECTIVE: to assist management in planning and abroad.
controlling the entity’s operation. 3. The CPA has been out of the country for at
Includes maintaining the records, producing the least 2 years immediately prior to the date of
financial reports, preparing the budgets and controlling renewal of license and accreditation.
and allocating the resources of the entity.
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
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 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 INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE
STANDARS THAT WILL be generally accepted in the (June 1973)
Philippines.
An independent private sector body, with the
objective o achieving uniformity in the accounting
PAS and FRSC – approved statements of the FRSC.
principles which are used by business and other
1 CHAIRMAN – had been or is presently a senior organizations for financial reporting around the world.
accounting practitioner. (INTERNATIONAL ACCOUNTING STANDARDS)
BOA 1 OBJECTIVES:
SEC 1
BSP 1 1. To formulate and publish in the public interest
BIR 1 accounting standards to be observed in the
COA 1 presentation of financial statements and to
FINEX 1 promote their worldwide acceptance and
observance.
PUBLIC PRACTICE 2
2. To work generally for the improvement and
COMMERCE AND 2
harmonization of regulations, accounting
INDUSTRY
standards, and procedures relating to the
ACADEME 2
presentation of financial statements.
GOVERNMENT 2
INTERNATIONAL ACCOUNTING STANDARDS BOARD
*3 years term renewable for another term
*any member of the ASC shall not be disqualified from Replaced the IASC.
being appointed to the FRSC Intended to bring about greater TRANSPARENCY
and a higher degree of COMPARABILITY in financial
PHILIPPINE INTERPRETATIONS COMMITTEE reporting.
Formed by the FRSC (AUG 2006) and replaced the (INTERNATIONAL FINANCIAL REPORTING
Interpretations committee (formed by the ASC in MAY STANDARDS)
2000)
Role: to prepare interpretations of PFRS for PHILIPPINE FINANCIAL REPORTING STANDARDS
approval by the FRSC and in the context of the conceptual 1. IFRS=PFRS
framework, to provide timely guidance on financial 2. IAS = PAS
reporting issues not specifically addressed in the PFRS. 3. IC = PI
FINANCIAL ACCOUNTING CHAPTER 2
ACCOUNTING ASSUMPTIONS/ POSTULATES are the basic
notions or fundamental premises on which the accounting
process is based.
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.
2. ACCOUNTING ENTITY
The entity is separate from the owners, managers
and employees who constitute the entity.
To have fair presentation of financial statements.
3. TIME PERIOD
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.
4. MONETARY UNIT
2 aspects – quantifiability and stability of peso.
QUANTIFIABILITY ASPECT – The assets, liabilities, equity,
income, and expenses should 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.
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
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
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.
Objective of financial reporting
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
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.
Fundamental qualitative characteristics
1. Relevance
The capacity of the information to influence a
decision.
Financial information has PREDICTIVE VALUE if it
can be used as an input to processes employed by users to
predict future outcome.
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.
The ELEMENTS directly related to the measurement of
FINANCIAL POSITION in the statement of financial position
are :
a. ASSET
b. LIABILITY
c. EQUITY
The ELEMENTS directly related to the measurement of
FINANCIAL PERFORMANCE in the income statement are :
a. INCOME
b. EXPENSE
EQUITY is the residual interest in the assets of the entity
after deducting all of the liabilities.
RECOGNITION OF ELEMENTS
RECOGNITION means the reporting of an asset, liability,
Income or expense n the face of the financial statements
of an entity.
A. ASSET RECOGNITION PRINCIPLE
ASSET – a resource controlled by the entity as a
result of past events and 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.
FUTURE ECONOMIC BENEFIT
The potential to contribute directly or indirectly
to the flow of cash and noncash equivalents to the entity.
COST PRINCIPLE
Asset should be recorded initially at original
acquisition cost.
In a CASH TRANSACTION, cost is equivalent to cash
payment.
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
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.
2 conditions that must be present for the recognition
of a liability
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.
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.
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. 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:
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.
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.
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.
 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.
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
NONCURRENT ASSETS
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
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 NOTES TO FINANCIAL STATEMENTS 16. Liabilities included in disposal group classified as held
for sale
NONCURRENT LIABILITIES Provide narrative description or disaggregation of 17. Noncontrolling assets
PAS 1 paragraph 69 states that an entity shall classify items presented in the financial statements and 18. Share capital and reserves
all liabilities not classified as current are classified as information about items that do not qualify for
noncurrent. recognition. 2. Statement of comprehensive income

A. noncurrent portion of a long term debt Purpose: to provide the necessary disclosures required by COMPREHENSIVE INCOME
B. finance lease liability PFRS. The change in equity during a period resulting
C. deferred tax liability from transactions and other events, other than changes
D. long term obligations to company officers FORMS OF FINANCIAL POSITION resulting from transactions with owners in their capacity
E. long term deferred revenue. as owners.
A. REPORT FORM
EQUITY This form sets form the three major sections in a Includes:
Residual interest in the assets of the entity after downward sequence of assets, liabilities and equity. A. components of profit or loss
deducting all of its liabilities.
B. ACCOUNT FORM Profit or loss
PAS 1 paragraph 7 The assets are shown on the left side and the liabilities and The total income less expenses, excluding the
The holders of instruments classified as equity are equity on the right side of the balance sheet. components of other comprehensive income.
OWNERS.
PAS 1, paragraph 54, balance sheet line items B. components of other comprehensive income
SHAREHOLDER’S EQUITY
Is the residual interest of owners in the net assets 1. Cash and cash equivalents OTHER COMMPREHENSIVE INCOME
of a corporation measured by the excess of assets over 2. Financial assets Comprises items of income and expenses including
liabilities. 3. Trade and other receivables reclassification adjustments that are not recognized in
4. Inventories profit or loss as required or permitted by PFRS.
PHILIPPINE TERM IAS TERM 5. Property, plant and equipment
Capital Stock Share Capital 6. Investment in associates accounted for by the equity Components:
Subscribed Capital Stock Subscribed Share Capital method
Preferred Stock Preference Share Capital 7. Intangible assets A. OCI that will be reclassified subsequently to profit or
Common Stock Ordinary Share Capital 8. Investment property loss when specific conditions are met.
Additional Paid In Capital Share Premium 9. Biological asset
Retained Earnings (deficit) Accumulated Profits 10. Total assets classified as held for sale and assets 1. Unrealized gain or loss on equity investment
(Losses) included in disposal group classified as held for sale measured at fair value through other
Retained Earnings Appropriated Reserve 11. Trade and other payables comprehensive income.
Appropriated 12. Current tax liabilities 2. unrealized gain or loss on debt investment
Revaluation Surplus Revaluation Reserve 13. Deferred tax asset and deferred tax liability measured at fair value through other
Treasury Stock Treasury Share 14. Provisions comprehensive income.
15. Financial liabilities 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
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.
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.
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