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INTRODUCTION TO

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FINANCIAL ACCOUNTING
H. E. SALENDREZ
2 LEARNING OBJECTIVES
After studying this chapter, you should be able to:
 Understand the basics of financial accounting, and the theories involved in
the field.
 Understand the basics of the generally accepted accounting principles as
stated by Financial Reporting Standards Council, and be able to apply them
in particular scenarios
 Differentiate and distinguish the different components of a complete set of
financial statements
 Learn the components of complete set financial statements
 Know the elements of financial statements that made up each components
 Understand the use and purpose of each financial statements
Primary Focus of Financial Accounting
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 Providing financial information to various


external users:

Investors Creditors Other external users


Investors Use different kinds  To predict
and future risk and
of information
creditors potential
Financial information,
information return of
conveyed through investments or
financial statements loans
and disclosures  Before
notes, is a key supplying
component of that capital to
information set. businesses
4 Financial Accounting and Reporting Standards

Provide guidelines that companies follow


when measuring and reporting financial
information.

Accounting information should help investors and


evaluate the amount,
amount timing, and uncertainty
of the enterprise’s future cash flows.
The Conceptual Framework
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Provides structure and direction to


financial accounting and reporting and
underlying foundation for Philippines
Financial Reporting Standards (PFRS).
(PFRS)

Purpose is to provide guidance to:


to
Users to better understand and apply the
PFRS.
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Conceptual Framework
Objective of financial reporting: To provide financial
information that is useful to capital providers

Recognition,
Measurement,
Qualitative and Presentation
Elements and Disclosure
Characteristics
Capital and
Capital Maintenance
Financial
Constraints Statements Continued
Objective of financial reporting
Recognition
7 Qualitative Provides relevance
Elements and faithful
Characteristics representation
Fundamental Financial Position
Assets Measurement
Relevance
Liabilities Measurement bases
Faithful representation
Equity Presentation and
Enhancing
Comparability Performance Disclosure
Verifiability Income
Capital and
Timeliness Expenses
Capital Maintenance
Understandability Concepts
Financial Statements
Statement of financial position
Statement of profit or loss and
Constraint other comprehensive income
Other statements and disclosures
Cost
Underlying assumption (going concern)
effectiveness
Reporting entity (boundary of entity)
Qualitative Characteristics of
8 Financial Reporting Information
9 Measurement bases
Measurement is the process of determining the monetary
amounts at which the elements of the financial
statements are to be recognised and carried in the SFP
& IS.
 Historical cost. Assets, liabilities and related income and
expenses are recorded at transaction price or other event
that gave rise to them.
 Current cost. Assets are carried at the amount of cash that
have to be paid if the same asset was acquired currently.
Liabilities are carried at the amount of cash that would be
required to settle the obligation currently.
10 Measurement bases
 Realizable value. Assets are carried at the amount of cash
that could currently be obtained by selling the asset in an
orderly disposal. Liabilities are carried at the amount of cash
expected to be paid to satisfy liabilities in the normal course
of business.
 Present value. Assets are carried at the present discounted
value of the future net cash inflows that is expected to
generate in the normal course of business. Liabilities are
carried at the present discounted value of the future net cash
outflows that are expected to be required to settle the
liabilities in the normal course of business.
Elements of Financial Statements
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An asset is an economic resource that a company has
control over and that arises from past events.
The definition of a liability consists of three components:
present obligation, obligation to transfer economic
resources, and past events.
Equity comprises the remaining interest in a company’s
assets after deducting liabilities.
Income (revenues and gains) comes about from increment
in assets or reduction in liabilities and leads to increases in
equity, except those pertaining to shareholder contribution.
Expenses (including losses) come about from reduction in
assets or increment in liabilities and result in decreases in
equity, except those pertaining to shareholder distributions.
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Financial Statements
Primary means of communicating financial
Primary
information to external parties.
Statement of Financial Position:
Position presents organized list
of assets, liabilities, and equity at a point in time.
Statement of Profit or Loss and Other Comprehensive
Income: summarizes the income-generating
income
activities that caused shareholders’ equity to
change and that were not a result of transactions
with owners. Presented either in a single, continuous
statement, or in two separate but consecutive
statements.
13 Financial Statements

Statement of Cash Flows:: summarizes and classifies


the transactions that caused cash to change.
Statement of Changes in Equity:
Equity discloses the events
that caused shareholders’ equity accounts to
change.
Notes to Financial Statements: contain accounting
policies and other explanatory information
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Statement of Financial Position
Statement of Financial Position: Usefulness
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Reports financial position at a point in time.


Provides an organized array of assets, liabilities,
Provides
and equity—classified by common
characteristics (e.g., current/noncurrent assets
and liabilities).
These classifications and related disclosure
These
notes provide useful information about:
–Liquidity:: ability to convert assets to cash.
–Long-term solvency:: ability to pay long-term
long debts.
Current Assets
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Current assets are assets expected to be converted to
Current
cash within the coming year or within normal operating
cycle of the business if it’s longer than one year.
Operating Cycle of Manufacturing/Merchandising Firm
1 Use cash to acquire inventory

2 Prepare inventory for sale to customers

3 Deliver inventory to customers

4 Collect cash from customers


Types of Current Assets
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Current assets are usually listed on the


Current
statement of financial position in the order of
their liquidity (ability or amount of time to be
converted to cash).
Typical current assets include:
Typical
• Cash and cash equivalents
• Short-term
term investments
• Receivables
• Inventories
• Prepaid expenses
Noncurrent Assets
18 Assets expected to provide economic
Assets
benefits beyond the next year or the
operating cycle.

Types of Noncurrent Assets


• Investments
• Property, Plant, and Equipment
• Intangible Assets
• Other Noncurrent Assets
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Liabilities
Represent obligations to other entities.
Current Liabilities
- Obligations that are expected to be satisfied
through the use of current assets or the
creation of other current liabilities.
liabilities
- Expected to be satisfied within one year or
the operating cycle, whichever is longer.
longer
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Current Liabilities

Types of current liabilities


Types
• Accounts
ccounts payable
• Notes payable
• Deferred
eferred revenues
• Accrued liabilities
• Currently maturing portion of long-term
long debt
Noncurrent Liabilities
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 Obligations that will not be satisfied in the next
year or operating cycle,
cycle whichever is longer.
 Impact on future cash flows and long-term
long
solvency is assessed by reporting payment
terms, interest rates, and other details in a
disclosure note.
 Types of noncurrent liabilities
• Long-term notes
• Bonds
• Pension obligations
• Lease obligations
Shareholders’ Equity
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Residual amount derived by subtracting liabilities fro
Residual
assets:
Assets − Liabilities = Shareholders’ Equity
Arises primarily from:
1. Issued capital
2. Retained earnings
Sometimes referred to as net assets or book value.
Sometimes
Includes other equity components such as treasury
Includes
shares, capital reserve, translation reserve, hedging
reserve, and other reserves arising from other
comprehensive income items.
items
The Statement of Profit or Loss and
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Other Comprehensive Income
Comprehensive Income
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• Provides a broader perspective of income and includes
all revenues, expenses, gains,
gains and losses for the period
– Includes net profit plus other changes in shareholders’
equity that do not represent transactions with owners
Comprehensive = Net + Other
Income Profit or Comprehensive
Loss Income
• Other comprehensive income (OCI) items:
– Revaluation surplus
– Unrealized holding gains and losses on investments
– Gains (losses) from post-employment
employment benefit plans
– Deferred gains (losses) on derivatives
– Foreign currency translation gains (losses)
(losses
Statement of Changes in Equity
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26 Statement of Changes in Equity
An entity shall present:
 total comprehensive income for the period;
 the effects change in accounting policy or accounting error, if
there is any;
 the amounts of transactions with owners, showing separately
contributions by and distributions to owners;
 the amount of dividends recognized as distributions to owners
during the period, and the related amount per share
 each class of contributed equity, the accumulated balance of
each class of other comprehensive income and retained
earnings
The Statement of Cash Flows
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Statement of Cash Flows (SCF)
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 Required for each period that statement of profit or
loss and other comprehensive income is presented.
 Provides information about the cash receipts and
cash disbursements of an enterprise.
– Cash refers to cash,
cash cash equivalents, and
restricted cash.
 Helpful in assessing future profitability, liquidity, and
long-term solvency.
Operating activities
Categories of Investing activities
transactions affecting
cash Financing activities
Primary Elements of the Statement of
29 Cash Flows
Operating Activities
Cash effects of elements
Reconciliation of Net
of net profit or loss Increase or Decrease in
Cash With the Change
Investing Activities in the Balance of the
Cash effects of acquisition
Cash Accounts
& sale of long-lived assets
Financing Activities Significant Noncash
Cash effects of share Investing and Financing
issuance/repurchase and Activities are disclosed
debt issuance/repayment in the notes to the
financial statements.
Cash Flows From Operating Activities
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Inflows from:
• Sales to customers.
• Interest and dividends
received from investments. +
Outflows for:
Cash
• Purchase of inventory. Flows
• Salaries, wages, and other From
operating expenses.
_ Operating
• Interest on debt.
• Income taxes. Activities
• Dividends paid.
Cash Flows From Investing Activities
31 Inflows from:
• Sale of long-lived
lived productive assets used
in the business.
• Sale of investment securities (except
cash equivalents and trading securities).
• Collection of nontrade receivables. + Cash
• Interest or dividends from investments. Flows
From
Outflows for: Investing
• Purchase of long-lived
lived productive assets Activities
used in the business. _
• Purchase of investment securities (except
(
cash equivalents and trading securities).
• Create nontrade receivables, loans to
other entities.
Cash Flows From Financing Activities
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Inflows from:
• Issuance of ordinary and
preference shares.
• Borrowing from creditors
through notes, loans, +
mortgages, and bonds. Cash
Outflows for: Flows
• Share repurchase. From
• Repayment of principal
amount of debt. Financing
• Payment of dividends to _ Activities
shareholders.
• Payment of interest on
debt.
33 Notes to the financial statements
The notes must:
 present information about the basis of preparation of
the financial statements and the specific accounting
policies used
 disclose any information required by PFRSs that is not
presented elsewhere in the financial statements and
 provide additional information that is not presented
elsewhere in the financial statements but is relevant to
an understanding of any of them
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Thank you!

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