fin acc1 intro

HARRY R. CHUACPA, MBA, DBA

Financial Accounting & Reporting Part 1INTRODUCTION


House Rules1. Be prompt; tardiness nor absences is not excused (unless

your dead)2. Proper uniform3. Behave, no unnecessary noise4. Use of cellphones are not allowed inside the classroom

(kept it in silence mode)5. Always bring the following:

◦ 2-column journal, ledger and yellow pad paper◦ Ruler◦ Calculator (non-programmable)


Grading SystemMidterm:

Attendance/Class Standing 10%Assignments/Seatworks/Quizzes 40%Midterm Examination . 50%

100%Final:

Midterm Grade 50%Attendance/Class Standing 5%Assignment/Seatworks/Quizzes 20%Final Examination . 25%

100%NOTE: absence for 3 hours means minus 2.5 on attendance


Course Outline1. Concepts & Principles related to Financial Statements2. Accounting for Cash & Cash Equivalents3. Accounting for Receivables4. Accounting for Investments5. Accounting for Inventories6. Accounting for Biological Assets7. Accounting for Plant, Property & Equipment8. Accounting for Intangible Assets9. Accounting for Other Investments/Noncurrent Assets


Definition of Accounting Per Accounting Standards Council: Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic decision.

Per American Institute of Certified Public Accountants (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 analyzing and interpreting the results thereof.


Definition of Accounting Per American Accounting Association (AAA): Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.

Key features of these definitions:

Identifying – is the analytical component of the accounting process that recognizes or not recognizes business activities as “accountable” events. An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.


Definition of Accounting Measuring – is the technical component of the accounting process that assigns monetary amount to the accountable economic transactions and events. The measurement bases are historical cost, current cost, realizable value and present value.

Communicating – formal component of the accounting process that prepares and distributes accounting reports to potential user of the accounting information.


Difference of Accounting with other fields

Accounting versus Auditing:

Accounting is essentially constructive in nature while auditing is analytical.

Accounting ceases when financial statement are already prepared. The work of an auditor begins when the work of the accountant ends.

Accounting versus Bookkeeping:

Bookkeeping is procedural and largely concerned with the “how” or development and maintenance of accounting records while Accounting is conceptual and is concerned with the “why” or reason or justification for any action adopted.


Difference of Accounting with other fields

Accounting versus Accountancy:

Technically speaking, Accountancy refers to the profession of accounting practice while Accounting is used in reference only to a particular field of accountancy such as public accounting, private accounting and government accounting.

Financial Accounting versus Managerial Accounting:

Financial Accounting is primarily concerned with recording, classifying and summarizing of business transactions and preparation of financial statements intended for internal and external users while Managerial Accounting emphasizes developing accounting information needed by management in planning, controlling and evaluating the entity’s operations.


Accounting Assumptions

Going concern – means that in the absence of evidence to the contrary, the entity is viewed as continuing in operation indefinitely.

Accounting entity – is the specific business organization, which may be a proprietorship, partnership or corporation. It is assumed that the entity is separate from the owners, managers, and employees who constitute the entity. Personal transactions of these people shall not be allowed to distort the financial statements of information about the entity.

Time period – users of financial reports needs timely information for making an economic decision.


Accounting Assumptions

Monetary unit – financial information must be quantifiable in terms of money which has a stable character. Stability of money means that the purchasing power is stable or constant and that its instability is insignificant and ignorable as far as the accounting process is concern.


Financial Reporting Concepts

The financial statements most frequently provided are(1) the statement of financial position (balance sheet), (2) the statement of results from operations or financial

performance (income statement), (3) the statement of cash flows, and(4) the statement of changes in owners’ or

stockholders’ equity.

Note disclosures are an integral part of each financial statement.



Objectives of Financial Reporting:

1. To provide information useful in making decisions about providing resources to the entity;

2. To provide information useful in assessing the prospects of future net cash flows to the entity;

3. To provide information about entity resources, claims and changes in resources and claims;



Qualitative characteristics of financial reports:

Relevance – means that the financial reports are useful and has the capacity to influence an economic decision. Financial information must have predictive value that can be used as an input to processes to predict future outcome. It must also have confirmatory value that can provide feedback about previous evaluations to enable corrective actions in the future.

Materiality – is the quantitative threshold of relevance, meaning that the size and nature of the item is significant enough to affect the evaluation, decision and fairness of the financial statements. This concept if also known as doctrine of convenience.



Faithful representation – means that the actual effects of the transaction shall be properly accounted for and reported in the financial statements.Three characteristics of faithful representation:◦ Completeness – adequate disclosure◦ Neutrality – fair; without bias◦ Free from error – no errors or omissions

Adequate disclosure – means that all significant and relevant information leading to the preparation of financial statements shall be clearly reported. To be complete, financial statements must be accompanied by “Notes to Financial Statements.”



Substance over Form – as far as accounting is concerned, the economic substance of transactions and events are usually emphasized when economic substance differs from the legal form.

Example: When the lessee leased property from the lessor and the terms of the lease provide that the lease transfer ownership of the asset to the lessee at the end of the lease term.

In form, the contract is a lease as popularly understood. But in substance, the “transfer of ownership provision” states that the real intention is an installment purchase of the property by the lessee.



Conservatism – in case of doubt, record any loss and do not record any gain. Contingent loss is recognized as a “provision” if the loss is probable and the amount can be reliably measured wile Contingent gain is not recognized but disclosed only. It is synonymous with prudence.

Prudence – is the desire to exercise care and caution when dealing with the uncertainties in the measurement process such that assets or income are not overstated and liabilities or expenses are not understated.



Comparability – is the enhancing qualitative characteristic of the enables users to identify and understand similarities and dissimilarities among items.

Relevant and faithful represented information is most useful if it can be compared with similar information about the same entity for the previous period and with similar information report by other entities.

For information to be comparable, like things must look alike and different things must look different. Comparability is not enhance by making unlike things look alike or making like things look different.



Consistency – requires that the accounting methods and practices should be applied on a uniform basis from period to period.

Understandability – requires that financial information must be comprehensible or intelligible if it is to be most useful. The information should be presented in a form and expressed in terminology that a user understands.

Verifiability – means that the financial information is supported by evidence so that an accountant looking at the same evidence would arrive at same economic decision or conclusion.



Timeliness – means that financial information must be available or communicated early enough when a decision is to be made.

Cost constraint on useful information – cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information imposes cost and it is important that such cost is justified by the benefit derived from the financial information. The rule is “the benefit derived from the information should exceed the cost incurred in obtaining the information.”


Financial Reporting Principles

Asset Recognition Principle – an asset is recognize when it is probable that future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.◦ Future economic benefit – is the potential to contribute

directly or indirectly to the flow of cash and cash equivalents to the entity.

◦ Cost principle – requires that assets should be recorded initially at original acquisition cost.



Liability Recognition Principle – a liability is recognize when it is probable that an outflow of resources embodying economic benefits will be required for the settlement of a present obligation and the amount of the obligation can be measured reliably.◦ Legal obligation – is the consequence of a binding

contract or statutory requirement.◦ Constructive obligation – arise from normal business

practice, custom and a desire to maintain good business relations or act in an equitable manner.



Income Recognition Principle – income must be recognized when earned. Income is recognized when it is probable that an increase in future economic benefits related to an increase in an asset or a decrease in a liability has arisen and tat the increase in economic benefits can be measured reliably.◦ 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.



PAS 18, Paragraph 14 – Revenue from sale of goods:1. The entity has transferred to the buyer the significant

risks and rewards of ownership of the goods.2. The entity retains neither continuing managerial

involvement nor effective control over the goods sold.3. The amount of revenue can be measured reliably.4. It is probable that economic benefits associated with

the transaction will flow to the entity.5. The costs incurred or to be incurred in respect of the

transaction can be measured reliably.



Exceptions to the Point of Sale:

1. Installment method – revenue is recognized at point of collection (amount of revenue is determined by multiplying the gross profit rate by the amount of collection).

2. Cost recovery method or sunk cost method – revenue is recognized at point of collection (all collections are fist applied to the cost of the merchandise sold and the remainder are considered revenue).

3. Cash method – revenue is recognized when received regardless of when earned (all collections are treated as revenue).



4. Percentage of completion method – contract revenue and contract costs associated with the construction contract shall be recognized as and expenses by reference to the stage of completion of the contract activity.

5. Production method – revenue is recognized at the point of production; applicable only to agricultural, forest and mineral products (allowed when a sale is assured under a forward contract or a government guarantee, or when homogeneous market exists and there is a negligible risk of failure to sell).



PAS 18, Paragraph 19 – Revenue from rendering services:1. The amount of revenue can be measured reliably.2. It is probable that the economic benefits associated

with the transaction will flow to the entity.3. The stage of completion of the transaction at the end

of reporting period can be measured reliably.4. The costs incurred for the transaction and the costs to

complete can be measured reliably.



Revenue from interest, royalties and dividends:

1. Interest revenue – recognized at the time of proportionate basis that takes into account the effective yield on the asset.

2. Royalties – recognized on an accrual basis in accordance with the substance of the relevant agreement.

3. Dividends – recognized as revenue when the shareholder’s right to receive payment is established (dividends are declared).



Other income recognition:

1. Installation fees – recognized as revenue over the period of installation by reference to the stage of completion.

2. Subscription revenue – recognized on a straight line basis over the subscription period.

3. Admission fees – recognized as revenue when the event takes place.

4. Tuition fees – recognized as revenue over the period in which tuition is provided.



Expense Recognition Principle – expenses are recognized when 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.

Matching principle – costs and expenses incurred in earning a revenue must be reported in the same period.◦ Cause & effect association – expense is recognized when the

revenue is already recognized.◦ Systematic & rational allocation – some costs are expensed by

simply allocating them over the periods benefited.◦ Immediate recognition – expensed outright because of

uncertainty of future economic benefits or difficulty of reliably associating certain costs with future revenue.



Measurement of elements – the process of determining the monetary amounts at which the elements of financial statements are to be recognized and carried in the balance sheet and income statement.◦ Historical cost – amount of cash or cash equivalent paid

or fair market value of the consideration given to acquire an asset at the time of acquisition.

◦ Current cost – amount of cash or cash equivalent that would have to be paid if the same or equivalent asset was acquired currently (current purchase exchange price).

◦ Realizable value – amount of cash or cash equivalent that that could currently be obtained by selling the asset in an orderly disposal (current sale exchange price).


Financial Reporting Principles◦ Present value – the discounted value of the future net cash

inflows that the item is expected to generate in the normal course of business (future exchange price).

Capital maintenance approach – in preparing income statement, the net income occurs only after the capital used from the beginning of the period is maintained.◦ Financial capital concept – the absolute monetary amount

of the net assets contributed by shareholders and the amount of the increase in net assets resulting from earnings retained by the entity (based in historical cost).

◦ Physical capital concept – the quantitative measure of the physical productivity capacity to produce goods and services (based on current cost).


Accounting forCash & Cash Equivalents

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