INTRODUCTION TO FINANCIAL ACCOUNTING

PRIMARY FOCUS:
- To provide financial information to external users before supplying capital and to predict
future risks and potentials return of investments
External Users:
● Investors
● Creditors
● Other external users (government agencies, analysts, trade union, suppliers,
customers, employees, management, lenders)
FINANCIAL INFORMATION = KEY COMPONENT
- Conveyed through financial statements and disclosure notes
FINANCIAL ACCOUNTING AND REPORTING STANDARD
- GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
- Provide guidelines that companies follow when reporting financial information
- Accounting information should help investors to evaluate the:
- Amount;
- Timing;
- Uncertainty of the enterprise’s future cash flows
CONCEPTUAL FRAMEWORK
- Provides structure and direction to financial accounting and reporting
- Underlying foundation for Philippines Financial Reporting Standards (PFRS)
- Provides guidance to users/business owners to better understand the PFRS
MEASUREMENT BASES
Measurement - process of determining the monetary amounts of the elements
are to be recognized and reflected in the SFP and IS
● Historical Cost
- Element is recorded at transaction price or other event that gave rise to
them
● Currents Cost
 - Assets are carried at the amount of cash that have to be paid in the same
asset was acquired currently
- Liabilities are carried at the amount of cash that would be required to
settle the obligation currently
● Realizable Value
- Assets are carried at the amount of cash that could currently be obtained
during the sale of an asset
- Liabilities are carried at the amount of cash expected to be paid to
satisfy liabilities
● Present Value
- Assets are carried at the present discounted value of the future net cash
inflows
- Liabilities are carried ate the present discounted value of the future net
cash outflows
ELEMENTS OF FINANCIAL STATEMENTS
- Asset is an economic resource that a company has control over, arises from past events
- Liability consists of three components
- Present obligation
- Obligation to transfer economic resources
- Past events
- Equity comprises the remaining interest in a company’s assets after deducting liabilities
- Income revenues and gains, from increment in assets or reduction in liabilities and
increases in equity
- Expenses includes losses, reduction in assets or increment in liabilities and decreases
equity
FINANCIAL STATEMENTS
- Primary means of communicating information to external users/parties
● Statement of Financial Position
- Organized list of assets, liabilities and equity, classified by common
characteristics
- Financial position at a point in time
- Liquidity is the ability to convert assets to cash
- Long-term Solvency ability to pay long-term debts
● Statement of Profit or Loss and Other Comprehensive Income
 - Summarized income generating activities
- Report the cause of the change in shareholders’ equity
- Includes all revenues, expenses, gains and losses for the period
- Includes net profit and other changes in shareholders’ equity

- Other comprehensive income

1. Revaluation surplus
2. Unrealized holding gains and losses on investments
3. Gains (losses) from post-employment benefit plans
4. Deferred gains (losses) on derivatives
5. Foreign currency translation gains (losses)
● Statement of Cash Flows
- Summarized and classified transactions that caused cash to change
- Provides information about the cash receipts and cash disbursements
- Cash refers to cash, cash equivalents, and restricted cash
- Helpful in assessing future profitability, liquidity, and long-term solvency
 ● Statement of Changes in Equity
- Information about the events that caused the change in shareholders’
equity account
- Total comprehensive income for the period
- Effects change in accounting policy or error
- Amounts of transactions with owners, contributions and distributions
- Amount of dividends recognized as distributions to owners during the
period
- Each class of contributed equity, balance of each class of other
comprehensive income and retained earnings
● Notes to Financial Statement
- Contains accounting policies and explanatory information
- Must present information about the basis of preparation of the financial
statements and specific accounting policies
- Disclose any information required by PFRS
- Provide additional information that is not presented elsewhere in the
financial statements
ASSETS
● Current Assets
- Assets expected to be converted to cash within the coming year or within normal
operating cycle
○ Cash and cash equivalents
○ Short-term investments
○ Receivables, inventories
○ Prepaid expenses
 ● Non-current Assets
- Expected to provide economic benefits beyond the next year or the operating
cycle
○ Investments
○ Property, plant and equipment
○ Intangible assets
LIABILITIES
- Obligation 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
- Expected to be satisfied within one year
○ Accounts Payable
○ Notes Payable
○ Deferred Revenues
○ Accrued Liabilities
○ Currently maturing portion of a long term debt
○ Short term debt
● Non-current Liabilities
- Obligations that will not be satisfied in the next year
- Includes payment terms, interest rates and other details
○ Long-term Notes
○ Bonds
 ○ Pension Obligation
○ Lease Obligation
EQUITY
- Residual amount derived by subtracting liabilities from assets
- Arises primarily from
1. Issued capital
2. Retained earnings
- Referred as net assets/book value
- Includes treasury shares, capital reserve, translation reserve, hedging reserve, and other
reserves from other comprehensive income items
DEFERRAL AND ACCRUAL
 ACCOUNTING FOR CASH AND BANK RECONCILIATION
CASH
- Financial asset
- A medium of exchange
- Must be readily available
- Reported at face value
- If foreign, reported at closing rate
TYPES OF CASH
● Cash on hand
- Used for day to day transactions
● Loose coins and currencies
● Checks on hand
● Manager’s check
● Traveller’s check
● Cashier’s check
● Bank drafts
● Money order
● Cash in bank
● Cash set aside for current use
- Petty cash fund
- Payroll fund
- Travel fund
- Interest fund
- Dividend fund
- Tax fund
PETTY CASH
- Small amounts for the purchase of immaterial amounts
- Petty cash voucher filled up by the party who needs the fund
- When petty cash fund is depleted it will be requested
REPLENISHMENT
- Difference between the amount available in the fund and the amount of the petty cash
fund
CASH EQUIVALENTS
 - Short term, highly liquid investments convertible to known amounts of cash, subject to an
insignificant risk of change in value
- investment s purchased 90 days or less before maturity date
- Treasury bills, commercial papers, certificate of deposits, and money market placements
COMPENSATING BALANCE
- Minimum balance that an account holder should maintain in its bank account at all times
STALE CHECKS
- Checks not have been presented to the bank for encashment
- Not treated as part of the cash balance of the holder
- Restated as cash of the issuer
- Philippines 6 months limit
POST DATED CHECKS
- Checks that bear a future date on its face
- Only part of cash balance of the entity when the date stated on the check has arrived
NSF CHECKS
- Checks with not enough fund to pay the amount presented
- Check should not be considered part of the cash balance of the holder or payee
CASH SET ASIDE FOR NON CURRENT ASSETS
- Not readily available, not part of cash and cash equivalents
 ACCOUNTING FOR RECEIVABLES
RECEIVABLE
- Financial asset that is a contractual right to receive cash or another financial asset from
another entity in the future
TRADES AND OTHER RECEIVABLES
● Trade receivable
- Arising from sale of goods or rendering of services
● Claims receivable
- Amounts expected from claims such
- E.g. insurance policy
● Interest Receivable
- Interest earned but not yet received as of the end of the year
● Advances to affiliates
- Payment given in advance which are expected to be received in the near future
RECOGNITION
- Fair value plus transaction costs
- Accounts receivable are initially recorded at face value
- Short term receivables are reported at their net realizable value