CHAPTER 4 EQUATION

EXPANDED TO SHOW
OPERATING PERFORMANCE

FAR 101 CCC

Income Statement – summarizes the
operating activities of the business. The
success or failure of a business depends
on its financial performance.
 Accrual Concept of Recognizing Revenues and Expenses

Accrual Principle – recognizing assets and liabilities, revenues

and expenses based on the time period they relate. It is further
supported by the Realization Principle and Expense Recognition
Principle.

Realization of Revenue Principle – revenue is recognized

when it is earned regardless of collection. Effect of recognizing
revenue: it increases owner’s equity and increases assets.
Recognition of Expense Principle – expense is recognized
when incurred regardless of payment. Effect of recognizing
expense: it decreases owner’s equity and decreases assets or
increases liability.
 Three ways of recognizing expenses in generating income:

-Expense is recognized when revenue is recognized because

it is not possible to earn revenue without increasing
expenses. (Matching Principle)

-Resources or assets that will benefit the business over

several years should be allocated or spread out as
Depreciation Expense over the years the asset will be used.

-Some expenses are regularly incurred. Measurement is

needed for these expenses which are computed based on
consumption made by the business.
Cash Concept – recognized revenue
only when cash is collected and
expenses only when cash is paid.
PFRS 15 (Revenue Recognition Standard) – gives a
guideline for the recognition of revenue from contracts
with customers. Its core principle is premised on entity
recognizing revenue based on its promise to transfer
goods or services to customers for a consideration in
exchange for these services or goods.
 The core principle hinges on a five- model- step as follows:
1. There must be a contract specifying a) customer identity
b) probability of collection, c) approval of both entity and
customer, d) rights of each party, e) payment terms, and f)
contract has commercial substance (risk, timing, future
cash flows).
2. Performance obligation by the entity is specified as to
what distinct good or service to be delivered either as a
single performance or a series of performance.
3. Transaction or contract price is given regarding the
amount the entity expects to receive
 The core principle hinges on a five- model- step as follows:
4.The transaction price is to be allocated if performance
requires a series of promised good or services to be
transferred and each one can be distinctly separated and
identified.
5. Revenue is recognized when (or as) performance is
satisfied over time which means the revenue can be
reasonably measured as the performance progresses. Or
revenue may be recognized at a point in time which means
revenue is recognized only when performance has been
completely satisfied.
Income Statement – shows how wealth or profit was
produced by listing the revenues earned against the
expenses incurred.

Income – represents the inflow of cash or other assets

coming from a client or customer for service rendered
or merchandise sold.

1. Revenue – income coming from the normal course of

business
2. Gain – income which may arise but not really from its
normal course of operation
 REVENUE
PAS 1 – defines income as an increase in economic
benefits during the period that results in an increase
in equity, other than those resulting from
contributions of equity participants (investors). An
increase in economic benefits may take the form of
cash inflow or enhancement of assets or decreases in
liabilities.
Expenses – will decrease an asset or increase a liability with
a corresponding decrease in owner’s equity.

PAS No. 1 – defines the expenses as decrease in economic

benefit during the accounting period that results in a
decrease in equity, other than those relating to distributions
to equity participants.
 General Purpose Financial Statements

General Purpose of Financial Statements – address only the common

needs of the statement users and are based on Philippine Accounting
Standards or PAS 1 2007 these are the statement of cash flows,
statement of comprehensive income, statement of changes in equity,
and statement of financial position.
Statement of Comprehensive Income – is a statement that requires an
entity to present income and expenses either in a single statement of
comprehensive income or two statements: the first statement of which
is the statement of income while the second statement starts with the
profit or loss appearing in the first statement plus other comprehensive
income.
 Concepts of Capital and Capital Maintenance

Capital – synonymous with net assets or net worth.

Profit – earned only when the financial net assets at

the end of the year is more than financial net assets
at the start of the year but not as result of
contribution or distribution to the owner.
 Classification of Assets and Liabilities

Current Assets – include cash and cash equivalent

that are not restricted in use, as well other assets
expected to be realized into cash, or sold or
consumed within the normal operating cycle of the
business or one year, whichever is longer.

Non-Current Assets – in the form of plant, property,

and equipment.
 Classification of Assets and Liabilities

Current Liabilities – those debts or obligations

reasonably expected to be liquidated in the normal
course of the enterprise’s operating cycle or paid
within a period of one year by the use of current
assets or the creation of other current liabilities.
 The Accounting Period

One Year – usual reporting period provided in PAS 1.

Interim Financial Statements – financial statements

prepared monthly or quarterly.

Real Values – accounts in the statement of financial

position.

Temporary or Nominal Values – income statement

accounts.
 Operating Cycle

Operating Cycle – represents the period of time it

takes for the cash to be converted back into cash.
PAS 1 defines it as the time between the acquisition
of assets, their processing, and realization in cash
or cash equivalent.
Operating Cycle
Operating Cycle
Operating Cycle
THANK YOU
Presentation by Rey Greña Jr.