The development of the accounting prof.

The nature of accounting and the users of accounting information

Elements of financial statements

Ø  The financial effects of the activities undertaken by the enteprise
are presented in the financial statements based on certain
groupings or classes of characteristics, called the elements of
financial statements.
•  Assets (financial position)
•  Liabilities (financial position)
•  Equity (financial position)
•  Income (performance)
•  Expenses (performance)
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Elements of financial statements – continued

Ø  Assets are the resources controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the enterprise.
•  Financial assets such as cash, receivables, or debt and
equity securities of other enterprises held by the entity as
investments
•  Non-financial assets such as inventory, property, plant, and
equipment, and intangible assets
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Elements of financial statements – continued

Ø  Liabilities are present obligations of an enterprise arising from
past events, the settlement of which is expected to result in an
outflow from the entity of economic resources embodying
economic benefits.
•  Financial liabilities such as notes and accounts payable,
long-term debts and other contracts requiring the entity to
make cash payments at a future date.
•  Non-financial liabilties such as deferred revenues for which
goods or services are to be delivered in the future.
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Elements of financial statements – continued

Ø  Equity is the residual interest in the assets of the entity after
deducting all its liabilities. This is measured as the excess of
assets over liabilities.

Ø  Income is increases in economic benefits during an accounting

period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Elements of financial statements – continued

•  Revenues arise from major or central activities of the
enterprise.
•  Gains arise from incidental activities.

Ø  Expenses are decreases in economic benefits during the

reporting period in the form of outflows or depletion of assets or
incurrence of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants.
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Elements of financial statements – continued

•  Losses, which arise from incidental activities of the
enterprise.

Recognition principles
Ø  The Conceptual Framework identifies two general criteria for the
recognition of financial statement elements:
•  It is probable that there is an inflow or outflow of economic
benefits; and
•  The element has a cost or value that could be reliably
measured. Accountability and Integrity, Committed Service, Excellence in Work
The development of the accounting prof.
The nature of accounting and the users of accounting information

Recognition principles – continued

Ø  An asset and an income are recognized when:
•  It is probable that there is an inflow of economic benefits, and
•  It has a cost or value that could be reliably measured.

Ø  A liability and an expense are recognized when:

•  It is probable that there is an outflow of economic benefits,
and
•  It has a cost or value that could be reliably measured.
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Recognition principles – continued

Ø  Measurement is the process of recognition, which requires
assigning a value to the financial statement element.

Ø  The Conceptual Framework identifies four measurement bases:

•  Historical cost, which is the cost of acquisition
•  Current cost (or fair value), which is the amount of cash or
cash equivalents that would have to be paid if the same
asset or an equivalent asset is acquired currently
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Recognition principles – continued

•  Realizable value, which is the asset’s disposal value reduced
by disposal costs, or the liabilities’ settlement amount
including settling costs, and
•  Present value, which is the discounted future cash flows

Question:
Does the Conceptual Framework require any particular measurement
basis for the recognition of particular financial elements?
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The development of the accounting prof.
The nature of accounting and the users of accounting information

The concepts of capital and capital maintenance

Capital
Ø  Under the financial concept of capital, capital is synonymous with
net assets of the enterprise.

Ø  The physical concept of capital defines capital as the operating

capacity of the enterprise and requires the use of the current cost
as measurement basis for an enterprise’s assets and liabilities.

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The development of the accounting prof.
The nature of accounting and the users of accounting information

The concepts of capital and capital maintenance – continued

Capital maintenance concept
Ø  Measures profit as the amount of capital that the enterprise can
distribute to its owners and be as well off at the end of the period
as it was at the beginning

Ø  Thus, profit is the net change in capital after excluding the effects
of transactions with owners.

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The development of the accounting prof.
The nature of accounting and the users of accounting information

The concepts of capital and capital maintenance – continued

Capital maintenance concept – continued
Ø  Financial capital maintenance concept
•  Profit = Financial amount of net assets at the end of the
period – financial amount of net assets at the beginning of
the period, after deducting contributions from owners and
adding back distributions to owners.

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The development of the accounting prof.
The nature of accounting and the users of accounting information

The concepts of capital and capital maintenance – continued

Capital maintenance concept – continued
Ø  Physical capital maintenance concept
•  Profit = Productive capacity of the enterprise at the end of the
period – productive capacity at the beginning of the period,
measured in terms of current cost, after excluding the effects
of transactions with owners.

Question:
What is the appropriate concept of capital?
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Traditional accounting concepts and assumptions

Ø  Reporting (accounting) entity concept assumes that the
personality of the enterprise is separate and distinct from the
personality of its owners, employees, managers and other
stakeholders. Thus, only the assets and liabilities of the
enterprise are included in the presentation of a company’s
statement of financial position. Likewise, in the statement of
comprehensive income, only the income and expenses of the
business entity are included.
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Traditional accounting concepts and assumptions – continued

Ø  Accounting period concept divides the long life of a business
enterprise into equal intervals of time, called reporting
(accounting) periods, to present timely information on the effects
of the economic events undertaken by the enterprise.
•  Calendar year (January 1-December 31)
•  Fiscal year (starts with a month other than January)
•  A period shorter than but generally not longer than twelve
months
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The development of the accounting prof.
The nature of accounting and the users of accounting information

Traditional accounting concepts and assumptions – continued

Ø  Unit of measure concept requires that the face of the financial
statements include only the elements, which are expressed in
units of measure. Thus, the monetary unit is the standard unit of
measure for reporting financial information.

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Cash and cash equivalents (video)

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Cash and cash equivalents – continued
Nature and composition of cash
Ø  Cash belongs to a broad category of assets called financial
assets. A financial asset is defined as cash or a contractual right
to receive cash or another financial instrument in the future.
Examples are receivables and investments in debt and equity
securities.

Ø  Cash is any item that is used as a standard medium of exchange.

•  Bills and coins on hand
•  Demand credit instruments, such as checks, bank drafts,
postal money orders and currency demand deposits with
banks
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Cash and cash equivalents – continued
Nature and composition of cash – continued

Question:
Do all cash items, for reporting purposes, qualify as part of the
account title “cash” or “cash on hand and in banks”?

Ø  Cash is part of current assets if:

•  Unrestricted and immediately available for use in current
operations like for payment of operating expenses, current
liability, and acquisition of current asset

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Cash and cash equivalents – continued
Nature and composition of cash – continued

Ø  Cash is part of noncurrent assets if:

•  For use other than for current operations

Ø  Take note of the intention on how cash is to be used.

True or False:
The expected timing of disbursement of cash funds is not a
consideration in classifying them into current or noncurrent.

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Cash and cash equivalents – continued
Nature and composition of cash – continued

Current assets 2018 2017

Cash on hand XXX XXX
Undeposited cash collections such as
bills and coins, customers’, traveler’s,
manager’s, and cashier’s checks,
bank drafts, money orders
Working funds like petty, change,
payroll, dividend, tax, and interest
funds Accountability and Integrity, Committed Service, Excellence in Work
Cash and cash equivalents – continued
Nature and composition of cash – continued

Current assets 2018 2017

Cash in bank XXX XXX
Demand deposits pertain to
unrestricted funds deposited in a bank
that can be withdrawn upon demand
such amounts in checking and
savings accounts.

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Cash and cash equivalents – continued
Nature and composition of cash equivalents

Ø  Cash equivalents are highly-liquid financial instruments that are

so near their maturity and that there is insignificant risk of change
in value due to fluctuation of interest rates.

Ø  Please take note of the maturity date, normally three months or

less, from the date of acquisition. This is a general rule. However,
an enterprise can set its own accounting policy to determine
which financial instruments qualify as cash equivalents.

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Cash and cash equivalents – continued
Nature and composition of cash equivalents – continued

Ø  Assuming that a company adopts a policy to treat as cash

equivalents debt instruments with maturity of not more than 90
days from the date of acquisition.

•  Treasury bills acquired on December 15, 2018 and will

mature on March 15, 2019

Question:
Does this qualify to be reported as cash equivalents in the statement
of financial position as of December 31, 2018?
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Cash and cash equivalents – continued
Nature and composition of cash equivalents – continued

•  Treasury bills acquired on July 15, 2018 and will mature on

January 15, 2019

Question:
Does this qualify to be reported as cash equivalents in the statement
of financial position as of December 31, 2018?

Ø  Cash equivalents are not cash.

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Cash and cash equivalents – continued
Presentation and measurement of cash in the statement of financial
position

Ø  Cash is generally measured at face value, which is its fair value.

Foreign currency deposits are measured using the exchange rate
in effect at the end of the reporting period.

Ø  It is not necessary to classify cash to distinguish between

currencies on hand, cash in banks, or deposits at various
locations. The details, however, are preferably disclosed in the
notes to the financial statements.
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Cash and cash equivalents – continued
Presentation and measurement of cash in the statement of financial
position – continued

Ø  Foreign currency
Ø  Cash in closed banks or in banks having financial difficulty or in
bankcruptcy
Ø  Customers’ post-dated checks, NSF checks (no sufficient fund
checks)
Ø  Postage stamps and expense advances
Ø  A bank overdraft
Ø  Undelivered or unreleased checks
Ø  Company’s post-dated check
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Cash and cash equivalents – continued
Presentation and measurement of cash in the statement of financial
position – continued

Ø  Compensating balances
Ø  Cash set aside for long-term specific purposes or for acquisition
of a non-current asset

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Cash and cash equivalents – continued
Cash management

Ø  Is having an excessive amount of cash an advantage or not?

Ø  Characteristics of a system of cash control

•  Segregation of duties for handing cash and recording cash
transactions
•  Imprest system
•  Voucher system
•  Internal audits at irregular intervals
•  Periodic reconciliation of bank statement balance and cash
balance in the company’s accounting records
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