FABM 2 Useful information is said to be both relevant and

faithfully “represent what it purports to represent”.

INTRODUCTION TO ACCOUNTING AND Financial information cannot be useful unless the
FINANCIAL INFORMATION two fundamental characteristics are met.

Accounting – the process of identifying, measuring, Qualitative Components

recording, and communicating economic Characteristic
information about an organization or other entity, in Relevance – assist a user in
order to permit informed judgments by users of the predicting a financial situation or
information (Meyer, 2009) scenario (predictive value);
confirm predictions and forecasts
Accounting consists of inputs, several processes, previously made (confirmatory
and an output. value)
ᴥ Inputs – economic transactions entered into Faithful Representation –
by the business, evidenced by supporting accounting information must be
documents (capital contribution by the complete, neutral (unbiased), and
owners, rendering of services to customers, Fundamental free from error
and payment of expenses to suppliers) “makes ᴥ Completeness is the
ᴥ Process – Identification, Measurement and information reason why additional
Recording useful” explanatory notes are
ᴥ Output – communicating useful financial included in a complete set
information of financial statements.
ᴥ Neutral financial
Bookkeeping – mechanical aspect of accounting; information does not
only concerned with record keeping and intend to deliberately
maintenance of the book of accounts influence a user’s
decision.
FINANCIAL INFORMATION Freedom from error means that
the process in arriving at the
Financial statements are organized depiction of the financial information is indeed
events that happened in a business. free from error.
Comparability – if such
Title Contents Date information can be compared to
Statement of Assets, For a Point in another entity; if it can be
Financial Liabilities, and Time (as at or compared with the previous year
Position Equity as of) Verifiability – different users can
Statement of Revenues and For a Period in Enhancing reach an agreement about the
Comprehensive Expenses Time (For the “enhances financial information; about
income Period Ended) useful consensus
Statement of Transactions For a Period in information” Timeliness – information is
Changes in Involving Time (For the available to the users when they
Equity Owner’s Equity Period Ended) need it
Statement of Transactions For a Period in Understandability – information
Cash Flows Involving Cash Time (For the must be clearly and concisely
Period Ended) scaled down in order to be
Explanatory Other N/A understandable
Notes Information
In themselves alone, enhancing qualitative
USEFUL FINANCIAL INFORMATION characteristics do not make the information useful.
What make financial information useful are the
Not all financial information are useful. fundamental characteristics.
Statement of Financial Position
Asset – a resource controlled by the entity as result
of past events and from which future economic
benefits are expected to flow to the entity
Classification: Current and Non-current Assets
Criteria for an asset to be classified as current:
ᴥ Expected to be realized, sold or consumed in
the entity’s normal operating cycle
ᴥ Held primarily for trading
ᴥ Expected to be realized 12 months after the
reporting period
ᴥ Asset is cash or cash equivalent unless
restricted for at least 12 months after the
reporting period
Current Asset Examples
1. Cash and Cash Equivalents – short term, highly
liquid investments that are readily convertible to
known amounts of cash and which are subject to an
insignificant risk of changes in value
ᴥ Bills and coins on hand, bank accounts, and
operating funds, working funds (petty cash)
2. Trade Accounts Receivables – amounts owed
by customers to the entity; called “open” accounts
since they do not have documentary support other
than the sales contract
3. Notes Receivables – evidenced by a promissory
note; 3 key elements: principal amount of the
amount collectible by the entity from the customer,
maturity dates, corresponding interest
4. Interest Receivables – collectible amounts due
to the cost of borrowing money
5. Financial assets at Fair Value through Profit
of Loss (FAFVPL) – trading securities; either debt
or equity instruments of another entity held by the
reporting entity
6. Inventories
ᴥ Finished goods – goods for resell in the
normal course of business
ᴥ Work in progress or goods in process –
goods in the process of production
ᴥ Raw materials – materials and supplies to be
consumed in the production process
7. Supplies and Other Prepaid Assets – includes
office supplies to be consumed by the business and
prepaid assets
Non-current Asset Examples
1. Property, Plant, and Equipment
ᴥ Fixed assets used in the normal operating
cycle or production of the business
ᴥ Land and buildings being used by the
company
ᴥ Manufacturing plants, manufacturing
equipment, vehicles, furniture and fixtures,
and leasehold improvements
2. Intangible Assets – asset but without physical
substance
ᴥ Trademarks for brand names, patents for
inventions, and copyrights for
artistic/literary works
ᴥ Intangible assets with definite useful lives
are amortized over their useful lives. Those
with indefinite useful lives are annually
tested for impairment.
3. Investment Properties – long-lived assets not
used in production; the company’s intention for
these assets is to lease out or for long-term capital
appreciation
4. Biological Assets – living plants or animals held
by the business for resale or for breeding
ᴥ Trees in plantations, plants, dairy cattle,
pigs, bushes, figs, and fruit trees
Liability – present obligation arising from past
events the settlement of which is expected to result
in an outflow from the entity of resources
embodying economic benefits (assets)
Classification: Current and Non-current
Liablities
Criteria for an asset to be classified as current:
ᴥ Expected to be realized, sold or consumed in
the entity’s normal operating cycle
ᴥ Held primarily for trading
ᴥ Expected to be realized 12 months after the
reporting period
ᴥ If the entity has no unconditional right to
defer settlement for at least twelve months
Examples of Current Liabilities
1. Trade Accounts Payable – open accounts
relating to purchase of goods and/or raw materials

2. Notes Payable – evidenced by a promissory note

3. Interest Payable – interest (cost for borrowing

money)

4. Other Accrued Expenses – expenses incurred

but not yet paid
ᴥ Salaries, rent, and utilities

5. Income Tax Payable – computed at 30% of the

corporate taxable income

Non-current Liabilities
1. Long-term Debt – bank loans as a source of
financing for the entity; can be in a span of five
years to almost 25 years; most loans are serial loans
(principal repayment is due every year; a portion of
serial loans will be current while most of it is non-
current)
ᴥ Mortgage payable if certain properties are
held as collateral for such loans

2. Bonds Payable – bonds are contracts of

indebtedness sold to certain individuals; sometimes
evidenced with a bond certificate, unless it is a scrip
bond

Joanna Fronda (7/5/19)