MODULE 2

CONCEPTUAL FRAMEWORKS AND ACCOUNTING STANDARDS

SESSION TOPIC 1: General Purpose Financial Statement and Fundamental Characteristics

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session:
1. Explain the General Purpose Financial Statements
2. Identify the fundamental and enhancing characteristics of General Purpose Financial Statements

KEY POINTS

General Purpose Income Statement Cash Flow Statement Balance Sheet

Financial statement

Relevance

CORE CONTENT
Introduction:
This module covers the discussion of
a. General Purpose Financial Statements,
b. Fundamental Characteristics and Enhancing Characteristics of Financial Statements

IN-TEXT ACTIVITY

General Purpose Financial statements refer to the regular report submitted by a separate entity, in
compliance with the reporting requirements, that provides the external users of financial reports
information about the entities performance and position, as well as narratives (or disclosures) of all
material transactions affecting the resources and claims over the entity.

The General Purpose Financial Statement Include

 Statement of Financial Position
 Statement of Financial Performance
 Cash Flow Statements
 Statement of Changes in Owners Equity
 Notes to Financial Statements

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General Purpose Financial Statements:

 Balance Sheet- is also called a statement of financial position, this report provides information
about an entity’s assets, liabilities and owners’ equity at a point in time (or simply, example at the
end of the accounting period). The report shows the entity’s resources and its sources.
The balance sheet reported accounts are classified in major classes and amount- assets,
liabilities and equity or capital- these are called permanent or real accounts.

Example of Balance sheet:

BALANCE SHEETS
AS OF DECEMBER 31, 2019 and 2018
(Rounded Off To The Nearest Philippine Peso)

ASSETS 2019 2018

CURRENT ASSETS
Cash
Accounts Receivable
Creditable Withholding Tax
Total Current Assets - -

NON-CURRENT ASSETS
Property, Plant & Equipment - net - -

TOTAL ASSETS - -

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Income Tax Payable
Other Current Liabilities - -

Total Current Liabilities - -

EQUITY - -

TOTAL LIABILITIES AND EQUITY - -

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  Income Statement reports the success of a company’s operation during a given period of time.
The income statement is also commonly called as Statement of Financial Performance and is
created using the accrual method of accosting. It includes all the income and expenses, gains
and losses gained or incurred for the current accounting period.

Accounts reported under the Income statements are temporary accounts- which are being closed
or zero out every end of the reporting period and will always start as zero.

Example of Income Statement:

INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
(Rounded Off To The Nearest Philippine Peso)

2019 2018

REVENUES
COST OF REVENUES - -
GROSS INCOME - -
GENERAL AND ADMINISTRATIVE EXPENSES - -
NET INCOME BEFORE INCOME TAX - -
PROVISION FOR INCOME TAX
NET INCOME(LOSS) FOR THE PERIOD - -

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  Cash Flow Statement is the report that shows all the flows of cash- inflows or receipt of the cash
and outflows or disbursement of cash. The report shows only the CASH flows whether it is used
for acquisition of asset, purchase of inventory, or payment of expense – as long as there is cash
in the transaction it must be presented in this report.

Example of Cash Flow Statement:

NAME OF CLIENT

STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
(Rounded Off To The Nearest Philippine Peso)

2019 2018
CAS H FLOWS FROM OPERATING ACTIVITIES
Net Income(Loss) - -
Adjustments for:
Depreciation - -
Changes in Operating Assets & Liabilities
Decrease (Increase) in Accounts Receivable -
Decrease (Increase) in CWT -
Increase (Decrease) in Income Tax Payable -
Increase (Decrease) in Other Liabilities Payable -
Net Cash Provided in Operating Activities - -

CAS H FLOWS FROM FINANCING ACTIVITIES

Owner's Equity

NET INCREAS E IN CAS H - -

CAS H, JANUARY 1 -

CAS H, DECEMBER 31 - -

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  Changes in Owners Equity (or Shareholders Equity Statement – if corporation) the report shows
the additional or reduction of invested capital of the investor to the business. The profit and losses
earned and reported in the income statement is also reported in the Owners Equity Section.

Example of Statement of changes in owners Equity

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018
(Rounded Off To The Nearest Philippine Peso)

2019 2018
BEGINNING CAPITAL -
NET INCOME - -
BALANCE -
DRAWINGS
ENDING CAPITAL - -

 Notes to financial statements refers to the part of the report that shows all the disclosure
requirements, schedules and computation of the amounts reported in the other financial
statement.

Example of a part of Notes to Financial Statement (the image is for disclosure only for PPE)

NOTE 3- PROPERTY, PLANT & EQUIPMENT

This account is composed of :

2019 2018

Office Equipment
Vehicle

Total - -
Less: Accumulated Depreciation

Carrying Value - -

Depreciation is computed on a straight line method over the estimated life of the assets. No assets
are found impaired. The carrying amount is equivalent to its fair value. Property and equipment
are initially measured at cost less accumulated depreciation.

Depreciation charges during the year amounted to P 36,750.00

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Fundamental Characteristic General Purpose Financial Statements
- Relevance
o The relevance or relevant information refer to the information is capable of making a
difference in the decisions made by the user.
o Financial information is relevant if it has predictive value, confirmatory value or both.
o Predictive value is a forward-looking concept in which an item reported in the financial
statements can be projected or forecasted.
o Confirmatory value is a backward-looking concept- it is value of information to gauge how
accurate your predictions are.

- Faithful Representation
o Dictates that the information presented in the financial statements is complete, neutral,
and free from error.

Enhancing Qualitative Characteristics of General Purpose Financial Statements

These qualitative characteristics refer to the relationship and usefulness of the financial statements with
and to the users. The qualitative characteristics are (VCUT)
- Verifiability
o It means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement.
- Comparability
o That the information can be compared with a similar information about other entities and
with similar information about the same entity for another period or another date.
- Understandability
o It presupposes that the report was prepared for users who have a reasonable knowledge
of business and economic activities and who review and analyze the information with
diligence.
- Timeliness
o It means that information is available to decision makers in time to be capable of
influencing their decisions.

Elements of Financial Statement

Elements of Financial Definition

Statements
Financial Position or Balance Sheet Accounts
Assets is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.

Liabilities is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources
embodying economic benefits.

Equity is the residual interest in the assets of the entity after deducting all its
liabilities.

Financial Performance or Income Statement

Income Income is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that

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 result in increases in equity, other than those relating to contributions from
equity participants.

Income encompasses both revenue and gains.

Revenue arises in the course of the ordinary activities of an entity

Gains represent other items that meet the definition of income and may, or
may not, arise in the course of the ordinary activities of an entity.

Expenses Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating to distributions to
equity participants.

Expenses encompasses losses as well as those expenses that arise in the

course of the ordinary activities of the entity.

Expenses that arise in the course of the ordinary activities of the entity
include, for example, cost of sales, wages and depreciation.

Losses represent other items that meet the definition of expenses and may,
or may not, arise in the course of the ordinary activities of the entity. Losses
represent decreases in economic benefits and as such they are no different
in nature from other expenses.

Measurement of the Elements of Financial Statements

Measurement involves assigning monetary amounts at which the elements of the financial
statements are to be recognized and reported. The IFRS Framework acknowledges that a variety of
measurement bases are used today to different degrees and in varying combinations in financial
statements, including
- Historical cost
- Current cost
- Net realizable (settlement) value
- Present value (discounted)

Steps in Accounting
1. Identifying transactions and other events – this refer to the analysis of the transaction if the
transaction should be recorded or not.

2. Journalizing refers to the recording of the transaction in the general journal or creating the journal
entry.

3. Posting refers to the transfer of journal entries (book of original entry) to the ledger (book of final
entry)

4. Preparation of trial balance is prepared next this refer to the preparation of the ending balances of
all the accounts.

5. Preparation of Adjusting Entries is to be prepared to account all the needed adjustments – simply
to record all the expenses and income in the period

6. Preparation of the Adjusted Trial Balance refers to the trial balance to

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 7. Preparing Financial Statements

8. Closing entries refers to the zeroing out of all the temporary accounts (Income and Expenses)
and transferring and recording it to the Capital Account.

9. Post-closing trial balance is the trial balance showing only all permanent accounts- assets,
liabilities, and capital.

10. Reversing entries, an optional step, this process is to reverse some of the closing entries made to
enable the entity consistently apply their accounting process in recording advance payment of
expenses and income from clients.

SESSION SUMMARY

General Purpose financial statement are reports issued by the entity as compliance to the mandates of
the reporting standards- this include the balance sheet, income statement, changes in owners equity
statement, cash flow statement and notes to financial statement.

Each financial statement reports different elements, and should be construed to have the fundamental
and enhancing characteristics as cited in the accounting conceptual framework.

SELF-ASSESSMENT
Activity 1

REFERENCES
Refer to the references listed in the syllabus of the subject.

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Activities:
Using the ledger of the company reconstruct the journal entries made by the company for the
period.

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Write the transactions here:
A Invested cash
B Purchased cleaning supplies on account 21,400
C Purchased cleaning equipment on account 21,400
D No Entry
E Purchase Service Equipment, Paying P10,000 the balance on notes payable
F Paid rent, P73,000
G Received cash from services rendered, P31,800
H Paid Advertising Expense, P1,700
I Paid Prepaid Insurance, P4,800
J Paid accounts payable P9,000
K Paid Miscellaneous expense P2,200
L Bill customer for services rendered, P18,600
M Paid Salaries, P8,400
N Received cash from customer previously billed, P9,800
O Pay P2,400 for notes payable
P Pay P900 as telephone expense
Q Paid Salaries, P7,900
R Billed clients for services P22,500
S Withdrew cash for personal use, P10,000

Trial Balance Balance Sheet Income Statement

Accounts Debit Credit Debit Credit Debit Credit
Cash            
Accounts Receivable            
Cleaning Supplies            
Prepaid Insurance            
Cleaning Equipment            
Service Vehicle            
Notes Payable            
Accounts Payable            
Arenas, Capital            
Arenas, Withdrawal            
Cleaning Revenues            
Salaries Expense            
Rent Expense            
Advertising Expense            
Telephone Expense            
Miscellaneous Expense            
Total
Profit
Total

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