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BSA QualifyingReviewer-4 PDF
BSA QualifyingReviewer-4 PDF
THEORIES FROM
FINANCIAL ACCOUNTING
BY WEYGANDT ET AL
Prepared by:
ACTBAS1
I. Introduction to Accounting
1.1 Financial Statements
Financial Statements provide management, owners and other interested parties with
relevant financial data. These are:
Statement of Comprehensive Income – presents income and expenses and
resulting profit or loss for a specific period of time. As permitted by the
International Accounting Standards, an entity may present all items of income
and expense recognized in a period in either a single statement of
comprehensive income or in two statements:
a. a separate Income Statement/Profit of Loss Statement – displays
income and expenses resulting in a profit or loss
- revenue is listed first followed by expenses before determining
profit (or loss) for the period
- expenses are listed in order or magnitude
b. a Statement of Comprehensive Income – displays components of
other comprehensive income which comprises other income and
expenses that are not recognized in profit or loss
Statement of Changes in Equity – summarizes the changes in owner’s equity for
a specific period of time
- time period is the same as that covered by the income statement
- information in this statement indicated the reasons why owner’s equity has
increased or decreased
a. owner’s additional investments – assets that the owner
puts into the business
b. profits (or loss) – gross increase (decrease) in owner’s
equity which is equal to the difference of revenue – arises
in the course of the ordinary activities of the business – and
gains – include gains on disposal of non-current asses and
unrealized gains on revaluing assets – (expenses) over the
expenses – the cost of assets consumes or services used in
the process of earning income (revenue and gains)
c. owner’s drawings – withdraw cash or other assets for
personal use
Statement of Financial Position – reports the assets, liabilities and owner’s
equity at a specific date or point in time
- assets are listed at the top, followed by liabilities and owner’s equity
- total assets must equal total liabilities and owner’s equity (capital)
- snapshot of business’ financial condition at a specific moment in time
usually month-end or year-end
Statement of Cash Flows – summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time
- reports the cash effect of the following activities of an entity during a
period:
a. operating activities – include transactions that create
income and expenses
b. investing activities – include (a) acquiring and disposing of
investments and plant, property and equipment and (b)
lending money and collecting loans
c. financing transactions – include (a) obtaining cash from
issuing debt and repaying the amounts borrowed and (b)
obtaining cash from shareholders and providing them with a
return on their investment
- reports the net increase or decrease in cash and the cash amount at the end
of the period
- this report is useful of investors and creditors because they would want to
know what is happening to the company’s most liquid resource
- answers the following questions:
a. Where did cash come from?
b. What was the cash used for?
c. What was the change in the cash balance?
Notes to Financial Statements – include summary of significant accounting
policies used to prepare financial statements, and other explanatory notes and
supporting schedules
1.2 Definition, Nature and Scope of Accounting
Accounting – is an information system that identifies, records and communicates the
economic events of an entity to interested users
Identifying – selecting the economic activities/transactions relevant to a
particular entity
Recording – provide a history of the entity’s financial activities
- consists of keeping a systematic, chronological diary of events
- classifies and summarizes economic events
Communicating –through accounting reports of which the most common are
the financial statements, financial information is communicated to interested
users:
a. Internal – managers who plan, organize and run a business
1. Marketing Managers
2. Production Supervisors
3. Chief Financial Officers
4. Other Employees
b. External – there are types of external users and these are:
1. Investors (Owners) – use accounting information to
make decisions to buy, hold or sell shares
2. Creditors (such as Supplier and Bankers) – use
accounting information to evaluate risks of granting
credit or lending money
3. Tax Authorities - want to know whether the
company complies with the tax laws
4. Regulatory Agencies – want to know whether the
entity is operating within the prescribed rules
5. Customers – interested in whether an entity will
continue to honor product warranties and support
its product lines
6. Employees and Labor Unions – want to know
whether the entity can pay increased wages and
benefits
7. Economists – use accounting information to
forecast economic activity
Analyzing- involves the use of ratios, percentages, graphs and charts to highlight
significant financial trends and relationships
Interpreting – involves explaining the uses, meaning and limitations of reported
data
- often referred to as the “language of business” – means of communication
as it provides information that assist users to understand where the entity
has been by looking at its past performance, to understand where it is now
by looking at its current financial position, and to provide insight into what
is likely future prospects are
- its purpose is to assist people, whether internal or external to an entity, to
make decisions about the allocation of scarce resources
- means of measuring business activity and processing this information into
reports to communicate results to decision makers
- may be divided into:
a. Financial Accounting – provides economic and financial
information for external users
b. Management Accounting – provides economic and financial
information for internal users
- has three major fields:
a. Public Accounting – would offer expert services to the
general public
- involves the following major area/work:
1. Auditing – public accountants such as Certified
Public Accountant (CPA) or Chartered Accountant
(CA) examine the financial statements of entities
and express on opinion as to the fairness/reliability
of presentation
2. Taxation – includes tax advice and planning,
preparing tax returns and representing clients
before government agencies
3. Management Consulting – ranges from installing of
basic accounting systems to helping entities
determine whether they should use the space
shuttle for high-tech research and development
projects
- also include activities such as developing business financial
plans and outsourcing requirements for clients
b. Private (or Management) Accounting – includes the
following activities:
1. General Accounting – recording daily transactions
and preparing financial statements and related
information
2. Cost Accounting – determining the cost of
producing specific products
3. Budgeting – assisting management in quantifying
goals concerning revenue, costs of goods sold and
operating expenses
4. Accounting Information Systems - designing both
manual and computerized data processing systems
5. Tax Accounting – preparing tax returns and doing
tax planning for the business
6. Internal Auditing – reviewing the business
operations to see if they comply with the
management policies and evaluating the efficiency
of operations
c. Not-for-Profit Accounting – non-profit entities also need
sound financial reporting and control because donors to
such entities would want information about how well the
entity has met its financial objectives and whether
continued support is justified
- entities must also make decisions about allocating funds
- one area of Not-for-Profit Accounting is Government
Accounting
1.3 Brief History of Accounting
The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian
renaissance mathematician. In his 1494 text Summa de arithmetica, geometria,
proportione et proportionalite, he described a system to ensure that financial
information was recorded efficiently and accurately.
The advent of the industrial age in the 19th century and later, the emergence of large
entities, a separation of the owners from the managers of business took place. As a
result, the need to report the financial status of the entity became more important, to
ensure that the managers acted in accord with the owner’s wishes. Also, transactions
between entities became more complex, making necessary improved approaches for
reporting financial information
Our economy has now evolved into a post-industrial age – the information age – in
which many “products” are information services. The computer had been the driver of
this age
1.3.1 Double-Entry Bookkeeping
Double-Entry Bookkeeping – suggests that for every credit entered into a
ledger, there must be corresponding debit.
- one of the most beautiful discoveries of the human spirit
1.3.2 Harmonization of Accounting Reports
Generally Accepted Accounting Principles (GAAP) – set of standards and
rules for financial reporting
- these principles, since they are ‘Generally Accepted’, have a substantial
authoritative support from…
1.3.3 International Accounting Standards
International Accounting Standards Board (IASB) – national accounting
standard-setting bodies and/or regulatory and enforcement agencies
1.4 Relationship of Accounting to Other Fields of Discipline
“How will the study of accounting help me?”
General Management – make wise business decisions
Marketing – develops strategies to help the sales
Finance – examine and analyze statements
Real Estate – agents must understand the numbers involved
1.5 Forms of Business Organization as to Ownership and Activity
Proprietorship – a business owned by one person
- owner is often the manager/operator of the business, which is usually a small
service-type one
- only relatively small amount of money is necessary
- owner receives any profits, suffers any losses and is personally liable for all debts of
the business
- although there is no legal distinction between the business and the owner,
accounting records of the business activities are still kept separate from the
personal records of the owner
Partnership – business owned by two or more persons
- like a proprietorship in most cases expect that there are more than one owner
involve
- partnership agreement which may either be oral or in writing sets forth terms such
as initial investment, duties of each partner, division of profit (or loss) and
settlement to be made upon death or withdrawal of a partner
- each partner has unlimited personal liability for the debts of the partnership
- partnership affairs must be kept separate from the personal activities of the
partners
- often used to organize retail and service-type business, including professional
practices
Company/Corporation – business organized as a separate legal entity under the
corporation law and having ownership divided into transferable shares
- shareholders enjoy limited liability or they are not personally liable for the debts of
the company
- shareholders may transfer all or part of their shares to other investors at any time
- ease with ownership
- has unlimited life since the ownership may be transferred without dissolving the
company
1.6 Basic Professional Values and Business Ethics
Ethics – standards of conduct which encompasses principles such as:
a. acting in the public interest
b. acting with integrity (i.e. with honesty, fairness and sincerity)
c. avoiding conflicts of interest
d. independence
e. respect for confidentiality
f. maintaining technical competence
g. acting with due care
h. behaving ethically
ACTBAS2
ACTPACO