Professional Documents
Culture Documents
DAY 2
1|AC101SESSION1
Fundamentals
of Accounting 1
SESSION 2
0
FINANCIAL STATEMENTS
OBJECTIVES
Provide information about the financial position, performance and
changes in financial position of an entity that is useful to a wide range of
users in making economic decisions.
Financial statements prepared for this purpose:
▪ Meet the common needs of most users
▪ Also show the results of the stewardship* of management, or
accountability of management for the resources entrusted to it.
▪ Do not, however, provide all the information that users may need
to make decisions since they largely portray the financial
effects of past events and do not necessarily provide non-
financial information.
RELEVANCE
Relevant financial information is capable of making a difference in the
decision made by users, influences the economic decisions of users by helping
them to evaluate, past, present, or future events or confirming, or
correcting, their past evaluations.
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FAITHFUL REPRESENTATION
To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it
purports to represent.
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RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS
Measurement is the process of determining the monetary amounts at which the elements
of financial statements are to be recognized and carried in the balance sheet and income
statement. This involves the selection of a particular basis of measurement. A
number of these are used to different degrees and in varying combinations in
financial statements. They include the following:
CURRENT COST. Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was acquired
currently.
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(1) Each component of the financial statements shall be clearly
identified and the following information shall be emphasized for a
proper understanding of the information presented:
i. The name of the reporting entity;
ii. Whether the financial statements cover the individual
entity or a group of entities.
(2) The period covered by the financial statement shall be specified.
FINANCIAL POSITION
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(1) Useful in predicting the ability of the enterprise to
meet its long-term financial commitments as they fall
due.
Assets
Assets are should be classified only in two: current assets and non-
current assets. Operating Cycle is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents. When the
entity’s normal operating cycle is not clearly identifiable, it is assumed to
be twelve months.
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Current Assets
1. Cash any medium of exchange that a bank will accept for deposit at face
value. It includes coins, currency, checks, money orders, bank deposits
and drafts.
*Money orders is a document which can be bought as a way of sending money
through the post.
5. Inventory or Merchandise Inventory these are assets which are (a) held
for sale by the company, (b) in the process of production for such
sale, (c) in the form of materials (raw materials) or supplies to be
consumed in the production.
6. Supplies this may be office supplies like bond papers, paper clips and
the like or can be also store supplies like boxes, bags, packaging
tapes and other related materials.
Non-current Assets
All other assets not classified or does not fall under the criteria of
current assets are called non-current assets.
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1. Property, Plant and Equipment (PPE) these are tangible assets that are
held by an enterprise for use in the production or supply of goods or
in rendering services, or for rental to other, or for administrative
purposes and which are expected to be used during more than one period.
These are:
a. Land e. Delivery Equipment
b. Building f. Store Equipment
c. Office Equipment g. Service Vehicle
d. Furniture and Fixtures
To illustrate:
The Company has an office equipment worth P500,000 with a useful life of
10 years acquired last June 1, 2013.
Office Equipment P 500,000
Accumulated Depreciation – O/E (100,000)
Net book value P 400,000
Formula:
Annual Depreciation = Cost of the PPE – salvage value* (if any)
Life (n)
Accumulated Depreciation = Annual depreciation x age of the PPE
*Salvage value is the value of an asset if sold for scrap and also called as Residual or
scrap value.
To compute:
= 500,000 = 50,000 annual depreciation
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= 50,000 x 2 years = 100,000 Accu. Dep.
(from june 1 2013 to june 1 2015)
3. Intangible
These are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or
services, for rentals to others or for administrative purposes. These
are:
a. Goodwill e. Franchises
b. Patents f. Trademarks
c. Copyrights g. Brand names
d. Licenses
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LIABILITIES
Current Liabilities
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5. Current portion of Long-term debt These are portions of long-term
liabilities which are to be paid within one year from the balance sheet
date.
Non-current liabilities
All other liabilities not classified or does not fall under the criteria
of current liabilities are called non-current liabilities.
OWNER’S EQUITY
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COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE
REVENUE OR INCOME
EXPENSES
These are decrease in economic benefits during the period in the form
of outflows or using up of assets or incurrence of liabilities that result in
decreases in equity, other than relating to distributions to equity
participants.
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9. Interest Expense An expense related to use of borrowed funds.
THE ACCOUNT
The simplest form of the account is known as the “T” account because of
its similarity to the letter T. the account has three parts as shown on the
next page.
Account Title
Left side or Debit Right side or
side credit side
THE ACCOUNTING EQUATION and DEBITS AND CREDITS-THE DOUBLE ENTRY SYSTEM
Balance
The basic tool of accounting is the accounting equation. The left side
of the equation shows how much the business owns, and the right side of the
equation shows how much resources do the outside creditor and owner supplied
to the business.
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subtractions from both sides (left and right sides), or an addition and
subtraction on the same side (left or right sides). But in all cases the
equality must be maintained as shown above.
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ACTIVITY NO. 1
NAME: YR.&SEC.
COURSE: DATE
MULTIPLE CHOICE
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c. Relevance
d. Reliability
8. It is the ability to bring together for the purpose of noting
similarities and dissimilarities
a. Relevance
b. Reliability
c. Comparability
d. Understandability
9. Financial reporting is concerned only with information that is
significant enough to affect evaluation or decision.
a. Materiality
b. Timeliness
c. Comparability
d. Cost and benefit
10. The purchase of an asset on account will
a. Increase total liabilities and decrease total assets
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and decrease owner’s equity
11. Amounts owed by a business are referred to as
a. Assets
b. Equities
c. Liabilities
d. Capital
12. Which of the following equations is the fundamental accounting
equation?
a. Assets – Liabilities = Owner’s Equity
b. Assets = Liabilities + Owner’s Equity
c. Assets – Owner’s Equity = Liabilities
d. Assets – Owner’s Equity = Liabilities
13. When an owner deposits cash in an account in the name of the business,
it is an increase to
a. Cash and Accounts receivable
b. Cash and withdrawals
c. Cash and capital
d. Cash and expenses
14. Which of the following is not considered an account?
a. Equipment
b. Revenues
c. Accounts Payable
d. Cash
e. Accounts Receivable
15. If an owner invests her computer and printer in the business, there is
an increase to
a. Cash and capital
b. Computer Equipment and withdrawals
c. Cash and withdrawals
d. Computer equipment and capital
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16. The owner invested P50,000 in the business. What are the effects on the
fundamental accounting equation?
a. Assets increase P50,000; liabilities no effect; owner’s equity
increase P50,000
b. Assets increase P50,000; liabilities decrease P50,000; owner’s
equity increase P50,000
c. Assets increase P50,000; liabilities increase P50,000; owner’s
equity no effect
d. Assets increase P50,000; liabilities no effect; owner’s equity
decrease P50,000
17. The purchase of an asset for cash will
a. Increase total assets and decrease total liabilities
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and increase total owner’s equity
18. When the rent for the business is paid with a check
a. Cash is decreased and rent expense is decreased
b. Cash is decreased and rent income is increased
c. Cash is decreased and rent expense is increased
d. Cash is decreased and accounts payable is decreased
19. The purchase of supplies for cash will
a. Increase supplies and decrease cash
b. Increase supplies expense and decrease cash
c. Decrease cash and increase accounts payable
d. Decrease cash and increase capital
20. Which of the following transactions does not include an increase to
expense?
a. Received and paid the phone bill
b. Bought office supplies on account
c. Received cash for services performed
d. Paid the week’s salaries
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