FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

CHAPTER 1 – STATEMENT OF FINANCIAL POSITION

Statement of Management’s Responsibility – states that the company’s management, and

NOT the independent auditor, is responsible for the information content on the financial
statement.

Independent Auditor’s Report – informs the reader of the opinion of the auditor on the
fairness (refers to the correctness of the information based on GAAP, for which PFRS is the one
being used in the Philippines) of the financial statements based on their audit.

Types of Audit Opinion:

1. Unqualified – Fair;
2. Qualified – Fair except for some specific issues;
3. Adverse – Not fair; and
4. Disclaimer – Not auditable.

Benchmark of correctness or fairness: based on the accounting standards generally

acceptable in the Philippines; being comparable with that of the other companies, which
is also prepared based on PFRS.

Audit Procedure: based on audit standards acceptable in the Philippines, conducted in

sample, and not all, of the company’s transactions.

Inherent Limitations of Audit: Audit is conducted in a sample, and not all, of

transactions, meaning, auditors may not discover all of the errors, specifically those that
are not included in the sample.

Comparative FS – shows the FS of the prior year and the current reporting year side by side
giving the readers the indications whether the accounts increased or decreased over the year.

Complete Set of FS:

1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements

DefiningStatement of Financial Position (SFP) or Balance Sheet (BS)

1. Reports the resources available for the company to use, obligations that the company is
required to settle and the equity that belongs to the owners of the company; claims of
the creditors (liabilities), claims of the owners (equity).
2. Snap shot of the financial position of the company.
3. Main FS because the bottom lines of the other three FS find their way on this FS.
4. Report based on the accounting equation: Assets = Liabilities + Owner’s Equity.

Parts of Heading:
1. Name of the Company
2. Type of Financial Statement
3. Date of the FS
a. “As of the Year Ended” – balances reported in the FS is the net effect of the
company up to the FS date.
b. “For the Year Ended” – amounts presented in the FS does not include the
transactions that occurred before and after the accounting period.

Interconnection of Financial Statements

1. Net income computed from the SCI will flow to the SCE.
2. The ending balance computed from the SCE will flow to the SFP.
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CHAPTER 1 – STATEMENT OF FINANCIAL POSITION

3. The cash balance computed from the SCF is the same balance of cash reported on the
SFP.

ASSETS – resources with future benefits (should be useful in the future) that are within the
control (can prevent others from benefiting from the asset) of the company.

In the event of the company’s closure, the owners are entitled to the assets of the company only
after all the creditors had been paid.

CASH – money owned by the company; funds readily available to be spent for the
company’s operations; unrestricted from being used.
1. Cash on Hand
a. Checks – if post-dated, considered receivable.
2. Cash in Bank
3. Petty Cash Fund

Time Deposit–deposit in the bank that earns higher interest because the
depositor commits not to withdraw the funds over the agreed upon time,
otherwise, penalties will be imposed; given the restrictions, it is not classified as
cash.
1. If it will mature in up to 90 days – reported as Cash Equivalents;
2. While with amaturity of longer than 90 days – reported as Investments.

RECEIVABLES – general term referring to the company’s right to collect or claim

payment.

Sale Agreements:
1. Cash on Delivery (COD)
2. Credit Sales Agreement – gives rise to Accounts Receivable.

Accounts Receivable – evidenced by sales invoice and delivery receipt.

Notes Receivable –evidenced by a promissory note (legal document stating the

promise of the borrower to pay on a scheduled payment dates, a specific sum of
amount (principal) and interest based on principal and stated interest rate).

INVENTORY – reports the cost of unsold merchandise.

Consignment – the owner places his goods “on consignment” in the premises of
the store owner, the store is not obliged to purchase the goods, the owner may
even withdraw his unsold goods from the store at any time. The store owner will
remit the proceeds from the sale of goods to the merchandise owner, the store
owner’s income from this transaction maybe in the form of commission. The
inventory of the consigned goods will be reported at the FS of the merchandise
owner.

Merchandise for sale – INVENTORY; while

Items used in the daily activities of the company – SUPPLIES.

PREPAID EXPENSES – refer to future expenses that the company had paid for in
advance; it is placed in this account until the services or items are used and become
expenses.

Examples:
1. Communication
2. Rent
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CHAPTER 1 – STATEMENT OF FINANCIAL POSITION

3. Insurance
4. Advertising

PROPERTY, PLANT AND EQUIPMENT (PPE) – long term assets that are used in the
operations of the company; it will be used in the business for more than one year.
Rented facilities and equipment are excluded from PPE.

Capitalization – process of recognizing the asset.

Depreciation – transferring of cost of asset to expense.
Accumulated Depreciation – used to catch the depreciation and decrease the
asset value to be reported in the SFP.
Net Book Value – cost of the PPE, net of the balance of accumulated depreciation
as of the SFP date.

INTANGIBLE ASSETS – long term assets similar to PPE for these assets will be used in
the business for more than a year.

Amortization – allocation of cost of intangible assets to the year it was used;

computed similar to depreciation such that the cost of the asset is amortized
evenly over its useful life (finite life), but this is deducted directly to the
intangible asset account.

1. Patent – grant conferred by the government to the creator of an invention

for the sole right to make, use, and sells that invention for a specific
period of time.
2. Brand name – word/s used to identify a specific product and its
manufacturer.
3. Trademark – symbol that represents the brand.
4. Royalty – amount of money paid to the original creator of a product,
book, or music based on how many copies have been sold.

LIABILITIES–obligations that the company is required to pay.

PAYABLES – obligations to make payments to creditors.

Accounts Payable – normally refers to obligations to the suppliers of inventories,

evidenced by supplier’s sales invoices and delivery receipts.
Notes Payable – evidenced by a promissory note.

ACCRUED EXPENSES – unpaid expenses of the company as of the balance sheet cut-
off date.
Examples:
1. Salaries
2. Utilities
3. Rent
4. Interest

UNEARNED INCOME – customer payments received before the delivery of goods or

services; settled by the delivery of goods or rendering of services.

LONG-TERM LIABILITIES – obligations with due dates that fall more than one year
from the date of the SFP; part of financing activities of the company.
If to be settled in instalments, then those scheduled to be paid within twelve
months are classified as current and referred to as current portion of long-term
debt.
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CHAPTER 1 – STATEMENT OF FINANCIAL POSITION

EQUITY – net assets of the business; composed of the owner’s investments and the
accumulated net income of the company, net of any distributions to the owners; reflects the
portion of the asset that belongs to the owners of the business.

Owner’s Capital – only equity account on the balance sheet of sole proprietorships.

Owner’s Drawings – used to accumulate the owner’s withdrawals during the year.
However, this account is not separately presented on the BS, at the end of the year, this
account is netted off against the Owner’s Capital account.

PRESENTATION OF STATEMENT OF FINANCIAL POSITION

Account Form – follows the general T-account format.

Report Form - simple listing – assets first, followed by liabilities, and finally the equity account.