FABM NOTES:

LESSON 005-008
Lesson 005: Users of Accounting Information
Resources - Financial Position
Obligations - Financial Position
Profitability - Financial Performance
Capital - Equity
Cash flow - Cash flow

1. INTERNAL USERS
| the one who make company's decisions
• Owners - They provide capital to the business and they asses if it needs funding.
(remember: they are the sources of the business capital)
• Managers - They need financial information because they plan and organize the
firm. ( they are the one who decide for the company apart from the owners and
thus they need financial aspect and those financial information can be obtained
from AI) — what we need in making decision is the management accounting (MA).

2. EXTERNAL USERS
| we can give them financial accounting information
• Investors - "Should I invest in this company or not" ( " will my investment in this
company will grow?" so i will look at their financial information or in actual
statement in order for each other the stability of this company)
• Creditors - "Can they pay their obligation when they fall due?" + interest
• Customers - Those dependent with the firm are curious about business
continuity. ( for example: you are an avid customer of one company and you are
dependent on that company for the products that they sell so you can look at
their AI)
• Employees - "is the company I am working for stable?"
• Suppliers - "Can they pay for the goods and services I provided?"
• Tax Authorities - "Are they compliant? Do they pay the right amount of taxes?" -
Bureau of Internal Revenue where the VLA are.
• Government - "Do they follow rules and regulations?"
• General Public - "what are the new business trends?"
FABM NOTES:
LESSON 005-008
Lesson 006: Forms of Business Organization
• Sole Proprietorship
• Partnership
• Corporation
• Cooperatives

SOLE PROPRIETORSHIP

- A Sole Proprietorship also referred to as a sole trader or a proprietorship, is an

unincorporate business that has just one owner.
(when a person has the capital to start a business and he thinks that he is ready to
enter he can open the business easily.

ADVANTAGES

1. easy to form - If he already has the capital in order for him to open the business
then he can open the business easily.
2. Effort-reward relationship - Is when the efforts of a sole proprietor is given to
the business, he will receive and enjoy the reward for that effort that he gave.
3. Full Control - Since he is the only boss and he is the owner of that sole
proprietorship type of business then he has the full control of the whole entity.
4. Quick Decision - Since the owner is the sole owner of the business he doesn't
need anyone to advise him of what to do so the decision will be quick.
5. Economical and efficient - but not necessarily effective so we need to check on
that.
6. Personal Touch - Because you are the owner of your business, you can give a
personal touch to what you really want to do.
7. Keep the business simple, dynamic, and flexible.

DISADVANTAGES
1. small size - usually, sole proprietorship don't really go that big because they
have limited capital.
2. Limited life - in a sense that sole proprietorships tends to stop as a sole
proprietorship or corporation, so as a proprietor, it stops.
3. Lacks of Professional Skills and talent - because you don't have any partners or
any managers with you and being the sole owner of the business, we are the only
brain working in the business, so you lack professional skills and talents that might
be available into other forms of this organization.
FABM NOTES:
LESSON 005-008
Lesson 006: Forms of Business Organization
4. Unlimited Liabilities - In any case na magkanda-utang-utang ang business mo,
pati personal assets mo hahabulin ng mga creditors.
5. Growth prospects - we have actually a problem with a growth of a business and
it's all proprietorship type of business and then that's what I've told you earlier,
capital is very limited in this type of business.
6. Risk of wrong decisions.

PARTNERSHIP

- By the contract of partnership, two or more person's bind themselves to

contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
- Two or more person's may also form a partnership for the exercise of a
profession. (talents = industry)

ADVANTAGES

1. Bridging the gap in expertise and knowledge - If you're not knowledgeable with
this, then maybe your partner is knowledgeable with that kind of thing.
2. More cash - In partnership, you have more funding opportunities, because you
can partner with people.
3. More business opportunities - You are all representative of the business itself
and you can advertise your business to others. The number of partnership you
have, the number of chances that you can explore outside.
4. Moral Support
5. New Perspective - They can guide each other.

DISADVANTAGES

1. Loss of Autonomy - the right or condition of self- government.

2. Emotional issues - future selling complications.
3. Unlimited Liabilities - They still can use their personal assets to pay their
liabilities.
FABM NOTES:
LESSON 005-008
Lesson 006: Forms of Business Organization
CORPORATION

- A Corporation is an artificial being created by operation law, having the right

succession and the powers, attributes, and properties expressly by law or
incidental to its existence...
- remember that the corporation is an artificial being but technology our being
there are also a being is people like us, are natural being, a corporation is an
artificial being (in short para din siyang tao, pwede mo siyang kasuhan at pwede
ka rin niyang kasuhan) and it works like a person.
- it is created by the law, so without the approval of it, any legal perspective here
then the corporation will not proceed.
- so in any case, if the owner changes, the corporation will still continue there as a
succession.

ADVANTAGES
1. Limited liability - it enjoys limited liability, you cannot go after the personal
assets of the shareholders to answer the liabilities of the corporation there is a
really a gap between the corporation itself.
2. Source of Capital - you have a big source once you sell shares, you get money
but the downside of it is that you have owners that you might not know because
of those shares.
3. Ownership transfers

DISADVANTAGES

1. Double taxation - the profits of the corporation are being taxed already,
however when those profits are already distributed to the shareholders of a
corporation it will also be taxed and that's what you've all finally taxed.
2. Independent management - remember that the owner of a corporation will
create a management that will really look at the operations of the company and
sometimes the decisions of those management, people is different from the
decisions of the owners and that's what we call an agency problem, why? because
the management is the agent that works for the principal and the principal people
of the business are the owners of the corporation.
3. Forming a corporation costs more - a corporation costs more because you will
be dealing with many government requirements in order for you to set up a
corporation.
FABM NOTES:
LESSON 005-008
Lesson 006: Forms of Business Organization

COOPERATIVES

- Cooperatives are people-centered enterprises owned, controlled and run by and

for their members to realize their common economic, social, and cultural needs
and aspirations. ( Remember that cooperatives are being built because there is
only a common goal, for example: a credit cooperative may benefit their members
and then as part of their funding they can create a mini store and the proceeds of
the store can be enjoyed by the members of cooperatives either by a loan or by
having it.

ADVANTAGES
1. Lower cost - creation of a cooperative has lower cost.
2. Further Marketing Reach - and then you can also have further marketing reach
for that because you have many members of the co-operative who can work for
you.
3. Democratic organization - and then it is a democratic organization because the
goal of the cooperative is let the members enjoy the benefits of that cooperative.

DISADVANTAGES
1. Big inventors don't get much attracted - because in a cooperative one
member-one vote only, unlike any corporation the number of votes that you can
give in a shareholders meeting is the equal of shares that you bought in the
corporation.
2. Lack of membership and participation - people are not attracted to entering a
cooperative and there is also a lack of participation even though they are
members.

SUMMARY
• SOLE PROPRIETORSHIP - when only one person owns the business, it's the sole
proprietorship type of business.
• PARTNERSHIP - when a group of people already pulls their own money, property
or industry with the intention of dividing profits among themselves, that is a
partnership type of business.
• CORPORATION - when the ownership is already divided into shares of stock then
that is a corporation.
• COOPERATIVES - when the members of the firm only have one economic or
cultural goal then that is a cooperative.
FABM NOTES:
LESSON 005-008
LESSON 007: Types of Business According to Activities

• Services
• Merchandising
• Manufacturing

SERVICE

- Service businesses generates income by providing service (for a fee).

: So basically, what happens in a service business is that they'll provide services to
their customers and then the customers will pay them for the services that they
rendered.

MERCHANDISING

(Buying and selling of goods)

- A company purchases goods from a supplier, in which these goods will be sold to
customers.

MANUFACTURING

- A company that purchases raw materials, in which these raw materials will
undergo a process, until it becomes finished goods to be sold to customers.
: the company prepares the goods that they will sell unlike in merchandising that
they only buy what they will sell, so in manufacturing there will be a process that
will be undergone by the raw materials of a purchase.

Can the three types go together?

- A music production and recording company is handling singers and talents.

These singers and talents perform at concerts produced by the company. Also,
the firm has different artists. Lastly, the company is also producing CD albums of
the latest songs to their singers.

Concert Performances (SERVICE)

Record Bar (MERCHANDISING)
Production of CD albums (MANUFACTURING)
FABM NOTES:
LESSON 005-008
LESSON 007: Types of Business According to Activities

• Services
• Merchandising
• Manufacturing

SERVICE

- Service businesses generates income by providing service (for a fee).

: So basically, what happens in a service business is that they'll provide services to
their customers and then the customers will pay them for the services that they
rendered.

MERCHANDISING

(Buying and selling of goods)

- A company purchases goods from a supplier, in which these goods will be sold to
customers.

MANUFACTURING

- A company that purchases raw materials, in which these raw materials will
undergo a process, until it becomes finished goods to be sold to customers.
: the company prepares the goods that they will sell unlike in merchandising that
they only buy what they will sell, so in manufacturing there will be a process that
will be undergone by the raw materials of a purchase.

Can the three types go together?

- A music production and recording company is handling singers and talents.

These singers and talents perform at concerts produced by the company. Also,
the firm has different artists. Lastly, the company is also producing CD albums of
the latest songs to their singers.

Concert Performances (SERVICE)

Record Bar (MERCHANDISING)
Production of CD albums (MANUFACTURING)
FABM NOTES:
LESSON 005-008
LESSON 007: Types of Business According to Activities
Can these three types work as a system?

- A manufacturer of essential oils produces their products and sells them to

different groceries. These groceries then sell them to customers. A massage spa
will then purchase these essential oils for use in the massage therapy service.

Essential Oils Company (MANUFACTURING)

Grocery (MERCHANDISING)
Massage Spa (SERVICE)

INCOME MEASUREMENT

SERVICE

Service Revenue xxx

Less: Operating Expenses (xxx)
Net Income (Loss) xxx

: this means that, we will match the revenues that the company is earning minus
the expenses that they pay for to operate the business that is your net income.

MERCHANDISING/MANUFACTURING

Sales Revenue xxx

Less: Cost of Goods Sold (xxx)
Gross Profit xxx
Less: Operating Expenses xxx
Net Income (Loss) xxx

: you match sales revenue with the cost of goods sold (how much did the
company paid for the goods that they will sell) ex: the ballpen is 8 pesos, that is
goods sold then it was sold to customers at 12 pesos is the sales revenue, so 12
minus 8 pesos gives you 4 pesos, that is the Gross Profit (tubo) and then the gross
profit will be deducted to the operating expenses of the company to arrive at net
income or loss.
FABM NOTES:
LESSON 005-008
LESSON 007: Types of Business According to Activities
EXAMPLES:

Problem #1 : SERVICE

A barber shop earned P60,000 during the month of April. Salaries paid to barbers
amounted to P20,000, utilities paid for is P6,000, and rent of the space for the
barber shop is P5,000. How much is the net income of the barber shop?

Service Revenue 60, 000

Less: Operating Expenses

Salaries: 20,000
Utilities: 6,000
Rent: 5,000 - 31, 000
Net Income = 29,000

Problem #2 : MERCHANDISING

A grocery store earned P225,000 from selling their goods during the month of
April. These goods sold were first purchased at an amount of P160,000. Salaries
paid to employees is P25,000, utilities paid is P4,000 and rent of the selling area is
P6,000. How much is the net income of the grocery?

Sales Revenue 225,000

Less: Cost of Goods Sold: - 160,000
Gross Profit = 65,000
Less: Operating Expenses: - 35,000
Net Income = 30,000

Problem #3 : MANUFACTURING

A car manufacturing company sold 2 cars totalling P3, 000,000 during the month
of April. Car parts and materials used in these cars amounted to P600,000 labor
costs paid P800,000 and other indirect costs to manufacture the cars amounted
to P100,000. Salaries paid to office employees amounted to P50,000, utilities paid
was 20,000 and rent selling area and office space was P10,000. How much is the
net income of the car?
FABM NOTES:
LESSON 005-008
LESSON 007: Types of Business According to Activities
Sales Revenue. 3,000,000
Less: Cost of Goods Sold
Materials : 600,000
Labor : 800,000
Overhead : 100,000 - 1,500,000
Gross Profit : 1, 500,000
Less: Operating Expenses
Salaries : 50,000
Utilities : 20,000
Rent : 10,000. - 80,000
Net Income : 1, 420, 000
LESSON 008: Accounting Concepts and Principles
Generally Accepted Accounting Principles (GAAP) refer to a common set of
accounting principles, standards, and procedures issued by the Financial
Standards Board (FASB).

: GAAP is our guiding principle as accountants on how we are able to record

transactions appropriately, it is actually for consistency and uniformity on how we
report things in accounting.

... as applied in the Philippines

Philippine Financial Reporting Standards (PFRS)
Philippine Accounting Standards (PAS)

ACCOUNTING CONCEPTS

Economic Entity or Accounting Entity

- The personal transactions of the owner are separate from that of the business
he/she owns.

: kung ano yung transaction ng business that is business transaction, kung ano
ang transaction ng owner yun ang owner hindi mo siya dapat pagsasamahin
together. So, when the owner spends money for a birthday party ng anak niya at
personal niyang pera yon, it is NOT a business transaction.
: Anything that is happening in the business is not related to what happens
personally.
FABM NOTES:
LESSON 005-008
LESSON 008: Accounting Concepts and Principles
Accrual Basis of Accounting
Revenue is recorded when earned.
Expenses are recorded when it happens.
Regardless of when cash is received or paid.

Going Concern
- The company will continue operating indefinitely until the foreseeable future,
and that company closure is not imminent.

: we are looking at the business firm as if it will close forever. Going Concern
principle is something that tells you that don't worry, the business firm is not
closing so you don't need to prepare a report as if you are closing.

Monetary Unit
- Transactions are expressed in a monetary unit of measure.
: You will be recording the transaction in Philippine peso.

Time Period
- Transactions are summarized and reported at regular time intervals.
• Calendar Year (January 1-December 31)
• Fiscal Year (Any starting point + 12 months)

Cost Principle
- Amounts shown in financial reports are historical costs.
: Kung magkano yung na-receive mong pera o magkano yung pinangbili mo ng
bagay na 'yan nung time na yon, yun ang irerecord mo. We do NOT adjust it for
inflation, except for hyperinflation. let's put in mind that we record transactions
on how much it was when it happened that time.

Full Disclosure Principle

- Sufficient information for informed judgments.

: were the accountants should include all the information needed so that the
readers of the financial statements will have informed judgements. — sundin mo
kung ano yung sinasabi sa accounting standards na kailangan dine-disclose or
sinasabi sa financial reports. Kapag sinabing disclosure kasi pinapaalam
mo/sinasabi mo. In accounting, we are required as accountants to disclose
everything.
FABM NOTES:
LESSON 005-008
LESSON 008: Accounting Concepts and Principles
Matching Principle

- Matching revenue with expenses to know the profit of the business.

: Hindi pwedeng mag lilista ka lang ng lahat ng kinita mo. Hindi rin pwede na may
lista ka lang ng mga binili mo. In accounting, we match them together. Ito ang
lahat ng kinita ko (revenue), Ito ang lahat ng ginastos ko (expenses), both of them
should be match together. Kapag mas malaki ang revenue mo kesa sa expense
mo, congratulations! kumita ka, pero pag mas malaki ang expenses mo kesa sa
revenue (kinita mo) I'm sorry, lugi ka. We deal with the matching Principle hindi
lang basta nagre-record ka ng revenue and expense, para alam mo kung kumikita
ka o nalulugi ka.

Revenue Recognition Principle

- Recognize revenue when goods are sold or services are rendered, regardless of
cash receipt.
: you record the revenue when it happens, not when the cash is received from the
customer.

Materiality

- In accounting, materiality refers to the impact of an omission or misstatement of

information in a company's financial statements on the user of those statements.
If it is probable that users of the financial statements would have altered their
actions if the information had not been omitted or misstated, then the time is
considered to be material.
: It's something about an amount na kunware nagkamali yung FS or yung decision
mo nagbago dahil dun sa pagkakamali na yun ibigsabihin the item is material, if it
changes your decision or it affects your decision because if that error then the
impact of it is material. Let's put it in this way, In a company with a cash of 100
million pesos, an amount of 1,000 pesos might not be too material.

Conservatism

- If there are two acceptable alternatives in a situation, choose the alternative

that will result in lesser income or resources.
FABM NOTES:
LESSON 005-008
LESSON 008: Accounting Concepts and Principles
Objectivity
-Recording and reporting process should be performed with independence which
is free from bias.

Qualitative Characteristics of Useful Financial Information

Qualitative Characteristics

> Fundamental
- Relevance (Predictive value) (Confirmatory value) An item is relevant if it has
predictive and Confirmatory value. We are able to see or predict what will happen
in the future. In confirmatory, you are able to confirm what happened in the past
only you can say that the information is relevant.

- Faithful Representation (Complete) (Neutral) (Free from error) And to be able

to achieve that certain level of faithfulness, it should be complete, neutral, and
free from error.

> Enhancing VCUT

Verifiability - is the items in the financial reports or financial statements are
verifiable. You should have a supporting documents that could verify.
Comparability - We have 2 kinds of comparability (intra) we are comparing our
own financial statements with your own financial statements of different
years, (inter) you are comparing your financial reports to other companies
within the same industry.
Understandability - can only be achieved in a two-way process, we will do our
best as accountants to make these information very understandable but the
expectation and reader or the users, they should have at least a basic
understanding of what they are actually reading or else we cannot achieve
that certain level of understandability.
Timeliness - remember if the transactions are not timely then the reports are
not relevant anymore and if it's timely, it is relevant.