Professional Documents
Culture Documents
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 2
for-profit entities aim for a break-even position or small surplus to allow them to re-
invest in their business in future years.
Change of Titles
The revisions under PAS 1 includes change in the titles of the financial statements to reflect
their function more clearly.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 3
Paragraph 81 of revised PAS 1 provides that an entity shall present all items of income and
expenses and components of other comprehensive income in either of the following:
Financial statements are a structured representation of the financial position and financial
performance of an entity. The objectives of general purpose financial statements are to
provide information about the financial position, financial performance and cash flows of
an entity that is useful to a wide range of users in making and evaluating decisions about
the allocation of resources.
Specifically, the objectives of general purpose financial reporting in the public sector
should be to provide information useful for decision making, and to demonstrate the
accountability of the entity for the resources entrusted to it by:
Providing information about the sources, allocation and uses of financial resources;
Providing information about how the entity financed its activities and met its cash
requirements;
Providing information that is useful in evaluating the entity’s ability to finance its
activities and to meet its liabilities and commitments;
Providing information about the financial condition of the entity and changes in it; and
Providing aggregate information useful in evaluating the entity’s performance in terms of
service costs, efficiency and accomplishments
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 4
An entity shall present with equal prominence all of the financial statements in complete set of
financial statements. Per revised Philippine Accounting Standard (PAS) No. 1, a complete set
of financial statements comprises:
The statement of financial position (or balance sheet) lists all the assets, liabilities and
equity of an entity as a specific date. The income statement presents a summary of the
revenues and expenses of an entity for a specific period. The statement of changes in
equity presents a summary of the changes in capital such as investment, profit or loss, and
withdrawals during specific period.
The statement of cash flows reports amount of cash received and disbursed during the
period. Accounting Policies are the specific principles, bases, conventions, rules and
practices adopted by an enterprise in preparing and presenting financial statements.
Notes to financial statements provide narrative descriptions or disaggregation of items
presented in the statement and information about items that do not qualify for recognition
in the statements.
Financial structure – is the source of financing for the assets of the enterprise.
It indicates what amount of assets has been financed by creditors, which is
borrowed capital, and what amount of assets has been financed by owners,
which is invested capital.
Significance:
(1) Useful in predicting future borrowing needs and how future
profits and cash flows will be distributed among those with an
interest in the enterprise.
(2) Useful in predicting how successful the enterprise is likely to be
raising further finance.
Liquidity – refers to the availability of cash in the near future after taking account of
financial commitments over this period.
Significance:
(1) Useful in predicting the ability of the enterprise to meet its short
term financial commitments as they fall due.
Solvency – refers to the availability of cash over the longer term to meet financial
commitments as they fall due.
Significance:
(1) Useful in predicting the ability of the enterprise to meet its long term
financial commitments as they fall due.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 6
Capacity for adaption – the ability of the enterprise to use its available cash for
unexpected requirements and investment opportunities. This is also known
as financial flexibility.
(1) Information about the economic resources controlled by the enterprise and its
capacity for adaptation is useful in predicting the ability of the enterprise to generate cash
and cash equivalents in the future.
Assets
Assets are defined as “resources controlled by entity as a result of past transactions
and events and from which future economic benefits are expected to flow to the
entity”.
The essential characteristics of an asset are:
a. The asset is controlled by entity.
b. The asset is the result of a past transaction or event.
c. The asset provides future economic benefits.
d. The cost of the asset can be measured reliably.
CLASSIFICATION OF ASSETS
Assets are classified in two namely current assets and noncurrent assets.
When an entity supplies goods or services clearly identifiable operating cycle, the
separate classification of current and noncurrent assets is a useful information by
distinguishing between net assets that are continuously circulating as working
capital from the net assets used in long-term operations.
The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the the entity’s
normal operating cycle identifiable, its duration is assumed to be twelve months.
1. CURRENT ASSETS
Paragraph 66 of revised PAS 1 provides that an entity shall classify an asset as
current when:
The asset is cash or cash equivalents unless the asset is restricted from being
exchange or used to settle a liability for at least twelve months after the reporting
figure.
The entity holds the assets primarily for the purpose of trading.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 7
The entity expects to realize the assets within twelve months after the reporting
figure.
The entity expects to realize the asset or intends to sell or consume it within the
entity’s normal operating cycle.
2. NONCURRENT ASSETS
The caption “noncurrent assets” is a residual definition. The standard simple states
that “an entity shall classify all other assets not classified in current asset as
noncurrent.”
In other words, what is not included in the definition of current assets is is deemed
excluded. All other are classified as noncurrent assets. Accordingly, noncurrent
assets include the following:
1. Property, Plant and Equipment: These are tangible assets that are held by an
enterprise for use n the production or supply of goods or services, or for rental to
others, or for administrative purposes and which are expected to be used during
more than one period. Included are such items as land, building, machinery and
equipment, furniture and fixtures, motor vehicle and equipment.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 8
Liabilities
Liabilities are defined in the conceptual framework as “present obligations of an
entity arising from the past transaction or events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.”
Liabilities are also classified as current and noncurrent.
The entity expects to settle the liability within the entity’s normal operating
cycle.
The entity holds the liability primarily for the purpose of trading.
The liability is due to be settled within twelve months after the reporting
period.
The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 9
2. NONCURRENT LIABILITIES
The caption “noncurrent liabilities” is a residual definition. All liabilities not
classified as current are classified as noncurrent.
1. Mortgage Payable: This accounts records long-term debt of the business
entity for which the business entity has pledge certain assets as security to
the creditor. In the event that the debt payments are not made, the creditor
shall foresee or cause mortgage assets to be sold to enable the entity to settle
the claim.
2. Bonds Payable: Is a contract between the issuer and the lender specifying
the terms of repayment and the interest to be charged.
3. Deferred Tax Liability
4. Long-term Obligation to the Company Officers
5. Long-term deferred revenue
Equity
The term equity is the residual interest in the assets of the entity after deducting all of
its liabilities. Simply stated, equity means “net assets” of total assets minus liabilities.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 10
Owner’s Equity
1. Capital: This account is used to record the original and additional investments of the
owner of the business entity.
2. Withdrawals: When the owners of a business entity withdraws cash or other
assets, such are recorded in the drawing or withdrawal account rather than directly
reducing the owner’s equity account.
3. Income Summary: It is a temporary account used at the end of the accounting
period to close income and expenses. This account shows the profit or loss for the
period before closing to the capital account.
The financial statements must "present fairly" the financial position, financial
performance and cash flows of an entity. Fair presentation requires the faithful
representation of the effects of transactions, other events, and conditions in accordance
with the definitions and recognition criteria for assets, liabilities, income and expenses set
out in the Framework. The application of IFRSs, with additional disclosure when necessary,
is presumed to result in financial statements that achieve a fair presentation. [IAS 1.15]
IAS 1 requires an entity whose financial statements comply with IFRSs to make an explicit
and unreserved statement of such compliance in the notes. Financial statements cannot be
described as complying with IFRSs unless they comply with all the requirements of IFRSs
(which includes International Financial Reporting Standards, International Accounting
Standards, IFRIC Interpretations and SIC Interpretations). [IAS 1.16]
Inappropriate accounting policies are not rectified either by disclosure of the accounting
policies used or by notes or explanatory material. [IAS 1.18]
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with an IFRS requirement would be so misleading that it would conflict with
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 11
the objective of financial statements set out in the Framework. In such a case, the entity is
required to depart from the IFRS requirement, with detailed disclosure of the nature,
reasons, and impact of the departure. [IAS 1.19-21]
All accounting reports require a heading which is written on the first three he
center of the report being prepared
1st line – name of the Company
2nd line – title of the report or
statement
3rd line – Date of the report
For income statement and Statement of Changes in Equity, the date is written as:
For the month ended for the year ended or for the six months ended. For the
balance sheet, the date is written as:As of ________ or just the date.
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 12
Account Form
Course Module
[Conceptual Framework and Accounting Standards]
[Preparation of Financial Statement Part 1] 13
Assets
Current Assets
Cash P 100,500
Accounts Receivable 20,000
Office Supplies 25,000
Total Current Assets P 150,000
Non-current Assets
Office Equipment P 50,000
Total Assets P 200,500
Course Module
[Conceptual Framework and Accounting Standards] 14
[Preparation of Financial Statement Part 1]
Course Module