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INITAO COLLEGE
Jampason, Initao, Misamis Oriental
1st Semester, S.Y. 2023 - 2024
Course Code: EC1
Course Title: Intermediate Accounting and Business Application
Unit: 3 (Lecture)
Facebook Group: EC1_BSBA1-Initao College 2023

MODULE 3: August 21 – 25, 2023

Topic: Objectives of Financial Statements and its Underlying Assumptions

Duration: 3 hrs.
Desired Learning Outcome:
 Understand the importance of financial statements in doing business
 Illustrate the meaning of accrual basis accounting

INTRODUCTION
The framework, Framework for the Preparation and Presentation of Financial Statements, sets out the
concepts that underlie the preparation and presentation of financial statements for external users. The
framework is concerned with general-purpose financial statements (hereafter referred to as “financial
statements”). Such financial statements are prepared and presented at least annually and are directed toward
the common information needs of a wide range of users.
ABSTRACTION
Financial statements form part of the process of financial reporting. The framework applies to the financial
statements of all commercial, industrial and business reporting enterprises, whether in the public or the private
sectors.

ANALYSIS
OBJECTIVE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial position, performance, and
changes in financial position of an enterprise that is useful to a wide range of users in making economic
decisions.

Financial statements should meet the common needs of most users. However, financial statements do not
provide all the information that users may need to make economic decisions, since they largely portray the
financial effects of past events and do not necessarily provide non-financial information.

The classical notion of stewardship was focused on how the money and the other assets entrusted to the
steward (i.e. in previous times, a steward is the one employed by a large household or estate to manage
domestic concerns such as supervision of servants, collection of rents and keeping of accounts) by the owner
were used, and how much money the other assets were present at the end of the reporting period. Financial
statements also show the results of the stewardship of management, that is the accountability of
management for the resources entrusted to it by the owner(s).

The management of the enterprise has the primary responsibility for the preparation and presentation of the
financial statements of the enterprise. Information about the financial position is primarily provided in a
statement of financial position (or balance sheet). Information about performance is primarily in a
statement of comprehensive income and statement of changes in equity. Information on cash flows is
provided by the statement of cash flows.

UNDERLYING ASSUMPTIONS:

Accrual Basis
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The financial statements, except for the cash flow statement, are prepared on the accrual basis of accounting
in order to meet their objectives. Under the accrual basis, the effects of transactions and other events are
recognized when they occur and not as cash is received or paid. This means that the accountant records
revenues as they are earned and expenses as they are incurred. The timing of cash flows is relatively
immaterial for determining when to recognize revenues and expenses.

Financial statements prepared on the accrual basis inform users not only of past transactions involving
payment and receipt of cash, but also of obligations to pay cash in the future, and of resources that represent
cash to be received in the future. Generally accepted accounting principles require that a business use the
accrual basis.

In cash basis accounting however, the accountant does not record a transaction until cash is received or paid.
Generally. Cash receipts are treated as revenues and cash payments as expenses. Cash basis income is the
difference between operating cash receipts and disbursements. These cash flows necessarily exclude
investments by and distributions to the owner in the computation of income.

Illustration. A client paid the Sea Wind Resort in Boracay Island ₱7,000 on April 8, 2021 for a one-day super
deluxe accommodation on May 13, 2021. Under accrual basis of accounting, the receipt of ₱7,000 will be
considered as revenues when the business has rendered its service on May 13.

In contrast, if cash basis is used, the hotel will recognize revenues on April 8. Expenses related to this revenue
transaction will be incurred on May 13. Suppose a financial report is prepared at the end of April, under
accrual basis, no revenue or expense will be reported; under cash basis, revenues of ₱7,000 will be reported
but the related expenses will be recognized when incurred on May 13. Observe that the accrual basis provided
a better measure of the results of transactions.

Going Concern

The financial statements are normally prepared on the assumption that an enterprise is a going concern and
will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the
intention nor the need to liquidate or curtail materially the scale of its operations.

This assumption underlies the depreciation of assets over their useful lives. If an entity expects to liquidate in
the near future, its assets are valued at their worth at liquidation rather than original cost.

REFERENCE:
Ballada, W., & Ballada, S. (2007). Basic Accounting, Made Easy - 12th Edition. Manila: DomDane Publishers
& Made Easy Books.