Chapter 4

EQUATION EXPANDED TO
SHOW OPERATING
ACTIVITIES
 Accrual Concept

 Realization of Revenue
 Earned regardless of collection
 Increase assets or decreases liabilities which in turn
increases owner’s equity

 Recognition of Expense
 Incurred regardless of whether cash is paid or not
 Decreases either assets or increases liabilities which in
turn decreases equity
 3 Ways of Recognizing Expense

Expense is recognized when revenue is recognized

(Matching Principle)

Resources or assets that will benefit the business

over a number of years should be allocated or spread
out as depreciation expense

Expenses that are regularly incurred. Measurement

is needed for these expenses.
 Accrual VS. Cash

 IFRS 15 (Revenue Recognition Standard)

 Contract
 Performance obligation
 Transaction or contract price

 Transaction price is to be allocated (series of promised

goods)
 Revenue is recognized when performance is satisfied
overtime
 Operating Business for Profit

ASSETS = LIABILITIES + OWNER’S EQUITY

Increases due to
Contributions
Revenues

Decreases due to
Withdrawals
Expenses
 Income

PAS 1 – increase in economic benefits during the

period that results in increase in equity. It may be an
increase in cash inflow or enhance of assets or
decrease in liabilities
 Expense

PAS 1 – decrease in economic benefit during the

accounting period that results in decrease in equity.
It may be in the form of cash outflow or depletion of
asset or increase in liability.
 Profit or Loss

Difference between total income earned and total

expenses incurred.
 Statement of Comprehensive Income

Statement which requires an entity to present

income and expenses either in single statement or
two statements.

Our focus is the Income Statement

Fundamentally Related Financial Statements

Income Statement – Net income or Net loss is

carried forward to the capital statement

Capital Statement/Statement of Changes in Owner’s

Equity – Ending capital is brought forward to the
Statement of Financial Position

Statement of Financial Position – shows assets

owned by the business, claim of creditors and claim
of owner
 Capital and Capital Maintenance

Capital is synonymous with net assets or net worth.

Capital Maintenance – profit is earned only when

the financial net assets at the end of the year is
greater than the financial net assets at the start of the
year but not as a result of contribution or
distribution of the owner
 Classification of Assets and Liabilities

Current Assets – Cash and Cash Equivalents which

are not restricted and other assets expected to be
realized into cash, or sold or consumed within the
normal operating cycle or one year, whichever is
longer.

Non-Current Assets – in the form of Property, Plant

or Equipment and Intangible assets
 Classification of Assets and Liabilities

Current Liabilities – debts or obligations reasonably

expected to be liquidated in the normal course of
operating cycle or paid within a period of one year

Non-Current Liabilities – long term liabilities or

obligations which are payable longer than 1 year.
 Accounting Period

One year accounting process

Interim Financial Statements may also be prepared
Statement of Financial Position – reports real values
at a point in time
Income Statement – reports temporary or nominal
values at a certain period of time
Statement in Changes in Equity – reports changes in
equity only in a certain period of time
 Operating Cycle

Period of time it takes for cash to be converted back

into cash
Time between acquisition of assets, their processing
and realization in cash or cash equivalent
It depends on the type of business.
 CHAPTER 8

Income Statement/ Statement of Comprehensive

Income
Statement on Changes in Equity
Statement of Financial Position
Statement of Cash Flows
 Financial Statements

Limitations
 Largely financial in nature
 Do not contain non-financial information

 Not factual and objective

Integrity
 Preparer
 Standards

 Audited
 Income Statement

Prepared first
Summary of income and expense
Two presentations
 Nature
 Function
Only line items
 Statement on Changes in Equity

Capital Statement
Explains what happened to the capital
 Statement of Financial Position

Two forms
 Account form
 Report form
Current and Non-current Classification
Adequate Disclosure
 Statement of Cash Flows

How cash is being managed

Financial health
Maintain proper balance