FRAMEWORK FOR THE PRESENTATION OF FINANCIAL STATEMENTS
FRAMEWORK FOR THE PRESENTATION OF FINANCIAL STATEMENTS
June 30, 2015
TOPICSObjective of financial reportingUnderlying assumptionsQualitative characteristics of useful accounting informationElements of financial statementsRecognition conceptsMeasurement conceptsConcepts of capital and capital maintenanceMODULE 1
Objectives of Financial ReportingOBJECTIVE OF FINANCIAL REPORTINGPAS Framework states:The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.OBJECTIVE OF FSPAS Framework, par. 12The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making decisions.5OBJECTIVE OF FINANCIAL REPORTINGBrief ExplanationFor what purposeProvision of financial informationAboutReporting entityTo whomPotential and existing investors, lenders and other creditors (PRIMARY USERS)For what reasonTo assist them in making economic decisions about providing resources to the entity.ExamplesFinancial highlights and significant ratiosSummary of important financial figuresAnalysis of financial statementsFINANCIAL STATEMENTSOBJECTIVE OF FINANCIAL REPORTINGREFERENCE - http://www.chrisjmast.com/portfolio/print/annualreport/
OBJECTIVE OF FINANCIAL REPORTINGSPECIFIC OBJECTIVES OF FINANCIAL REPORTING(To provide information for the following reasons)1.Any useful information in making decision about providing resources to the entity.Information about entity resources, claims, and changes in resources and claims.2.Any useful information in assessing the prospects of future net cash flows to the entity.SAMPLE DECISIONS AND ASSESSMENTSDetermine terms of creditIncrease or decrease reliance as customer or borrowerExtend creditEnter suit or force bankruptcyOBJECTIVE OF FINANCIAL REPORTINGLIMITATIONS OF FINANCIAL REPORTING1.DO NOT and CANNOT provide all of the information needed by primary users.2.NOT DESIGNED to show the value of a reporting entity but only to help estimate the value of reporting entity.3.Only COMMON INFORMATION are provided common to all users.4.Financial reports are BASED ON ESTIMATE AND JUDGEMENT rather than exact depiction.OBJECTIVE OF FINANCIAL REPORTINGIN SUMMARYOver-all objectiveTo provide information that is useful for decision making.Directed primarily to whomPrimary users (existing and potential investors, lenders and other creditors)Why directed to primary users?They have the most critical and immediate need for information in financial reports.Is financial reports usable to management?YES to some extent but they can be able to obtain and access additional financial information internally.MODULE 2
Overview Financial StatementsBusiness Transactions and AccountingBusiness TransactionsFinancial StatementsAccounting ProcessINPUTOUTPUTRECORDING PHASEDocumentationJournalizingPosting to the ledgerSUMMARIZING PHASEPreliminary Trial Balance preparationAdjustment data compilationWorksheet preparationFinancial Statements preparationPost-Closing Trial Balance preparationClosing the accounting booksReversing journal entry preparationPAS 1, par. 10
Statement of Financial PositionIncome StatementStatement of Comprehensive IncomeStatement of Cash FlowsStatement of Changes in EquityNotes to FSWhat are Financial Statements?The end product or main output of the financial accounting process.END PRODUCT the output (SEE the diagram on previous slide)
FINANCIAL ACCOUNTING PROCESS The accounting processWhat are financial statements?A structured financial presentation of the financial position and financial performance of an entity.STRUCTURED - logical, systematicFINANCIAL expressed in monetary valuePRESENTATION reportFINANCIAL POSITION what we own (assets), what we owe (liabilities), and what is left for the owners (owners equity).FINANCIAL PERFORMANCE revenue, cost and expenses, and net profitENTITY the company itself as separate from its ownersWhat are financial statements?The means by which the information accumulated and processed in financial accounting is periodically communicated to users. MEANS - medium of communicationINFORMATION Financial accounting informationPROCESSED The accounting processFINANCIAL ACCOUNTING IAS/PFRSPERIODICALLY Annually, quarterly, monthlyUSERS with direct and indirect interest to business entity.What are presented in FS?Financial positionPerformance in financial positionChanges in financial positionSpecific Financial StatementsFinancial positionStatement of Financial Position or Balance Sheet
PerformanceStatement of Comprehensive Income or Income Statement
Changes in financial positionStatement of Cash FlowsRESPONSIBILITY FOR FSCONCERNRIEF EXPLANATIONPrimary responsibility in Financial statementsThe MANAGEMENT of the reporting entity.BODs discharging of liabilityBy REVIEWING AND AUTHORIZING the financial statements for issue before its submission to stockholder.Management accountabilityFor the safekeeping of the entitys resources.For its proper, efficient and profitable use.RESPONSIBILITY FOR FS
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Underlying AssumptionsBasic Accounting Assumptions and Principles
What are accounting assumptions?Accounting assumptions are the basic notions or fundamental premises on which certain standard accounting principles, and accounting processes or procedures are based. Accounting AssumptionsAssumptions are the foundations of accounting principles.From accounting assumptions, accounting principles are conceptualized.From accounting assumptions, accounting processes are also conceptualized.Basic Accounting AssumptionsBusiness Entity Assumption
Going Concern Assumption
Quantifiability Assumption
Stability of the Peso Assumption
Periodicity AssumptionBUSINESS ENTITY ASSUMPTIONThis was conceptualized by a Benedictine monk named Don Pietra who assumed that a business enterprise was a separate economic entity, distinct from its owner or owners. The business is another individual with its own transactions. Business Entity Assumption Caricature
All personal transactions of the business owners shall be accounted separately and should not be accounted or recorded in the business accounting records.
Business Entity Assumption ApplicationGOING CONCERN ASSUMPTION
Hanggang kailan kaya tatakbo ang aking negosyo? Nobody knows when the life of the business will end.GOING CONCERN ASSUMPTIONThe business continues to operate for an indefinite period of time unless otherwise stated.
If there is an evidence that the business entity cannot continue to operate due to severe losses or bankruptcy, or whatever reasons that made the management or its owners to discontinue its operations. the going concern assumption is not anymore applicable. Instead, the quitting concern shall be applied.QUANTIFIABILITY ASSUMPTION
I have my meeting yesterday sa isang potential big client ng company (transaction 1). I spent PhP 1,000.00 during the meeting (transaction 2). Alin ba sa dalawang transaction na ito ang ire-record namin sa accounting records?QUANTIFIABILITY ASSUMPTIONOnly business transactions that can be quantified shall be recorded by accounting.
The quantification can be in any unit of measure but in the end, accounting defines which specific unit of measure shall be used for recording purposes.QUANTIFIABILITY ASSUMPTION
I have my meeting yesterday sa isang potential big client ng company. I spent PhP 1,000.00 during the meeting. Alin ba sa dalawang transaction na ito ang ire-record namin sa accounting?ANSWER: The PhP 1,000.00 spent during the meeting.STABILITY OF THE PESO ASSUMPTION
Twenty years ago, ang piso ko ay pambayad na for minimum fare sa jeep. Ngayon, ang piso ko ay di na puwedeng pambayad as minimum fare kasi walong piso na ang katumbas nito ngayon. Hay buhay!In accounting, it is assumed that the value of the Philippine peso will be the same from year to year.
In accounting, the devaluation of Philippine peso due to inflation is ignored. Therefore, no adjustment in acquisition cost will be made.
If there is a significant change in the value of Peso, there is a separate accounting treatment for this . This is discussed in higher accounting subject.STABILITY OF THE PESO ASSUMPTION
Periodicity AssumptionPERIODICITY ASSUMPTIONThe concern of periodicity assumption is the period of reporting regarding what is happening to the business? if it is:
Earning or notFinancially stable or not
Periodicity Assumption ConceptAs a solution to period of reporting, the life of the business is divided into equal period, usually twelve (12) months or one (1) year. This is the periodicity assumption.
Every end of this period, financial reports are prepared in the form o financial statements.
In fact, reporting period can also be on a daily, weekly, monthly, quarterly or semi-annual basis.
But for practicality, the acceptable accounting period is one (1) year. Periodicity AssumptionThe accounting period is of two (2) types, namely:
The calendar period. It starts every January 1 and ends every December 31 of each year.
The fiscal period. It starts on any first day of the month within the calendar year and ends every on the twelfth month from the first day of the starting month.Periodicity Assumption Requirement by BIR
For BIR purposes, only corporation is allowed to use the fiscal period.Other Underlying Assumptions and PrinciplesAccounting Principles Are principles that govern current accounting practice and that is used as a reference to determine the appropriate treatment of complex transactions.ACCOUNTING PRINCIPLESACCOUNTING PRINCIPLESBusiness TransactionsRECOGNITIONMEASUREMENTREPORTINGOther Underlying Accounting Assumptions and PrinciplesUnit of Measure PrincipleHistorical Cost PrincipleMatching PrincipleAccrual Basis of AccountingObjectivity PrincipleFull Disclosure PrincipleMateriality PrincipleConservatism PrincipleConsistency PrincipleUNIT OF MEASURE PRINCIPLEAccounting Assumption Basis: QUANTIFIABILITY ASSUMPTIONThe Monetary Currency is the unit of measure used in accounting.Since we are in the Philippines, the unit of measure shall be the Philippine Peso.Foreign currencies received shall be converted to peso using the exchange rate on transaction date.
On January 1, 2011, we purchased PhP 50,000 worth of desktop computer. How much is the amount to be reported for desktop computer on December 31, 2011? On December 31, 2012? On December 31, 2013?HISTORICAL COST PRINCIPLEHISTORICAL COST PRINCIPLEAccounting Assumption Bases: GOING CONCERN ASSUMPTIONSTABILITY OF THE PESO ASSUMTIONThe historical cost of the transaction shall be the amount to be recorded and reported from transaction date to succeeding periods like months, quarters, years.ANSWER: On December 31, 2011 PhP 50,000.00On December 31, 2012 PhP 50,000.00On December 31, 2013 PhP 50,000.00
On January 1, 2011, we purchased PhP 50,000 worth of desktop computer. How much is the amount to be reported for desktop computer on December 31, 2011? On December 31, 2012? On December 31, 2013?HISTORICAL COST PRINCIPLEMATCHING PRINCIPLE
During November, 2011, we purchased 10 pieces of hotel souvenir items at PhP 400.00 each. We sold 6 pieces at PhP 1,000.00 each. How much is our total sales revenues? Our total cost of goods sold? Our gross profit from sales? MATCHING PRINCIPLEAccounting Assumption Basis: GOING CONCERN ASSUMPTIONPERIODICITY ASSUMPTIONMatching Principle simply tells us that you cannot achieve something without any sacrifices.
In business, you will not earn profits or income unless you have incurred and paid related costs and expenses to achieve its target revenues or simply the goal.
Therefore, it is expected that any remaining income will be computed by deducting from total income all related costs and expenses. MATCHING PRINCIPLE
During November, 2011, we purchased 10 pieces of hotel souvenir items at PhP 400.00 each. We sold 6 pieces at PhP 1,000.00 each. How much is our total sales revenues? Our total cost of goods sold? Our gross profit from sales? ANSWER No. 1: Total sales revenues PhP 6,000.00(6 pieces sold x PhP 1,000.00 sales price per piece)
During November, 2011, we purchased 10 pieces of hotel souvenir items at PhP 400.00 each. We sold 6 pieces at PhP 1,000.00 each. How much is our total sales revenues? Our total cost of goods sold? Our gross profit from sales? ANSWER No. 2: Total cost of goods sold PhP 2,400.00(6 pieces sold x PhP 400.00 purchase price per piece)MATCHING PRINCIPLE
During November, 2011, we purchased 10 pieces of hotel souvenir items at PhP 400.00 each. We sold 6 pieces at PhP 1,000.00 each. How much is our total sales revenues? Our total cost of goods sold? Our gross profit from sales? ANSWER No. 2: Total cost of goods sold PhP 2,400.00(6 pieces sold x PhP 400.00 purchase price per piece)MATCHING PRINCIPLEWhy the total cost of goods sold is PhP 2,400.00 and not PhP 4,000.00 (10 pieces purchased x PhP 400.00 purchase price per piece)?
During November, 2011, we purchased 10 pieces of hotel souvenir items at PhP 400.00 each. We sold 6 pieces at PhP 1,000.00 each. How much is our total sales revenues? Our total cost of goods sold? Our gross profit from sales? MATCHING PRINCIPLEANSWER: There is no related sales revenue yet to 4 pieces unsold. Therefore, it is illogical to deduct its related purchase cost of PhP 1,600.00 (4 pieces x PhP 400.00 purchase price per piece) from the sales revenue of PhP 6,000.00 which is related to 6 units already sold.
MATCHING PRINCIPLEThis is the essence of MATCHING PRINCIPLE Matching of revenues to related cost
MATCHING PRINCIPLEThe cost of PhP 1,600.00 has no related revenues to match because these items are not yet sold MATCHING PRINCIPLEUSING THE SAME CASE, assume further that the following expenses were paid by the business during November, 2011:
Rental expense of Php 2,000.00 for November and December, 2011.Commission Expense 10% of Sales, PhP 600.00 (PhP 6,000.oo sales revenues x 10%)Power services, PhP 500.00.Telephone, PhP 500.00How much is the cost of rental to be charged for November, 2011?How much is the commission expense, power services and telephone expenses to be charged for November, 2011?MATCHING PRINCIPLE
These are November, 2011 costs which are related to November, 2011 sales revenuesMATCHING PRINCIPLE
REVENUESCOSTS AND EXPENSES related to generation of revenues during the reporting period (November, 2011)ACCRUAL BASIS OF ACCOUNTINGAccounting Assumption Basis: GOING CONCERN ASSUMPTIONPERIODICITY ASSUMPTIONIts concern is the timing of recognition of revenues and expenses (or costs).
The questions being asked in its applications are the following:How much shall be recognized this period?What shall be the accounting treatment for the unrecognized?When the unrecognized shall be recognized?MODULE 4
Qualitative characteristics of useful accounting informationMODULE 5
Elements of Financial StatementsOBJECTIVE OF FSThe financial statement information include the following:
AssetsLiabilitiesEquityIncome and Expenses, including gains and lossesContributions by and distributions to owners in their capacity as ownersCash flowsMODULE 6
Recognition ConceptsMODULE 7
Measurement ConceptMODULE 5
Concept of Capital and Capital Maintenance
