actbas1 - lesson 2 (statement of financial position)

ACTBAS1Introductory Accounting for

Service Business

Presented by:Mr. Francis H. Villamin

DLSU June 2, 2011

Financial Statements

Means by which financial accounting information are communicated to internal and external users.

Structured representations of management.

Financial Statements

Portray the economic activities and the result of economic activities undertaken by the enterprise during a reporting period.

Objectives of Financial Statements

Provide information about the entity’s financial position, performance and changes in financial position that is useful to a wide range of users in making economic decisions.

Objectives of Financial Statements

Provide information on how well a management has been able to make use of the resources of the enterprise during a particular reporting period.

Questions that may be sought from financial statements

Does the entity have the ability to meet short-term obligations?

Is the entity profitable enough to provide a reasonable rate of return to investors?

Does the entity have the ability to sustain its operations without risk of being liquidated?

Questions that may be sought from financial statements

Is the entity complying with government rules and regulations?

Is the entity able to provide just remuneration to its employees?

Could the entity supply the needs of its customers?

Qualitative Characteristics of Accounting Information

Understandability Relevance Reliability Comparability

Components of Financial Statements

Statement of Financial Position Statement of Comprehensive

Income Statement of Cash Flows Statement of Changes in Equity Notes to Financial Statements

Statement of Financial Position

Provides information on the financial position of the entity as of a given reporting period.

Statement of Comprehensive Income

Provides information on the performance of an entity for a given reporting period. This statement is an expanded form of the income statement, but includes gains and losses taken to other comprehensive income.

Statement of Cash Flows

Provides information about the historical changes in cash and cash equivalents during a reporting period.

Statement of Changes in Equity

Provides information on the activities that cause changes in financial position and information on performance that affect equity.

Notes to Financial Statements

Provides information on the accounting policies adopted by the management, schedules to support the balances presented on the face of the financial statements and other information that may be relevant to the users but is not appropriately presented on the face of the financial statements.

Responsibility for Preparation and Presentation of F/S

Management, or where appropriate, those charged with governance has the responsibility for fair presentation and preparation of financial statements in accordance with applicable reporting framework (Philippine Financial Reporting Standards).

Elements of Financial Statements

(1) Elements of Financial Position a. Assets b. Liabilities c. Equity(2) Elements of Financial Performance a. Income b. Expenses

General-Purpose Financial Statements

These are intended to meet the diverse needs of the wide range of data users.

These are sometimes referred to as “external reports”.

These financial statements are not prepared to meet the specific information needs of the various decision-makers.

Special-Purpose Financial Statements

These are not intended for general use but are prepared to meet the specific information needs of certain decision-makers.

The most frequent user of these reports is the management of the business enterprise.

These are sometimes referred to as “internal reports”.

Users of Financial Statements

Management Investors Trade Creditors Banks and Other Lenders Government and its Agencies Employees and Labor Unions Customers and Clients General Public

Underlying Assumptions in the Preparation of Financial Statements

Accrual Basis

Under this basis, income is recognized when earned, not necessarily during the period when cash is received; expenses are recognized when incurred, not necessarily during the period cash is paid.

Underlying Assumptions in the Preparation of Financial Statements

Going Concern Assumption

Under this assumption, it treats the entity as one that continue its operations for an indefinite period of time in the future, unless there is an evidence to the contrary.

Statement of Financial Position

Conventionally called balance sheet It presents the financial position of an

enterprise as of a given date. It presents the three elements:

assets, liabilities and equity. It is a formal presentation of the basic

accounting equation: Assets = Liabilities + Equity

Major Parts of the Statement of Financial Position

Heading

1. Legal name of the business enterprise 2. The title of the financial statement, that is “Statement of Financial

Position” 3. The particular date as of when the

financial position of the business enterprise is being reported, which is usually at the end of the month.

Major Parts of the Statement of Financial Position

Body 1. The assets or economic resources

owned by the reporting business enterprise.

2. The liabilities or economic obligations of the enterprise to other entities.

3. The equity of the owner or owners over the assets of the enterprise.

Fundamental Accounting Equation

Assets = Liabilities + Equity

Assets

Include those economic resources, rights and property – both tangible and intangible- that are owned and/or controlled by either natural or legal entity.

An item is considered as an asset if it is expected to have future usefulness to the entity, or if it has the capacity to give entity certain future economic benefits.

Examples of Asset Account Titles

Cash – coins, currencies and other similar cash items that are readily available for use in business operations.

Accounts receivable – amounts to be collected in the future from clients or customers.

Examples of Asset Account Titles

Loans receivable – claims from borrowers as a result of lending money.

Merchandise Inventory - Goods and products that are acquired by a merchandising business for the primary purpose of reselling them to customers at higher prices.

Examples of Asset Account Titles

Prepaid expenses – rights to receive benefit from expenses already paid for but are expected to be consumed to used in the following period or periods.

Examples: Unexpired insurance, Prepaid taxes, Unused office supplies, Prepaid

advertising, Prepaid rent

Examples of Asset Account Titles

Prepaid expenses – rights to receive benefit from expenses already paid for but are expected to be consumed to used in the following period or periods.

Examples: Unexpired insurance, Prepaid taxes, Unused office supplies, Prepaid

advertising, Prepaid rent

Examples of Asset Account Titles

Accrued revenue receivable – right to collect income that is but already earned but not yet collected.

Example: Accrued rent income

Examples of Asset Account Titles

Investment in stock – ownership of shares of a corporation.

Investment in bonds – ownership of financial instruments evidencing obligations of another entity.

Examples of Asset Account Titles

Land Building Machinery and equipment Furniture and Fixtures Delivery Equipment Intangible Assets (e.g. Franchise,

Copyright, Trademark, Patents)

Current Assets

Criteria:1. It is expected to be realized in, or it is

intended for sale or consumption in the entity’s normal operating cycle.

2. It is held primarily for the purpose of being traded.

3. It is expected to be realized within twelve months after the reporting period.

Current Assets

Criteria:4. It is cash or cash equivalent, unless

it is restricted from being exchanged or used to settle liability for at least twelve months after the balance sheet date.

Liabilities

Represent the present economic obligations of an entity that would require some form of future settlement.

They may arise as a result of buying or acquiring goods or services on credit term, borrowing money or the occurrence of a business activity or event that gives rise to a future obligation.

Examples of Liability Account Titles

Accounts Payable – obligations of the business enterprise to the suppliers as a result of buying goods and services, on credit basis, in the ordinary course of the business operations.

Examples of Liability Account Titles

Notes Payable – obligations as a result of buying goods and/or services, on credit basis, or as a result of borrowing money, for which a promissory note is given by the business to the supplier or lender.

Examples of Liability Account Titles

Advances from customers – obligations by a seller or contractor to deliver goods or render services to the customers who have paid in advance.

Loans payable – obligations of the business to lenders as a result of borrowing money. Usually the settlement of these requires payment of interest.

Examples of Liability Account Titles

Unearned Revenues – obligations for revenues that are collected in the current reporting period but are expected to be earned in the following period or periods.

Examples: Unearned Rent Income or Deferred Rent Revenue

Examples of Liability Account Titles

Accrued Expenses Payable – obligations for expenses that are already incurred but not yet paid.

Example: Accrued rent expense, Accrued taxes or taxes payable

Examples of Liability Account Titles

Mortgage Payable – obligation of the business enterprise to a lender, usually a bank for long-term borrowing wherein land or building owned by the business is used as a collateral.

Current Liabilities

Criteria:1. It is expected to be settled in the

entity’s normal operating cycle.2. It is held primarily for the purpose

of being traded.3. It is due to be settled within twelve

months after the reporting period.

Current Liabilities

Criteria:4. The entity does not have an

unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

Equity

It represents the residual claim or owner or owners over the business enterprise’s assets.

The owner’s equity is sometimes called “capital” or simply “equity”.

Equity = Assets - Liabilities

Forms of the Statement of Financial Position

Account Form – which looks like a big T-account, where assets are listed on the left side of the statement, while liabilities and equity are listed on the right side.

Report Form – which is a continuous format of presenting all the three elements. Liabilities are presented immediately after the total assets and equity accounts are listed after the liabilities section.

Thank you.That’s all for today!!!