Accounting
Relevance
the capability of financial information to influence the decision making of users.
Enumerate the different forms of financial statements
1. Consolidated 2. Unconsolidated 3. Combined
Materiality
An information is material if it has the capacity to influence the decision making of the users of financial statements It is in relation to the fundamental qualitative characteristic of Relevance
GAAP definition and purpose
Generally Accepted Accounting Principles is the set of rules, principles, standards, conventions and underlying assumption that are used when preparing financial statament. Serves as a guide for individuals in the accounting profession.
General definition of Accounting
Is described as the language of business. It aims to communicate with people through the use of financial statements.
Qualitative Characteristics of Useful Information
1. Fundamental Qualitative Characteristics 2. Enhancing Characteristics C. Cost Constraint
The three basic processes of Accounting
1. Identifying 2. Measuring 3. Communicating
Definition of accounting based on the Accounting Standards Council (ASC)
Accounting is a service activity that functions to provide quantitative information in the form of financial statements about economic entities to assist in making economic decisions
Elements of the Financial Statements
Assets Liabilities Equity Revenue Expenses
Going Concern Principle
Assumes that the company will continye to exist unless stated or believed otherwise note: if it is believed that the company will not be able to continue, it must state the reason as to why in the notes of the financial statements
Merchandising Company
Buy and Sell In depth definition: Buys goods from suppliers and sells them to customers at profit. Also called a trading business or retail company.
Manufacturing Company
Buys raw materials, produces and sells finished products. Note: Also called a production company
Faithful Representation
Complete Neutral Free from error note: neutrality is supported by prudence which means the exercise of caution when making judgements under condition of uncertainty
Enumerate Generally Accepted Accounting Principles (GAAP)
Economic Entity Principle Monetrary Assumption Principle Accrual Basis Matching Principle Specific time period assumption Full disclosure principle Going concern principle Materiality Conservatisim
Users of financial statements
External users Internal users
FRSC definition and purpose
Financial Reporting Standards Council to improve and establish accounting standards that will be generally accepted in the Philippines
Confirmatory value
Financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations. Summary: It enables users to check and confirm previous predictions or evaluations
Specific Time Period Assumption
Financial statements need to indicate the time period for the activity reported note: "as of" means from the inception of the company until a certain point in time "for the period" means all the days in between two specific dates. usually year ends of the previous year and the current year.
Explain the three basic processes of Accounting
Identify the economic events relevant to the business Measure the economic event in financial terms using monetary units and Communicate the collected information in the form of financial statements to the users.
Definition of accounting based on American Accounting Association (AAA)
It is the art of identifying, measuring and communicating economic information to assist the users in decision making and making informed judgements.
Definition of accounting based on American Institute of Certified Public Accountants (AICP)
It is the art of recording, classifying, and summarizing money, transactions and events (financial in nature) and interpreting its results.
Economic Entity Principle
It states that transactions carried out by a business are separated from those conducted by its owner. Summary: The business is a separate entity from the owners
The Revised Corporation Code does what?
Manages/ governs the corporations in the Philippines
parent-subsidiary relationship
One company owns another owning majority of voting stock
What is a business
Organization engaged in the trade of goods, services, or both to consumers, generally to earn profit and increase the wealth of the owners. Note: Can be classified by nature of the business re: service, manufacturing, merchandising or legal form re: Propietorship, Partnership or Coporation
Define a Partnership and enumerate advantages and disadvantages
Owned by AT LEAST 2 PEOPLE. Is established by a contract of co-partnership Advantages - Second opinion - easy to establish - more capital available - share of losses - partners only pay personal tax Disadvantages - Unlimited Liability - Disagreement between partners - share in profit - change in ownership = dissolution of the business
PFRS definition and purpose
Philippine Financial Reporting Standards set of accounting standards established by the FRSC or Financial Reporting Standards Council to constitue the GAAP or Generally Accepted Accounting Priniciples in the Philippines.
Financial information is relevant if it has
Predictive Value and Confirmatory Value
Notes to financial statements
Provides additional information that is significant in decision making which are not presented in the face of entity's financial statements Also known as footnotes It is in relation to Faithful representation
Accrual Basis
Revenue is recorded when earned but not yet received. Expenses are recognized when incurred but not yet paid.
Statement of Cash flows
Shows information of how changes in statement of financial position and operation affect cash and cash equivalent tool to determine an entity's capability to meet their short term financial obligations can be classified into three activities 1. Operating 2. Investing 3. Financing Activities note: it is in relation to liquidity
Complete set of financial statements
Statement of Financial Position Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes to financial statements
Components of Financial Statements
Statement of financial position (balance sheet) Statement of financial performance (income statement) Statement of changes in owners equity Statament of cash flows notes to financial statements
Information provided by Financial Statements
Structured representation of the financial position and financial performance of an entity. To provide information about the financial position and performance and casf flow of an entity that assists users in making economic decisions
Solvency
The capacity of a company to meet their long term financial obligations
Liquidity
The capacity of a company to meet their short term financial obligations
Conservatism
The company must choose the most acceptable way to record a transaction. More often called prudence which is the practice of exercising caution note: so that it represents faithful representation of the information provided
Monetray Assumption Principle
The use of the same currency through all financial statements Note: is part of comparability because the use of the same currency allows for easier comparison between other entities in the country as well as within the entity itself. "purchasing power of currency remains static over time" meaning inflation is not recognized in financial reports
Conceptual Framework definition
a system of ideas and objectives that lead to the creation of consistent set of rules and standards. It sets out the concepts that underlie the preparation and presentation of financial statements for its users Notes: Does not override any standards or any requirements in a standard because it is NOT a standard. other purposes : 1. assust the FRSC to develop PFRS that are based on consistent concepts 2. Assist preparers to develop consistent accounting policies when no standard applies to a particular transaction or other event, or when a standard allows a choice of accounting policy 3. assist all parties to understand and interpret the standards
Indirect verification
checking the inputs and recalculating the outputs using the same methodology
Understandability
classifying, characterizing, and presenting information clearly and concisely
Full Disclosure Principle
company discloses all information that related to the function of its financial statements in notes accompanying the statament It is in relation to the fundamental qualitative characteristic Faithful Representation
Financial Position
defined as the status of financial well-being of a company as of a specific date. It is the indicator of a company to adapt to changes in the environment to which it operates in. It is the liquidity and solvency of a company
Direct verification
direct observation
Comparability
enables users to identify and understand similarities and differences in items.
Reporting entity
entity that is required to prepare the financial statements. is not necessarily a juridical entity (legal entity). may be a portion of an entity or more than one entity
Economic Events
events that impacts t the financial position of the company
Fundamental Qualitative Characteristics
for financial information to be useful, it must be relevant and and must have faitful representation for what it represents.
Timeliness
having information available to decision-makers before it loses its capacity to influence decisions
Verifiability
helps assure users that information faithfully represents the economic phenomena it represents. Observers could reach a consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation Can be direct or indirect
Consistency
is a scope of comparability. Consistency is the process in order to arrive at the capability of comparability
Define a Sole Proprietorship and enumerate advantages and disadvantages
is owned by one person only. It is also the most basic legal form of a business Advantages - Easy to establish because of less requirements of the law - Sole ownership (walang kahati sa profits etc) - Operations may be discontinued at will - Income is taxed as personal income Disadvantages - Unilimited liability - Prone to bankrupcy since mahirap kumuha ng funding for the business - No second opinion - life of the business is directly related to that of the owner's
Predictive value
is the capacity of financial information to be used in predicting future outcomes. notes: the information itself does not need to be a prediction or forecast in order for it to have predictive value. It is simply used by users to come up with their own predictions
Bookkeeping
is the process of identifying, measuring and recording financial transactions
Unconsolidated financial statements
provides information about A,L,E,R and E of parent entity only It is the separate financial statements prepared by the parent company
Consolidated financial statements
provides information about the A,L,E,R and E of both parent and subsidiaries as one entity It is prepared by the parent entity
Combined financial statements
provides information about the A,L,E,R, and E of two or more entities that have no parent-subsidiary relationship
Enhancing Qualititative Characteristics define and enumerate
qualitative characteristics that enhance the usefulness of relevant and faithfully represented information Verifiability Comparability understandability Timeliness
Matching Principle
recognize expenses in the same period as the revenues they help to generate revenu and expenses are matched
What is unlimited liability?
requirement that an owner is personally and fully responsible for all losses and debts of a business
Service Company
sells services rather than physical goods
Statement of Changes in Equity
the changes in owners equity resulting from investments and withdrawals
Cost - Constraint
the cost shall not outweigh its benefits
External users
those interested parties that do not have direct access to financial informations of a company
Internal users
those that have direct access to financial informations of a company. Owners Employees Managers note: the process of providing accounting information to internal users is called management accounting
Objective of general purpose financial reporting according to the conceptual framework
to provide financial information that is useful to users in making decisions relating to providing resources to the entity
The use of Financial Infromation
used by users to asses the management stewardship of the company's economic resources and prospects for future net cash inflows to the company Summary: how the company manages its economic the resources and shows the company's prospects for future net cash inflows
Definition of Corporation according to the RCC
A corporation is an artificial being that has a separate legal entity from its owners Advantages - has more capital - limited liability - life of a business is unlimited - ownership is easily transferrable without dissolving the business and consent from stockholders Disadvantages - Double taxation - Harder to establish due to the requirements of the law and costs more
Financial Performance
Ability of a company to generate profit or incur loss (income statement or statement of comprehensive income)
