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What is
BUSINESS?
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A business can be described as an organization
or enterprising entity that engages in
professional, commercial or industrial
activities. There can be different types of
businesses depending on various factors. Some
are for-profit, while some are non-profit.
Similarly, their ownership also makes them
different from each other.
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What is
ACCOUNTING
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The American Accounting Association (AAA)
defines accounting as: the process of
identifying, measuring, and communicating
economic information to permit informed
judgments and decisions by the users of the
information. This information is primarily
financial—stated in money terms.
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What is the complete
ACCOUNTING PROCESS
FINANCIAL
STATEMENTS
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DESIRED LEARNING OUTCOMES:
• Determine the components of financial statements.
• Determine the components of financial statements.
• Identify the objective of financial statements
• Understand the objective of financial reporting
• Define the primary responsibility for the preparation of
financial statements.
• Describe the general features in the preparation of financial
statements.
PURPOSE OF FINANCIAL
STATEMENTS:
➢ Financial statements are a structured representation of the
financial position and financial performance of an entity.
➢ The objective of financial statements is to provide
information about the financial position , financial
performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.
➢ Financial statements also show the results of the management
stewardship of the resources entrusted to it.
➢ To meet this objective, financial statements provide
information about an entity's (a) assets (b) liabilities (c)
equity (d) income and expenses, including gains and losses
(e) contributions by and distributions to owners in their
capacity as owners and (f) cash flows.
➢ This information, along with other information in the notes,
assists users of financial statements in predicting the entity's
future cash flows and , in particular, their timing and certainty.
COMPLETE SET OF
FINANCIAL STATEMENTS:
A. A statement of financial position as at the end of the
period
B. A statement of profit or loss and other comprehensive
income for the period
C. A statement of changes in equity for the period
D. A statement of cash flows for the period
E. Notes, comprising significant accounting policies and
other explanatory information
F. A statement financial position as at the beginning
of the preceding period when an entity applies an
accounting policy retrospectively or makes a
retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial
statements.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Fair presentation and compliance with PFRSs – The
application of PFRSs, with additional disclosure, when
necessary, is presumed to result in financial statements
that achieve a fair presentation. An entity whose financial
statements comply with PFRSs shall make an explicit and
unreserved statement of such compliance in the notes.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Going concern assumption – The financial statements are
prepared based on the assumption that the entity will be
operating in the foreseeable future.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Accrual basis of accounting – Income and expenses are
recognized when earned and incurred, respectively, regardless
of the timing of the related cash flows
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Materiality and aggregation – An entity shall present
separately each material class of similar items. An entity
shall present separately items of a dissimilar nature of
function unless they are immaterial.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Offsetting – An entity shall not offset assets and
liabilities or income and expenses, unless required or
permitted by an PFRS.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Frequency of reporting – An entity shall present a complete
set of financial statements (including comparative
information) at least annually.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Comparative information – Except when PFRSs permit
or require otherwise, an entity shall present comparative
information in respect of the preceding period for all
amounts reported in the current period’s financial statements.
GENERAL FEATURES OF
FINANCIAL STATEMENTS
Consistency of presentation – An entity shall retain the presentation and
classification of items in the financial statements from one period to the
next unless:
a. another presentation or classification would be more
appropriate having regard to the criteria for the selection and
application of accounting policies in PAS 8; or
b. an PFRS requires a change in presentation.
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Statement of financial position (Balance Sheet) – is a
statement of financial position that presents the resources (assets), obligations
(liabilities) and equity at a given point in time.
Elements of Statement of Financial Position
Assets – are resources controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.
Liabilities – are present obligations of the entity arising from past events, the
settlement of which are expected to result in an outflow from the entity of
resources embodying economic benefits.
Equity – is the owners’ residual interest in the assets of an entity that remains
after deducting its liabilities.
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RECOGNITION OF ASSETS
AND LIABILITIES:
Assets – are recognized in the balance sheet when it is probable
that the future economic benefits will flow to the entity and the
asset has a cost or value that can be measured reliably.
Liabilities – are recognized in the balance sheet when it is
probable that an outflow of resources embodying economic
benefits will result from the settlement of a present obligation and
the amount at which the settlement will take place can be
measured reliably.
CURRENT AND NON- 20
CURRENT CLASSIFICATION:
Assets and liabilities should be separately classified on the face of the balance
sheet except in circumstances when a liquidity-based presentation provides more
reliable and relevant information.
Current asset
IAS/PAS 1, paragraph 66: An entity shall classify an asset as current when:
a. It expects to realize the asset or intends to sell or consume it, in its
normal operating cycle;
b. It holds the asset primarily for purpose of trading.
c. It expects to realize the asset within twelve months after the reporting
period; or
d. The asset is cash or cash equivalent unless the asset is restricted from
being exchanged or used to settle a liability for at least twelve months
after the reporting period.
An entity shall classify all other assets as non-current.
CURRENT AND NON- 21
CURRENT CLASSIFICATION:
Assets and liabilities should be separately classified on the face of the balance
sheet except in circumstances when a liquidity-based presentation provides more
reliable and relevant information.
Current liabilities
IAS/PAS 1, paragraph 69: An entity shall classify a liability as current
when:
a) It expects to settle the liability in its normal operating cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after the
reporting period; or
d) The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.
An entity shall classify all other liabilities as non-current.
INFORMATION TO BE PRESENTED IN 22
THE STATEMENT OF FINANCIAL
POSITION:
a. Property, plant and equipment k. Trade and other payables
b. Investment property l. Provisions
c. Intangible assets
m. Financial liabilities (excluding
d. Financial assets (excluding amounts amounts shown in (K) and (L)
shown under e, h and i)
e. Investment accounted for using the n. Liabilities and assets for current tax as
equity method defined in IAS 12 Income taxes
f. Biological assets within the scope of o. Deferred tax liabilities and deferred tax
IAS 41 Agriculture assets as defined in IAS 12 Income taxes
g. Inventories
p. Liabilities included in the disposal
h. Trade and other receivables groups classified as held for sale in
i. Cash and cash equivalents accordance with IFRS 5
j. The total assets classified as held for sale q. non-controlling interest, presented
and assets included in disposal groups within equity
classified as held for sale in accordance
with IFRS 5 r. Issued capital and reserves attributable
to equity holders of the parent
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Information to be presented either in the statement of financial position or in the
notes - an entity shall disclose, either in the statement of financial position or in the
notes further subclassifications of the line items presented, classified in a manner
appropriate to the entity. The disclosures vary each item, for example:
• Items of property, plant and equipment are disaggregated into classes
in accordance with IAS 16
• Receivables are disaggregated into amounts receivable from trade
customers, receivables from related parties prepayments and other
amounts;
• Inventories are sub-classified, in accordance with PAS 2, into
classifications such as merchandise, production supplies, materials,
work in progress and finished goods;
• Provisions are disaggregated into provisions for employee benefits and
other items; and
• Equity capital and reserves are disaggregated into various classes, such
as paid-in capital, share premium and reserves.
AN ENTITY SHALL DISCLOSE THE FOLLOWING,
EITHER ON THE FACE OF THE BALANCE SHEET OR 24
IN THE NOTES:
• For each class of share capital;
• The number of shares authorized;
• The number of shares issued and fully paid, and issued but not
fully paid;
• Par value per share, or the shares have no par value;
• A reconciliation of the number of share outstanding at the
beginning and at the end of the period;
• The rights, preferences and restrictions attaching to the class
including restrictions on the distribution of dividends and the
repayment of capital;
• Shares in the equity held by the entity or by its subsidiaries or
associates; and
• Shares reserved for issue under options and contracts for the sale
of shares, including the terms and amounts; and
• A description of the nature and purpose of each reserve within
equity
STATEMENT OF PROFIT OR LOSS AND
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OTHER COMPREHENSIVE INCOME
The statement of profit or loss and other comprehensive income shall present, in addition to the profit or loss
and other comprehensive income sections:
a) profit or loss
b) Total comprehensive income
c) Comprehensive income for the period, being the total of profit or loss and other comprehensive income
If an entity presents a separate statement of profit or loss it does not present the profit or loss section in the
statement presenting comprehensive income.
An entity shall present the following items, in addition to the profit or loss and other comprehensive income
sections, as allocation of profit or loss and other comprehensive income for the period;
(a) Profit or loss for the period attributable to
(1) non-controlling interests and
(2) owners of the parent
(b) comprehensive income for the period attributable to: (1) non-controlling interest and (2) Owners of the
parent
In addition to items required by other IFRSs, the profit or loss section or the statement of profit or loss
shall include line items that present the following amounts for the period;
(a) revenue, presenting separately interest revenue calculated using the effective interest method
(b) Gains and losses arising from the derecognition of financial assets measured at amortized cost
(c) Finance costs
(d) Impairment losses (including reversals of impairment losses or impairment gains)
(e) Share of profit or loss of associates and joint ventures accounted for using the equity method
(f) If a financial asset is reclassified out of the amortized costs measurement category so that it is measured
at fair value through profit or loss, any gain or loss arising from the difference between the previous
amortized cost of the financial asset and its fair value at the reclassification date
(g) If a financial asset is reclassified out of the fair value through other comprehensive income
measurement category so that it is measured at fair value through profit or loss, any cumulative gain or
loss previously recognized in other comprehensive income that is reclassified to profit or loss
(h) Tax expense
(i) A single amount for the total of discontinued operation
FORMS OF PRESENTING THE STATEMENT OF
PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME:
1. Functional presentation – also known as cost of sales method, this form classifies expenses according to their
function as part of cost of sales, selling activities, administrative activities and other activities. At a minimum,
an entity discloses its cost of sales under this method separately from other expenses.
FORMS OF PRESENTING THE STATEMENT OF
PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME:
2. Natural presentation – also known as nature of expense method, this form, expenses are aggregated
according to their nature and not allocated among various functions within the entity. (for example,
depreciation, purchase of materials, transport costs, employee benefits, and advertising costs), and are not
reallocated among various functions within the entity.
STATEMENT OF CHANGES IN EQUITY.
Information to be presented in the statement of changes in equity:
(a) total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests.
(b)For each component of equity, the effects of retrospective application or retrospective
restatement recognized in accordance with IAS 8
(c) For each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately (as a minimum) disclosing changes
resulting from (1) profit or loss (2) other comprehensive income and (3)
transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership interest in
subsidiaries that do not result in a loss of control.
STATEMENT OF CASH FLOWS
Cash flow information provides users of financial statements with a basis to assess the
ability of the entity to generate cash and cash equivalents and the needs of the entity to
utilize those cash flows. IAS 37 sets out requirements for the presentation and
disclosure of cash flow information.
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ASSESSMENT
TEST
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1. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations and
cumulative effect.
c. revenues, expenses, gains, and losses.
d. All of these.
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1. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations and
cumulative effect.
c. revenues, expenses, gains, and losses.
d. All of these.
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2. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
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2. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
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3. Which method of income measurement is used in the preparation of the
income statement?
a. Capital maintenance approach.
b. Transaction approach.
c. Cash-flow approach.
d. Income components approach
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3. Which method of income measurement is used in the preparation of the
income statement?
a. Capital maintenance approach.
b. Transaction approach.
c. Cash-flow approach.
d. Income components approach
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4. Which of the following equations expresses the definition of “income”?
a. Income = Revenues – Expenses
b. Income = (Revenues + Gains) – (Expenses + Losses)
c. Income = Revenues + Gains
d. Income = Gains – Losses
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4. Which of the following equations expresses the definition of “income”?
a. Income = Revenues – Expenses
b. Income = (Revenues + Gains) – (Expenses + Losses)
c. Income = Revenues + Gains
d. Income = Gains – Losses
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5. The definition of expenses includes
a. losses only.
b. expenses and losses.
c. expenses only.
d. expenses, losses and unrealized losses on available-for-sale securities.
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5. The definition of expenses includes
a. losses only.
b. expenses and losses.
c. expenses only.
d. expenses, losses and unrealized losses on available-for-sale securities.
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6. Which of the following is not a selling expense?
a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.
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6. Which of the following is not a selling expense?
a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.
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7. Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
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7. Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
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8. The statement of financial position is useful for analyzing all of the following
except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
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8. The statement of financial position is useful for analyzing all of the following
except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
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9. The basis for classifying assets as current or noncurrent is conversion to cash
within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
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9. The basis for classifying assets as current or noncurrent is conversion to cash
within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
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10. Each of the following are an intangible asset except
a. copyrights.
b. goodwill.
c. plant expansion fund.
d. trademarks.
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10. Each of the following are an intangible asset except
a. copyrights.
b. goodwill.
c. plant expansion fund.
d. trademarks.
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