03.04.

2021

What is a Financial Statement?

- Financial Statement is used by the management in making important decisions
like investment decisions, procurement of company assets, issuance of dividends to
shareholders and may also be used as a basis for increasing employee benefits. FS
has a lot of uses for government compliances so it must be accurate to not affect
important management decisions.

There are 2 kinds of Financial Statement:

1. General Purpose- Statements that cater to the common needs of external users,
primarily that potential and existing investors, lenders and other creditors.

2. Special Purpose- A financial report that is intended for presentation to a limited

group of users such as BOD and Management.

Usually 3-5 consecutive years are covered not just the present performance in a
financial statement.

Another important factor to FS are the notes. The investors and other users can
clearly understand the numbers if the narrative report or detailed report will be
seen on the notes to financial statement.

What are the general features of financial statements?

• Fair representation and compliance with IFRS
• Going Concern
• Accrual basis of accounting
• Materiality and aggregation
• Offsetting
• Frequency of reporting
• Comparative information
• Consistency of presentation

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03.08.2021

Exercise no. 1 & 2

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03.11.2021

Statement of Financial Position (SFP) also known as the balance sheet, displays the
financial health of the company at a given period of time. It represents the
resources, obligations and equity of the company at a given period of time.

Statement of Financial Position (SFP) has 3 elements.

- Assets, Liabilities & Equity.

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 owner's residual interest in the asset of an entity that remains after
deducting its liabilities.

How do we recognize an asset in SFS?

- An asset is recognized 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
(inflow of resources).

How do we recognize a liability in SFS?

- 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.

Assets and liabilities can either be classified as current or noncurrent.

ASSETS
According to IAS/PAS1, paragraph 66, an entity shall classify an asset as current
when it expects to realize the asset or intends to sell or consume it, in it its normal
operating cycle.

ex: Accounts Receivable.

Other reason: It holds the asset primarily fro the purpose of trading. It expects to
realize the asset within twelve months after the reporting period. The asset is cash
or cash equivalent unless the asset is restricted from being exchange or used to
settle a liability for at least twelve months after the reporting period. Cash and cash
equivalents must be unrestricted to be classified as current.
If an asset does not meet the above criteria, it is considered as noncurrent.

ex: Property, plant & equipment.

LIABILITIES
Under IAS/PAS1, paragraph 69, an entity shall classify a liability as current when
it expects to settle the liability in its normal operating cycle.

ex: Accounts Payable.

Other reason: It holds the liability primarily for the purpose of trading. It is due to
be settled within twelve months after the reporting period. The entity does not have
an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period.

All other are considered noncurrent.

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03.15.2021

Comprehensive Income.

Preparation of income statement and other comprehensive income.

Income statement shows the financial performance of the entity for a period of
time. This shows if the company generates profit or on the other side the company
gain nothing (loss).

What are the components of income?

1. Sale of goods
2. Rendering services

Other sources: use of entity resources, say if a company owns a building, some
units can be rented to other tenants. Aside from business' place, on the other hand
they are gaining profit due to rentals.

Another one is interest income, due to bank deposits or gain on sales of assets.

There are two ways to present it:

1. Functional- cost of sales method
2. Natural - nature of expense method
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.

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 cost) and are not re allocated
among various functions within the entity.

Note: Be aware if the problem you are solving ask for:

a. Profit or loss,
b. OCI
c. Total comprehensive income

Components of expenses:
1. Cost of goods sold/cost of sales
2. Distribution cost/selling expenses
3. Administrative expenses
4. Other expenses
5. Income tax expense

Computation of COGS depends upon if merchandising or manufacturing nature of

business.

If manufacturing, you have raw materials, direct labor and overheads.

If merchandising, you have beginning inventory, purchases and ending inventory.

Distribution - expenses related to selling the product, like marketing/advertising

expense, freight, sales salaries.

Admin includes office related expenses other than selling expenses.

Other expenses, not your regularly expenses of conducting/running a business like

these are incidental only like loss on sale investment/PPE, loss due to natural
calamities.

Finance cost or interest expense for loans or other financing services.

Revenue - expenses = income before tax

30% tax rate for corporations

Less income tax expense = net income/loss

Now you have income statement or statement of profit or loss.

Next OCI for us to compute for the statement of comprehensive income. OCI
comprises items of income and expenses including reclassification and that are not
recognized in the income statement. These includes foreign currency gain or loss.
Unrealized gain or loss from cash flow hedge.

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03.18.2021

Key points when preparing the SFS:

If you were given a data to prepare a SFS, your heading should be:
1. Name of the company
2. Report name which is SFS
3. Date

Also if given the data for as of December 31, 2020, your report date should be year
2020 also not 2021 because the transactions occurred during the year.

Equity = Assets - Liabilities

• Share capital
• Share premium
• Retained earnings

Equity shows the capitalization of the company owners. Share capital as shown on
the report should be at par value, contributed capital at original value or face value.

Shares of stock cannot be sold below par value. It can be sold at least at its par
value, break even. If an issuance of shares take place, to an investor or to the public
(IPO- initial public offering) at higher than par value, this is called share premium.

Retained earnings:
1. Free to use at company's discretion
2. Set aside for/as contingency funds for unexpected natural events, or for plant
expansion, etc.
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 pf equity, a reconciliation between the carrying amount to
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.

On the SCE, it shows the capital movement and the increase of contributions, is
there an income or none but a loss instead, is there prior period error correction, or
changes in accounting policy that affects the figures on the previous report.

In running balance. The SFS under equity summarized amount is presented; in the
SCE is where you can see detailed changes.

Beginning balance +/- Changes = Ending balance

Key take away for prior period correction, this is common for nominal account or
those in the IS.

Journal entry if the depreciation last year is understated..

Debit(-) RE
Credit(+) Accumulated Depreciation

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03.22.2021

Statement of Cash Flows & Notes to FS

Under SCF we have operating, investing and financing transactions of the

company. This shows the in and out of cash which is why we have:

beginning cash balance +/- effects of these transaction = ending balance

Here deals with cash and cash equivalents.

Cash:
1. Cash on hand
2. Cash in bank
3. Demand deposits

Cash equivalents are highly liquid investments, meaning easily convertible to cash
within a short period of time of 3 months and the value does not change rapidly.

Three Components of SCF:

1. Operating Activities - a section of a company's cash flow statement that explains
the sources and uses of cash from ongoing regular business activities in a given
period. This typically includes net income from the income statement, adjustments
to net income and changes in working capital.

- primary transactions of a running business which is generation of revenue and

paying expenses attributable to the company.

Example: cash receipts from sales of goods/ rendered services & cash payments for
operating expenses.

According to PAS 7, part 33, interest income and interest expense is part of
operating expenses because it is part of the net income/loss computation of the
company.

2. Investing Activities - a section of the cash flow statement that shows the cash
generated or spent relating to investment activities. Involving non operating assets.

- Long term investments like cash purchase of PPE or cash receipts from sales of
long term investment from equity or debt instruments.

3. Financing Activities - tells the borrowings of the company to finance the

business which is either equity or debt financing.

Two ways of computing the cash in and out of operating activities:

1. Direct method - considered only those accounts that involve cash, whether cash
is received or cash paid. Or directly affects cash. Cash basis of income statement.
2. Indirect method - more complex compared to direct method because it must now
put into consideration those non-cash transactions. Ex: depreciation/amortization.

Conversion of net income to cash. Convert net income from accrual basis to cash
basis.
In both methods you must be aware of the effects of increase or decrease in
accounts, journal entry expertise.

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03.25.2021

In determining cash receipts and payments, you should analyze all accounts in the
SFP except for cash account.

How do you compute for the net collection for the current year?
Direct method:
AR, beg + sales current year = Total AR - AR, end = Total cash collected

Journal Entry: for sales

Debit AR
Debit Sales Discount (if any)
Credit Sales

Ro compute above entry including COGS:

Debit COGS
Credit MI

How do you compute for the cash paid for current purchases of MI?
For cash payment:
AP, beg + current purchases = Total AP - AP, end = Total cash paid for purchases

Journal Entry: for purchase

Debit Purchases (or Merchandise Inventory)
Credit AP

Investing and financing has less transactions compared to operating. Since it

involves transactions that are not on a daily basis of a running business.

The difference in indirect method is the need to analyze the increase/decrease in

each account, not considering the other factors affecting it, to be able to know the
effect on cash and any non-cash account considered then.

Net income +/- decrease/ increase in accounts.

This is why it is called presenting net income from accrual basis to cash basis.
Guidelines on how to compute net cash provided by operating activities:
1. ⏫ in trade non-cash current asset, deduct from net income.
2. ⏬ in trade non-cash current asset, add to net income.
3. ⏫ in trade non-cash current liability add to net income.
4. ⏬ in trade non-cash current liability deduct to net income.

Generally, current accounts are involved because of non-current. It will either fall
on financing or investing.

5. Non-cash expenses like depreciation/amortization are added back to net income

because, technically, it should be included to arrive at net cash to eliminate or to
remove effect since it is originally deducted, so in effect it is zero.
6. Any gain on disposal of asset or retirement of liability, this is non-operating thus
deducted on net income, to eliminate the effect, need to deduct to net income, since
it is originally added to net income.
7. Any loss on disposal or early retirement, again not part of operation, to eliminate
the effect, there need to add to net income.

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03.29.2021

Notes of Financial Statement

These are important information about the company, the transactions, a narrative
description to support the Financial Statement report for better understanding of
the user.

These includes how the company records their transactions like what particular
accounting policies are observed, the measurement basis like historical cost, FMV
and this should be in accordance with what the accounting standard requires.

Disclosure, if they foresee uncertain events that will impact their operation, if they
want to venture on other major investment, or credit policy, how many years to pay
the existing debt financing.

These are all supporting information that will make the report more readable.

List of PPE and their corresponding depreciation and remaining life. The
composition of capital, no. of shares and its par value or the declaration of
dividends, pricing policies, aging of receivables.
There is also something called, Disclosure to Notes of related party transactions,
this is common, if an entity is a subsidiary of a parent company.

There are two types of events after the reporting period:

1. Adjusting events - events that will affect the FS if the events happened or
already existing at the end of the period.
2. Non-adjusting events - events happened after the reporting period.