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THE FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME The following are the major categories of
The basic purpose of accounting is to provide expenses under the function of expense • “Statement of profit or loss and other method: information that is useful for making economic comprehensive income” decisions. • It shows information on an entity’s financial 1. Cost of sales (or Cost of goods sold) Financial statements are the structured representation performance during the period. 2. Distribution costs (or Selling of an entity’s financial position and results of its Profit or loss expenses) operations. It is the product of the accounting process. Other comprehensive income 3. Administrative expenses (or General Comprehensive income and administrative expenses) 4. Other expenses 5. Interest expenses (or Finance cost) 6. Income tax expense
Distribution costs (or Selling expenses) are
costs attributable to selling activities.
Examples include: freight-out or delivery
expenses, sales commissions, advertising, salaries of sales personnel, depreciation on delivery equipment, rent pertaining to space occupied by the sales department, and the like. Elements of the SCI Administrative Expenses INCOME – are increases in economic benefits during the period in the form of inflows or • insurance taxes and licenses (except Elements of the financial statements enhancements of assets or decreases of liabilities income tax expense) that result in increase in equity, other than those • salaries of non-sales personnel ASSETS - are the resources you control that have relating to investments by the business owners. • depreciation of assets not used by the resulted from past events and can provide you with sales department future economic benefits. Essential elements a. Revenue- arises during the ordinary • rent pertaining to office space activities of a business. (sales, fees, interest, • bad debt • Control (exclusive right to enjoy the benefits) dividends) • Past events (control over the resource have • interest b. Gains- represent the other items that meet resulted from a past event or transaction) the definition of income and may or may not STATEMENT OF CASH FLOWS • Future economic benefits (the resource is arise during ordinary activities of an entity. expected to provide economic benefits over more • It provides information on the sources than one accounting period) EXPENSES– are decreases in economic benefits and utilization of cash during the during the period in the form of outflows or information period. depletions of assets or increases of liabilities that • It provides the information on cash result in decrease in equity, other than those inflows and cash outflows during the relating to distributions to the business owners. period. Expenses include both expenses and losses. Presentation of Statement of Cash Flows a. past LIABILITIES - are the present obligations that have resulted from Expenses arise during events Essential the ordinary activities element of a business. 1. Operating Activities - results from EQUITY = assets minus liabilities & “capital”, “net b. Losses represent other items that meet the transactions that affect income and assets”, “net worth” definition of expenses and may, or may not, expenses arise during the ordinary activities Examples Current and Noncurrent Assets Current (can be Cash receipts from the sale of goods and converted within 12 months into cash) Expenses may be presented in the statement of the rendering of services comprehensive using either of the following Cash receipts form interest income methods: Cash payments for purchases of inventory 1. Nature of expense method Cash payments for expenses 2. Function of expense method (Cost of sales method) 2. Investing Activities - results from acquisition and disposal of long-term Current (expected to be settled within 12 months from Nature of expense method assets and other investments, like the end of reporting period) property, plant, and equipment - Under this method, expenses are presented Examples: according to their nature (for example, Cash payments for the acquisition of depreciation, purchases of materials, property, plant, and equipment transport costs, employee benefits and Cash receipts from sales of property, advertising costs) and are not reallocated plant, and equipment among their functions within the entity. - A statement of comprehensive income that 3. Financing Activities - results from Some receivables and payables are presented as current shows expenses by their nature is referred transactions with the owner and from even if they are collectible or payable beyond 12 to as prepared using a single-step approach. borrowings Examples months. These are called Trade Receivables And Trade Function of expense method - expenses are Cash receipts from investments of owner Payables. classified and presented according to their to the business function as part of cost of sales or, for example, Cash payments on drawing by owner the costs of distribution or administrative Cash receipts on loans activities. At a minimum, an entity discloses its Cash payments on repayment of loans cost of sales under this method separately from Reporting cash flows from Operating activities
Direct Method - It shows each major class of gross
cash receipts and gross cash payments
Indirect Method - It adjusts accrual basis profit or loss
for the effects of changes in operating assets and liabilities and effects of non-cash items.
Guidelines: Indirect Method
Non-cash expenses
• Depreciation expense is added to accrual basis
profit because depreciation decreases accrual basis profit but does not affect cash. • Losses on sale of property, plant, and equipment are added to accrual basis profit because losses on sale of PPE decrease accrual basis profit but they pertain to investing activity
Non-cash income
• Gains on sale of property, plant, and equipment
are deducted from accrual basis profit because gains on sale of PPE increase accrual basis profit but they pertain to investing activity • Increases in operating current assets, except cash, (e.g., trade accounts and trade notes receivables, inventory, and prepayments) are deducted from accrual basis profit. • Decreases in operating current assets, except cash, (e.g., trade accounts and trade notes receivables, inventory, and prepayments) are added to accrual basis profit. • Increases in operating current liabilities (e.g., trade accounts and trade notes payables, accrued expenses, and unearned income) are added to accrual basis profit. • Decreases in operating current liabilities (e.g., trade accounts and notes payables, accrued expenses, and unearned income) are deducted from accrual basis profit.
Reporting cash flows from Investing and Financing
activities - Cash flows are reported based on major classes of gross cash receipts and gross cash payments.
FINANCIAL STATEMENTS are the structured
representation of an entity’s financial position and results of its operations. It is the product of the accounting process. BASIC DOCUMENTS AND TRANSACTIONS RELATED TO BANK DEPOSITS TIME DEPOSIT
Types of Bank Accounts A bank account represents - It refers to an interest-bearing fund
maintained at a bank for a fixed period of time funds entrusted by a depositor to a bank for (e.g., 30 days, 60 days, 90 days, etc.) safekeeping. - A time deposit is similar to a savings account, but it earns higher interest rate. Moreover, a SAVING ACCOUNT time deposit is denominated in fixed amounts - It is a bank account that earns modest interest and, normally, cannot be withdrawn until its maturity date. A time deposit is evidenced by rate and is intended to encourage savings. a "Certificate of Time Deposit." - A savings account is normally evidenced by a “passbook”. The passbook shows the Preparation of Check depositor’s deposits and withdrawals, the amount of interest earned by the deposit, and A check is an instrument that orders a bank the balance of the account. (drawee) to pay the person named on the check or - Interest on a savings deposit is accrued daily, the bearer thereof (payee) a definite amount of based on the end of day balance, but is money from the drawer’s bank account. reflected on the account at the end of every Bank statement - is a report issued by a bank quarter. The interest earned is reduced by a (monthly basis) which shows the deposits and 20% withholding tax. withdrawals during the period and the cumulative - Opening a bank account requires an initial balance of a depositor’s bank account. B amount of deposit and a required maintaining balance. If the balance of the deposit falls below the required maintaining balance, the bank charges the depositor some penalties.
CURRENT OR CHECKING ACCOUNT
- It is a bank account wherein the depositor can
write checks. - A check is an instrument that orders a bank (drawee) to pay the person named on the check or the bearer thereof (payee) a definite amount of money from the drawer's bank account. - A current or checking account can be either of the following: a. Basic Checking Account - usually do not pay interest b. Interest-Bearing Checking Account - pays interest just like a savings account. - Instead of a passbook, the depositor in a checking account receives a "check book" - a booklet containing preprinted blank checks. - Checkbooks are not free though; the bank charges the depositor for every checkbook requested from the bank. Some checking accounts, however, come with either an ATM card or a passbook (or both). The bank issues VERTICAL VS HORIZONTAL a "bank statement" to the depositor every month. - The bank statement shows the deposits and withdrawals during the period and the cumulative balance in the depositor's bank account. - The requirements and fees for a checking account are like those of a savings account. However, the initial deposit and maintaining balance may be higher for a checking account.