Exam D2 - Pe & Fabm

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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.

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