Introduction to Accounting

• Accounting involves recording, classifying, summarizing, interpreting, and communicating financial information to stakeholders like owners, managers, investors, banks, and traders.
• Bookkeeping is a procedural part of accounting that focuses on setting up, updating, and maintaining financial records, but does not necessarily require accountants.
• The purpose of accounting is to provide financial information to users, facilitating well-informed decisions, judgments,and business deals.
• Primary users of financial information include investors and lenders/creditors such as banks and suppliers.
• Managerial accounting reports are generally not published outside of the company.
• Managerial accounting offers flexible guidelines, tailored to the specific needs of internal users.
• The Philippine Financial Reporting Standards (PFRS) are based on the International Financial Reporting Standards (IFRS), with necessary adaptations for the local context.
• PFRS aims to minimize information asymmetry and ensure comparability across financial statements.
• Conceptual Framework for Financial Reporting serves as a guide when there's no specific standard available and is subject to constant change.
• A primary objective of PFRSs and the IASB is to assist in the development, review, and harmonization of accounting regulations and standards, both nationally and internationally.
• According to the Conceptual Framework, useful financial information should have fundamental characteristics of relevance and faithful representation.
• Financial information is relevant when it can influence user decisions.
• Faithful representation requires information to be complete, neutral, and free from material error.
• To enhance usefulness, financial information should also display comparability, consistency, verifiability, timeliness, and understandability.
• The accrual basis of accounting recognizes transactions and events when they occur rather than when cash changes hands.
• Materiality refers to the relative importance/significance of an item which depends on the company and could affect the decisions of its informed users.
• Key financial statements include the Statement of Financial Position (SFP) or Balance Sheet, the Statement of Profit or Loss (SPL), the Statement of Changes in Equity (SCE), Statement of Cash Flows (SCF), and Notes to the Financial Statements.
• Assets are present economic resources controlled by the entity due to past events.
• Legal ownership isn't required for an asset to be recognized.
• Liabilities are present obligations arising from past events requiring a transfer of economic resources.
• Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Cash and Cash Equivalents

• Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of value change.
• Cash includes mediums of exchange given or received in cash transactions and other negotiable instruments payable in money and acceptable for bank deposits.
• Categories of cash on hand consist of checks on hand, manager's checks, cashier's checks, bank drafts, and undeposited collections.
• Petty cash, payroll fund, tax fund, purchasing fund, travel fund, interest fund, and dividend funds are examples of cash funds for current use.
• Foreign currencies are translated to their peso equivalent at the closing rate at the end of the reporting period.
• Savings accounts, checking accounts, and postal money orders are classified as cash in bank.
• Post-dated checks, stale checks, NSF checks, bond sinking funds, IOUs and cash set aside for non-current assets are excluded from cash balance.
• A compensating balance is a minimum balance maintained in a bank account; it is disclosed separately if restrictions exist on its use.
• Internal controls for cash require separation of cash duties, limited access to cash, proper documentation of cash receipts, and strict control of cash disbursements using a voucher system.
• Reconciling items include certain timing differences or errors.
• Reconciling items due to timing differences are recorded in the books by the bank only, or vice versa.
• Bank credit memos increase the company's bank account.
• Bank debit memos decrease the company's bank account.
• When determining cash for accounting purposes;
  • IOUs and undeposited checks are classified as items to be receivables.
  • Only what a bank accepts for deposit is considered cash.
  • Do not deduct bank overdrafts.

Receivables

• Receivables are classified as financial assets that give the right to receive cash or other financial assets from another entity.
• Trade receivables derive from the regular course of business.
• Other receivables can arise from different sources of agreement as long as a contractual right to gather cash is gained.
• Receivables are initially recognized at cost/face value with subsequent recognition at net realizable value (NRV).
• Derecognition of receivables occurs when the contractual right to cash flow expires.
• Estimating the loss in NRV involves using the Allowance for Doubtful Accounts (ADA).
• ADA is used to determine if there are uncollectable amounts in future cash flow.
• ADA can be estimated by using either a certain percentage of accounts receivable or by aging the accounts receivable.
• The allowance for doubtful accounts is directly related to accounts receivable on the net realizable value on the SFP.
• Doubtful accounts is part of the entry onto the SPL.
• Aging the accounts receivable requires classification of accounts based on outstanding days for estimating uncollectible amounts.
• Notes receivables should be recognized at fair market value with transaction costs, and long-term notes receivables should be recognized at present value
• Present value is calculated using the appropriate formulas based on payment models and intervals.
  • Single Payment: PV = FV/ (1+i)^n
  • Present Value of Ordinary Annuity Formula: PV0 = P [1 - (1 + i)^-t]
• Accounts Receivable turnover quantifies the effectiveness in collecting receivables.
• Receivable financing expedites cash flows through various techniques.
• In pledging, accounts receivable serves as collateral for a loan, disclosed but not removed from accounting records.
• In assignment, an entity obtains a loan from a creditor and the creditor can collect the loan if the entity remains the owner.
• In factoring, entities sell accounts receivable to a 'factor'.

Investments in Equity and Debt Instruments

• Investments in equity and debt instruments are classified as passive income.
• To measure financial instruments, determine if the cash flows come from the payments of principal and interest solely.
• Also detemine if financial assets are being used for collecting contractual cash flows or sold for advantage of fair value, and if assets receive dividends income from equity instruments.
• At Amortized Cost (Debt) classification is measured based on if the main purpose of an instrument is to collect contractual cash flows and pay principal with interest.
• Fair Value Through Other Comprehensive Income (FVOCI) and are generally debt instruments and the cash flows here must be solely payments of principal and interest
• At Fair Value Thru Profit & Loss (Equity) contains cash flows that are not solely payments of principal and interest and the financial are equity instruments

At Fair Value Thru Profit & Loss (FVPL)

• Initial recognition occurs, then they are recognized at fair value.
• Transaction costs are expensed
• Subsequent recognition also occurs at Fair Value
• Changes in values are recognized on the SPL.

At Fair Value Thru Other Comprehensive Income (FVOCI)

• For initial recognition transaction costs are not expensed but are included as part of investment value.
• Instruments are presented at fair value, but the fair value changes appear in the SCI.
• It derecognizes current carrying amount
• Latest balance of unrealized gains and losses is closed to retained earnings.
• Any gain or loss which sale directly is closed to retained earnings.

Investment in Associate

• Investor must own shares in the company to exercise influence over the investee company.
• Initial recognition occurs as NCA at costs + transaction costs
• Dividends received are recognized as reduction to the carrying amount of the investment
• Inverstor's share in the income in the investee results in increase to the carrying amount of investment.

Debt Instruments

• Debt instruments are in the form of bonds.

1. At Fair Value Through Profit and Loss (FVPL)
   • Initial recognition occurs at fair value + transaction fees ( SPL).
   • At Derecognition, any gains or losses recorded must be recorded on selling price and current fair value.
2. At Fair Value Through Other Comprehensive Income (FVOCI)
   • At Initial recognition, bonds recognized at fair value and transaction costs are added.
   • During sale, cumulative unrealized G/L transferred to SPL.
   • Need for calc gain/loss upon sale.
3. At Amortized Cost
   • Similar to Notes Receivable.
   • recognized at at fair value based on market quotation or compute for PV, transaction costs included ad part of fair value.

Inventory

• For merchandising firms, inventory is goods that are purchas and planned to be resoled at ahigher price or completed goods for sale.
• In manufacturing firms, raw materials, work-in0process, and finished goods invenotry
• General rule states that all goods which the entity has title of, all must be included in inventory.
• Perpetual inventory system records cost including discounts dirctly in the Merchandise Inventory account while periodic inventory records costs into separate Purchases Account and requires at the end of period physical count

Costs Inlcuded IN Inventory

• Cost of Purchase ( Trad, Cash Discounts)
• Freight In , Tax, Insurance
• Warehousing cost, other charges =Total Cost of Inventory

Cost Low Assumption

An assumption that determines the order in which costs should flow out.

• Specific Identification is attributing specific costs to items in inventory and it is mostly used for costly items
• Goods are Indistinguishable in Average Cost. and in moving-average method it requires computation of new average cost after each purchase.