FABM 2 Q1 Reviewer - raph.pdf

ACCOUNTING CYCLE MATERIALITY - entity specific; an information is material if omitting it affects a...

ACCOUNTING CYCLE MATERIALITY - entity specific; an information is material if omitting it affects a user’s decision-making. FAITHFUL REPRESENTATION - transactions recorded must be true with evidence; must “present what it purports to present” COMPLETENESS - includes additional explanatory notes NEUTRALITY- unbiased, does not intend to deliberately affects user’s decision FREEDOM FROM ERROR - literally free CONCEPTUAL FRAMEWORK: QUALITATIVE from error; no mistakes CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION ENHANCING QUALITATIVE - not all financial information is useful thus it is CHARACTERISTICS important to identify ones that are useful which is said to be both relevant and faithfully COMPARABILITY - information can be “represent what it purports to represent” compared to previous year’s (sales this year can providing useful information guides the be compared to last year’s for percentage business’ decisions decrease or increase since it contains similar transactions) VERIFIABILITY - different users of the information can reach an agreement about the financial information (different accountant records the same cash amount on a certain FUNDAMENTAL QUALITATIVE transaction) CHARACTERISTICS TIMELINESS - financial information is available when users need it since they decide RELEVANCE - transactions recorded must be based on what they know at hand; avoids appropriate for a user’s decision-making misinformed decisions process; it is said to be relevant if it has: UNDERSTABILITY - must be clearly and PREDICTIVE VALUE - assist users in concisely scaled down, complex yet relevant predicting a financial situation or scenario information must not be eliminated, users are (current year sales can forecast next year’s willing to learn about complex information sales) FINANCIAL STATEMENTS CONFIRMATORY VALUE - confirm - where financial information is contained and predictions and forecasts previously made communicated by organized depiction of events that (current year happened in a business. expenses confirm if it is within budgeted limit, - contains and communicates financial information; like overspending) a novel telling different stories of interrelated subject;  A complete set of financial statements are composed of FUNCTION OF EXPENSE METHOD the following: - a.k.a.“cost of sales” method answers the 1. Statement of Comprehensive Income question “How are they related to the normal 2. Statement of Changes in Equity operations of the business? 3. Statement of Financial Position - a.k.a. “multi-step approach” used in 4. Statement of Cash Flows merchandising businesses 5. Notes to Financial Statements - classifies expenses according to their function as part of sales - examples are selling/distribution, general and administrative, and other operating activities STATEMENT OF COMPREHENSIVE INCOME/ INCOME STATEMENT - this statement can be compared to a moving video clip since it tells the reader about the performance and activities of the company from the start and end of the period - presents revenues and expenses incurred by a company - Heading: For the month ended/For the year ended/For the period ended NATURE OF EXPENSE METHOD - answers the question “What are these expenses? - a.k.a. straightforward method as “single-step” approach used in service businesses - expenses are aggregated or combined in the COMPARISON OF THE 2 APPROACH: income statement according to their nature - usually used in many smaller enterprises because no allocation of operating expenses between functional classifications is necessary  REMEMBER THESE FORMULAS📌 STATEMENT OF CHANGES IN EQUITY - this statement summarizes the changes that occurred in owner’s equity; it tells the reader OPERATING EXPENSES about the beginning stake of the owner, any SELLING EXPENSES - related directly to the additional investments, withdrawals, and share entity’s efforts to generate sales; examples are in net income or net loss; the date is similar to commissions paid to salesmen, salaries of sales SCI, “for the period ended December 31, staff, delivery expenses (freight-out), store YEAR” delivery equipment, and store supplies FORMS OF BUSINESS ORGANIZATION GENERAL & ADMINISTRATIVE SOLE PROPRIETORSHIP EXPENSES - other expense that does not PARTNERSHIP cover the previous types; examples are general CORPORATION depreciation expenses, general rent expenses, office salaries, taxes and licenses, bad debts/doubtful accounts, office supplies SOLE PROPRIETORSHIP expense, accounting and legal services, and - a business organization owned by one person called telecommunications proprietor who generally is also the manager; the accounting record of the sole proprietorship do not OTHER EXPENSES - losses; loss due to theft, loss include the proprietor’s financial records due to fire, interest expense, miscellaneous expense etc. SCE FOR SOLE PROPRIETORSHIP OTHER INCOME/REVENUE - gains; gains from the - includes beginning capital, additional sale of equipment, other items that meet the definition of investment, net income, and withdrawals; income and may, or may not, arise in the course of the headings are stated as “For the period ended”, it ordinary activities of an entity; incidental to the resembles that of a statement of comprehensive operations of a business income because the SCE shows the movement in the capital account of the owner. OTHER COMPREHENSIVE INCOME - in computing the total comprehensive income, income tax (30%), which is the sum of money payable to the government is also included; however accounting standards prohibits business organizations in including these items in the computation STATEMENT OF FINANCIAL POSITION/ - Inventory BALANCE SHEET - Prepaid Expenses - Can be compared to a static picture or portrait, presents a company’s position when it comes to NON CURRENT ASSETS - assets that do not the resources it owns (assets), obligations meet the criteria claimed against it (liabilities, and the owner’s residual interest (equity) Examples of Non Current Assets: - The date of this statement is always “as at” or - Property, Plant, and Equipment (PPE) “as of” - Accumulated Depreciation - the information needed for this statement are the - Trademarks/Patents/Copyrights net balances at the end of the period - Users of financial statement analyze the balance LIABILITIES sheet to evaluate an entity’s: - a present obligation of the enterprise arising LIQUIDITY - availability of cash in the near from past events, the settlement of which is future after taking account of the financial expected to result in an outflow from the commitments over this period enterprise of resources embodying economic FINANCIAL FLEXIBILITY - ability to take benefits (assets) effective actions to alter the amounts and timings of cash flows so that it can respond to CURRENT LIABILITIES - the following unexpected needs and opportunities. This criteria makes a liability current; includes the ability to raise new capital or tap into unused lines of credit SOLVENCY- availability of cash over the longer term to meet financial commitments as they fall due Examples of Current Liabilities: (based on time of ELEMENTS OF SFP maturity/due date) - Accounts Payable ASSETS - Notes Payable - valuable resources owned by the entity; it is a resource - Interest Payable controlled by the enterprise as a result of past events and - Accrued Liabilities from which future economic benefits are expected to - Income Tax Payable flow to the enterprise - Unearned Revenues - Current portion of Long-term debt CURRENT ASSETS- the following criteria makes an asset current; NON CURRENT LIABILITIES - liabilities that do not meet the criteria Examples of Non Current Liabilities: - Long-term Debts Examples of Current Assets: (in decreasing order of - Mortgage Payable liquidity) - Bonds Payable - Cash - Cash Equivalents OWNER’S EQUITY - Accounts Receivable - residual interest in the asset of the enterprise - Notes Receivable after deduction all its liabilities; it may pertain - Allowance for Bad Debts (deducted from A/R to any of the following, depending on the form - Supplies of business 2 FORMATS OF SFP ACCOUNTING EQUATION REPORT FORMAT - lists the assets, followed by the liabilities then by the owner’s equity in vertical sequence ACCOUNT FORMAT- lists the asset on the left and the liabilities and owner’s equity on the right; resembles T-Accounts; horizontal manner STATEMENT OF CASH FLOWS - Is a basic component of the financial statements which summarizes the operating, investing and financing activities of an entity. - In simple language, the statement of cash flows provides information about the cash receipts and cash payment of an entity during a period. CASH AND CASH EQUIVALENTS (CCE) - Cash and cash equivalents are a line item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately. - Cash equivalents include bank accounts and some types of marketable securities, such as debt securities with maturities of less than 90 days. - However, cash equivalents often DO NOT include equity or stock holdings because they can fluctuate in value. CASH - Cash is money in the form of currency, which includes all bills, coins, and currency notes. It also includes money orders, cashier's checks, certified checks, and demand deposit accounts. - A demand deposit is a type of account from which funds may be withdrawn at any time without having to notify the institution. Examples of demand deposit accounts include checking accounts and savings accounts. All demand account balances as of the date of the financial statements are included in cash totals. CASH EQUIVALENTS - Cash equivalents are investments that can readily be converted into cash. The investment must be short-term, usually with a maximum investment duration of 90 days. - If an investment matures in more than 90 days, it should be classified in the section named "investments". - Cash equivalents should be highly liquid and easily sold on the market. The buyers of these investments should be easily accessible. EXAMPLES OF CASH EQUIVALENTS: - Marketable Securities - broad term for liquid investments - Treasury Bills - U.S. government debt instruments - Other Short-Term Government Bonds - debt Take note!: instruments from other governments Cash receipt - increase - Banker’s Acceptance - guaranteed future Cash payment - decrease agreement Cash proceeds - increase - Commercial Paper - short-term corporate debt - Money Market Account - interest-bearing INVESTING ACTIVITIES deposit account - Are the cash flows derived primarily from the - Certificate of Deposits - time-bound deposit acquisition and disposal of long term assets and products other investment not included in cash equivalents. - As a simple language, investing activities are cash effects of transactions involving non operating assets, such as investment, property, plant and equipment, intangible assets and other noncurrent assets. - Affects non-current assets OPERATING ACTIVITIES - Are the cash flows derived primarily from the principal revenue producing activities of an entity. - Generally, operating activities result from the cash effects of transactions and other events that enter into determination of net income or loss. - Affects current assets, current liabilities, net profit and loss. FINANCING ACTIVITIES - Are the cash flows derived primarily from equity and borrowing of the entity - In other words, these are the cash flows that result from transaction between the entity and its owners (equity financing) and between the entity and its creditors (debt financing) - As simple guide, financing activities include the cash flows from transactions involving “non trade liabilities” and “equity” of an entity - DIRECT METHOD - The direct method shows in details or itemizes the major classes of gross cash receipts and gross cash payments. - The cash receipts are listed one by one, the cash payments are listed one by one, and the difference represents the net cash flow from operating activities. - In essence, the direct method is the “cash basis” income statement  6) Any gain on disposal of property is previously included in net income but it is a non-operating item. Thus, this is deducted from net income. 7) Any loss on disposal of property is previously deducted in net income but it is a non-operating item. Thus, this is added from net income. INDIRECT METHOD - Means that the net income or loss is adjusted for the effects of transactions of a noncash nature, any deferrals or accruals of past or future operating cash receipts and payments and items of income or expense associated with investing and financing activities. The guidelines that may be used in adjusting the accrual basis net income to cash basis net income under the indirect method are: 1) All increases in trade non cash current assets are deducted from net income. Increase accounts receivable Decrease net income 2) All decreases in trade non cash current assets are added back to net income Decrease Inventory Increase net income 3) All increases in trade current liabilities are added back to net income. Increase accounts payable Add back to net income 4) All decreases in trade current liabilities are deducted from net income. Decrease accounts payable Deduct from net income 5) Depreciation, amortization, and other noncash expenses are added back to net income to eliminate the effect they had on net income ANALYSIS AND INTERPRETATION OF VERTICAL ANALYSIS FINANCIAL STATEMENTS - Also called as common size analysis - A method used in analyzing individual lines of COMPARISON STANDARDS financial statement data to a base line items Comparability of a Financial Statement is used as a such as: basis of an entity to identify similarities, differences, a. The total assets from the asset section of the and trends. Comparison can be made using different statement of financial position; standards: b. The total liabilities and owner’s equity in the liabilities and owner’s equity section in the INTRACOMPARABILITY statement of financial position; and - used in comparing the financial statement of an c. The net sales from the statement of entity in a period with the financial statement of comprehensive income. the same entity in a different period. - It is called “vertical” due to the analysis method - This indicates decreases and increases in certain that generates vertical columns of ratios next to accounts. This points out the area of the individual items. In calculating the percent improvement of an entity. part of individual items, the formula below is used. INTERCOMPARABILITY - used in comparing the financial statement of an entity with the financial statement of its direct competitor. This indicates whether the entity underperformed or overachieved in a period INDUSTRY STANDARD RATIO ANALYSIS - used in comparing the financial statement of an - It compares one indicator to another. entity with its industry’s standard average. - Ratios can give significant insight into the performance and relative importance of two TOOLS FOR FINANCIAL STATEMENT indicators. ANALYSIS - A ratio, which may either be a percentage, a rate, or simple proportion, expresses the HORIZONTAL ANALYSIS mathematical relationship between one quantity - This technique is used to analyze a series and another. financial statement data over a period of time. - Also called trend analysis or comparative LIQUIDITY RATIOS analysis - measures the ability of an entity to pay - is used to express increases and decreases that is short-term obligations [short-term creditors, presented whether in percentage or amount. such as a bank, investors] - This type of analysis can provide an entity with - Determines whether an entity can be able to pay positive and negative trends. for current liabilities as they become due with the use of current assets. - Creditors and potential creditors are interested in continuously monitoring an entity’s ability to pay interest as it comes due and to repay the principal of the debt at maturity. EFFICIENCY RATIOS PROFITABILITY RATIOS - Measures how well does an entity utilizes their - Profitability is the ability of an entity to assets and resources to generate income. generate profit. Investors makes use of these ratios in choosing from diverse investment opportunities available - measure how well does an entity generate income that relates to their revenue, operating costs, assets, and capital. SOLVENCY RATIOS - Also called leverage ratios - Solvency is the capacity of an entity to pay its long-term obligations, simply, non-current liabilities. - Determines whether an entity has more ownership rather than debts. - These ratios involve the comparisons of debt, assets, equity, and interest. - Long-term creditors and shareholders are interested in the long-run solvency, particularly its ability to pay interest as it comes due and to repay the principal of the debt at maturity. GOODLUCK SA PERIO GUYS!!! Treasury Bills and Treasury Shares ay magkaiba wag kalimutan ha Shares and stocks, parehas lang Let me know kung may mga na-miss out akong infos para madagdag ko agad. - Raph