Financial Statements PDF

Financial Statements Statement of Financial Position (Balance Sheet) WRITTEN WORKS 25% QUIZZES 10% HOMEWORK 7% SEATWORK 8% PERFORMANCE 45% ACTIVITY 20% RECITATION...

Financial Statements Statement of Financial Position (Balance Sheet) WRITTEN WORKS 25% QUIZZES 10% HOMEWORK 7% SEATWORK 8% PERFORMANCE 45% ACTIVITY 20% RECITATION 10% PROJECT 15% TERM EXAMS 30% TOTAL 100% Basic Purpose of the Financial Statements The basic purpose of accounting is to provide information that is useful in making economic decisions. Accounting information is most commonly communicated to users through the financial statements. FINANCIAL STATEMENTS are the structured representation of an entity’s financial position  Users of Accounting Information Accountin Extern Intern g al al Informatio Users Users Creditors n Investors Owners Government and Tax Managers Authorities Employees and Regulatory Agencies Customers and Trade Unions Consumers Competitors Lawmakers and Economic  1 – Analyze business transactions 9 – Prepare post 2 – Journalize the closing trial transactions balance 8 – Journalize and 3 – Post to ledger post closing accounts entries 7 – Prepare 4 – Prepare a trial financial balance statements 6 – Prepare an 5 – Journalize and adjusted trial post adjusting balance entries The financial statements provide information on: 1.How much resources are controlled by an entity and how these resources were generated – (financial position). 2.How well the entity performed during a certain period – (results of operations). Complete Set of Financial Statements TYPE OF DESCRIPTION FINANCIAL STATEMENT Statement of - Also called the Balance Sheet or Financial Statement of Position Position - A balance sheet reports the assets, liabilities, and owner’s equity at a specific date Statement of - Also called the Income Statement or Profit and Loss Statement of Comprehensive Income - Provides information on income and expenses Complete Set of Financial Statements TYPE OF DESCRIPTION FINANCIAL STATEMENT Statement of - Provides information on how cash and Cash Flows cash equivalents were generated and used during the period Notes / Notes - Provides narrative disclosures and other to Financial information required by the standards Statements but were not presented in the other financial statements Information on financial position is primarily provided by the statement of financial position. Information on results of operation is provided by the other components of a complete set of financial statements as follows: 1. Information on financial performance is provided by the statement of comprehensive income. 2. Information on changes in financial position is provided by the statement of changes in equity and statement of cash flows. The notes are used in conjunction with the other Elements of Financial Statements 1. Assets 2. Liabilities 3. Equity (Capital, Net Assets or Net Worth) 4. Income 5. Expenses Assets, Liabilities and Equity are the elements directly related to the measurement of financial position in the Statement of Financial Position. Income and Expenses are the elements directly related to the measurement of financial performance in the Statement of Comprehensive Income. Other financial statements usually reflect income and expenses and changes in the balance sheet elements. Accordingly, there are no elements that are unique to these statements. Elements of Statement of Financial Position Financial position simply refers to the condition of an entity’s assets, liabilities and equity and their interrelationships. The Statement of Financial Position (Balance Sheet) provides information on an entity’s financial position. Elements of Statement of Financial Position Assets – are the resources that the company controls that have resulted from past events and can provide you with future benefits. Essential Elements in the definition of Assets Control Past Events Future Economic Economic benefits – means the potential of the business to provide you, directly or indirectly, with cash. The resource can be: - Sold or exchanged for other assets - Used singly or in combination with other assets to produce goods for sale - Used to settle liability - Distributed to owners Liabilities – are your present obligation that have resulted in past events and can require you give up resources when settling them. Essential Element the definition of Liabilities Present Obligation – means that, right now, you have a responsibility to pay someone because of an obligating event that has already transpired. An obligating event is an event that creates either (a) a legal obligation (b) a constructive obligation. Legal obligation arises from: a. contract; b. a law; or c. operation of law Constructive obligation arises from the past business practices or published policies that have created a valid expectation on the part of others that you will pay for them. Equity – is simply assets minus liabilities. Other terms for equity are “capital,” “net asset,” and “net worth.” Presentation of Statement of Financial Position (Balance Sheet) A statement of financial position is presented either as: Classified (current/non-current distinction) – a classified balance sheet shows information on current and noncurrent assets and liabilities Unclassified (based on liquidity) – an unclassified balance sheet does not show distinction between current and noncurrent assets and liabilities. Common presentation of the SFP is classified. Entities that usually uses the unclassified balance sheet are banks and Current and Noncurrent Assets Current Assets Noncurrent Assets Cash Land Accounts Receivable Building (including (including Allowance for Accumulated Doubtful Accounts) Depreciation) Inventory Equipment (Including Prepaid Assets Accumulated Depreciation) Assets that are classified as current when they are expected to be realized within 12 months from the end of reporting period. All other assets are classified as noncurrent. Realized means converted into cash or claim for cash. Current and Noncurrent Liabilities Current Liabilities Noncurrent Liabilities Accounts Payable Long-term notes payable Salaries Payable (non trade payable that Utilities Payable matures beyond 1 year Unearned Income from the end of reporting period) Assets that are classified as current when they are expected to be realized within 12 months from the end of reporting period. All other assets are classified as noncurrent. Realized means converted into cash or claim for cash. A statement of financial position is presented either as: Classified (current/non-current distinction) – a classified balance sheet shows information on current and noncurrent assets and liabilities Unclassified (based on liquidity) – an unclassified balance sheet does not show distinction between current and noncurrent assets and liabilities. Common presentation of the SFP is classified. Entities that usually uses the unclassified balance sheet are banks and Trade and Non Trade Receivables and Payables Some receivables and payables are presented as current even if they are collectible or payable beyond 12 months. These are called trade receivables and trade payables. Trade and Non Trade Receivables Trade receivables are receivables arising from the sale of goods or services in the ordinary course of business. These include trade accounts receivable and trade notes receivable. Receivables arising from other sources are classified as nontrade receivable. In a classified statement of financial position: a. Trade receivables are presented as current assets if they are collectible within the normal operating cycle, even if the normal operating cycle is longer than 12 months. b. Nontrade receivables are presented as current assets only if they are  The normal operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months. C:\Users\acer\Documents\001 Ronald v2\03 LAMS\2019-2020 Sem 01\01 SFP illustration.xlsx Trade and Non Trade Liabilities Trade payables are obligations arising from purchases of inventory that are sold in the ordinary course of business. Payables arising from other sources are classified as non trade receivables. In a classified statement of financial position: a. Trade payables are presented as current liabilities if they are payable within the normal operating cycle, even if the normal operating cycle is more than 12 months. b. Nontrade payables are presented as current liabilities only if they are  Assets Kinds of Assets CASH RECEIVABLES INVENTORY PREPAID EXPENSES PROPERTY, PLANT AND EQUIPMENT INTANGIBLE ASSET Cash and Cash Equivalents Cash ₱ XX Cash Equivalents XX Cash and cash equivalents ₱ XX Cash is money owned by the company. Cash kept in the company’s premises is called cash on hand. Cash in bank refers to money in bank which can be kept in savings or checking account. - Cash refers only to funds readily available to be spent for the company’s operations - It is used for buying assets, paying suppliers, utilities, employee salaries, and others. - It is also used for settlement of obligations. - Cash is sourced from contribution of owners, proceeds from borrowings, sale of assets or collections from customers Cash on hand includes bills, coins and bank checks kept in the premises of the company. Bank checks, or checks are bank documents used by the issuer to instruct the bank to pay the assigned payee from funds in the issuer’s bank account. Checks maybe reported as part of cash because these documents are accepted as payments and deposits. A check is classified as cash if the date of the check is on or before the SFP date. A check dated after the SFP date is a post dated check and is classified as a receivable rather than cash. Not all bank deposits are considered as cash. Some accounts are not readily available for use such as a time deposit account. Time deposit account is a deposit in the bank the earns a higher interest because the depositor commits not to withdraw the funds over the agreed upon time. Given the withdrawal restrictions, time deposits are not classified as cash. Those with a term up to 90 days are reported as cash equivalents while ABM store is managed by Albert Rein. Albert asked you to determine the balance of his cash account as of December 31, 20X1. You determine the following: 1. He kept some cash in the store as change fund (sukli). The cash count revealed 3 pieces of 100 peso bills, 5 pieces of 50 peso bills, 5 pieces of 20 peso bills, 5 pieces of 10 peso coins, 10 pieces of 5 peso coins, 10 pieces of 1 peso coins and 25 pieces of 25 centavo coins. 2. Two of his regular customers gave Albert the following checks in payment of debts - P1,540 check dated December 29, 20X1 - P2,432 check dated January 3, 20X2 3. There are two bank accounts in the name of the store with the following balances: a. Balance of the savings account on December 31, 20X1 according to the passbook is P26,780 b. A time deposit certificate for P100,000 for 90days Receivables is a general term that refers to the company’s right to collect or claim payment. A sale agreement may require a customer to pay the seller immediately upon delivery of goods. This is called cash on delivery (COD). In contrast to COD, a customer may instead promise to pay the seller at some future time after delivery. Accounts receivables normally has a term of 30 days which means a customer should pay 30 days from date of delivery. Some sellers give terms of 30, 60 or 90 days. Notes receivable is another kind of receivable. It is evidenced by promissory notes (PN). PN is a legal document that says the borrower promises to pay, on scheduled payment dates, a specific sum called the principal and interest based on principal and stated interest rate. Albert Rein asked you to compute how much Aries Jay owed the store. Albert sells to Aries on credit. Aries pays every 15th and 30th of the month. Inventories consist of raw material, work- in-process and finished goods which are held by a business in ordinary course of business, either for sale or for the purpose of using them in the process of producing goods and services.  Types of Inventory Raw Material. Raw material is a type of inventory which acts as the basic constituent of a product. For example cotton is raw material for cloth production and plastic is raw material for production of toys. Raw material is usually held by manufacturing companies because they have to manufacture goods from raw material. Work-In-Process. Work in process is a type of inventory that is in the process of production. This means that work-in-process inventory is in the middle of production stage and it is partly complete. Work-in-process account is used by manufacturing companies. Finished Goods. Finished goods is a type of inventory which comes into existence after the production process in complete. Finished goods is ready for sale inventory. Consignment is an important issue in inventory accounting. The owner places his goods “on consignment” in the premises of the store owner. The store is not obligated to purchase the goods. The owner may also withdraw his unsold goods from the store at any time. The store owner on the other hand, will remit to the merchandise owner’s income from his transaction maybe in the form of commission form the sale and/or rent from the store space used to display the consigned goods. The store should not report the consigned goods as inventory even if they are held in the store premises. Rather, the consigned Recording Inventories In periodic inventory system, merchandise inventory and cost of goods sold are not updated continuously. Instead purchases are recorded in Purchases account and each sale transaction is recorded via a single journal entry. Thus cost of goods sold account does not exist during the accounting period. It is determined at the end of accounting period via a closing entry. Recording Inventories In perpetual inventory system, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction. Some other transactions may also require an update to inventory account for example, sale/purchase return, purchase discounts etc. Purchases are directly debited to inventory account whereas for each sale two journal entries are made: one to record sale value of inventory and other to record cost of goods sold. Purchases account is not used in perpetual inventory system.  INVENTORY Difference between perpetual and periodic inventory system Sale Transaction is recorded via two journal entries in perpetual system. One of them records the sale value of inventory whereas the other records cost of goods sold. In periodic inventory system, only one entry is made. Closing Entries are only required in periodic inventory system to update inventory and cost of goods sold. Perpetual inventory system does not require closing entries for inventory account. Assets Assets INVENTORY  INVENTORY Before Juana dela Cruz opened the store on January 1, 20X2, she asked you to help her count the merchandise inside the store. The result of the count are as follows: Note: 1. The chocolate bars were on consignment from Tsokolate-Eh. 2. Of the 5 notebooks inside the store, one is used for listing customer credit.  Assets INVENTORY Note: 1. The chocolate bars are not owned by the store. It was on consignment. 2. Only 4 notebooks are for sale. One was used as office supplies in the  Prepaid Expenses Prepaid expense (also called prepayment) is an asset which arises when a business pays an expense in advance. In accordance with the matching principle, the advance payment is not recorded as an expense at the time of payment because it relates to future expenses. It is recorded as an asset initially and written-off as expense through an adjusting entry when the expense  Prepaid Expenses Prepaid expenses are reported on a balance sheet as a current asset when they relate to expenses that are expected to be incurred within the next 12 months and non-current asset otherwise. Common prepaid expenses include prepaid rent, prepaid utilities expense, Prepaid Expenses  Property, Plant and Equipment (PPE) Property, Plant and Equipment or PPE, are long-term assets that are used in the operations of the company. PPE is classified as long-term asset (or non- current asset) because these assets will be used in the business for more than one year. Only those assets owned and controlled by the company will be reported as PPE. Rented facilities and equipment are  Property, Plant and Equipment (PPE) The cost of the PPE is not immediately reported as expense, rather, it is reported as asset. As the asset is used, a portion of the cost is transferred to expense.  Property, Plant and Equipment (PPE) Cost Fixed assets are recognized by a company when it gains control over economic benefits generated from the assets. All fixed assets are recognized at their historical cost which is the reliable estimate of all costs that are necessary to bring it to its intended use. The capitalized cost of a fixed asset has different  Property, Plant and Equipment (PPE) Cost of land includes: purchase price, transaction fees i.e. all legal fees, commissions, registration fees, etc. related to the purchase of land, cost of demolishing old buildings, etc. Cost of buildings includes: architect’s fee, building permit fee, construction contract price, excavation cost, etc. Cost leasehold improvement include: refurbishing, interior improvements,  Property, Plant and Equipment (PPE) Useful life Each fixed asset has a certain useful life, i.e. number of years for which the fixed asset is expected to generate economic benefits through continued use. Salvage value Salvage value (also called scrap value or residual value) is the expected value a fixed asset will have at the end of its useful life. Fixed assets lose value as they get older due to wear and tear, obsolescence, etc. However, their value normally does not drop to zero even at the end of their useful life, because they normally have some secondary use or because the material used in the  Property, Plant and Equipment (PPE) Depreciable amount Since a fixed asset’s value will never drop below its salvage value, the amount that is charged to the income statement over the useful life of the asset is lower than its cost, this amount is called depreciable amount. Depreciable amount = cost – salvage value  Property, Plant and Equipment (PPE) Depreciation expense Since a fixed asset is expected to generate economic benefits over more than one period, the depreciable amount of the asset is written off over the useful life of the asset through a process called depreciation. Depreciation expense is the amount subtracted from revenue in an accounting period on account of wear and tear, obsolescence, etc. of the asset. Depreciation expenses = depreciable amount/useful life  Property, Plant and Equipment (PPE) Accumulated depreciation Accumulated depreciation is a contra-asset account which accumulates total depreciation expense charged on a fixed asset over its useful life. It is subtracted from the cost of the asset to arrive at carrying value of the asset on the balance sheet. Carrying value Carrying value is the amount at which a fixed asset is presented on a balance sheet. Carrying value = cost - accumulated depreciation - accumulated impairment losses  Property, Plant and Equipment (PPE) Tommy bought an equipment for the factory on June 1, 20X1 on credit. The amount of the equipment was Php 1,500,000. The equipment can be used for 5 years. Please determine the following: 1. Initial journal entry. 2. Cost of Equipment 3. Annual Depreciation 4. Accumulated depreciation as of December 31, 20X1 5. Net book value of equipment as of December 31,  Assets Property, Plant and Equipment (PPE)  Assets Property, Plant and Equipment (PPE)  Intangible Asset Intangible assets are long term assets similar to PPE These assets will be used by the business for more than one year The allocation of the cost of intangible assets to the year it was used is called amortization Amortization is computed similar to depreciation such that the cost of the asset is amortized evenly over its useful life. The Accounting Equation Liabilities Assets Owner’s Equity  LIABILITIES Kinds of Liabilities PAYABLES ACCRUED EXPENSES UNEARNED INCOME LONG-TERM LIABILITIES  Payables The opposite of right to collect is the obligation to pay. Receivables are the right to collect payments from debtors while payables are obligations to make payments to creditors. General types of payables: 1. Accounts Payable (AP) 2. Notes Payable (NP)  Payables Accounts Payable (AP) - Normally refers to obligations to suppliers of inventories - Evidenced by the supplier’s invoices and delivery receipts Most suppliers give credit terms of 30 to 90 days. Suppliers may also give discount for early payments like 2/10 n/30.  Payables Notes Payable (NP) - Normally refers to obligations evidenced by promissory note (PN) - The issuer of the PN reports this as Notes Payable in his accounting books. The holder of the PN, on the other hand, has to right to collect and reports Notes Receivable in his books Accrual Concept In accounting, business transactions must be recorded at once when income is earned or expenses are incurred even though no actual money is received or paid yet. - Revenue Recognition Principle - Expense Recognition Principle - Matching Principle Conservatism Concept Accountants apply the conservatism concept when they choose the worst case scenario for the company when it is faced with significant uncertainties about an accounting problem. This leans to the direction of caution so that the users of financial information will not have false  Accrued Expenses Accrued Expenses refers to the unpaid expenses of the company as of cut-off date of the SFP. Kinds of Accrued Expenses: Salaries Payable Utilities Payable Rent Payable Interest Payable Accrued Expenses  Unearned Income Customer deposits or down payments are customer payments received before the delivery of goods or service. They will not count as sales until deliveries are made. These payments are initially recorded as Unearned Income - a liability payable in goods or services Unearned income is a liability. However, unlike regular liability, the settlement of Unearned Income is not through direct cash payment to the customer. Rather, it is settlement by the delivery of goods or Unearned Income  Long-term Liabilities Long-term liabilities (also called non- current liabilities) are financial obligations of a company that are due after a year or more. Long- term liabilities are presented on a balance sheet of a company together with current liabilities which represent payments due within one  Long-term Liabilities Classification of liabilities into current and non- current is important because it helps users of the financial statements in assessing the financial strength of a business in both short- term and long-term. While information about current liabilities of a company (together with its current assets) provide vital information about liquidity of a company, long-term liabilities (together with non-current assets) are critical for assessment of its long-term  Long-term Liabilities In order to construct the store, Juana borrowed P50,000 from Universal Bank and P25,000 from United Bank. Terms of loans are as follows: Universal Bank: The bank requires Juana to pay interest of 7% payable monthly. The principal is payable on October 1, 20X3. United Bank: The bank requires Juana to pay five monthly installments of P5,000 plus interest on the unpaid balance. The loan was taken on November 1, 20X1 and first installment is due on November 30, 20X1. Which of the two loans should be reported as Long-Term Liability on the Store’s calendar year 20X1 SFP  Long-term Liabilities 1. While interest is payable monthly, the principal on the Universal Bank loan is payable on October 1, 20X3. The due date is one year and 10 months from the date of the SFP December 31, 20X1. This loan is classified as long term liability because the due date is beyond one year of SFP date. 2. Given the monthly principal payments, the United Bank loan will be fully paid by the end of March 20X2. This is only three months from the SFP date of December 31, 20X1. Hence, the United Bank loan is a current liability. The Accounting Equation Liabilities Assets Owner’s Equity  Equity Equity is the net assets of the business. It is composed of the owner’s investments and the accumulated net income of the company, net of any distributions to the owners. It reflects the portion of the assets  Equity An organization is defined as having two or more individuals working together toward the attainment of a goal or goals.  Equity Sole proprietorship – only one individual owns the business Partnership – is an association of two or more persons to carry on as co-owners of a business for profit Corporation – is a separate body consisting of at least five or more individuals and treated by law as a unit Equity