Fundamentals of Accountancy, Business, and Management 2 PDF

The means by which the information FUNDAMENTALS OF accumulated and processed in financial ACCOUNTANCY, accounting is periodically communicated to BUSINESS, AND the us...

The means by which the information FUNDAMENTALS OF accumulated and processed in financial ACCOUNTANCY, accounting is periodically communicated to BUSINESS, AND the users for them to make sound economic decisions. MANAGEMENT 2 It is a structured representation with the SECOND QUARTER REVIEWER objective of providing information about Team President, Academics Committee financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in LESSON 1: MARK-UP making economic decisions. Markup Based on Cost Essence of Financial Statements Mark-Up is calculated as a percentage Statement of How much did the business of the cost of the product. Comprehensive entity earn? Income To get the percentage of the Selling price is: (Selling Price Value/Cost Statement of What is the financial Value) x 100 Financial condition of the business? Example: Position Selling Price 960 120% Statement of How much is the owner’s Cost 800 100% Owner’s Equity interest in the entity today? Mark-up 160 20% Statement of What happened to the cash Markup Based on Sales Cash Flows receipts? Where did the cash go? Calculated as a percentage of the selling price than the cost Fundamental Qualitative Characteristics (RFr) To get the percentage of the Cost is: (Cost Value/Selling Price Value) x 100 Relevance - the capacity of the information Example: to influence a decision. Selling Price 1,000 100% ○ Predictive Value - the information can Cost 800 80% be used to predict future outcomes. Mark-up 200 20% ○ Confirmatory Value - the information provides feedback on previous evaluations. LESSON 2: INTRODUCTION TO Faithful Representation - financial reports FINANCIAL STATEMENTS represent economic phenomena or transactions in words and numbers. Financial Statements ○ Completeness - include all information necessary for a user to understand it. They communicate the results of the ○ Neutrality - there is no bias in the financial operations of the business to selection or presentation of financial various interested users. information ○ All pieces of information needed to ○ Free from Error - there are no errors or prepare the financial statements are omissions in the depiction of any provided in the worksheet. ​  phenomena and that the processes Financial Statements used to produce the reported information have been selected and Statement of Financial Position applied with no errors in the process. ○ A formal statement showing the assets, liabilities, and equity. Enhancing Qualitative Characteristics (VCUT) ○ Investors and creditors use this statement to analyze the liquidity, Verifiability - means that different solvency, and the need of the entity for knowledgeable and independent observers additional financing. could reach consensus that a particular Statement of Profit or Loss depiction is a faithful representation. ○ A formal statement showing the Comparability - enable users to identify and financial performance (results of understand similarities and dissimilarities operation) of an entity for a given period among items of time. ○ Intracomparability - within the business ○ Presents the income, expenses, gains, ○ Intercomparability - with other losses (net income or not loss) during businesses the period. Consistency is important. Statement of Comprehensive Income Understandability - requires that financial ○ A formal statement that presents information must be comprehensible or components of other comprehensive intelligible if it is to be useful income *higher accounting Timeliness - having information available to Statement of Changes in Owner’s Equity decision makers in time to influence their ○ Summarizes the transactions affecting decisions. the owner’s capital (i.e., additional ○ The older the information, the less investment, net income or net loss and useful it is. withdrawal.) Statement of Cash Flows Complete Set of Financial Statements ○ Provides information about cash receipts and cash payments of an Based on International Accounting entity during a period. Standard 1 (IAS 1), Presentation of ○ Summarizes the operating, investing, Financial Statements, a complete set of and financing activities of an entity. financial statements are as follows: Notes to Financial Statements ○ Statement of Financial Position (SFP) ○ Provide narrative description or as at the end of the period; disaggregation of items presented in the ○ Statement of Comprehensive Income financial statements and information (SCI) for the period; about items that do not qualify for ○ Statement of Changes in Equity (SCE) recognition. for the period; ○ Statement of Cash Flows (SCF) for the Overall Considerations for Financial period; Statements ○ Noted to the Financial Statements Frequency of Reporting and Comparative Information ○ At least annually. ○ Present with equal prominence each financial statement in a complete set of ​  financial statements including ○ The business is experiencing losses in comparative information in respect of case revenues are less than the costs the previous period for all amounts and expenses during the period. reported in the current period. For many users of the Financial Statements, Consistency of Presentation the information on an entity’s profitability is ○ The presentation and classification of perceived as the most useful for predicting items in the financial statements in future profitability and future cash generating successive periods shall be retained Profitability. unless an alternative presentation is more appropriate. Approaches to Income Measurement Identification of Financial Statements ○ An entity shall clearly identify the 1. Capital Maintenance Approach - financial statements and distinguish measures profit or net income as the excess them from other information in the same of ending capital over beginning capital, published document. after excluding the effects of transactions ○ IFRSs apply only to the financial with owners. statements and not necessarily to other ○ Financial Capital - profit is earned only information presented in an annual if the financial amount of the net assets report or other documents. at the end of the period exceeds the ○ An entity shall clearly identify the financial amounts of the net assets at financial statements and the notes. The the beginning of the period, after following information should be excluding distributions to, and displayed prominently: contributions from, owners during the Name of the Reporting Entity period. Whether the Financial Statements Net Assets = total assets - total are of the individual entity or a group liabilities of entities. Increase in assets, increase in net Date of the end of the reporting assets period or the period covered. Decrease in liabilities, increase in Presentation Currency net assets Level of rounding used in presenting Decrease in assets, decrease in net amounts. assets Increase in liabilities, decrease in LESSON 3: FINANCIAL net assets STATEMENTS OF MERCHANDISING BUSINESS Statement of Comprehensive Income Presents the results of operation for a given period. The result of the operation can either be profitable or not. ○ The operation is profitable when ○ Physical Capital - Profit is earned only revenues exceed costs and expenses if the physical productive capacity of during the period. the enterprise at the end of the period ​  exceeds the physical productive Revenue Recognition Principle capacity at the beginning of the period ○ Revenue is generally recognized under after excluding distributions to, and accrual accounting, at that point goods contributions from, owners during the are delivered or services are rendered. period. ○ Income is recognized when: 1. There is a probable inflow of 2. Transaction Approach economic benefit ○ Profit is measured as the difference 2. Inflow can be reliably measured between the total income and total Sale of Goods expenses for a given reporting period, ○ Under IAS 18, Revenues, revenues based on recorded transactions of the from sale of goods are recognized enterprise. when: ○ This approach is applied using the The significant risks and rewards of accrual basis of accounting. ownership have been transferred ○ It is also called the matching approach. from the seller to the buyer ○ This is the approach used in accounting The seller no longer has continuing today. managerial involvement or effective An entity shall present all items of income control over the goods and expense recognized in a period: The amount of revenue can be ○ In a single statement of comprehensive measured reliably income; or It is probable that the selling price of ○ In two statements: displaying the goods will be received by the components of profit or loss (P&L) and Company displaying the components of other The costs incurred or to be incurred comprehensive income (OCI) in relation to the transaction can be IFRS does not prescribe any specific format measured reliably between the two forms of income statement. Rendering of Services The choice on what to use between the two ○ Under IAS, Revenues, revenues from is on the entity. services are recognized when: The amount of revenue can be Elements of Performance measured reliably Income - increases in economic benefits It is probable that the economic during the accounting period in the form of benefits associated with the inflows or enhancements of assets or transaction will flow to the entity decreases of liabilities that result in an The stage of completion of the increase in equity, other than those relating transaction at the end of the to contributions from equity participants reporting period can be measured ○ Revenues - arise from the central or reliably; and major revenue producing activity. The costs incurred for the Sales of Goods transaction and the costs to Rendering of Services complete the transaction can be ○ Gain - arise from incidental transactions measured reliably to the operations of an entity Gain on Sale/ Disposal of Expenses - decreases in economic benefits Resources during the accounting period in the form of Other Income outflows or depletions of assets or ​  incurrences of liabilities that results in allocation of costs to functions can decrease in equity be arbitrary. ○ Cost of Sales/Cost of Services ○ Operating Expenses General and Administrative Expense Selling Expense or Distribution Costs ○ Other expense - Finance Costs (Interest Expense) ○ Income Tax Expense ○ Losses - result of incidental transactions Expense Recognition Principle ○ Costs and expenses incurred in earning a revenue should be reported in the same period Cause and effect association Systematic and rational allocation Immediate recognition Presenation of Expense ○ IAS 1 encourages an entity to present an analysis of expenses in the profit or loss section of the statements of Perpetual Inventory System comprehensive income using a classification based on either: Net Income Nature of Expense: expenses are Net Sales Php XX aggretated in the P&L according to their nature and not allocated Less: Cost of Goods Sold (XX) among the various functions of the entity Gross Profit XX Less: Operating Expense (XX) Operating Income XX Other Income/ Expense (XX) Net Income Php XX Revenues from Sales Function of Expense (Cost of Sales/Services Method): expenses are classified according to their function in the operations of a company (Cost of Sales/Services or Operating Expense); provides more relevant information, although ​ Cash Sales Php XX Credit Sales (sales on account) XX Gross Sales Php XX Less: Sales Returns and Allowances (XX) Sales Discount (XX) Net Sales Php XX Cost of Goods Sold Net Sales Php XX Less: Cost of Goods Sold XX Gross Profit Php XX ​ Periodic Inventory System Cost of Goods Sold Net Income Net Sales Php XX Net Sales Php XX Less: Cost of Goods Sold XX Less: Cost of Goods Sold (XX) Gross Profit Php XX Gross Profit XX Gross Profit or Gross Margin Less: Operating Expense (XX) Operating Income XX Excess of net sales over cost of sales. Two elements involved in the computation of Other Income/ Expense (XX) gross profit: Net Income Php XX Net Sales ○ Excess of gross sales over sales returns and allowance and sales discounts. Revenues from Sales Cost of Goods Sold/ Cost of Sales Cash Sales Php XX Cost of Goods Sold or Cost of Sales Credit Sales (sales on account) XX Gross Sales Php XX Refers to the total cost of merchandise sold Less: Sales Returns and Allowances (XX) It includes all costs related to the cost of the goods sold. Sales Discount (XX) The cost of sales has four parts: Net Sales Php XX ○ Beginning inventory ○ Net purchases Cost of Goods Sold (Actual Inventory To compute for net purchases, Count) freight-in is added to purchases, and purchases returns and allowances Merchandise Inventory, beg Php XX and purchases discounts are deducted. Add: Purchases XX ○ Goods available for sale Freight In XX When beginning inventory is added to net purchases, the result is called Gross Purchases XX total goods available for sale. This indicates the total values of Less: Purchase Ret. and Allow. (XX) merchandise that are available to Purchase Discount (XX) customers for sale. ○ Ending inventory Net Purchases XX To compute the cost of sales, ending merchandise inventory is Cost of Goods Available for Sale Php XX deducted from total goods available Less: Merchandise Inventory, end XX for sale. Cost of Goods Sold Php XX ​ Operating Expenses Each item of other comprehensive income Are expenses related to the operations of Transaction with owners in their the business. capacity as owners, showing ○ Administrative Expenses - expenses separately contributions from and related to the administrative functions of distributions to owners. the business. Any amount of dividends recognized during Office Supplies Expense the period and the dividends per share Salaries of Administrative Staff should be disclosed either in the statements Depreciation of Office Equipment of changes in equity or in the notes to the Utilities Expense financial statements. Gasoline and Oil ○ Selling or Marketing Expense - Beginning Capital Php XX expenses related to the marketing of the products. Add: Net Income XX Salespeople’s Salaries Additional Investments XX Freight-out Doubtful Accounts Less: Net Loss (XX) Traveling Expenses Depreciation of Delivery Equipments Withdrawals (XX) Ending Capital XX Statement of Changes in Equity Shows the events and transactions that took place during a reporting period that affects equity. ○ Net Income or Net Loss ○ Additional Investments ○ Withdrawals The following information shall be presented on the face of the Statements of Changes in Equity: ○ The total comprehensive income for the period Statement of Financial Position ○ For each component of equity, the effect of any retrospective application or A summary of an entity’s economic retrospective restatement as a result of resources (assets), economic obligations change in accounting policy or (liabilities), and equity and their relationship correction of prior period errors; and to each other. ○ For each component of equity, a The elements of statements of financial reconciliation of the carrying amount at position are: Assets, Liabilities, Capital the beginning and the end of the period, It is a detailed expression of the accounting separately disclosing changes resulting equation: Assets = Liabilities + Owner’s from: Equity Profit or loss; Operating Cycle - when not clearly identified, it is assumed to be 12 months. ​ Assets Working Capital Resources controlled by the entity as a Current Assets less Current Liabilities result of past events and from which future Working capital is a measure of a company's economic benefits are expected to flow to liquidity, operational efficiency and its the entity short-term financial health. A present economic resource controlled by ○ If a company has substantial positive the entity as a result of past events working capital, then it should have the ○ An economic resource is a right that has potential to invest and grow. the potential to produce economic ○ If a company's current assets do not benefits. exceed its current liabilities, then it may ○ Current Assets: have trouble growing or paying back Cash creditors, or even go bankrupt. Accounts Receivable Merchandise Inventory Equity Prepaid Expenses Supplies (on hand) Claim of the owner on the assets of the ○ Non-current Assets: business Property, Plant, and Equipment Owner’s residual interest in the assets on an Intangible Assets entity that remind after deducting its Long-term Investments liabilities Also called “net assets” Liabilities Format of the Statement of Financial Position Present obligations of the entity arising from past events, the settlement of which are Report Form - assets, liabilities, and equity expected to result in an outflow from the are shown in that order in a vertical entity of resources embodying economic manner. benefits A present obligation of the entity to transfer an economic resource as a result of past Events ○ An obligation is a duty or responsibility that the entity has no practical ability to avoid. ○ Current Liabilities Accounts Payable Notes Payable Salaries Payable Utilities Payable Unearned Revenue ○ Non-current Liabilities Mortgage Payable ​  Account Form - follows the T-Account These are journal entries that close balances of Format where Assets are on the Left side, nominal accounts only. They are sometimes while Liabilities and Equity are shown on the called clearing entries. The term “to close" means to make the balance Right side of the statement of financial of the account equal to zero. position. Perpetual Inventory System STEP 1: Close all income and expense accounts with credit balances. STEP 2: Close all income and expense accounts with debit balances. Financial Position Form - emphasizes the working capital position of an enterprise. STEP 3: Close the Income and Expense Summary Account STEP 4: Close the Owner’s Drawing Account Periodic Inventory System LESSON 3: CLOSING ENTRIES STEP 1: Close all income and expense AND POST-CLOSING TRIAL accounts with credit balances. BALANCE Closing Entries The eighth step in the accounting cycle is the preparation of closing entries. This marks the end of the accounting period. ​ STEP 2: Close all income and expense accounts with debit balances. Post-Closing Trial Balance Once all nominal accounts are closed, a post-closing trial balance may be prepared. At this time, only real accounts have open balances in the ledger. A post-closing trial balance is a statement of financial position in a trial balance form. It proves the accuracy of debit and credit after Close Beginning Inventory and Set Up Ending closing entries, and serves as basis of Inventory beginning balances of the ledger accounts for the next accounting period Income and Expense Summary XX Merchandise Inventory XX To close selling beginning inventory * The amount to be debited and credited is the beginning balance of merchandise inventory. Income and Expense Summary XX Merchandise Inventory XX To close selling beginning inventory * The amount to be debited and credited is the ending balance of merchandise inventory: Whichever is lower between NRV and cost of merchandise inventory STEP 3: Close the Income and Expense Summary Account The amount of merchandise inventory shown is the ending balance. The amount in the post-closing trial balance will be the beginning balance for the 2021 accounting period. STEP 4: Close the Owner’s Drawing Account ​ Sample Questions and Problems WORKSHEET AND FINANCIAL STATEMENTS Credits to the owner: Samantha Magpantay, 12ABM-04 CLICK THIS ONCE YOU'RE DONE ANSWERING References: Fundamentals of Accountancy, Business, and Management 1 by Nick L. Aduana Content from Ma’am Christine Hui’s presentations Notes from Samantha Magpantay, 12ABM-04 Proofread by the Team Secretary and Team President ​