Financial Statement o Definition: the cash receipts and payments

o Definition: structured financial representation of arising from the operating, investing and
the financial position and performance of an financial activities of the entity.
entity. o Presentation: in the Statement of Cash Flow
o Preparation: on accrual basis except for cash o Usefulness (objective): in assessing the ability of
flow information. the entity to generate cash and cash equivalents.

o Components: 6 components Financial Reporting

1. Statement of Financial Performance o Definition: the provision of financial
2. Income Statement information about the entity to external users
3. Statement of Comprehensive Income that is useful to them in making economic
decisions and accessing the effectiveness of the
4. Statement of Changes in Equity entity’s management.
5. Statement of Cashflows o Done through the presentation of the annual
6. Notes, comprising a summary of financial statements.
significant accounting policies and o However, financial reporting encompasses not
other explanatory information only financial statement but also other means of
communicating information that relates directly
or indirectly to the financial accounting process,
o Objective: to provide information about the such as:
financial position, financial performance and
cash flows of an entity that is useful to a 1. Financial highlight
wide range of users in making economic 2. Summary of important financial figures
decision. 3. Analysis of financial statement
In order to achieve this objective, financial 4. Significant ratios
statements provide information about:
 Assets
 Liabilities
 Equity o General Objective of financial reporting:
 Income and expenses (including gains “Provide information that is useful for decision
and losses) making”
 Contributions by and distributions to
owners in their capacity as owners. Conceptual Framework for Financial Reporting,
 Cash flows states:
“the objective of financial reporting is to provide
Statement of Financial Position: financial information about the reporting entity
o Composition: assets, liabilities and equity at that is useful to existing and potential investors,
particular moment of time. lenders and other creditors in making decisions
o Pertains to the liquidity, solvency, and the need about the providing resources to the entity.
of the entity for additional financing.
o Specific objective of Financial Reporting:
Statement of Financial Performance:
As stated by the Conceptual Framework for
o AKA: Results of Operation Financial Reporting:
o Composition: revenue, expenses and net income 1. To provide information useful in making
investment and credit decisions about
or loss of an entity for a period of time
providing resources to the entity.
o Performance, defined: the level of income
2. To provide information useful in
earned by the entity through the “efficient” and
assessing the cash flow prospects of the
“effective use” of its resources.
entity
o Presentation: in the Income Statement and
Statement of Comprehensive Income.
3. To provide information about the entity’s
resources, claims and changes in
resources and claims.
Cash Flows
o Targets users of Financial Reporting Have the most
 Existing and potential investors critical and
immediate need for
information of
  Lenders recognition criteria for assets, liabilities, income and
 Other creditors expenses laid down in the Conceptual Framework.

a primary user of financial information Q4: What does fair presentation require the entity to do?
– parties that provide resources to the entity. - Select and apply accounting policies in
accordance with PFRS
Note: information that meets the needs of the specified - Present information, including accounting
primary users is likely to meet the needs of others users, policies, in a manner that provides relevant and
such as: faithfully represented information.
 Employees - Provide additional disclosure if necessary, for
 Customers the users to understand the entity’s financial
 government and their agencies. statement.

o Limitations of Financial Reporting: Q5: Can an entity rectify inappropriate accounting

 Do not and cannot provide all of the policies by disclosure of accounting policy or by notes
information that existing and potential or explanatory information?
investors, lenders and other creditors need. - No.
 Do not design to show the value of a When an entity departs from a standard, entity should
reporting entity – but rather “estimate” the disclose the ff:
value of the entity. a Management has concluded that FS is
“because not all people deserve to know your real fairly presented
worth” b It has complied with applicable
standards and interpretation, except that
Responsibility for financial statements it has departed from a particular
Q1: Who shall have the primary responsibility to prepare requirement to achieve fair presentation.
and present the financial statement? c The title of the standard or interpretation
- Management from which entity has departed. The
Q2: What are the responsibilities of the Board of treatment adopted.
Directors? d Financial impact of the departure on
- In discharging its responsibilities, reviews and each item that would have been reported
authorizes the financial statement for issue in complying with the requirement
before submitting to shareholders of the entity. B. Going Concern
 AKA: continuity assumption
General features of financial statements: Assets are normally recorded at original
a fair presentation acquisition cost. As a rule, market value is
b going concern ignored unless required by a standard.
c accrual basis e.g. PAS 16 requires that PPE should be
d materiality and aggregation subsequently recorded using either: Cost model
e offsetting or Revaluation model.
f frequency of reporting
g Comparative information Relevance of Going Concern
h Consistency of preparation Going concern is relevant when management
shall make an estimate of the expected outcome
A. Fair Presentation of future events, such as recoverability of AR
B. and useful life of noncurrent assets (foundation
Q3: How is “fair presentation” achieved? of cost principle).
– if the financial statements are prepared in
accordance with the Philippine Financial Q6: In what instance the going concern shall be
Reporting Standard which represent the GAAP suspended?
in the Philippines, with additional disclosure, if - Financial statement shall be prepared on a going
necessary (presumed fairly presented). concern basis unless management intends to
liquidate the entity or cease trading or has no
Fair Presentation, defined realistic option but to do so.
Faithful representation of the effects of transactions and
other events in accordance with the definition and
Q7: What shall the entity do if there are uncertainties
regarding the ability of the entity to continue as a going
INVENTORY
concern?
- Uncertainties shall be fully disclosed
“If the financial statements are not prepared on
going concern basis, such fact shall be disclosed
together with the measurement basis and the Q10: What shall the company do if the line item is not
reason thereof (p. 10). “ individually material?
- It is aggregated with other items either in those
Q8: In making assessment about the going concern statements or in the notes
assumption, management shall take into account all - Example: an investor’s share in the net income
available information about the future which is? of an associate is presented as a separate line
- At least twelve months from the end of reporting item in the income statement, however, if this
period. amount is not individually material, it may be
aggregated with other income.
C. Accrual Basis
Q11: When is an item material?
 Entity shall prepare the financial statement on - Relative
accrual basis - There is no strict or uniform rule for determining
Recognition using accrual method whether an item is material or not.
- Income is recognized when earned regardless of - Very often, this is dependent on good
when received judgement, professional expertise and common
- Expense is recognized when incurred regardless sense.
of when paid.
General guide for materiality:
Accrual accounting most essential in: “An item is material if knowledge of it would affect the
The recognition of decision of the informed users of the financial
- Accounts receivable statement”
- Prepaid expense
- Accrued expense Materiality is a relativity
- Deferred income Q12: Materiality of an item depends on?
- Accrued income - Relative size rather than absolute size.
- What is material for one entity may be
D. Materiality and Aggregation immaterial for another.
o An entity shall present separately -
 each material of “similar” items Factors of Materiality
 items of “dissimilar” nature or function a. Relative size of the item in relation to the
unless they are immaterial total of the group to which the item belongs
(e.g. the amount of advertising cost to total
Q9: What is the final stage in the process of aggregation administrative expense)
and classification? b. Nature of the item – an item may be
- Presentation of condensed and classified data “inherently” material because of its very nature
which for line items in the financial statement. it affects economic decision
GR Assets and liabilities, and income and e.g. A bribe of 20,000php is material to both
expenses, when material, shall not be offset small and large entities.
against each other.
XP Offsetting may be done when it is required or E. Offsetting
N permitted by another PFRS - See offsetting examples on p.14

 Cash on hand F. Frequency of Reporting

Presented as one Q13: An entity shall present a complete set of financial
 Petty cash fund
item in: statements at least?
 Cash in bank - Annually
 Cash equivalent “CASH AND CASH
EQUIVALENT”
 Finished goods
 Goods in process
 Raw materials
Q14: What shall an entity do if it changes the end of the
reporting period and presents financial statements for a
period longer or shorter than one year?
- The entity shall disclose:
1. The period covered by the financial
statements
2. The reason for using a longer or shorter
period
3. The fact that amounts presented in the
financial statement are not entirely
comparable.

G. Comparable Information

Q15: How is “comparable” information achieved? GR Entity shall disclose comparative information
- Through consistency in respect of the previous period for all
amounts reported in the current period’s
F. Consistency of Preparation financial statement.
Principle of Consistency XP When permitted or require otherwise by PFRS.
Requires that the accounting methods and practices shall N
be applied on a uniform basis from period to period.

Q16: Does consistency mean there is no change in

accounting method can be made?
- No. It is inappropriate for an entity to leave
accounting policies unchanged when better and
acceptable alternatives exist.
- Therefore, if the change will result to
information that is faithfully represented and
more relevant to the users, then such change
should be made.
Change in the presentation and classification criteria:
a. When it is required by another PFRS
b. If significant change will demonstrate a more
appropriate revised presentation and
classification

Q17: What is the responsibility of an entity when there is

a change in the presentation and classification?
- An entity should fully disclose the change and
the peso effect of the change.
Third Statement of Financial Position
Required when an entity:
a. Applies an accounting policy retrospectively
b. Makes retrospective restatement of items in the
financial statement
c. Reclassifies items in the financial statement

Q18: What are the 3 statements of financial position?

1. The end of the current period
2. The end of the previous period
3. The beginning of the earliest comparative
period.