CHAPTER 3 SUMMARY

Accounting is considered as the language of business because through accounting, the business was able
to tell what it has accomplished with the help of an accountant. The information used to present
financial information are called financial statements. Financial statements are structured representation
of financial position and financial performance of an entity. The objective if financial statement is to
provide information that is useful in making economic decision. A financial statement that prepared to
provide useful information to a wide range of users are called General-purpose statement.

There are conditions set out in the International Accounting Standards Board(IASB) Framework to
present fairly the financial statements. There are seven including going-concern and Accrual Basis, the
others are: 1) materiality and aggregation, an entity shall present material class of similar items; 2)
offsetting, an entity shall not offset assets and liabilities, income and expenses unless permitted by IFRS;
3) Frequency of reporting and comparative information, an entity shall present with equal prominence
each financial statement; 4) Consistency of Presentation, an entity shall retain the presentation of items;
5) Identification of Financial Statements, an entity shall clearly identify the financial statements.

As Per revised IAS No.1, the six basic financial statements are statement of financial position, statement
of comprehensive income, statement of changes in equity, statement of cash flow, notes, and
comparative statement.

The Statement of Financial Position is a financial statements that measures and evaluates the liquidity,
solvency, capital structure, and capacity for adaptation of an entity. Liquidity refers to the financial
availability of an entity to meet it currently maturing obligation. Solvency refers to the ability of entity to
meet its long term maturing obligation. Capital Structure refers to the source of financing for assets. And
Capacity for adaptation refers to the financial flexibility of an entity. Statement of financial position has
three elements, the assets, liabilities, and equity. Assets refers to the source or value that controlled by
the business. Liabilities refers to the debts and obligations of the business. And equity refers to the
investment that put up by the proprietor to the business. The statement of financial position was
previously known as “balance sheet”.

The second financial statement is the statement of comprehensive income. It is the most important
financial statement because its main concern is the profitability of the business. It shows the results of
operation of the business for a given period of time. It consists of three elements which are the Revenue
or income, Expenses, and profit or loss. Revenues are generated from normal business activities, while
income are earned when it is outside the normal business operation. Expenses are costs of operation to
generate revenue. While profit and expense are the results of business operation. Profit refers to the
excess of revenues to the expenses, while loss is if the expenses excess the revenue. The statement of
comprehensive income was previously known as income statement.

The third financial statement is Statement of Changes in equity. It summarizes the changes in equity for
a given period of time. It shows the beginning equity of the owner, the additional investment, profit or
loss, and the withdrawal of the owner.

The fourth financial statement is the statement of Cash Flows. It is a financial statement that provide
information about the causes of cash inflow and out flow of the business. This information presents the
beginning cash balance to the end of the given period of time. It has three major activities such as
operating activities, investing activities, and financing activities. Operating activities are cash outflows
and inflows generated from normal operations. Investing activities are cash outflows when purchasing a
property and equipment, and cash inflows when selling property and equipment. Financial activities are
cash inflow and outflow in financing the business.

Notes to the financial statements disclose the detailed assumptions made by accountants when
preparing a entity’s financial statement. Disclosure that accompany financial statements should be
limited to facts and reasonable estimates. Therefore, notes should be the product of both management
and accountant’s efforts.

There are two qualitative characteristics of a useful information, the fundamental qualitative
characteristics and enhancing qualitative characteristics. The fundamental qualitative characteristics as
relevance, are prepared intended to help users make informed economic decision. The second
fundamental is faithful representation, meaning the information should be adequate. This includes
completeness, neutrality, and freedom from error. The second qualitative characteristic is Enhancing.
This means that information should present with comparability, verifiability, timeliness, and
understandability.

The elements of financial statements consists of five major accounts, which are assets, liabilities, equity,
revenue, and expenses. These elements are given account name or account titles are identification of
the same types or nature of items.

ASSETS – are defined as things of value that are owned and used by the business in its operation
according to Layman. Assets are classified into two, the current asset and non-current asset. Current
assets are value that expected or consumed within the entity’s normal operating business or assumed to
be twelve months. Cash, cash equivalents, petty cash fund, notes receivable, accounts receivable,
estimated uncollectible accounts, advances to employees, inventories, Unused supplies, prepaid
expenses, and accrued income are considered as current assets. Non-current assets are value that are
expected to be used during more than one period such as land, building, equipment, furniture &
fixtures, accumulated depreciation, and intangible assets. Capital expenditures are incurred which
extend the useful life of the asset, therefore treated as assets.

LIABILITIES- are financial obligations of the business to its creditors and represents the claim of the
creditors over the assets of the enterprise. Liabilities also classified account titles into current liabilities
and non-current liabilities. Current liabilities are expected to be settle within its normal operating cycle
of the business. Accounts payable, notes payable(short term), accrued expenses and unearned income
are examples of current liabilities. Non-current liabilities are expected to be settle during more than one
period such as notes payable(long term), and mortgage payable.

EQUITY- are the amount of money put by the proprietor into the business to start with the operation
called as initial capital. The equity decreased when the owner made a withdrawal.

REVENUE/INCOME- are the gross inflow of economic benefits arising in the course of ordinary activities
of the business. Gains are income are activities that are not from the ordinary course of the business
operation. Examples of income titles are service income, professional income, rental income, interest
income, and miscellaneous income.
EXPENSES- are the gross outflow used in ordinary course of business to generate revenue. There is a loss
when there is a decrease in assets or increase in liabilities arising from the events that are
outside the ordinary course of business operation. Examples of expenses are Supplies Expense,
Rent Expense, Repairs and Maintenance, Salaries Expense, Uncollectible Accounts, Depreciation
Expense, Taxes and Licenses, Insurance Expense, Utilities Expense, Interest Expense,
Miscellaneous Expense, Gas & oil.
THE CRITERIA OF RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS
1. It is probable that any future economic benefit associated with the item will flow to or form
the enterprise.
2. The item has a cost or value that can be measured with reliability.
3. The information is representationally faithful, verifiable, and neutral.
4. The information about it is capable of making a difference in user decisions.
The basis of measurement of financial statement are employed to different degrees in varying
combinations in financial statements. They include the following:
a) Historical Cost- a measure of value is recorded at its original cost when acquired by the
company.
b) Current Cost- current cost is the cost that would be required to replace an asset in
the current period.
c) Realizable value- refers to the estimated selling price less the estimated costs of
completion and costs necessary to make the sale.
d) Present Value - is the current value of a future sum of money or stream of cash flows
given a specified rate of return.