FUNDAMENTAL CONCEPTS AND INTRODUCTION

FINANCIAL ANALYSIS AND REPORTING - PROF 2

TO FINANCIAL REPORTING AND ANALYSIS

Fundamental Concepts
And Introduction To
Financial Reporting And
Analysis Financial

Leader:
Pastor, Mary Catherine R.

Members:
Mañibo, Meagan
Maralit, Princess Ana
Maranan, Darem
Ramirez, Joyce Ann

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
MS. CLAUDETTE G. SIM, CMITAP
Instructor
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

TABLE OF CONTENTS
FUNDAMENTAL CONCEPTS AND
INTRODUCTION TO FINANCIAL REPORTING
AND ANALYSIS
Financial Reporting 3
Financial Statements 3

Development of Generally Accepted Accounting Principles (GAAP) 5

Traditional Assumptions of the Accounting Model 6

Role and Functions of Regulatory Bodies 9

Securities and Exchange Commission 10

American Institute of Certified Public Accountants 10
Financial Accounting Standards Board 10
Governmental Accounting Standards Board 10
International Accounting Standards Committee Foundation 11

International Accounting Standards Board 13

International Financial Reporting Standards 14

References 15

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

FINANCIAL REPORTING
Financial reporting is the disclosure of financial results and related information to
management and external stakeholders (e.g., investors, customers, regulators) or
released to the public about how a company is performing over a specific period of time
in terms of profit and loss.
Users of financial statements include a company’s managers, stockholders,
bondholders, security analysts, suppliers, lending institutions, employees, labor unions,
regulatory authorities, and the general public.
For example:
 Potential investors use the financial reports as an aid in deciding whether or not
to buy the stock.
 Suppliers use the financial reports to decide whether or not to sell merchandise
to a company on credit.
 Labor unions use the financial reports to help determine their demands when
they negotiate for employees.
 Management could use the financial reports to determine the company’s
profitability.

Financial Statements
1. Balance Sheet or Statement of Financial Position
Presents the company’s financial position at a given period. It consists of
three elements- assets, liabilities and equities.

 Assets are resources controlled by the entity as a result of past

transaction and events from which future economic benefits are
expected to flow in the entity.
 Liabilities are the present obligations of the firm from past transaction
or events, the payment of which is expected to result in an outflow of
economic resources or assets.
 Equity is the excess of the firm’s asset over the firm’s liabilities.

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

2. Income Statement or Profit and Loss Report

Presents the result of the firm’s operations or performance for a given
time. It consists of income and expenses of the company.

Income is a transaction that increases assets and/or decreases liabilities

lending to increase in equity
a. Revenues- income generated from the primary operations of the
business
b. Gains- income derived from other activities of the business
Example: Sale of merchandise to Juana’s customer is revenue because it is
the primary operation is to sell its inventories. Interest income from the time
deposit is considered gains because investment in the time deposit is not part of
the primary operation of the store.

Expenses are transaction that decrease assets and/or increase liabilities

lending to decrease in equity. Related to primary operation of business while
losses are from other activities of the business
Example: In the Juana’s store is selling activities. The cost of the
merchandise sold by Juana’s store is part of the store’s selling activities then it is
an expense. Interest expense from notes payable is not part of the selling
activities of the store.

3. Statement of Changes in Equity

It is prepared to meet the requirements of the readers to understand the
transactions that caused the movements in equity accounts.

SoCE presents the:

 Total or net comprehensive income
 Effects brought by the changes in accounting policies or correction of
errors
 Investment transactions of owners and dividends paid to owners.
 The beginning balance of each component in the statement of changes in
equity and movement under them that brought about the ending balances

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

4. Cash Flow Statement

Reports on a company’s cash flow activities, including its operating,
investing, and financing activities.
 Operating activities are related to the main revenue-producing activities
of the business.
 Investing activities are cash transaction related to acquisition and disposal
of long term assets such as property, plant and equipment and intangible
assets
 Financing activities are cash transactions with equity owners and
creditors.

DEVELOPMENT OF GENERALLY ACCEPTED

ACCOUNTING PRINCIPLES (GAAP)
GAAP represent the rules, procedures, practice and standards followed in the
preparation and presentation of financial statements.
Securities Acts of 1933 and 1934 began the formal process of developing
accounting principles that exist today in the United States. Prior to these securities acts,
the New York Stock Exchange (NYSE), which was established in 1792, was the primary
mechanism for establishing specific requirements for the disclosure of financial
information.
The stock market crash of 1929 provoked widespread concern about external
financial disclosure. Some alleged that the stock market crash was substantially
influenced by the lack of adequate financial reporting requirements to investors and
creditors. The Securities Act of 1933 was designed to protect investors from abuses in
financial reporting that developed in the United States. This act was intended to
regulate the initial offering and sale of securities in interstate commerce.
In general, the Securities Exchange Act of 1934 was intended to regulate
securities trading on the national exchanges, and it was under this authority that the
Securities and Exchange Commission (SEC) was created. In effect, the SEC has the
authority to determine GAAP and to regulate the accounting profession. The SEC has
elected to leave much of the determination of GAAP and the regulation of the

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS
accounting profession to the private sector. At times, the SEC will issue its own
standards.
Currently the SEC issues Regulation S-X, which describes the primary formal
financial disclosure requirements for companies. The SEC also issues Financial Reporting
Releases (FRRs) that pertain to financial reporting requirements. Regulation S-X and
FRRs are part of GAAP and are used to give the SEC’s official position on matters relating
to financial statements. The formal process that exists today is a blend of the private
and public sectors.
A number of parties in the private sector have played a role in the development
of GAAP. The American Institute of Certified Public Accountants (AICPA) and the
Financial Accounting Standards Board (FASB) have had the most influence.

TRADITIONAL ASSUMPTIONS OF THE ACCOUNTING

MODEL
I. Business Entity
The concept of separate entity means that the business or entity for which
the financial statements are prepared is separate and distinct from the
owners of the entity. In other words, the entity is viewed as an economic unit
that stands on its own.
For example, an individual may own a grocery store, a farm, and numerous
personal assets. To determine the economic success of the grocery store, we
would view it separately from the other resources owned by the individual.
The grocery store would be treated as a separate entity.

II. Going Concern or Continuity

The operations of a business will continue indefinitely in the future.
Wherein the operations of business will not stop in the near future and will
not be forced to liquidate its assets to pay off it liabilities. And it allows the
accountants to defer recognition of expenses in the future.
For example, company A rents a building for Php 100,000 per month. On
January 1, 2016 company paid the rent for 2 years in the amount of Php
2,400,000. Under the going concern assumption, the company can recognize
the part of the Php 2,400,000 that is not yet incurred. On January 1, 2016, the
company has not yet used the building but already paid the rent. In this case,

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS
the accountant can record an asset instead of recognizing an expense
immediately.

III. Time Period

The purpose of FS is to show the overall results of the operations of a
company. However, the final and comprehensive report of the results of the
company operations cannot be produced until the company is at the ends of
life (after liquidation). Users of the accounting information of a company need
periodic reports to enable them to make economic decisions.
It states that the indefinite life of a company can be divided into periods of
equal length for the preparation of financial reports. Normally, the periods
span for one year. Accounting period of a business may be a calendar year or
fiscal year. A calendar year is a 12- month period that ends in December 31.
Fiscal year is a 12 month period that ends on any month of the year.

IV. Monetary Unit

It has two aspects, namely quantifiability and stability of peso.
Quantifiability aspects mean that the assets, liabilities, equity, income and
expenses should be stated in terms of a unit of measure which is the peso in
the Philippines. Stability of the peso assumption means that the purchasing
power of the peso is stable or constant and that its instability is insignificant
and therefore may be ignored.
In today’s world, the assumption that the peso is a stable over time is not
necessarily valid.
Example: Considered an equipment that was imported 10 years ago from
the US for $100,000 the exchange rate was Php 35 to $1 an equivalent of Php
3,500,000. The same equipment was purchase now exchange rate was Php 45
to $1 an equivalent of Php 4,500,000

V. Historical Cost
It is a measure of value used in accounting in which the value of an asset
on the balance sheet is recorded at its original cost when acquired by the
company.
It is in line with conservative accounting, as it prevents overstating the
value of an asset. Valuing assets at historical cost prevents overstating an
asset's value when asset appreciation may be the result of volatile market
conditions. For example, if a company's main headquarters, including the land

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS
and building, was purchased for $100,000 in 1925, and its expected market
value today is $20 million, the asset is still recorded on the balance sheet at
$100,000.

VI. Conservatism
The accountant must select the measurement w/ the least favorable effect
on net income and financial position in the current period.
There must be alternative measurement, each of which must have reasonable
result. An acceptable use of conservatism would be to value inventory at the
lower historical cost or market value.

VII. Realization
The point of recognition of revenue should be the point in time when
revenue can be reasonably and objectively determined
 Point of sale revenue is usually recognized at the point of sale
 Other acceptable methods of recognizing revenue
1. End of production is the recognition of revenue is at the completion
of the production process
2. Receipt of Cash -This method is used when the collection is not
capable of reasonable estimation at the time of sale.
3. During Production- some long term construction projects recognize
revenue as the construction progresses.
4. Cost Recovery

VIII. Matching
Basic intent is to determine the revenue first and then match the
appropriate costs against this revenue

IX. Consistency
Requires the entity to give the same treatment to comparable transactions
from period to period.

X. Disclosure
The accounting reports must disclose all facts that may influence the
judgment of an informed leader.

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

XI. Materiality
Involves the relative size and importance of an item to a firm. A material
item a one entity may not be material to another.

XII. Industry Practices

Are those accounting issues that are unique to a specific industry, and
which are used instead of normal accounting practices and reporting. For
example, the financial statements of organizations will vary somewhat if they
are in the gaming, insurance, medical care, or utility industries

XIII. Transaction approach

Is the concept of deriving the financial results of a business by recording
individual revenue, expense, and other purchase transactions. These
transactions are then aggregated to see if a business has earned a profit or a
loss.

XIV. Cash basis

Is a method of recording accounting transactions for revenue and
expenses only when the corresponding cash is received or payments are
made. Thus, you record revenue only when a customer pays for a billed
product or service, and you record a payable only when it is paid by the
company

XV. Accrual basis

Recognizes revenue when realized (realization concept) and expenses
when incurred (matching concept)

ROLE AND FUNCTIONS OF REGULATORY BODIES

A company's financial statements present its current financial condition and
future prospects to investors. To be useful, a company's financial statements need to be
accurate, understandable and easily compared with the statements of other companies.
To make sure companies file their accounting statements correctly, the United States

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS
developed four main accounting regulatory bodies. These four regulatory bodies each
have a different purpose to protect the standards of accounting.

A. Securities and Exchange Commission

They regulate the financial statements of companies to protect investors.
The goal of the Securities and Exchange Commission is to ensure that
investors have access to all information relevant to an investment decision.
This is done by requiring all public companies to release accurate and timely
financial information. The Securities and Exchange Commission functions as
an accounting regulatory body by ensuring this financial information is
accurate. Civil actions are brought against companies that commit accounting
fraud.

B. American Institute of Certified Public Accountants

They are in charge of representing the field of accountants. The AICPA
develops the CPA exam, sets standards for the audits of private companies
and provides continuing education for its members. The AICPA also maintains
the standards of the accounting field by ensuring members follow strict
ethical and technical standards. Infractions of these standards are
investigated by the organization. The purpose of the AICPA as a regulatory
body is to monitor the professional conduct of practicing accountants.

C. Financial Accounting Standards Board

FASB is in charge of the accounting standards of nongovernmental
organizations. The FASB establishes guidelines for companies to follow to
ensure proper financial reporting. By following these national standards,
companies publish more accurate and uniform financial statements. This
makes it easier for investors to review and compare the status of different
companies. The FASB's role as an accounting regulatory body is to monitor
and improve accounting standards to regulate the publishing of financial
statements.

D. Governmental Accounting Standards Board

They are in charge of accounting standards for government organizations.
The GASB sets the guidelines for the financial reporting of state and local
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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS
governments. Similar to the FASB, the GASB works to ensure that government
financial reports are easy to understand and compare across the United
States. The role of the GASB as a regulatory body is to set and improve the
accounting standards of government organizations.

INTERNATIONAL ACCOUNTING STANDARDS

COMMITTEE FOUNDATION
The International Accounting Standards Committee (IASC) Foundation is the
private sector independent body responsible for the development and promulgation of
a single set of high quality international accounting standards with the objective of
achieving uniformity in the accounting principles which are used by business and other
organizations for financial reporting around the world.
It was formed in June 1973 through an agreement made by professional
accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico,
Netherlands, United Kingdom, and Ireland and United States of America. IASC is
headquartered in London, United Kingdom.

Objectives of IASC:
 To formulate and publish in the public interest accounting standards to be
observed in the presentation of financial statements and to promote their
worldwide acceptance and observance; and
 To work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of financial
statements.

Organization of the IASC Foundation:

1. Membership:
From 1983 the membership of IASC included all the professional accountancy
bodies that were members of IFAC International Federation of Accountants. Under the
2000 Constitution, the members cease to have a formal role in the decisions of the IASC
Foundation.
2. The Trustees:

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS
From 2000, the governance of the IASC foundation rests with the Trustees. There
are 19 trustees, initially appointed by a Nominating Committee but thereafter taking
responsibility themselves for filling vacancies as these arise.
Trustees are required to show a firm commitment to the IASC as a high-quality
global standard-setter, to be financially knowledgeable, and to have the ability to meet
the time commitment expected.
3. The International Accounting Standards Boards (IASB):
From 2000, the IASB comprises 14 members, appointed by the Trustees. The
foremost qualification for membership of the Board is technical expertise. The people
chosen represent the best available combination of technical skills and background
experience of relevant international business and market conditions.
4. Standing Interpretation Committee (SIC):
In 1995, it was agreed that it would be desirable to have interpretations giving
additional rulings on particular aspects of the standards. This would be an important
aspect of ensuring the acceptance of IASs by the regulators of securities exchanges. The
work of preparing these interpretations is in the hands of the Standing Interpretations
Committee (SIC).
The objective of the SIC is to enhance the rigorous application and worldwide
comparability of financial statements that are prepared using IAS by interpreting
potentially contentions accounting issues.
5. Intergovernmental Organizations:
IASB works closely with a number of intergovernmental bodies. These bodies co-
operate with each other and with IASB. Such bodies are:
a. EU – European Union:
b. OECD: Organization for Economic Cooperation and Development:
c. ISAR: Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting
6. Acceptance of IASs by International Organisation of Securities Commission (IOSCO):
Its objectives include:
i. The establishment of standards and effective surveillance of international
securities transactions

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

ii. Provision of mutual assistance to ensure the integrity of the markets by a

rigorous application of standards and by effective enforcement against offenders.

INTERNATIONAL ACCOUNTING STANDARDS BOARD

The International Accounting Standards Board (IASB) replaces International
Accounting Standards Committee (IASC). It is an independent, private-sector body that
develops and publishes standards in a series of pronouncements called International
Financial Reporting Standards (IFRSs). However, the IASB has adopted the body of
standards issued by IASC.
The International Accounting Standard Board currently consists of 14 experts
with experience in setting accounting standards, preparing/auditing financial reports
and accounting education.
The IASB has an important role to play in the regulation of financial information
as it is responsible for issuing IFRS, which are then adopted for use in many different
jurisdictions. Since 2001, almost 120 countries have required or permitted the use of
IFRS in preparing financial information which makes the IASB the most important
accounting body worldwide.

Objectives of the IASB:

(a) To develop in the public interest, a single set of high-quality, understandable
and enforceable global accounting standards that require high quality, transparent and
comparable information in financial statements and other financial reporting to help
participants in the world’s capital markets and other users make economic decisions;
(b) To promote the use and rigorous application of those standards; and
(c) To bring about convergence of national accounting standards and
International Accounting Standards to high-quality solutions.

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

International Financial Reporting Standards

IFRS is a global phenomenon intended to bring about greater transparency and a
higher degree of comparability in financial reporting.
The standard issued by the FASB and IASB are considered in developing the
accounting standard that will be generally accepted in the Philippines.
At present, the FRSC has adopted in their entirety all International Accounting
Standards and International Financial Reporting Standards.
IFRS is essential to achieve the goal of one uniform and globally accepted
financial reporting standard.
Philippines is fully compliant with IFRS effective January 2005, a process which
was started back in 1997 in moving from USA to IFRS.

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

References

Gibson, C.H (2009). Financial Reporting and Analysis: Using Financial Accounting
Information. Mason, USA: South-Western Cengage Learning

Valix, C.T., Peralta, J.F., and Valix, C.A.M. (2017). Financial Accounting Volume One
First Part. Manila, Philippines: GIC Enterprises &Co., INC.

https://hostanalytics.com/blog/what-is-financial-reporting/

https://corporatefinanceinstitute.com/resources/knowledge/accounting/gaap/
https://bizfluent.com/info-8395002-purpose-accounting-regulatory-bodies.html
http://www.accountingnotes.net/accounting-standards/international-accounting-
standards-committee-iasc-foundation/5570

http://www.accountingnotes.net/accounting-standards/international-accounting-
standards-committee-iasc-foundation/5570

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

PRESENTATION STRATEGY
The reporters conduct an oral presentation to give information or explanation about the
topic given. At the end of the lesson, a question and answer portion will take place between the
reporters, the students and the professor to tackle or to give clarification to the topic. And also
they have an assessment to determine whether or not they understand the topic.

CLASS EVALUATION

INDIVIDUAL TASKS

Name Task Done Leader’s Grade

(Alphabetically Arrange) (10 Points)
Mañibo, Meagan
Maralit, Princess Ana

Maranan, Darem

Ramirez, Joyce Ann

Pastor, Mary Catherine R.

Leader

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF
 FUNDAMENTAL CONCEPTS AND INTRODUCTION
TO FINANCIAL REPORTING AND ANALYSIS

INDIVIDUAL PRESENTATION GRADE

Individual Presentation
Name Content Mastery Discussion Total Points Final
(Alphabetically Arranged) (20 (10 (20 points) Earned Rating
points) points)

Mañibo, Meagan
Maralit, Princess Ana

Maranan, Darem

Pastor, Mary Catherine R.

Ramirez, Joyce Ann

GROUP PRESENTATION GRADE

Name Individual Paper Powerpoint Individual Final Rating

(Alphabetically Arrange) Presentation Presentation Presentation Tasks

Mañibo, Meagan
Maralit, Princess Ana

Maranan, Darem

Pastor, Mary Catherine R.

Ramirez, Joyce Ann

MS. CLAUDETTE G. SIM, CMITAP

Instructor

Date : ___________________

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FINANCIAL ANALYSIS AND REPORTING - PROF 2
3:30 – 5:00 pm TF