FINANCIAL

STATEMENTS
 ELEMENTS OF FINANCIAL STATEMENTS

- REFER TO THE QUANTITATIVE INFORMATION

REPORTED IN THE STATEMENT OF FINANCIAL
POSITION AND INCOME STATEMENT.
ELEMENTS DIRECTLY RELATED TO ELEMENTS DIRECTLY RELATED TO
THE MEASUREMENT OF FINANCIAL THE MEASUREMENT OF
POSITION FINANCIAL PERFORMANCE

*ASSETS *INCOME
*LIABILITIES *EXPENSES
*EQUITY
 ASSETS
- ARE RESOURCES CONTROLLED BY THE ENTITY AS A
RESULT OF PAST TRANSACTIONS OR EVENTS AND FROM
WHICH FUTURE ECONOMIC BENEFITS ARE EXPECTED TO
FLOW TO THE ENTITY.
 LIABILITIES
- ARE PRESENT OBLIGAITONS OF THE ENTITY ARISING
FROM PAST TRANSACTIONS OR EVENTS THE SETTLEMENT
OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM
THE ENTITY OF RESOURCES EMBODYING ECONOMIC
BENEFITS.
 EQUITY

- IT IS THE RESIDUAL INTEREST IN THE ASSETS OF THE

ENTITY AFTER DEDUCTING ALL OF ITS LIABILITIES.
 INCOME
- IT IS THE INCREASE IN ECONOMIC BENEFIT DURING
THE ACCOUNTING PERIOD IN THE FORM OF INFLOW OR
INCREASE IN ASSET OR DECREASE IN LIABILITY THAT
RESULTS IN INCREASE IN EQUITY, OTHER THAN
CONTRIBUTION FROM EQUITY PARTICIPANTS.
 EXPENSE
- IT IS THE DECREASE IN ECONOMIC BENEFIT DURING
THE ACCOUNTING PERIOD IN THE FORM OF AN OUTFLOW
OR DECREASE IN ASSET OR INCREASE IN LIABILITY THAT
RESULTS IN DECREASE IN EQUITY, OTHER THAN
DISTRIBUTION TO EQUITY PARTICIPANTS.
 RECOGNITION OF ELEMENTS
RECOGNITION

- A TERM WHICH MEANS THE REPORTING OF AN ASSET,

LIABILITY, INCOME OR EXPENSE ON THE FACE OF THE
FINANCIAL STATEMENTS OF AN ENTITY.
 4 MAIN RECOGNITION PRINCIPLES

• AS EXPLICITLY ENUMERATED IN THE CONCEPTUAL FRAMEWORK THESE ARE

THE RECOGNITION PRINCIPLES TO BE FOLLOWED IN THE PREPARATION AND
PRESENTATION OF FINANCIAL STATEMENTS, .

1) ASSET RECOGNITION PRINCIPLE

2) LIABILITY RECOGNITION PRINCIPLE
3) INCOME RECOGNITION PRINCIPLE
4) EXPENSE RECOGNITION PRINCIPLE
 ASSET RECOGNITION PRINCIPLE

• “AN ASSET IS RECOGNIZED WHEN IT IS PROBABLE THAT FUTURE ECONOMIC

BENEFITS WILL FLOW TO THE ENTITY AND THE ASSET HAS A COST OR VALUE
THAT CAN BE MEASURED RELIABLY.”

2 CONDITIONS:

1. IT IS PROBABLE THAT FUTURE ECONOMIC BENEFITS WILL FLOW TO THE

ENTITY.
• PROBABLE - THE CAHNCE OF THE FUTURE ECONOMIC BENEFIT
ARISING IS MORE LIKELY RATHER THAN LESS LIKELY.
•
2. THE COST OR VALUE OF THE ASSET CAN BE MEASURED RELIABLY.
FUTURE ECONOMIC BENEFIT

• THE FUTURE ECONOMIC BENEFIT EMBODIED IN AN ASSET IS THE POTENTIAL TO

CONTRIBUTE DIRECTLY OR INDIRECTLY TO THE FLOW OF CASH AND CASH
EQUIVALENTS TO THE ENTITY.

• EXAMPLES:

- AN ASSET MAY BE USED SINGLY OR IN COMBINATION WITH OTHER ASSETS IN THE

PRODUCTION OF GOODS OR SERVICES TO BE SOLD BY THE ENTITY.
- EXCHANGED FOR OTHER ASSETS
- USED TO SETTLE A LIABILITY
- DISTRIBUTED TO THE OWNERS OF THE ENTITY
*INHERENT IN ASSET RECOGNITION IS THE COST PRINCIPLE.

COST PRINCIPLE

- THIS PRINCIPLE REQUIRES THAT ASSETS SHOULD BE RECORDED INITIALLY AT

ORIGINAL ACQUISITION COST.
 LIABILITY RECOGNITION PRINCIPLE
• “A LIABILITY IS RECOGNIZED WHEN IT IS PROBABLE THAT AN OUTFLOW OF
RESOURCES EMBODYING ECONOMIC BENEFITS WILL BE REQUIRED FOR THE
SETTLEMENT OF A PRESENT OBLIGATION AND THE AMOUNT OF THE OBLIGATION CAN
BE MEASURED RELIABLY.”

• 2 CONDITIONS

1. IT IS PROBABLE THAT AN OUTFLOW OF ECONOMIC BENEFITS WILL BE REQUIRED

FOR THE SETTLEMENT OF A PRESENT OBLIGATION.

2. THE AMOUNT OF OBLIGATION CAN BE MEASURED RELIABLY.

 LIABILITIES
*AN ESSENTIAL CHARACTERISTIC OF A LIABILITY IS THAT THE ENTITY HAS A
PRESENT OBLIGATION WHICH MAY BE LEGAL OR CONSTRUCTIVE.

*OBLIGATIONS MAY BE LEGALLY ENFORCEABLE AS A CONSEQUENCE OF A BINDING

CONTRACT OR STATUTORY REQUIREMENT.

*(ACCOUNTS PAYABLE FOR GOODS AND SERVICES RECEIVED)

• SETTLEMENT OF A PRESENT OBLIGATION

- PAYMENT OF CASH
- TRANSFER OF NONCASH ASSETS
- PROVISION OF SERVICES
- REPLACEMENT OF THE OBLIGATION WITH ANOTHER OBLIGATION
- CONVERSION OF THE OBLIGATION INTO EQUITY
 INCOME RECOGNITION PRINCIPLE
• “THE BASIC PRINCIPLE IS THAT INCOME SHALL BE RECOGIZED WHEN EARNED.”

*THE CONCEPTUAL FRAMEWORK PROVIDES THAT “INCOME IS RECOGNIZED WHEN IT IS PROBABLE THAT AN
INCREASE IN FUTURE ECONOMIC BENEFITS RELATED TO AN INCREASE IN AN ASSET OR A DECREASE IN A
LIABILITY HAS ARISEN AND THAT THE INCREASE IN ECONOMIC BENEFITS CAN BE MEASURED RELIABLY.”

• 2 CONDITIONS:

1) IT IS PROBABLE THAT FUTURE ECONOMIC BENEFITS WILL FLOW TO THE ENTITY AS A RESULT OF AN
INCREASE IN AN ASSET OR A DECREASE IN A LIABILITY.
2) THE ECONOMIC BENEFITS CAN BE MEASURED RELIABLY.

*BOTH CONDITIONS ARE PRESENT AT THE POINT OF SALE.

• ACCORDINGLY, THE POINT OF SALE IS THE POINT OF INCOME RECOGNITION.

• IT IS AT THE POINT OF SALE THAT THE ENTITY HAS TRANSFERRED TO THE BUYER THE SIGNIFICANT RISKS AND REWARDS OF
OWNERSHIP OF THE GOODS.

• LEGAL TITLE TO THE GOODS PASSES TO THE BUYER AT THE POINT OF SALE.

• THE POINT OF SSALE IS USUALLY THE POINT OF DELIVERY, WHICH MAY BE ACTUAL OR CONSTRUCTIVE).

• LEGALLY, IT IS DELIVERY THAT TRANSFERS OWNERSHIP FROM THE SELLER TO THE BUYER.
• DEFINITION OF INCOME

-ENCOMPASSES BOTH REVENUE AND GAINS

• REVENUE

- ARISES IN THE COURSE OF THE ORDINARY REGULAR ACTIVITIES AND IS

REFERRED TO BY A VARIETY OF DIFFERENT NAMES INCLUDING SALES, FEES, INTEREST,
DIVIDENDS, ROYALTIES AND RENT.

- THE ESSENCE OF REVENUE IS REGULARITY

• GAINS

- REPRESENT OTHER ITEMS THAT MEET THE DEFINITION OF INCOME AND DO

NOT ARISE IN THE COURSE OF THE ORDINARY REGULAR ACTIVITIES.
• EXCEPTIONS TO THE POINT OF SALE
INSTALLMENT METHOD
- REVENUE IS RECOGNIZED AT THE POINT OF COLLECTION.
- THE AMOUNT OF REVENUE IS DETERMINED BY MULTIPLYING THE GROSS PROFIT RATE BY THE
AMOUNT OF COLLECTIONS.
- THE REASON FOR THIS METHOD IS THE UNCERTAINTY OF COLLECTION OR THE POSSIBILITY OF
CANCELLATION OF THE INSTALLMENT SALES CONTRACT.

COST RECOVERY METHOD OR SUNK COST METHOD

- REVENUE IS RECOGNIZED ALSO AT THE POINT OF COLLECTION.
- ALL COLLECTIONS ARE FIRST APPLIED TO THE COST OF THE MERCHANDISE SOLD.
- WHEN THE COST OF MERCHANDISE SOLD IS FULLY RECOVERED THROUGH
COLLECTIONS, THEN ALL SUBSEQUENT COLLECTIONS ARE CONSIDERED REVENUE.

CASH METHOD
- REVENUE IS RECOGNIZED WHEN RECEIVED REGARDLESS OF WHEN EARNED.
- ALL COLLECTIONS ARE TREATED AS REVENUE
- THERE ARE NO ACCRUALS AND DEFERRALS

PERCENTAGE OF COMPLETION METHOD

- WHEN THE OUTCOME OF A CONSTRUCTION CONTRACT CAN BE ESTIMATED RELIABLY, CONTRACT
REVENUE AND CONTRACT COSTS ASSOCIATED WITH THE CONSTRUCTION CONTRACT SHALL BE RECOGNIZED AS
REVENUE AND EXPENSES, RESPECTIVELY, BY REFERENCE TO THE STAGE OF COMPLETION OF THE CONTRACT ACTIVITY.

PRODUCTION METHOD
- REVENUE IS RECOGNIZED AT THE POINT OF PRODUCTION.
- THIS METHOD IS APPLICABLE TO AGRICULTURAL, FOREST AND MINERAL PRODUCTS.
REVENUE FROM RENDERING SERVICES:

• CONDITIONS FOR RECOGNITION:

1. THE AMOUNT OF REVENUE CAN BE MEASURED RELIABLY

2. IT IS PROBABLE THAT THE ECONOMIC BENEFITS ASSOCIATED WITH THE TRANSACTION WILL FOLW TO THE ENTITY.
3. THE STAGE OF COMPLETION OF THE TRANSACTION AT THE END OF REPORTING PERIOD CAN BE MEASURED
RELIABLY.
4. THE COSTS INCURRED FOR THE TRANSACTION AND THE COSTS TO COMPLETE CAN BE MEASURED RELIABLY.

REVENUE FROM INTEREST, ROYALTIES AND DIVIDENDS

• INTEREST REVENUE - SHALL BE RECOGNZED ON A TIME PROPORTION BASIS THAT TAKES INTO ACCOUNT THE
EFFECTIVE YIELD ON THE ASSET.

• ROYALTIES - SHALL BE RECOGNIZED ON AN ACCRUAL BASIS IN ACCORDANCE WITH THE SUBSTANCE OF THE
RELEVANT AGREEMENT.

• DIVIDENDS - SHALL BE RECOGNIZED AS REVENUE WHEN THE SAHREHOLDER’S RIGHT TO RECEIVE PAYMENT
IS ESTABLISHED, MEANING, WHEN THE DIVIDENDS ARE DECLARED.

OTHER INCOME RECOGNITION

1. INSTALLATION FEES - RECOGNIZED AS REVENUE OVER THE PERIOD OF INSTALLATION BY REFERENCE TO THE
STAGE OF COMPLETION.
2. SUBSCRIPTION REVENUE SHOULD BE RECOGNIZED ON A STRAIGHT LINE BASIS OVER THE SUBSCRIPTION PERIOD.
3. ADMISSION FEES ARE RECOGNIZED AS REVENUE WHEN THE EVENT TAKES PLACE.
4. TUITION FEES ARE RECOGNIZED AS REVENUE OVER THE PERIOD IN WHICH TUITION IS PROVIDED.
 EXPENSE RECOGNITION PRINCIPLE
• “THE BASIC EXPENSE RECOGNITION PRINCIPLE MEANS THAT “EXPENSES ARE RECOGNIZED
WHEN INCURRED”.

• *THE CONCEPTUAL FRAMEWORK PROVIDES THAT “EXPENSES ARE RECOGNIZED WHEN IT IS

PROBABLE THAT A DECREASE IN FUTURE ECONOMIC BENEFITS RELATED TO DECREASE IN
AN ASSET OR AN INCREASE IN LIABILITY HAS OCCURRED AND THAT THE DECREASE IN
ECONOMIC BENEFITS CAN BE MEASURED RELIABLY”.

• 2 CONDITIONS:

1) IT IS PROBABLE THAT A DECREASE IN FUTURE ECONOMIC BENEFITS HAS OCCURRED AS A

RESULT OF A DECREASE IN AN ASSET OR AN INCREASE IN A LIABILITY.
2) THE DECREASE IN ECONOMIC BENEFITS CAN BE MEASURED RELIABLY.
*DEFINITION OF EXPENSES ENCOMPASSES LOSSES AS WELL AS THOSE EXPENSES THAT ARISE
IN THE COURSE OF THE ORDINARY REGULAR ACTIVITIES.

*EXPENSES THAT ARISE IN THE COURSE OF ORDINARY REGULAR ACTIVITIES

- COST OF SALES
- WAGES
- DEPRECIATION

*LOSSES - REPRESENT OTHER ITEMS THAT MEET THE DEFINITION OF EXPENSES AND
DO NOT ARISE IN THE COURSE OF THE ORDINARY REGULAR ACTIVITIES.

- LOSSES RESULTING FROM DISASTERS (FIRE, FLOOD, TSUNAMI AND

HURRICANE) AND LOSSES FROM DISPOSAL OF NONCURRENT ASSETS.

• “THE EXPENSE RECOGNITION PRINCIPLE IS THE APPLICATION OF THE MATCHING PRINCIPLE.”

• MATCHING PRINCIPLE

- THE GENERATION OF REVENUE IS NOT WOTHOUT ANY COST. THERE HAS

GOT TO BE SOME COST IN EARNING A REVENUE.

- THERE IS NO GAIN IF THERE IS NO PAIN.

- REQUIRES THAT “THOSE COSTS AND EXPENSES INCURRED IN EARNING A

REVENUE SHALL BE REPORTED IN THE SAME PERIOD.”

• 3 APPLICATIONS OF MATCHING PRINCIPLE

• CAUSE AND EFFECT ASSOCIATION

• SYSTEMATIC AND RATIONAL ALLOCATION

• IMMEDIATE RECOGNITION
• CAUSE AND EFFECT ASSOCIATION

- UNDER THIS PRINCIPLE, THE EXPENSE IS RECOGNIZED WHEN THE REVENUE

IS ALREADY RECOGNIZED.

• EXAMPLES:

- COST OF MERCHANDISE INVENTORY

- DOUBTFUL ACCOUNTS

- WARRANTY EXPENSE

- SALES COMMISSIONS
• SYSTEMATIC AND RATIONAL ALLOCATION

- SOME COSTS ARE EXPENSED BY SIMPLY ALLOCATING THEM OVER THE

PERIODS BENEFITED.

- THE COST INCURRED WILL BENEFIT FUTURE PERIODS AND THAT THERE
IS AN ABSENCE OF A DIRECT OR CLEAR ASSOCIATION OF THE EXPENSE
WITH SPECIFIC REVENUE.

• EXAMPLES

- DEPRECIATION OF PROPERTY, PLANT & EQUIPMENT

- AMORTIZATION OF INTANGIBLES

- ALLOCATION OF PREPAID RENT

- INSURANCE AND OTHER PREPAYMENTS

• IMMEDIATE RECOGNITION

- THE COST INCURRED IS EXPENSES OUTRIGHT BECAUSE OF UNCERTAINTY OF

FUTURE ECONOMIC BENEFITS OR DIFFICULTY OF RELIABLY ASSOCIATING CERTAIN
COSTS WITH FUTURE REVENUE.

- AN EXPENSE IS RECOGNIZED IMMEDIATELY WHEN AN EXPENDITURE PRODUCES NO

FUTURE ECONOMIC BENEFITS OR WHEN FUTURE ECONOMIC BENEFITS DO NOT
QUALIFY, OR CEASE TO QUALIFY FOR RECOGNITION IN THE STATEMENT OF
FINANCIAL POSITION AS AN ASSET.

• EXAMPLES:

- OFFICERS’ SALARIES AND MOST ADMINISTRATIVE EXPENSES

- ADVERTISING AND MOST SELLING EXPENSES

- AMOUNT TO SETTLE LAWSUIT AND WORTHLESS INTANGIBLES

- MANY LOSSES, SUCH AS LOSS FROM DISPOSAL OF BUILDING, LOSS FROM SALE OF
INVESTMENTS, AND CASUALTY LOSS ARE IMMEDIATELY RECOGNIZED BECAUSE THEY
ARE NOT DIRECTLY RELATED TO SPECIFIC REVENUE.
• MEASUREMENT OF ELEMENTS

• MEASUREMENT

- THE PROCESS OF DETERMINING THE MONETARY AMOUNTS AT WHICH THE

ELEMENTS OF THE FINANCIAL STATEMENTS ARE TO BE RECOGNIZED AND CARRIED IN THE
STATEMENT OF FINANCIAL POSITION AND INCOME STATEMENT.

• 4 MEASUREMENT BASES OR FINANCIAL ATTRIBUTES

• HISTORICAL COST

• CURRENT COST

• REALIZABLE VALUE

• PRESENT VALUE
• HISTORICAL COST

- THE AMOUNT OF CASH OR CASH EQUIVALENT PAID OR THE FAIR VALUE OF THE
CONSIDERATION GIVEN TO ACQUIRE AN ASSET AT THE TIME OF ACQUISITION.
- ALSO KNOWN AS PAST PURCHASE EXCHANGE PRICE
- MOST COMMONLY ADOPTED BY ENTITIES IN PREPARING THEIR FINANCIAL STATEMENTS.

• CURRENT COST

- THE AMOUNT OF CASH OR CASH EQUIVALENT THAT WOULD HAVE TO BE PAID IF THE SAME
OR EQUIVALENT ASSET WAS ACQUIRED CURRENTLY.
- THIS IS ALSO KNOWN AS CURRENT PURCHASE EXCHANGE PRICE

• REALIZABLE VALUE

- IS THE AMOUNT OF CASH OR CASH EQUIVALENT THAT COULD CURRENTLY BE OBTAINED BY

THE SELLING THE ASSET IN AN ORDERLY DISPOSAL.
- THIS IS ALSO KNOWN AS CURRENT SALE EXCHANGE PRICE

• PRESENT VALUE

- THE DISCOUNTED VALUE OF THE FUTURE NET CASH INFLOWS THAT THE ITEM IS
EXPECTED TO GENERATE IN THE NORMAL COURSE OF BUSINESS.
- THIS IS ALSO KNOWN AS FUTURE EXCHANGE PRICE
• THE FINANCIAL PERFORMANCE OF AN ENTITY IS DETERMINE SUING TWO
APPROACHES:
• CAPITAL MAINTENANCE
• TRANSACTION APPROACH

• TRANSACTION APPROACH
- THE TRADITIONAL PREPARATION OF AN INCOME STATEMENT

• CAPITAL MAINTENANCE APPROACH

- MEANS THAT NET INCOME OCCURS ONLY AFTER THE CAPITAL USED
FROM THE BEGINNING OF THE PERIOD IS MAINTAINED.
- NET INCOME IS THE AMOUNT AN ENTITY CAN DISTRIBUTE TO ITS
OWNERS AND BE AS “WELL-OFF” AT THE END OF THE YEAR AS AT THE
BEGINNING.
- THE CONCEPTUAL FRAMEWORK CONSIDERS TWO CONCEPTS OF CAPITAL
MAINTENANCE OR WELL-OFFNESS, NAMELY FINANCIAL CAPITAL AND
PHYSICAL CAPITAL.
• FINANCIAL CAPITAL

- THE ABSOLUTE MONETARY AMOUNT OF THE NET ASSETS CONTRIBUTED BY SHAREHOLDRES AND THE AMOUNT OF THE
INCREASE IN NET ASSETS RESULTING FROM EARNINGS RETAINED BY THE ENTITY.

- BASED ON HISTORICAL COST

- THIS CONCEPT IS ADOPTED BY MOST ENTITIES.

- UNDER THIS CONCEPT, NET INCOME OCCURS:

- “WHEN THE NOMINAL AMOUNT OF THE NET ASSETS AT THE END OF THE PERIOD EXCEEDS THE NOMINAL
AMOUNT OF THE NET ASSETS AT THE BEGINNING OF THE PERIOD, AFTER EXCLUDING DISTRIBUTIONS TO AND
CONTRIBUTIONS FROM OWNERS DURNG THE PERIOD.”

• PHYSICAL CAPITAL

- IT IS THE QUANTITATIVE MEASURE OF THE PHYSICAL PRODUCTIVE CAPACITY TO PRODUCE GOODS AND SERVICES.

- PHYSICAL PRODUCTIVE CAPACITY MAY BE BASED ON, FOR EXAMPLE, UNITS OF OUTPUT PER DAY OR PHYSICAL CAPACITY
OF PRODUCTIVE ASSETS TO PRODUCE GOODS AND SERVICES.

- THIS CONCEPT REQUIRES THAT PRODUCTIVE ASSETS SHALL BE MEASURED AT CURRENT COST RATHER THAN
HISTORICAL COST.

- PRODUCTIVE ASSETS INCLUDE INVENTORIES AND PROPERTY, PLANT & EQUIPMENT

- PHYSICAL CAPITAL IS EQUAL TO THE ENT ASSETS OF THE ENTITY EXPRESSED IN TERMS OF CURRENT COST.

- UNDER THE PHYSICAL CAPITAL CONCEPT, NET INCOME OCCURS:

- “WHEN THE PHYSICAL PRODUCTIVE CAPITAL AT THE END OF THE PERIOD EXCEEDS THE PHYSICAL PRODUCTIVE CAPITAL
AT THE BEGINNING OF THE PERIOD, AFTER EXCLUDING DISTRIBUTIONS TO AND CONTRIBUTIONS FROM OWNERS DURING THE
PERIOD.”