Financial Accounting 1 summary Valix PDF

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FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 1. accounting is a service activity. Its function is to provide quantitative information primarily financial in nature that is intended to be useful in making economic decisions. 2. accounting is the ART of recording, classifying, process) 3. of basic ...

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FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX

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1. ASC- accounting is a service activity. Its function is to provide quantitative information primarily financial in nature that is intended to be useful in making economic decisions. 2. AICPA- accounting is the ART of recording, classifying, summarizing(RCS--communication process) 3. AAA(statement of basic accounting theory)- PROCESS of identifying, measuring, communicating(IMC) 4. Identifying as the analytical component 5. Measuring as the technical component 6. Communicating as the formal component 7. In order to be identifiable, a certain event must be quantifiable or expressed in terms of a unit of measure. It must have an effect on Assets, Liabilties, OE. 8. External transaction is also known as exchange transaction which involves 2 entities. Example is payment of salaries to employees. 9. Internal transaction- production and casualty loss(unanticipated losses, act of god) 10. Accounting is the language of business because of the communication process. 11. Classifying- is accomplished by posting to the ledger 12. Summarizing- preparation of FS. 13. Accountant’s primary task is to supply financial information to statement users so that they could make informed judgment and better decision. 14. Rep. Act 9298- Philippine accountancy act of 2004 regulates the practice of accountancy in the Phil. 15. BOA- body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession 16. Certificate of registration shall be issued if the registrant has acquired a minimum of 3 years of meaningful experience in any areas of public practice including taxation. It will be valid for 3 years, renewable every 3 years upon payment of required fees. 17. Management advisory services- business conduct and operations 18. Controller is the highest accounting officer 19. Accounting is essentially constructive in nature 20. Auditor examines FS to ascertain whether they are in conformity with GAAP. 21. GAAP is a social process. 22. Development of GAAP is formalized initially through the creation of ASC. The accounting standards promulgated by the ASC constitute the GAAP. 23. SFAS is now known as PAS and PFRS 24. Accounting standards-proper accounting practice. It creates common understanding. 25. FRSC replaces ASC 26. FRSC is the accounting standard setting body created by PRC upon recommendation of BOA to assist the BOA in carrying out its powers and functions provided under RA 9298. Main function is to esbalish and improve accounting standards that will be generally accepted in the Phil. 27. FRSC is composed of 15 members with a chairman who had been or is presently a senior accounting practitioner. 2 members from Public practice, commerce and industry, academe, government. 28. The counterpart of PIC is the IFRIC in UK 29. IASC- improvement, harmonization and worldwide acceptance and observance of accounting standards 30. IASB replaces IASC. It is a global phenomenon intended to bring about great transparency and a higher degree of comparability in financial reporting; one uniform and globally accepted financial reporting standard 31. Accounting assumptions- serve as the foundation or bedrock of accounting to avoid misunderstanding. Known as postulates. 32. Accounting/fiscal period- 12months 33. Fiscal period could either be calendar or natural. If calendar, ends on dec. 31. if natural, ends on any month when the business is at the lowest or experiencing slack season. 34. Monetary Unit has 2 aspects, quantifiability and stability of peso(current replacement cost is ignored). Sometimes, it is not necessarily valid that peso is stable since there may be instances wherein there is a

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa considerable gap between historical and current replacement cost. Entity should therefore choose whether cost model or revaluation model they will apply to their entire class of PPE. 35. Framework for FS is promulgated by the IASB 36. Framework is the underlying theory for the development of accounting standards and revision of previously issued accounting standards. Assists FRSC, preparers of FS, users and auditors 37. Framework excludes special-purpose report such as prospectuses and tax computation 38. FS largely portray the financial effects of past events and do not necessarily provide nonfinancial information. It shows the result of the stewardship of management or the accountability of management for the resources entrusted to it. 39. Management has the primary responsibility for the preparation of FS. 40. Capacity for adaption or financial flexibility- using the entity’s available cash for unexpected requirements and investment opportunities. It is may be accomplished through raising cash at a short notice through borrowing, sale of securities, disposal of assets without disrupting normal operations 41. Accounting concepts: a. Entity theory= A=L+C (income statement) b. Proprietary= A-L=C (statement of FP) c. Residual equity= A-L-preference/OS=C d. Fund Theory= Fund= Cash inflows-cash outflows (custody and administration of funds) 42. Financial reporting= provision of financial information about an entity to external users. Not just financial statements but also other means of communicating information. It includes non-financial information. 43. Financial reporting objectives: a. provide information useful in investment, credit, and similar decision b. cash flow prospects c. resources and claims to those resources and changes in them. 44. Four principal qualitative characteristics: a. relevance b. reliability c. understandability d. comparability 45. relevance and reliability relate to content and are primary qualities. 46. understandability and comparability relate to presentation and are secondary characteristics. 47. Relevance is affected by its nature and materiality. It helps users form predictions and confirmations or revision to their expectation. 48. Ingredients of relevance are: a. Predictive value b. feedback value c. Timeliness 49. Reliability ingredients: a. Faithful representation-actual effects of transaction should be properly accounted for and reported b. Substance over formc. Neutrality d. Conservatism or prudence e. Completeness- Standard of adequate disclosure(notes to FS) 50. Understandability- Users are assumed to have a reasonable knowledge of the economic activities and accounting and a willingness to study the information with reasonable diligence 51. Accounting constraints: a. Timeliness b. Cost-benefit c. Materiality d. Balance between relevance and reliability 52. Materiality- doctrine of convenience. Quantitative threshold

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 53. An example of trade-off between relevance and reliability is when entity reports quoted equity instruments at 54. . Information is relevant but not reliable. On the other hand, if entity reports an instrument at cost, information is reliable but may not be relevant. 54. Installment method- revenue is recognized at the point of collection. Revenue is determined by multiplying the gross profit by amount of collection 55. Immediate recognition of expense- reflects conservatism or prudence. Revenue expenditure 56. Financial performance is determined using 2 approaches: a. capital maintenance- net income occurs if capital is maintained(single entry) b. transaction approach- traditional preparation of income statement 57. 2 concepts of capital maintenance: a. financial capital- based on historical host b. physical capital-current cost Cash and cash equivalents 1. Cash not just include currency and coins but also those that are acceptable by bank for deposit or immediate encashment such as checks, bank drafts and money orders. 2. Cash is measured at face value. Cash in foreign currency is measured at current exchange rate 3. If the financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than face value 4. excess cash should be invested in revenue-earning investment 5. deposits in foreign investment which are subject to foreign exchange restriction, if material, should be classified separately among noncurrent assets and the restriction clearly indicated. 6. Details comprising cash and cash equivalents should be disclosed in the notes to financial statements 7. the credit balance in the cash in bank account results from the issuance of checks in excess of the deposits—overdraft 8. Overdraft is not permitted in the Philippines 9. if entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with debit balance in order to show, cash, net of bank overdraft 10. An overdraft can also be offset against the other bank account if the amount is immaterial 11. if the deposit is legally restricted because of a formal compensating balance agreement, the compensating balance is classified separately as “cash held as compensating balance” under current assets if the related loan is short term, otherwise, it is classified as noncurrent investment 12. In banking practice, checks become stale if not encashed within 6months from the time of issuance 13. if stale check is immaterial, it is simply accounted for as a miscellaneous income. Cash Miscellaneous Income 14. If material and liability is expected to continue, cash is restored and liability is again set up 15. Cash short/over Due from cashier Loss from cash shortage Cash Cash short/over Cash short/over 16. cash short/over account is a temporary account. When we already know the cause of such shortage or overage, we then cancel d cash short/over account and replace it with the “real cause”. 17. Imprest system- system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursement should be made by means of check. 18. In imprest system, payment of expenses requires no formal entries. Petty cashier generally requires a signed petty cash voucher for such payments and prepares memo entry in the petty cash journal. 19. Petty cash disbursement should be replenished only by means of check and not from undeposited collection 20. If not replenished, the entry is to state the correct cash fund is:

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa expenses petty cash fund 21. Under fluctuating fund system, checks drawn to replenish the fund do not necessarily equal the petty cash disbursement. Expenses are immediately recorded and PCF fluctuates from to time. Accounts Receivable 1. Account receivable is an open account not supported by a promissory note. Also known as trade debtors 2. advances to affiliates are usually treated as a long-term investment 3. Creditors’ accounts with debit balances are classified as current assets. 4. Special deposits on contract bids normally are classified as other noncurrent assets 5. Financial assets shall be recognized initially at fair value plus transaction costs that are directly attributable to the acquisition. Fair value is usually the transaction price , fair value of the consideration given 6. AR is subsequently measured at net realizable value or estimated recoverable amount 7. assets shall not be carried at above their recoverable amount 8. freight collect means freight charge on the goods shipped is not yet paid. Buyer pays for it 9. freight prepaid is already paid by the seller 10. AR 100,000 Freight-out 5,000 Sales 100,000 Allow.for freight charge 5,000 Cash Sales discount Allowance for freight charge Accounts receivable

93,000 2,000 5,000 100,000

11. Sales return Allowance for sales return 12. Net method(beyond the discount period): Cash AR Sales discount forfeited(income)

100,000 95,000 5,000

13. Allowance method conforms with matching principle. AR is properly measured at NRV 14. Reversal in Direct write-off: AR Cash or if discovered in subsequent year: Cash Bad debts AR Miscellaneous Income 15. Correction of excessive allowance: Allowance for DA 30T Doubtful accounts Miscellaneous income

20T 10T

16. if granting of credit and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as distribution cost. If under an officer, it is administrative expense. In the absence to the contrary it is admin expense. Loan receivable 1. Transaction costs that are directly attributable to the loan receivable include direct origination cost.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX 2. direct origination cost is an origination fee not chargeable against the borrower 3. Loan receivable 5M Cash 331,800 Unearned 100T Cash 5M Unearned Interest 331,800 Cash Principal amount 5,000,000 Origination fees received ( 331,800) Direct origination cost incurred 100,000 4,768,200

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100T

*next step is to find the effective interest that would discount the principal amount and future interest payment to 4,768,200 * the discount on loan receivable is 231,800 to be amortized using effective interest method Receivable financing 1. Financial flexibility or capability of an entity to raise money out of its receivables 2. Assignment of accounts receivable is transferring some of the rights in AR to a lender called the assignee in consideration for a loan. It is formal, evidenced by a financing agreement and a promissory note both of which the assignor assigns. 3. Pledging is general because all AR serve as collateral for the loan. 4. in Nonnotification basis, customers are not informed that that their accounts have been assigned. As a result, they continue to make payments to the assignor, who in turn remits collection to the assignee. In notification basis, customers are notified to make their payments directly to the assignee. 5. Assignee lends only a certain percentage of the face value of the accounts assigned because the assigned accounts may not be fully realized by reason of such factors as sales discount, sales return, and allowances and uncollectible accounts.] 6. Notification: Note payable 588,000 NP 800,000 Sales discount 12,000 Cash received (588,000) Accounts receivable assigned 600,000 Balance 212,000 Interest expense Cash

8,000 8,000

Remittance from the bank: Cash Interest expense(1%x212T) NP AR-assigned AR AR-assigned

AR-assigned Collection Balance

1,000,000 (900,000) 100,000

85,880 2,120 212,000 300,000 100,000 100,000

7. entity shall disclose its equity in the assigned accounts AR-assigned 1,000,000 Less: NP 800,000 Equity 200,000

8. factoring is a sale of AR on a without recourse, notification basis. Factor assumes responsibility for uncollectible factored accounts. In assignment, assignor retains ownership of the accounts assigned. 9. Casual factoring- normal sale of accounts receivable, without other deductions 10. Cash 365,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Sales disc 10,000 Commission 25,000 Receivable from factor 100,000 Accounts receivable 500,000

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*Customer is subsequently allowed a credit of 50,000 for damaged merchandise: Sales returns and allowance 50,000 Sales discount(2%x50T) 1,000 Receivable from factor 49,000 *final settlement: Cash 51,000 Receivable from factor 51,000 11. if customer buys goods and uses a credit card, the credit card receipt must be forwarded by the retailer to the card issuer who will then pay the retailer the appropriate amount minus credit service charge Accounts receivable- Diners club 200T Sales 200T Cash 194,000 Credit card service charge 6,000 AR-diners club 200,000 12. Notes received from officers, employees, shareholders and affiliates shall be designated separately 13. Dishonored notes shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any, interest and other charges. Accounts receivable Notes receivable Interest Income 14. When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a bank or other financing company. Payee then becomes an endorser and the bank becomes the endorsee 15. Endorsement may be with recourse which means that the endorser shall pay the endorsee if the maker dishonors the note. This is the contingent or secondary liability of the endorser; or it could be without recourse which means that the endorser avoids future liability even if the maker refuses to pay the endorsee on the date of maturity. In the absence to the contrary, endorsement is assumed to be with recourse. 16. Principal 1,000,000 Interest(1Mx12%x180/360) 60,000 MV(full term of the note) 1,060,000 Term of the note Less: Days expired from july 1 to aug.30 Discount period Discount: (1,060,000 x 15% x 120/360)

180 60 120days 53,000

Net proceeds: 1,060,000-53,000= 1,007,000 Principal 1,000,000 Accrued interest(1Mx12%x60/360) 20,000 CV 1,020,000 Cash Loss on NR discounting

1,007,000 13,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Notes receivable 1,000,000 Interest Income 20,000

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17. If the discounting is with recourse, the transaction is accounted for as either conditional sale of note receivable recognizing contingent liability and secured borrowing a. conditional sale: Cash Loss on NR discounting Note receivable discounted Interest Income

1,007,000 13,000 1,000,000 20,000

*the note receivable discounted account is deducted from the total note receivable when preparing the balance sheet with disclosure of contingent liability *the note is paid by the maker to the first bank NR discounted 1,000,000 Note receivable 1,000,000 *if the note is dishonored by the maker and the entity pays the first bank the maturity value, plus protest fee and other bank charges of 40,000 Accounts receivable 1,100,000 NR discounted 1M Cash 1,100,000 Note receivable 1M 18. if the discounting is treated as secured borrowing, NR is not derecognized but instead an accounting liability is recorded at an amount equal to the face amount of the NR discounted Cash 1,007,000 Interest expense 13,000 Liability for NR discounted 1,000,000 Interest income 20,000  no gain or loss because the discounting is borrowing 19. If the note discounted is made by the party discounting, a primary liability exists, not a contingent liability since in this case, the maker is the one originally liable to the bamk for the loan obtained Cash 440,000 Discount on NP(500Tx12%) 60,000 Note payable-bank 500,000 20. Interest-bearing note- interest being included in the face value 21. Interest-bearing note, interest is compounded annually: Note receivable 1M Land 800T Gain on sale of land 200T Accrued Interest receivable 120T Interest income(12%x1M) 120T 2nd year: Accrued IR Interest income

134,400

Face value Interest accrued for 1st year

1,000,000 120,000

134,400

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Total 1,120,000 Interest: 1,120,000x12%

3rd year Cash NR Accrued IR Interest income

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134,400

1,404,928 1,000,00 254,400 150,528

Face value Interest accrued Total

1,000,000 254,400 1,254,400

Interest: 1,254,400x12%

150,528

Noninterest bearing note: Note receivable Sales Unearned interest income

400,000 350,000 50,000

Gross income: 350,000 cash price-280,000= 70,000 Cash 100,000 NR 100,000 Unearned interest income Interest income

20T

*bond outstanding method is used. 20T

Note receivable-current portion Less: Unearned interest income

100,000 15,000 85,000

Note receivable-noncurrent portion Less: Unearned interest income CV

200,000 15,000 185,000

Noninterest-bearing note with down payment and ordinary annuity. Cash price is not given Cash NR Equipment Gain on sale of equipment Unearned Unearned interest income Interest income

100,000 300,000 250,000 98,690 51,310 24,869 24,869

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