INTERMEDIATE ACCOUNTING III o Financial statements largely portray the financial effects of past events and

do not necessarily provide non-financial information

CHAPTER 1: FINANCIAL STATEMENTS

Financial Position – comprises the assets, liabilities, and equity of an entity at a

Financial Statements – means by which the information accumulated and processed particular moment in time.
in financial accounting is periodically communicated to the user.
- Pertains to the liquidity, solvency and the need of the entity for
General Purpose Financial Statement – intended to meet the need of users who are additional financing.
not in a position to require an entity to prepare reports tailored to their particular
Financial Performance – comprises the revenue, expenses and net income or loss of
information needs.
an entity for a period of time.
Components of Financial Statements:
- Performance ► level of income earned by the
1. Statement of Financial Position entity through the efficient and effective
2. Income Statement use of its resources.
3. Statement of Comprehensive Income - Known also as the results of operations and is portrayed in the
4. Statement of Changes in Equity income statement and statement of comprehensive income.
5. Statement of Cash Flows
Cash flows – cash receipts and cash payments arising from the operating, investing
6. Notes, comprising a summary of significant accounting policies and other
and financing activities of the entity.
explanatory information.
- Statement of Cash Flows ► where information about
Objective of Financial Statements: “to provide information about the financial cash receipts and payments are presented.
position. Financial performance, and cash flows of an entity that is useful to a wide
range of users in making economic decisions.” Financial Reporting – provision of financial information about an entity to external
users that is useful to them in making economic decisions and for assessing the
Financial Statements provides information about the following: effectiveness of the entity’s management.
a. Assets
b. Liabilities
c. Equity  The principal way of providing financial information to external users is
d. Income and Expenses, including gains and losses through the annual financial statements.
e. Contributions by and distributions to owners in their capacity as owners  Objective: “to provide financial information about the reporting entity that
f. Cash flows is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
  Also, to provide information that is useful for decision making. Fair Presentation

Specific Objectives of Financial Reporting:  Achieved if the financial statement are prepared in accordance with
PFRS which represent Philippine GAAP.
a. To provide information useful in making investing and credit decisions about
 An entity whose financial statement comply with PFRS shall make
providing resources to the entity.
an explicit and unreserved statement of such compliance in the
b. To provide information useful in assessing the cash flow prospects of the
notes.
entity.
 It requires to:
c. To provide information about entity resources, claims and changes in
o Select information and apply accounting policies in
resources and claims.
accordance with PFRS
o Present information, including accounting policies, in a
manner that provides relevant and faithfully represented
The management of an entity has the primary responsibility for the
financial information.
preparation and presentation of financial statements.
o Provide additional disclosures necessary for the users to
The Board of Directors in discharging its responsibilities reviews and
understand the entity’s financial statements.
authorizes the financial statements for issue before these are submitted to
 An entity cannot rectify inappropriate accounting policies either by
the shareholders of the entity.
disclosure of the accounting policies used or by notes or
Management is accountable for the safekeeping of the resources and their
explanatory information.
proper, afficient and profitable use.

Departure from Standard

General features of Financial Statements:
An entity is permitted to depart from standard:
1. Fair presentation and compliance with PFRS
2. Going Concern a. In extremely rare circumstances;
3. Accrual Basis b. When management concludes that compliance with the
4. Materiality and aggregation standard would be misleading;
5. Offsetting c. When the departure from the standard is necessary to achieve
6. Frequency of Reporting fair presentation;
7. Comparative Information d. When the regulatory conceptual framework requires or
8. Consistency of Presentation otherwise does not prohibit such a departure.
Going Concern

 Means that accounting entity is viewed as continuing in operation

indefinitely in the absence of evidence to the contrary.
 Also known as continuity assumption
 Thus, assets are normally recorded at original acquisition cost. As a rule,
market value is ignored.
 However, some standards require measurement of certain assets at fair
value.

Accrual Basis

 Assets are recognized when receivable and liabilities are recognized

payable.
 Accrual accounting means that income is recognized when earned and
expense is recognized when incurred regardless of when paid.

Materiality and Aggregation

 An entity shall present separately each material class of similar items.