FABM REVIEWER
Financial Statement
- structured presentation of the financial position and performance of an entity.
- provide information about the financial position (balance sheet), financial
performance (income statement) and cash flows of an entity, helpful for making
economic decision.
A. Assets
B. Liabilities
C. Income and Expenses
D. Equity
E. Contributions by and Distributions to owners in their capacity
F. Cash flows
Balance Sheet Elements
1. Assets
- resource controlled by the entity.
- results of past events.
- future economic benefits are expected to flow to the entity.
2. Liabilities
- present obligation of the entity.
- arising from past events.
- expected to result in an outflow from the entity of resources embodying economic
liabilities.
3. Equity
- residual interest in the assets of the entity after deducting all its liabilities.
Basic Principles of Accounting
1. Accrual Accounting Principle
- the company should record accounting transactions in the same period it
happens, not when the cash flow was earned.
2. Going-Concern Principle
- a company would operate for as long as it can in the near or foreseeable future.
3. Disclosure Principle
- a company should disclose all financial information to help the readers see the
company transparently.
4. Cost Principle
- this is the concept that a business should only record its assets, liabilities, and
equity investments at their original purchase costs.
5. Business Entity Principle
- this is the concept that the transactions of a business should be kept separate
from those of its owners and other businesses.
6. Monetary Unit Principle
- a business should only record transactions that can be stated in terms of a unit of
currency.
7. Materiality Principle
- all assets that are immaterial to make a difference in the financial statements
which the company should record as an expense.
8. Time-Period Principle
- the business should report the financial statements appropriate to a specific
period of time.
9. Matching Principle
- cost should be match with the revenue generated.
10. Conservatism Principle
- also known as prudence.
- assets and income should not be overstated while liabilities and expenses should
not be understated.
11. Objectivity Principle
- Financial statements of an organization must be prepared with supporting solid
evidence.
Current Assets
- expects to realize the asset or intends to sell or consume it in its normal
operating cycle.
a. Cash
b. Cash Equivalents
c. Cash Inventories
d. Accounts Receivable
e. Prepaid Expenses
f. Marketable Equity Securities
g. Office and Store Supplies
Non-Current Assets
- all other assets that are not current shall be classified as non-current assets.
a. Land
b. Machineries
c. Investment Property
d. Land Improvements
e. Equipment
f. Intangible Assets
g. Building
h. Investment in an associate ( more than 20% )
i. Investment in equity securities
Current Liabilities
- expects to settle the liability in its normal operating cycle.
- liability due to be settled within 12 months after the reporting period.
a. Trade Accounts Payable
b. Short-Term Notes Payable
c. Salaries Payable
d. Rent Payable
e. Utilities Payable
f. Current Income Tax Payable
Non-Current Liabilities
- all other liabilities that are not current shall be classified as non-current liabilities.
a. Bonds payable
b. Long-Term Notes Payable
Accounting Equation
- Assets = Liabilities + Equity
Income Statement
- Reports the company’s financial performance through presenting the entity’s
revenues, gains, expenses and losses for the period ended.
- Revenues - Expenses = Net Income
Elements of Income Statement
1. Income
- Increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in
increase in equity.
- Encompasses both revenues and gains.
arises in the course of ordinary regular activities.
items that represent increases in economic
benefits but does not arise regularly in
ordinary business operations.
2. Expense
- Decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity.
- Encompasses both expenses and losses.
decreases in economic benefits due to, for example,
salaries, rent and depreciation.
do not arise in regular business operations
such as loss from fire and disasters.
Single-Step Income Statement
- Revenues – Expenses = Net Income
Multi-Step Income Statement
Sales – (Sales Return and Allowances + Sales Discount) = Net Sales
Purchase + Freight In = Total Purchases – (Purchase Return and Allowances +
Purchase Discount) = Net Purchases
Beg. Inventory + Net Purchases = Cost of Goods Available for Sale
COGFS – Ending Inventory + Cost of Goods Sold
Add all expenses = Operating Expenses
Net Sales – COGS = Gross Profit + Other Income = Total Revenue – Operating
Expenses = Net Income
Operating revenue
- generated from a company's core business operations and is the area where a
company usually earns most of its income. What constitutes operating revenue
varies depending on the nature of the business or industry.
Sales: A sale refers to the exchange of goods for cash or cash equivalent. For
instance, a clothing retailer would record the income from selling shirts to
customers as sales or merchandise sales.
Rents: Landlords earn rental income by allowing tenants to reside in their
buildings or occupy their land. The tenants usually have to sign a rental contract
that details the rental terms.
Consulting services: Consulting services, also called professional services, refers
to income derived from providing a service to clients or customers. For instance,
law firms record professional service revenues when they provide legal services
to clients.
Non-operating revenue
- derived from activities not related to your company's core business operations,
usually non-recurring or unpredictable transactions. Some examples of non-
operating revenue include:
Interest revenue: This is the most common form of non-operating revenue, as
most companies earn small amounts of interest from their checking and savings
accounts. Interest income not only includes bank account interest but also
interest accrued from accounts receivable or other contracts.
Sale of an asset or equipment: This refers to proceeds received for usually a
one-time sale of an asset or equipment that a company no longer needs.
Accrued and deferred revenue
Accrued revenue is the revenue that a company earns for goods and services
that have been delivered but not yet paid for by the customer. In accrual
accounting, revenue is reported at the time of a sales transaction and not
necessarily when the funds have been received.
Deferred revenue, or unearned revenue, is the opposite of accrued revenue. In
this case, a customer pays for goods or services in advance before they are
delivered. The payment is reported as a liability on an income statement until the
customer receives the goods or services.
Calculating revenue
revenue is typically calculated at the end of each reporting cycle, which can be
monthly, quarterly or annually. Once a company has calculated its revenue by
aggregating the amount in sales for the given time period, it reports it on its
financial statements. However, there are two different ways to calculate revenue
based on the accounting method followed by the company.
