ACCOUNTING FROM A GLOBAL

PERSPECTIVE
BASIC ACCOUNTING CONCEPTS

- Revenues are recognized when earned, and expenses are

recognized when assets are consumed.
- recognize sales, profits and losses in amounts that vary from what
would be recognized based on the cash received from customers
or when cash is paid to suppliers and employees.
BASIC ACCOUNTING CONCEPTS

Revenues are only recognized when there

is a reasonable certainty that they will be realized, whereas
expenses are recognized sooner, when there is a reasonable
possibility that they will be incurred.
Once a business chooses to use a specific
accounting method, it should continue using it on a go-forward
basis. By doing so, the financial statements prepared in multiple
periods can be reliably compared.
BASIC ACCOUNTING CONCEPTS

• Economic entity concept. The transactions of a business are to be

kept separate from those of its owners. By doing so, there is no
intermingling of personal and business transactions in a company's
financial statements.
• Going concern concept. Financial statements are prepared on the
assumption that the business will remain in operation in future
periods. Under this assumption, revenue and expense recognition
may be deferred to a future period, when the company is still
operating. Otherwise, all expense recognition in particular would
be accelerated into the current period.
BASIC ACCOUNTING CONCEPTS

• Matching concept. The expenses related to revenue should be

recognized in the same period in which the revenue was
recognized. By doing this, there is no deferral of expense
recognition into later reporting periods, so that someone viewing
a company's financial statements can be assured that all aspects
of a transaction have been recorded at the same time.
BASIC ACCOUNTING CONCEPTS

• Materiality concept. Transactions should be recorded when not

doing so might alter the decisions made by a reader of a
company's financial statements. This tends to result in relatively
small-size transactions being recorded, so that the financial
statements comprehensively represent the financial
results, financial position, and cash flows of a business.
RECOGNITION AND MEASUREMENTS
RECOGNITION

• Recognition is a term which means the reporting of an asset,

liability, income, or expense to the face of the financial statement
of an entity.
• There are four main recognition principles to be followed in the
preparation and presentation of financial statements as
enumerated in the Conceptual Framework, namely;
Asset Recognition Principle

• 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.
• E.g. cash transaction = cash payment; noncash or an exchange
transaction= fair value of the asset given or fair value of the asset
received;
Liability recognition principle

• – 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.
• Example: Accounts payable for the goods and services received.
Income Recognition principle

• “income shall be recognized when earned”.

• e.g. Revenue from sale of goods; rendering of services; from
interest, royalties and dividends; installation fees; subscription
revenue; admission fees; and tuition fees;
Expense Recognition principle

• “expenses are recognized when incurred”.

• e.g. Cost of sales; wages and depreciation; losses
MEASUREMENT

• Measurement is 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
financial performance.
• There are four measurement bases or financial attributes namely;
4 MEASUREMENT BASES

• Historical cost – is 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 known as past purchase exchange price.” It is
most commonly adopted by entities in preparing their financial
statements.
• Current cost – is the amount of cash or cash equivalent that would
have to be paid if the same or equivalent that would have to paid
if the same or equivalent asset was required currently also known
as current purchase exchange price.
4 MEASUREMENT BASES

• Realizable value – is the amount of cash or cash equivalent that

could currently be obtained by selling the asset in an orderly
disposal also known as current sale exchange price.
• Present value- discounted value of the future net cash inflows that
the item is expected to generate in the normal course of business
also known as future exchange price.
OTHER ASSETS AND LIABILTY TERMS
OTHER ASSETS AND LIABILTY TERMS

• Marketable securities - any unrestricted financial instrument that

can be bought or sold on a public stock exchange or a public bond
exchange.
- marketablee equity security or a marketable debt security.
• Examples of marketable securities include common
stock, commercial paper, banker's acceptances, Treasury bills, and
other money market instruments.
•
OTHER ASSETS AND LIABILTY TERMS

• FIXED ASSET ( CAPITAL ASSETS) - is a long-term tangible piece of

property that a firm owns and uses in its operations to generate
income. Fixed assets are not expected to be consumed or
converted into cash within a year. Fixed assets are known as
property, plant, and equipment (PP&E).
• INTANGIBLE ASSETS - operational assets that lack physical
substance, such as patents, copyrights, trademarks, franchises and
goodwill. A company’s intangible assets are often not reported on
a company's financial statements or will be reported at
significantly less than their actual value.
OTHER ASSETS AND LIABILTY TERMS

• INVENTORY VALUATION METHODS

• IAS 2 allows two different methods to be used for valuing inventory:
• 1. First in, first out (FIFO). This assumes that the first items to be
bought will be the first to be used, although this may not be the
physical distribution of the goods. Thus, remaining inventory
valuation will always be the value of the most recently purchased items.
• 2. Average cost (AVCO). Under this method a new average value
(usually the weighted average using the number of items bought) is
calculated each time a new delivery of inventory is acquired.
OTHER ASSETS AND LIABILTY TERMS

• RECEIVABLES - all money claims a company has against other

entities, including people, customers, and other organizations.
• Accounts receivable represents money owed to the company from
customers for sales of merchandise or services on account. Accounts
receivable are generally short-term credit, usually due in 30–60 days. The
most common receivable on a company’s books
• Notes receivable are amounts that customers owe for which a formal,
written promissory note has been issued by the customer. Notes receivable
generally have longer terms than accounts receivable and usually bear
interest.
RECEIVABLES

• Other receivables are normally recorded separately on the balance

sheet. If they are expected to be collected within one year, they are
reported in the current asset section. If collection is expected beyond
one year, they are classified as noncurrent assets and reported under the
Investments section. One of the two methods of accounting for
uncollectible receivables is the direct write-off method. Under this
method, the bad debt expense is not recorded until the time the
account is determined to be worthless. At that time, the accounts
receivable account is reduced and the bad debt is recorded as an
expense, reducing Retained Earnings. The allowance method estimates
the uncollectible accounts receivable at the end of the accounting
period. Based on this estimate, Bad Debt Expense is recorded by an
adjustment.
ALLOWANCE FOR DOUBTFUL ACCOUNTS

• Once a specific customer account is determined to be worthless,

it is written off against the allowance account. The expense for
that account had already been estimated and recorded in a prior
period when the original sale was made.
• The two methods used to estimate uncollectible accounts are:
• The percent of sales method
• The analysis of receivables method
OTHER ASSETS AND LIABILTY TERMS

• Bond - is a fixed income investment in which an investor loans money to

an entity (typically corporate or governmental) which borrows the funds
for a defined period of time at a variable or fixed interest rate. Bonds
are used by companies, municipalities, states and sovereign
governments to raise money and finance a variety of projects and
activities. Owners of bonds are debtholders, or creditors, of the issuer.
• Lease - is a contract outlining the terms under which one party agrees to
rent property owned by another party. It guarantees the lessee, also
known as the tenant, use of an asset and guarantees the lessor, the
property owner or landlord, regular payments from the lessee for a
specified number of months or years. Both the lessee and the lessor face
consequences if they fail to uphold the terms of the contract.
OTHER ASSETS AND LIABILTY TERMS

• Dividend - is a distribution of a portion of a company's earnings,

decided by the board of directors, paid to a class of its
shareholders. Dividends can be issued as cash payments, as shares
of stock, or other property.
• Stock buybacks - refer to the repurchasing of shares of stock by
the company that issued them. A buyback occurs when the issuing
company pays shareholders the market value per share and re-
absorbs that portion of its ownership that was previously
distributed among public and private investors.
OTHER ASSETS AND LIABILTY TERMS

• Stock split - is a corporate action in which a company divides its

existing shares into multiple shares to boost the liquidity of the
shares. Although the number of shares outstanding increases by a
specific multiple, the total dollar value of the shares remains the
same compared to pre-split amounts, because the split does not
add any real value. The most common split ratios are 2-for-1 or 3-
for-1, which means that the stockholder will have two or three
shares, respectively, for every share held earlier.
OTHER ASSETS AND LIABILTY TERMS

• Foreign exchange reserves are used to back liabilities and

influence monetary policy. This refers to any foreign money held
by a central bank, such as the United States Federal Reserve Bank.
These reserves can include banknotes, deposits, bonds, treasury
bills and other governmental securities. These assets serve many
purposes but are most significantly held to ensure that a central
government agency has backup funds if their national currency
rapidly devalues or becomes all together insolvent.
PRESENTATION OF FINANCIAL STATEMENTS
ELEMENTS OF FINANCIAL STATEMENTS

• ASSETS- “resources controlled by the entity as a result of past tranactions or

events and from which future economic benefits are expected to flow to the
entity”.
• LIABILITIES - “presents obligations 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 – “residual-al interest of the entity after deducting all its liabilities.’
• INCOME – “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 – “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.”
COMPONENTS OF FINANCIAL STATEMENTS

• A complete set of financial statements as set out in the Standard,

comprises:
 Balance sheet (Statement of Financial Position)
 Income statement (Statement of comprehensive income)
Statement of changes in equity
Statement of Cash Flow
Accounting policies and explanatory notes
Income statement (Statement of
Comprehensive Income)

• There is certain data which the statement requires to be

identified and detailed on the face of the income statement.
•- revenue
•- finance costs/expenses
•- the charge for taxation
•- the after–tax profit or loss for the period from discontinued
operations.
•
Balance sheet (Statement of Financial
Position)
• IAS 1 specifies the minimum information which must be shown on the face of
the balance sheet. It does not specify the order in which information is to be
presented.
The statement requires entities to separate out:
- Non–current assets, the usual sort of fixed assets such as property,
plant, equipment, plant and machinery, motor vehicles, intangible assets,
goodwill, etc.
- Current assets; inventories, trade receivables, cash and cash equivalents.
- Current liabilities; trade payables, bank overdrafts and taxation.
- Non–current liabilities; bank loans and long term provisions.
- Equity; Share capital, share premium reserves and retained earnings.
STATEMENT OF CASH FLOW

• This statement is required to be produced as part of a company’s

financial statements. The statement provides guidelines for the
format of Cash Flow Statements. The statement is divided into
three categories:
• 1. Operating activities – the main revenue generating activities of
the business, together with the payment of interest and tax.
• 2. Investing activities – the acquisition and disposal of long term
assets and other investing activities.
• 3. Financing activities – receipts from the issue of new shares,
payments for the redemption of shares and changes in long term
borrowings.
STATEMENT OF CASH FLOW

• Format of the Statement

• 1. Operating activities
• The cash flow from operating activities is calculated as:
• Profit from operations (profit before deduction of tax and
interest)
• Add: Depreciation charge for the year.
• Loss on sale of non – current assets (or deduct gain on
sale of non –current assets).
STATEMENT OF CASH FLOW

• Less: Investment income

• Add or deduct changes in inventories, trade and other
receivables or payables
• Less: Interest paid
• Less: Taxes paid on income (usually corporation tax)
•
STATEMENT OF CASH FLOW

• Investing activities
• This is calculated by including:
• Inflows from:
• - proceeds from sale of non – current assets, both tangible and
intangible, together with other long – term non – current assets.
• Outflows from:
• - cash used to purchase non – current assets, both tangible and
intangible, together with other long – term non – current assets.
• - Interest received
• - Dividends received
•
STATEMENT OF CASH FLOW

• Financing activities
• This is calculated by including:
• Inflows from:
• - cash received from the issue of share capital
• - raising or increasing loans
• Outflows from:
• - repayment of share capital
• - repayment of loans and finance lease liabilities.
• - Dividends paid
•
•
ANALYSIS OF THE FINANCIAL STATEMENTS
ANALYSIS OF THE FINANCIAL STATEMENTS

• 1. Comparative Statements - statements showing the

profitability and financial position of a firm for different periods
of time in a comparative form to give an idea about the position
of two or more periods. It usually applies to the two important
financial statements, namely, balance sheet and statement of
profit and loss prepared in a comparative form. This analysis is
also known as ‘horizontal analyses’.
ANALYSIS OF THE FINANCIAL STATEMENTS

• Common Size Statements - indicate the relationship of different items of

a financial statement with a common item by expressing each item as
a percentage of that common item. The percentage thus calculated
can be easily compared with the results of corresponding
percentages of the previous year or of some other firms, as the numbers
are brought to common base. Such statements also allow an analyst to
compare the operating and financing characteristics of two
companies of different sizes in the same industry. Thus, common
size statements are useful, both, in intra-firm comparisons over
different years and also in making inter-firm comparisons for the same
year or for several years. This analysis is also known as ‘Vertical
analysis’.
ANALYSIS OF THE FINANCIAL STATEMENTS

• Trend Analysis: It is a technique of studying the operational results and

financial position over a series of years. Using the previous years’ data of
a business enterprise, trend analysis can be done to observe the
percentage changes over time in the selected data. The trend
percentage is the percentage relationship, in which each item of
different years bear to the same item in the base year. Trend analysis is
important because, with its long run view, it may point to basic changes
in the nature of the business. By looking at a trend in a particular ratio,
one may find whether the ratio is falling, rising or remaining relatively
constant. From this observation, a problem is detected or the sign of
good or poor management is detected.
ANALYSIS OF THE FINANCIAL STATEMENTS

• Ratio Analysis: It describes the significant relationship which

exists between various items of a balance sheet and a statement
of profit and loss of a firm. As a technique of financial analysis,
accounting ratios measure the comparative significance of the
individual items of the income and position statements. It is
possible to assess the profitability, solvency and efficiency of an
enterprise through the technique of ratio analysis.
ANALYSIS OF THE FINANCIAL STATEMENTS

• Cash Flow Analysis: It refers to the analysis of actual movement of cash

into and out of an organization. The flow of cash into the business is
called as cash inflow or positive cash flow and the flow of cash out of
the firm is called as cash outflow or a negative cash flow. The difference
between the inflow and outflow of cash is the net cash flow. Cash flow
statement is prepared to project the manner in which the cash has been
received and has been utilized during an accounting year as it shows the
sources of cash receipts and also the purposes for which payments are
made. Thus, it summarizes the causes for the changes in cash position of
a business enterprise between dates of two balance sheets.
•
USERS OF THE FINANCIAL STATEMENTS

• (i) Investors: Shareholders or proprietors of the business are

interested in the wellbeing of the business. They like to know the
earning capacity of the business and its prospects of future
growth.
• (ii) Management: The management is interested in the financial
position and performance of the enterprise as a whole and
of its various divisions. It helps them in preparing budgets and
assessing the performance of various departmental heads.
• (iii) Trade unions: They are interested in financial statements
for negotiating the wages or salaries or bonus agreement with
the management.
USERS OF THE FINANCIAL STATEMENTS

• (iv) Lenders: Lenders to the business like debenture holders,

suppliers of loans and lease are interested to know short term as
well as long term solvency position of the entity.
• (v) Suppliers and trade creditors: The suppliers and other creditors
are interested to know about the solvency of the business i.e. the
ability of the company to meet the debts as and when they fall
due.
• (vi) Tax authorities: Tax authorities are interested in financial
statements for determining the tax liability.
USERS OF THE FINANCIAL STATEMENTS

• (vii) Researchers: They are interested in financial statements in

undertaking research work in business affairs and practices.
• (viii) Employees: They are interested to know the growth of profit. As a
result of which they can demand better remuneration and congenial
working environment.
• (ix) Government and their agencies: Government and their agencies
need financial information to regulate the activities of the enterprises/
industries and determine taxation policy. They suggest measures to
formulate policies and regulations.
• (x) Stock exchange: The stock exchange members take interest in
financial statements for the purpose of analysis because they provide
useful financial information about companies.
INTERCORPORATE INVESTMENTS
INTERCORPORATE INVESTMENTS

• Intercorporate investments include investments in the debt and equity

securities of other companies.
• Reasons for investing in other companies:
• To achieve additional profitability.
• To enter new markets through companies established in those areas.
• To diversify.
• To obtain competitive advantages.
• The classification of intercorporate investments is based on the degree of
influence or control that the investor is able to exercise over the investee.
INTERCORPORATE INVESTMENTS

Investments are classified into four categories based on the degree of

influence or control:
− Investments in financial assets (ownership percentage < 20%):
Investments in which the investor has no significant control over the
investee.
− Investments in associates (ownership percentage between 20% and
50%): Investments in which the investor has significant influence but
not control over the investee.
− Business combinations (ownership percentage > 20%): Investments in
which the investor has control over the investee.
− Joint Venture: An entity operated by companies that share control.
 Accounting for
Investments in financial assets
Type Intent Accounting Treatment

Has intent and ability to • Reported at amortized cost.

Held to maturity
hold the debt until it • Changes in value ignored unless
(for debt securities)
matures. deemed as impaired.

Does not intend to sell in

• Recorded at fair value.
the near term, elect fair
Available for sale • Changes in value are recognized
value accounting, or hold
in other comprehensive income.
until maturity.

Held for trading Intends to sell in the near

• Recorded at fair value.
and term (i.e., held for
• Changes in value are recognized
those designated as fair trading ) or has otherwise
in profit or loss on income
value through profit or elected fair value
statement.
loss accounting.
THANK YOU!
SUBMITTED BY:
ROBLES, CHRYSZEL JOY P.
VILLANUEVA, ROZETTE AIZA S.
CUEVAS, REINALYN ANGELICA T.
ATIENZA, ROBERT JOHN B.
MBA-F