CHAPTER 3

Key Terms:
Accounting policies. These are specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
Accrual basis. It is a basis of accounting where income is recognized when earned,
not necessarily when cash is received, and expenses are recognized when incurred,
not necessarily when cash is paid.
Adjusting event after the reporting period. It is an event that confirms a
condition that already exists at the date indicated in the statement of financial
position. It requires an adjustment in the amounts recognized in the financial
statements.
Asset. It is a resource controlled by an enterprise as a result of past event and from
which future economic benefits are expected to flow to the enterprise.
Biological asset. These are living plants and animals held by a company engaged
in raising livestock,
forestry, cropping, cultivating orchards and plantation,
floriculture or aquaculture.
Cash. It is an item that is acceptable for deposit at face value by a bank or other
financial institution. It includes cash on hand and demand deposits with banks or
other financial institutions.
Cash equivalents. There are highly liquid financial instruments that are so near
their maturity that there is significant risk of change in value due to change interest
rate.
Cash flow statement. A statement showing the historical changes in cash and
cash equivalents classified into operating activities, investing activities and
financing activities.
Current asset. An asset that satisfies anyone of the following criteria: (a) it is
expected to be realized in, or is intended for sale or consumption in, the entitys
normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it
is expected to be realized within twelve months after date indicated in statement of
financial position; or (d) it is cash or cash equivalent that is not restricted from
being exchanged or used to settle a liability for at least twelve months after the
reporting period.
Current liabilities. Liabilities that are expected to be settled in the entitys normal
course of an enterprises operating cycle or are to be settled within twelve months
after the reporting period.
Events after the reporting period. Events occurring between the end of the
reporting period and the date when the financial statements are authorized for
issue.

Equity. It is the residual interest in the assets of the enterprise after deducting all
its liabilities.
Financial asset. It is any asset that is (a) cash; (b) contractual right to receive
cash or other financial asset from another enterprise; (c) contractual right to
exchange financial instruments with another enterprise under conditions that are
potentially favorable; or (d) an equity instrument of another enterprise.
Going concern. This assumes that in the absence of evidence to the contrary, an
enterprise is to continue operations in the future.
Intangible asset. Any identifiable non-monetary asset without physical substance.
International Financial Reporting Standards (IFRS). Accounting standards and
interpretation promulgate and adopted by the International Accounting Standards
Board, and comprised the following: the specific International Financial Reporting
Standards (developed by the International Accounting Standards Board),
International Accounting Standards (developed by the International Accounting
Standards Committee, and improved and revised by the International Accounting
Standards Board), and the interpretations of the International Financial Reporting
Interpretation Committee (IFRIC) and Standing Interpretation Committee (SIC).
Inventories. Assets of an enterprise are (a) held for sale in the ordinary course if
business, (b) in the process of production for such sales; or (c) in the form of
materials or supplies to be consumed in the service provider, this refers to cost of
unbilled services.
Investment property. Consists of land or building or both, held by the owner or by
the lessee under a finance lease to earn rentals or for capital appreciation, or both.
Liabilities. These are present obligations of the enterprise arising from past
events, thesettlement of which is expected to result in an outflow from
theenterprise of resources embodying economic benefits.
Net assets. Excess of total assets over total liabilities; Refers to equity.
Non-adjusting event after the reporting period. Relates to a condition
different from the condition as of the end of the reporting period. This is indicative
of condition that arose after the reporting period. The event may be ignored or
disclosed, if material.
Non-current assets. Assets that are not classified as current assets such as
tangible, intangible, operating and financial assets of a long-term nature.
Non-current liabilities. Liabilities that are not classified as current and include
bonds payable and mortgage payable not maturing within twelve months from the
date indicated in the statement of financial position, lung-term loans from a
affiliated companies, deferred tax liability and non-current portion of finance lease
obligations.
Notes to the financial statements. These are non-quantitative and qualitative
information about an enterprise that are considered significant and relevant to the

needs of the users, and/or information required to be disclosed by specific

accounting standards but are not appropriately presented on the face of the
financial statements.
Operating cycle. Time between the acquisition of materials entering into a process
and each realization n cash or an instruments that is readily convertible into cash. It
refers to the time required to complete the purchase of goods, sale of goods, and
collection from customers.
Philippine Financial Reporting Standards (PFRS). Accounting standards
currently adopted in the Philippines which are based on the International Accounting
Standards and International Financial Reporting Standards. The PFRSs set out the
recognition, measurement, presentation and disclosure requirements dealing with
transactions and events that are important in general purpose financial statements.
Property, plant and equipment. These are tangible assets that are held by an
enterprise for use in the production or supply of goods or services, for rental to
others, or for administrative purposes.
Refinancing. It is an arrangement between debtor and creditor to defer the
settlement of an obligation either through an extension of maturity date or
assuance of a debt instrument to settle the maturing debt instrument.
Reporting period. Time interval used for financial reporting; due to the timely
information, to life of a business is divided into specific accounting periods for
external reporting purposes. One year is the normal reporting period.
Statement of changes in equity. A statement that shows the changes in each
equity account during a reporting period. It is a reconciliation of the beginning
balances of equity accounts to the final balances shown on the statement of
financial position.
Statement of financial position. A statement listing the assets, liabilities and
equity of an enterprise as of a given date.
Working capital. Excess of current assets over current liabilities.

Chapter Summary:

Financial statements are a structured representation of the financial position

of and the transactions undertaken by an enterprise. The objective of
general-purpose financial statements is to provide information about the
financial position, performance and cash flows of an enterprise that is useful
to a wide range of users in making economic decisions. A complete set of
financial statements is composed of statement of financial position, a
statement of comprehensive income, a statement of cash flows, a statement
of changes in equity and notes comprising a summary of significant
accounting policies and other explanatory notes. An entity is required to
present a statement of financial position as at the beginning of the earliest

comparative prior period presented when it applies an accounting policy

retrospectively or makes a retrospective restatement of items in the financial
statements, or when it reclassifies an item in the financial statements.
Financial statements are the responsibility of the companys management,
and are largely affected by the accounting policies adopted by the latter. The
management shall choose accounting policies based on the following
hierarchy: (a) applicable requirements of the International (or Philippine)
Financial Reporting Standards and Interpretations, (b) use of management
judgment in applying accounting policy that results in relevant and reliable
information and considering the following in descending order: (1)
requirements of Standards dealing with similar issues, and (2) definitions,
recognition criteria, and measurement bases for financial statement elements
in the Conceptual Framework.
Several features guide the preparers of the financial statements. These are
fair presentation and compliance with IFRS, going concern, accrual basis of
accounting, materiality and aggregation, offsetting, frequency of reporting,
comparative information and consistency of presentation. Financial
statements shall be presented at least annually. In rare instances when the
reporting period is shorter than or longer than one year, the reason for using
a different reporting period and the lack of comparability with previous period
presented must be disclosed. Financial statements shall be identified clearly
and distinguished from other information in the published document or
financial report.
The statement of financial position (conventionally called the balanced sheet)
presents information about an entitys assets, liabilities and equity as of a
given date, called the reporting date, which is the end of the reporting period.
As a minimum the face of the statement of financial position shall present
the following line items: property, plant and equipment; investment property;
intangible assets; financial assets, with separate line presentations for
investments accounted for under the equity method, trade and other
receivables, and cash and cash equivalents; biological assets, inventories,
total assets classified as held for sale and assets included in the disposal
groups classified as held for sale; financial liabilities with separate line items
for trade and other payables and provisions; liabilities and assets for current
tax; deferred tax liabilities and deferred tax assets; liabilities included in
disposal groups classified as held for sale; non-controlling interest; and issued
capital and reserves attributable to owners of the parent.
An entity shall present current and non-current assets and current and noncurrent liabilities, as separate classifications on the face of the statement of
financial position, except when a presentation based on liquidity provides
information that is reliable and more relevant. When the exception applies,
assets and liabilities shall be presented in the order of liquidity.
An enterprise shall assess the events after the reporting period to determine
which events provide conditions that existed at the end of the reporting
period and, therefore, require adjustments in the financial statements, and
which events indicate conditions that arose after the reporting period. If the

enterprise assesses that the non-adjusting event is material, such will be

disclosed in the notes to the financial statements.
The notes to the financial statements present information about the basis of
presentation of financial statements, the specific accounting policies applied,
information required by IFRSs and additional information that are not
presented on the face of the financial statements but relevant to an
understanding of the financial statements.

CHAPTER 8
Key Terms:
Accounting policies. The specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
Correcting entries. Entries made in the accounting records to correct an improper
treatment of an event, information, or transaction in a prior period.
Counterbalancing error. Accounting errors which, when not discovered within the
year following the year the error was committed, are automatically corrected as
natural part of the accounting process. Counterbalancing errors are those that
involved misstatements in inventory, purchases cut off, sales cut off, prepayments,
unearned revenue, and accruals.
Generally Accepted Accounting Principles (GAAP). Principles, bases,
conventions and procedures that define accounting practice at a particular time. At
present, GAAP in the Philippines are the Philippine Financial Reporting Standards
adopted from the International Financial Reporting Standards.
Impracticable. A procedure is considered impracticable if the effects of
retrospective application are not determinable; or the retrospective application
requires assumption about what managements intentions would have been at the
time; or the retrospective application requires significant estimates of amounts and
it is impossible to distinguish objectively, from other information, information about
those estimates, that provides evidence of circumstances that existed at that time
and would have been available at that time.
Non-counterbalancing error. An error that remains uncorrected until the asset or
liability account affected by the error is disposed of or settled.
Prior period errors. Omissions from, and misstatements in, the entitys financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that was available when financial statements for those periods
were authorized for issue and could reasonably be expected to have been obtained
and taken into account in the preparation and presentation of those financial
statements.
Retrospective application. A process which requires application of correct
accounting policy or procedure as if the policy or procedure has always been in

effect. Retrospective application requires restatement of prior period comparative

financial statements. The effects of the correction on the asset and liability balances
at the beginning of the earliest comparative prior period presented is shown in the
financial statements as an adjustment to the beginning balance of retained earnings
or another appropriate equity component.

Chapter Summary:

The presence of errors undermines the reliability of financial statements

because they affect the measurement of the enterprise performance and its
financial status. Once discovered, errors should be corrected immediately.
When errors in the current period are detected, entries are made to correct
the account balances. When errors are discovered in the period subsequent
to their commission or omission, corrections are made by restating the
comparative prior period financial statements. Any effect of the errors on
profit before the first comparative period presented is treated as an
adjustment to the beginning balance of equity (either retained earnings or
another appropriate component of equity).
A counterbalancing error is one which when not detected within the
immediate subsequent period is automatically corrected. The effect of the
error on the reporting period it is committed is offset in the immediately
following reporting period. A correcting entry is necessary for any
counterbalancing error that is detected before it has been counterbalanced.
A non-counterbalancing error remains uncorrected until the asset or liability
account affected is finally disposed of or a correcting entry is made. A
correcting entry is necessary for a non-counterbalancing error, unless the
asset affected has already been fully utilized or the liability affected has
already been settled.
Other than correcting the error of the current period and restating the
comparative prior period financial statements, certain disclosures are
required in the notes to the financial statements.