DM 2 223 FINANCIAL MANAGEMENT Lecture 2

THE ACCOUNTING EQUATION AND THE STATEMENT OF FINANCIAL POSITION

ASSETS = LIABILITIES + OWNER’S EQUITY

ASSETS
➢ Resources that an entity owns in order to derive some future benefits
➢ Normally used for manufacturing of goods or delivery of resources
➢ Has the capability to give benefits to the company which may be directly or indirectly an increase in the
inflow of cash to the entity or reduction of outflows

Current Assets
➢ All assets which are expected to be realized within the ordinary course of business, or a span of 12
months, whichever is longer.

Realization – assets are expected to be converted into cash, sold, or disposed after a certain time, through the
passage of time.

Accounts under Current Assets

1. Cash
➢ Most basic and familiar of all assets
➢ Also includes money in the form of bank deposits, cash equivalents and checks
➢ Most liquid

Money – everything composed of bills and coins, considered as legal tender or legal tenders of other nations.
Cash Equivalents – short-term investments which are considered subject to negligible changes in fair value and
are maturing within three months from the date of purchase.

2. Accounts Receivable
➢ represents amounts that are collectible from customers
➢ usually arise when business sells its goods or services on account or on credit
➢ oral promises to the entity to receive cash at a later date and usually arise from the normal
course of business

Trade Receivables – arise from the normal course of business

Non-Trade Receivables – do not arise from the normal course of business (other receivables)

3. Short-term Investments
➢ Investments in low-risk, highly liquid assets such as bonds and stocks, which are expected to be
liquidated in less than a year
➢ Most often, these are entered to make the most income out of its idle cash

4. Notes Receivable
➢ Written promises to the entity to receive cash at a later date and usually arise from the normal
course of business
➢ Sometimes called promissory notes

5. Inventories
➢ Includes raw materials, work-in-process items, finished goods and supplies

Raw Materials Inventory – inputs for producing other materials

Work-In-Process Inventory – raw materials entered into production but awaiting completion
Supplies Inventory – do not serve as input for a product but are used in the production
Finished Goods Inventory – end products upon completing production

6. Prepayments/Prepaid Expenses
➢ Paid in advance for goods or services anticipated to be received by the entity in the future
➢ Would only cease to be as such when they are finally used up

Non-Current Assets
➢ All other assets which are not current
➢ Expected to be realized in more than 12 months

Instructor: Danica M. Almario, CPA 1

DM 2 223 FINANCIAL MANAGEMENT Lecture 2

Accounts under Non-Current Assets

1. Long-term Investments
➢ Most liquid of the noncurrent assets
➢ Investments which are not expected to be realized within 1 year

2. Fixed Assets/Property, Plant and Equipment

➢ Most tangible, longest-serving assets
➢ Expected to not be converted into cash immediately and regularly placed as a means of
production
➢ Not usually consumable and are only used through utilization

Depreciation – deterioration with the passage of time, through usage, normal wear-and-tear, and obsolescence
(except land).

3. Intangible Assets
➢ Lack physical substance and yet are similarly realizable over long periods of time
➢ Value and assets are harder to measure and evaluate
➢ Includes patents, copyrights, franchises, goodwill, trademarks and licenses
➢ Often are represented by written documents or certificates stating their description and
ownership status

4. Other Assets
➢ All remaining assets which do not fall into any of the accounts mentioned
➢ Catch-all for assets which are usually very much unique or hard to classify

LIABILITIES
➢ One of the claims of external parties from the entity
➢ Debts of the entity to external creditors
➢ Some are in form of obligations to do some service or even give something

Current Liabilities
➢ Expected to be settled or paid out within 12 months

Paying Out – not necessarily payment through cash, can also be conversion and/or refinancing

Accounts under Current Liabilities

1. Accounts Payable
➢ Opposite of accounts receivable
➢ Contemplate only about borrowings involved in the production process
➢ Incur obligation to pay its supplier after a certain number of days

2. Notes Payable
➢ Written promises of the entity to pay sum certain in a future determinable time
➢ Can also arise from the regular borrowings
➢ Opposite of notes receivable
➢ Pay interest regularly and may be paid in lump sum or installments

3. Accrued Liabilities
➢ All other accounts which the company should pay, arising from the normal course of business
➢ Company has already received benefits from certain events yet still been unable to pay for it

4. Current Portion of Long-term Debt

➢ Portion of the remaining debt that is expected to be paid within 12 months

5. Unearned Revenue
➢ Obligations awaiting actual delivery in form services or products

6. Other Payables
➢ All other due from the entity outside the normal course of the business

Accounts under Non-Current Liabilities

1. Non-Current Portion of Long-term Debt
➢ Portion of the remaining debt that is not expected to be paid within 12 months

Instructor: Danica M. Almario, CPA 2

DM 2 223 FINANCIAL MANAGEMENT Lecture 2

2. Bonds Payable
➢ Degree more formal than notes payable
➢ Have stated interest rates
➢ Usually issued by the government, banks and huge corporations seeking huge financing sources

Bond Indenture – agreement of a long-term debt, often in huge sums

Term Bonds – Have principal maturing in a single date
Serial Bonds – Have principal maturing in multiple dates

EQUITY
➢ Residual claims or net assets of the owners of an entity
➢ Similar to net worth part of the SALN of our public servants
➢ Residual interest of the owners in the assets of the business after considering all liabilities
➢ Can be solved thru subtracting liabilities from assets
➢ Comes from the owners of investments of capitals and income of the business from normal operations

Revenues – Expenses = Net Income (Net Loss)

Owner’s Capital – equity of sole proprietorships and partnerships

Stockholder’s Equity – equity of corporations

1. Revenues
➢ earned when the company sells its products or its services
➢ recorded once the company expects to earn an economic benefit in the form of an increase in cash
or decrease in liabilities

2. Expenses
➢ costs that are incurred by the company for the operations of its business
➢ costs of goods being sold

3. Capital
➢ represents the net investments of the business
➢ where revenue and expenses are closed, and their excess is added (deducted) on this account

Note: Not all contributions of owners are in form of cash, it also can be properties or services.

4. Withdrawals
➢ payments from an owner’s share in a company
➢ money the owner took out of the company to use for personal expenses

Instructor: Danica M. Almario, CPA 3