ANALYZING-BUSINESS-TRANSACTION-Part-1.pptx

FAR1

1. Analyzing Business Transaction Part 1

2. MODULE GOALS/LEARNING OBJECTIVES: At the end of the session, the learners will be able to: Enumerate and explain the qualitative characteristics that financial information should possess. State the accounting equation and define its components. Enumerate and explain the accounting principle underlying the recognition and measurement of transactions, accounting elements and statement of financial position. Explain the two more basic principles used in preparing an income statement. Analyze the effects of business transactions on the accounting equation. Present the financial statements. Appreciate the interrelationship among the financial statements.

3. Based on the Framework of Accounting, the financial position or structure of a business entity is based on three elements – assets , liabilities , and owner’s equity while its financial performance is based on two elements called revenues and expenses . The Financial Structure of a Business

4. Asset are economic resources owned by the business. They are used in operating the business and are expected to benefit the business over a number of years. Asset, as defined in the Framework, is a resource obtained and controlled by the enterprise as a result of a past event and from which probable future economic benefits are expected to flow to the entity. Asset

5. Note that an asset has three features: It is a resource obtained from a past event, The enterprise has control over it, and Future economic benefits will be received from its use.

6. Liabilities can be simply defined as an obligation to do or pay. Or it may be defined as debts of the business owing to outside parties like the banks, financing companies and suppliers of goods and services.  The framework defines a liability as a present obligation arising from past event, the settlement of which is expected to result in an outflow of resources from the enterprise. Liabilities

7. A liability has three features: There is a present obligation, Which arose from past event, and Settlement is expected to be made in the future in the form of an outflow of resources.

8. Net assets or Net worth of the business is determined by deducting the total liabilities from the total assets. The net assets claimable by the owner is called owner’s equity. Equity is defined by the framework as a residual right or interest of the owner(s) in the entity’s net assets. Owner’s Equity

9. The Accounting Equation

10. The Accounting elements are affected by the business transactions or economic activities of a business. A transaction is defined as an exchange of values between two parties expressed in monetary terms. It has three characteristics: Exchange of values Between two parties In terms of money. Business Transactions and the Accounting Elements

11. The business transaction must always have a dual effect and that is for every value received there is an equal value parted. This bookkeeping system is called Double Entry Bookkeeping or the Venetian Model . A transaction either increases or decreases the assets, liabilities or owner’s equity but the equation or fundamental identity of the three elements should always be maintained. Business Transactions and the Accounting Elements

12. Demonstration Problem 1 Happy Tour and Travel Transactions during March 2020

13. March 1 May Gomez opened a tour and travel service by contributing cash of P50,000. She has three cars worth P1,200,000 but contributed only two cars worth P750,000. Asset invested by the owner. ASSET = OWNER’S EQUITY Cash P 50,000 Gomez, Capital P 800,000 Cars 750,000 P 800,000 P 800,000

14. March 3 Gomez borrowed P 100,000 cash from PNB for use in her business. Cash borrowed from the bank. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P150,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 P 900,000 P100,000 P800,000

15. March 7 Bought tables and chairs from Blim’s and paid cash, P45,000 Asset purchased for cash. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P 105,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Furniture 45,000 P 900,000 P100,000 P 800,000

16. March 15 Various equipment were purchased on account from National Winners for P55,000. Asset purchased on account. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P 105,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Accounts Payable 55,000 Furniture 45,000 Equipment 55,000 P 955,000 P 155,000 P 800,000

17. March 18 Gomez made cash withdrawal of P5,000 for personal use. Cash withdrawn by owner. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P 100,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Accounts Payable 55,000 Gomez, Drawing ( 5,000) Furniture 45,000 Equipment 55,000 P 950,000 P 155,000 P 795,000

18. March 20 The account due to National winners was paid in cash. Payment of Liability. ASSETS = LIABILITIES + OWNER’S EQUITY Cash P 45,000 Loans Payable P 100,000 Gomez, Capital P 800,000 Cars 750,000 Gomez, Drawing ( 5,000) Furniture 45,000 Equipment 55,000 P 895,000 P 100,000 P 795,000

19. The Business Entity Concept was applied on March 1 when the assets of the business increased with the investment of two cars, notwithstanding the fact that Gomez owned three cars. This concept was also applied when cash was withdrawn by Gomez on March 18and delisted from the cash of the business. Additional notes:

20. On March 7 and 15, Exchange price or Cost Concept was applied when the cash prices of the furniture and equipment bought were P45,000 and P55,000, respectively, and were recorded at these amounts no matter if the prices differed in another store. Additional notes: (Cont.)

21. All these transactions were properly documented based on the Objectivity Principle : March 3 was supported by a contract signed by Gomez as owner of the enterprise, March 10 and 15 were supported by purchase invoices and March 20 by an official receipt. Values assigned to all transactions based on the Monetary Measurement Principle . Additional notes: (Cont.)

22. The Statement of Financial Position is a list of assets, liabilities, and owner’s equity of a business. This statement informs users of the wealth and obligations accumulated by the business, and is used to determine liquidity and solvency of the business. Statement of Financial Position

23. This statement is not prepared every time there is a change in the accounting equation. Under the principle of period of time, this is usually prepared yearly with balances shown only at the end of the particular year. Interim statements may be prepared (monthly or quarterly) as needed by the users.

24. Prepare a Statement of Financial Position for Happy Tour and Travel from Demonstration Problem I. Activity:

25. Solution:

26. The framework for the preparation and presentation of financial statements describes, among others, the attributes of characteristics that financial information must possess to make them trustworthy and useful in making informed judgement and decision. The framework identifies four principal attributes: understandability , relevance , reliability , and comparability . QUALITATIVE ATTRIBUTES

27. Understandability requires that: Users have a reasonable knowledge of finance, accounting, and economics to come up with a good assessment and sound judgment, Terminologies used must be clear, Presentation of reports must be orderly. A. Understandability

28. It prescribes the quality of information that will make a difference and influence a statement user to make a meaningful decision. The information must give the past performance of the business ( feedback value ) which is useful in projecting what might take place in the future ( predictive value ). The relevance of financial information is also affected by materiality. Materiality will depend on whether an item (by its nature or size) will influence user’s decision or not. B. Relevance

29. Aside from materiality another constraint in reporting relevant information is timeliness. Reports must be given promptly or within the period it is needed to form judgment else it loses its usefulness.

30. Can the financial statements be depended upon by the users? Yes, if the information is objective and free from material errors or misstatements . There are four ingredients to be considered: faithful representation , substance over form , prudence , neutrality and completeness . C. Reliability

31. Faithful representation means that information represent faithfully what they purport to be, that the information should not mislead users to think that it is when it is not. C. 1. Faithful Representation

32. In substance over form, if the substance or economic reality (intention) of the contract is not consistent with the legal form, the economic reality should prevail. C. 2. Substance over Form

33. Neutrality requires that the information should be useful to all users. It should not show bias for a particular user. C. 3. Neutrality

34. Prudence is another ingredient of reliability which requires the accountant to exercise caution when using estimates or information that is marked by uncertainty. C. 4. Prudence

35. Completeness is another component of reliability. The value of information found in the financial statements may be enhanced to help users make informed judgment when all information are provided taking into consideration the importance of each item to statement users. C. 5. Completeness

36. Comparability helps one identify changes taking place in the entity between two or more periods so users will be able to determine the change or trend of its performance or position. Comparability may also be made between two or more entities so users will be able to make a meaningful assessment of the entity’s competitiveness. D. Comparability

37. ACCOUNTING PRINCIPLES Principles are laws or rules that guide the conduct and practice of the profession. In accounting, these are specially used in identifying, measuring, and reporting financial information. These generally accepted accounting principles or simply called GAAP are not natural laws but man-made laws usually a result of long-used accounting practice, norm of conduct of a place or standards promulgated by an authoritative body.

38. All Business transactions are measured and recorded using only one unit of measurement . Since money is used as a medium of exchange, it is therefore the most practical unit of measuring financial data. A. Measurement in Terms of Money

39. This concept assumes that a business enterprise is separate and distinct from its owner or investo r. In preparing financial statements of an entity, only the assets, liabilities, revenues and expenses of that entity should be contained herein. Personal asset and liabilities of the owner should not be included. B. Business Entity Concept

40. Assets, Liabilities, Revenues and Expenses should be recorded based on cost . Cost is the amount agreed upon in an arm’s length transaction. It may be based on cash or its cash equivalent if no cash was exchanged (paid) at the time the transaction occurred. C. Exchange Price or Cost Principle

41. Supporting the Exchange Price or Cost Principle is the Going Concern Assumption. Based on this premise, it is expected that the business will continue to exist indefinitely (PAS 1, par. 25) thus financial statements should be prepared on a going concern basis unless management intends to close the business or cease trading. D. Going Concern Assumption

42. PAS 1 par. 27-28 requires that financial statements be prepared under the accrual basis. Assets, Liabilities, Revenues, or Expenses should be recognized based on the period they relate or based on the occurrence of the transaction / event rather than based on cash received or paid. E. Accrual Assumption

43. The Concept of Objectivity requires that the assets acquired must be veriafiable and substantiated by documents such as invoices, vouchers or official receipts F. Objectivity

44. How often should the accountant prepare the financial statements especially since it is assumed that the business is a continuing concern? It is understood that a complete and accurate financial picture of the business may only be made at the end of its life. G. Reporting Period

45. 21 st Century Accounting Process; 2015 edition, by Zenaida Vera Cruz-Manuel SOURCE:

46. Thank you 