Chapter 2

Elements of financial
statements
 Contents of chapter 2

• Financial statement
2.1

• Elements of financial statement

2.2

• Analyze the effect of business transaction on

2.3 the elements of financial statement
 2.1 Financial statement
- Bao cao tai chinh la ho so chinh thuc ve hoat dong va tinh hinh tai chinh cua don vi.
- Bao cao tai chinh la ket qua cua qua trinh tong hop
cua ke toan
Definition
Financial statements (or financial report) is a formal
record of the financial activities and position of an entity.
Financial statements are the outcome of summarizing
process of accounting.
 Purpose of financial statements

To provide financial information about the reporting

entity that is useful to present and potential equity
investors, lenders, and other creditors in making
decisions about providing resources to the entity.
de cung cap thong tin tai chinh ve don vi bao cao huu ich cho cac nha dau tu co phan hien tai va
tiem nang, nguoi cho vay va cac chu no khac trong viec dua ra quyet dinh ve viec cung cap
nguon luc cho don vi
 Characteristics of financial statements

➢ Users of financial statements can be internal

or external
➢ Financial statements provide general information
for all users. thong tin chung

➢ Financial statements are disclosed to all users

duoc cong bo cho tat ca nguoi su dung
 Information reflected in financial statements

➢ Informations about financial position

➢ Informations about business performance

➢ Informations about changes in owner’s equity

➢ Informations about cash flows

➢ Other informations
 Financial statement

Income
Balance Owner’s Statement Notes to
Statement
Sheet/ Equity’s of Cash Financial
P/L and
SOFP Statement Flows Statement
OCI

profit and loss statement of

financial
picture
 Financial statement

➢ An income statement reports on an entity’s entity’s income, expenses,

and profits over a period of time, it provides information on the
operation of the enterprise
➢ A balance sheet or statement of financial position, reports on a
company's assets, liabilities, and owners equity at a given point in time
➢ An owner’s equity’s statement summarises the changes in Owner’s
equity for a specific period of time
➢ A cash flow statement reports on a company's cash flow activities,
particularly its operating, investing and financing activities
➢ Footnotes (or notes) to the financial statements typically describe each
item on the balance sheet, income statement and cash flow statement in
further detail
 2.2 Elements of financial statement

2.2.1. Asset
- Definition?
2.2.2. Liability - Criteria of recognition?
- Classification?

2.2.3. Equity
2.2.4. Income
2.2.5. Expense
 2.2.1 Asset

Definition

An asset is a resource controlled by the entity as a

result of past events from which future benefits are
expected to flow to the entity
 Definition

Future economic benefit embodied in an asset is the

potential to contribute, directly or indirectly, to the
flow of cash and cash equivalents to the entity.
The future economic benefit embodied in an asset
may flow to the entity in a number of ways:
➢ Used singly or in combination with other assets in
the production of goods or services to be sold by
the entity.
➢ Used to settle a liability
➢ Distributed to the owners of the entity.
Asset Economic Benefit
Used for the production of goods for sale to
Machine
customer.
Office Provides space to employees for administering
Building company affairs.
Used in the transportation of company products
Vehicle
and also for commuting.

Inventory Cash is generated from the sale of inventory.

Cash Cash!
Receivables Will eventually result in inflow of cash
 Criteria of recognition

1st: The item has a cost or value that can be

measured with reliability
2nd: Resources controlled by the business
entity

3rd: It is probable that any future economic

benefit associated with the item will flow to the
entity

4th: As a result of past events or transactions

Trademark

Fix assets
Monopoly brand
 Classification

Liquidity

Criteria Purpose of
of classification using

Time of using
 Cash on hand, cash in/at bank, cash in transit
Current
asset Short term securities investment, short loans…

tai san ngan han

Account Receivable (A/R), inter-company
receivable, advanced payment…
Inventory: Material, tool, supply, merchandise,
goods, finished good… thanh pham
Asset

Long term Receivable from customer, long term

inter-company receivable

Tangiable fixed assets, intangiable fix assets,

finance lease assets
Non
current Investment in subsidiaries,
asset Investment in joint-venture…

Other non current assets

 Classification

Land Cash Receivable

Buildings Assets Franchises

Prepaid
Equipment Supplies Accounts
 Classification

➢ Current assets: assets are accounting entity expects

to convert into cash, sell, or consume either in one
year or in the operating cycle, whichever is longer.
➢ E.g. Debtors,, Stock (Inventory), Cash, Bank, Short-
term investments….
 Classification

➢ Non-current assets: assets are those not meeting the

definition of current assets.
➢ E.g. Land, Building, Machinery, Plant, Furniture and
Fixtures, etc.
What are your assets?
 2.2.2 Liability

Definition

A liability is a present obligation arising from past

events, the settlement of which is expected to result in
an outflow from the entity of resources embodying
economic benefits
 Criteria of recognition

1st: Measured reliably

2nd: Settlement by entity’s resources in a

relatively certain way

3rd: As a result of past events or transaction

 Criteria of recognition

The settlement of a present obligation usually involves the

entity giving up resources embodying economic benefits in
order to satisfy the claim of the other party. Settlement of a
present obligation may occur in a number ways, for
example, by:
➢ Payment of cash;
➢ Transfer of other assets;
➢ Provision of services;
➢ Replacement of that obligation with another obligation;
➢ Conversion of the obligation to equity.
 Classification

Short –term loans vay ngan han

Accounts payable (trade payable)
khoan no phai tra cho nguoi ban
Current Taxes payable
Liabilities
Salary Payable
nhung khoan ni
phai thanh toan
trong 1 nam
Short –term Inter-company
payables (internal payables)
Liabilities
Other Short –term payables
Long –term loans, long term
bonds, long-term leases
Non-current
Liabilities Long –term Inter-company
payables
Long-term product warranties
 Classification

Payable Bonds

Liabilities

Accrued Unearned
Liabilities Revenue
 Classification

➢ Current liabilities: Obligations that a company

reasonably expect to liquidate within one year or the
normal operating cycle
➢ Non-current Liabilities: Obligations that a company
does not reasonably expect to liquidate within the
longer of one year or the normal operating cycle. .
➢ E.g: Long-term bonds, notes payables, long
term leases, pension obligations, and long-term
product warranties.
 2.2.3. Owner’s equity

Definition

1st: Beyond the equation

ASSETS = EQUITY + LIABILITIES
Owners’ equity is the residual interest in the assets of
the enterprise after deducting all its liabilities.
von chu so huu la phan con lai cua tong tai san sau khi da tru di no phai tra

Or : The owner’s equity is simply the owner’s share of

the assets of a business.
 2.2.3. Owner’s equity

Definition

2st: Owners’ equity is one type of capital source owned

by the business entity, which has the right to use it for the
duration of its operation.
la mot loai nguon von ma don vi co the su Acc 411
dung lau dai trong suot thoi gian hoat dong
cua don vi
 Increases in Owner’s equity

➢ Investments by owner are the assets the owner puts into

von chu so huu tang len do chu so huu dau tu
the business.

➢ Revenues result from business activities entered into for

the purpose of earning income.

►Common sources of revenue are: sales, fees,

services, commissions, interest, dividends, royalties,
and rent.
 Decreases in Owner’s equity

➢ Drawings An owner may withdraw cash or other

assets for personal use.

➢ Expenses are the cost of assets consumed or

services used in the process of earning revenue.

►Common expenses are: salaries expense, rent

expense, utilities expense, tax expense, etc.
 Classification phan loai

Net Investment
income by owners

Other equity
 Classification

➢ Investments by owner are the assets the owner puts

into the business.

➢ Net Income

✓ (1) = Income – expense

✓ (2) = Total ending equity-Total Beginning equity –

Investment by Owners + Drawings

➢ Other equity: Exchange rate differences, Margin of

property revaluation
 Classification

Owner’s Capital
Investment
by owners Other capital

Investment and development funds

Net Fund financial reserve

Owners’equity
Income Other funds of owners' equity
Retain earnings

Foreign Exchange differences

Other
equities Revaluation differences on asset
Other funds of owners' equity
 Classification

Owner’s Owner’s
Capital Withdrawals

Equity

Revenues/incomes Expenses
 2.2.4 Income

Definition

Income is increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating
to contributions from equity participants
 Criteria of recognition

1st: Measured reliably

2nd: Increases in economic benefits that

result in increases in equity

3rd: As a result of past events

 Criteria of recognition

3rd: As a result of past events

➢Under the cash basis, income recognized when cash

is received.
➢Under the accrual basis, entities recognize income
when they perform services or products (rather than
when they receive cash).
 Classification

Revenue from sales

Revenue
Financial income
Income:

Gains Other Income

 Classification

Income includes both revenues and gains.

➢ Revenues - ordinary activities of a company
➢ Gains - not arise from ordinary activities.
Revenue accounts Gain accounts
◆ Sales ◆ Gains on the sale of long-
◆ Fee, rent term assets
◆ Interest ◆ Gains from getting penalty
◆ Dividend
◆ Royalties
 Revenue classification – recognition
(Accrual basic)

➢ For sales of goods or rendering of service: earned &

realized
➢ For interest revenue: on time basis
➢ For royalties: in accordance with the substance of the
relevant agreement
➢ For dividend: when dividend declared
 2.2.4 Expense

Definition

Expenses are defined as 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, other than those relating to
distributions to equity participants.

Salary
 Criteria of recognition

1st: Measured reliably

2nd: Decreases in economic benefits that

result in decreases in equity

3rd: As a result of past events or

transactions
 Criteria of recognition

3rd: As a result of past events or

transactions

➢Under the cash basis, expenses recognized when cash

is paid.

➢Under the accrual basis, expenses are recognized

when incurred (rather than when paid).
 Classification

Cost of goods sold

Selling expenses
General
Expenses General
administration
expenses
Expenses
Financial expenses

Losses Other Expenses

 Classification

Expenses include both expenses and losses.

➢ Expenses - ordinary activities of a company
➢ Losses - not arise from ordinary activities.
Expense accounts Loss accounts
◆ Cost of goods sold ◆ Losses on restructuring
◆ Depreciation charges
◆ Interest ◆ Losses on sale of long-
◆ RentSalary and term assets
wages ◆ Losses from fire, flood
◆ Taxes
 Expenses – classification based on nature

➢ Salary expense
➢ Material expense
➢ Depreciation expense
➢ Service expense from suppliers
➢ Expense paid with cash
➢ Others
 Expenses – classification
based on function

➢ Direct material
➢ Direct labour
➢ Manufacturing overheas
➢ Selling expenses
➢ Administrative expenses
➢ …
 2.3 The effect of the transaction on the
accounting equation

Transactions are a business’s economic events

recorded by accountants.
➢ May be external or internal.
➢ Not all activities represent transactions.
➢ Each transaction has a dual effect on the
accounting equation.
 Transaction analysis

A transaction may do one of several things:

➢ It may increase both the asset side and the liabilities

and owners' equity side.

➢ It may decrease both the asset side and the liabilities

and owners' equity side.
 Transaction analysis

A transaction may do one of several things:

➢ It may cause both an increase and a decrease on the asset side.

➢ It may cause both an increase and a decrease on the liabilities

and owners' equity side.

Regardless of what transaction occurs, the accounting equation

must be in balance after the transaction is analyzed
 Summary of transaction

1. Each transaction is analyzed in terms of its effect on:

➢ The three components of the basic accounting
equation.
➢ Specific of items within each component.
2. The two sides of the equation must always be equal.
 Types of economic transaction

1
Increase Asset Decrease Asset
2 5
4 3 6
Decrease Increase
Liability Liability
9
Decrease 10 7 Increase
Owners’ Equity 11 Owners’ Equity
12

13 8
Expense Income
incurred incurred
 Analyze the effects of following transactions on
elements of financial statement:
1/Receipts from customer (cash on hand): 800
2/ Paid salary to employee (cash on hand): 50
3/ Clear advances by deducting employee’s salary: 50
4/ Pay on behalf of employee for electricity of current
period (cash at bank): 30
5/ Deliver goods to customers from the contract of
which customer made an advanced payment with
the value of 1,000; cost of goods sold 700.
6. Purchase a van (using for delivery of goods), which is payable to
supplier X: 420
7. Pay salary to employees (cash on hand): 50
8. Receipts from customer A for due amount of previous period
(cash at bank): 50
9. Owner contributes additional capital in cash (cash on hand): 500
10. Retained earnings used to increase capital: 200
11. Advances to employees for business trip (cash on hand): 15
12. Retained earnings is allocated to Bonus and Welfare Fund: 10
13. Merchandise is purchased and received, paid by cash at bank: 50
14. Purchase tangible fixed assets financed by long-term loan: 300
15. Payment to settle short-term loan(cash at bank):100;payment to
State Treasury: 30
Which items/ transactions satisfy
revenue recognition criteria
according to cash basis?