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The document outlines key concepts in accounting, focusing on the Statement of Cash Flows, cash classifications, and accounting policies. It details cash flow classifications, noncash transactions, and the treatment of interest and dividends in financial reporting. Additionally, it discusses changes in accounting policies, estimates, reporting entities, prior period errors, and events after the reporting period.

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9 views6 pages

Untitled Document 17

The document outlines key concepts in accounting, focusing on the Statement of Cash Flows, cash classifications, and accounting policies. It details cash flow classifications, noncash transactions, and the treatment of interest and dividends in financial reporting. Additionally, it discusses changes in accounting policies, estimates, reporting entities, prior period errors, and events after the reporting period.

Uploaded by

sophia abanto
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 10 Conceptual Frameworks of Accounting Summary

Statement of Cash flows


●​ Statement of cash flows component of financial statements summarizing the
operating, investing, and financing activities
●​ Used to provide information about cash receipts and cash payments
●​ Provide information since it is a financial statement, about cash receipts and
cash payments of an entity during a period

Cash and cash equivalent


●​ Statement of cash flows are designed to provide information about the change
in an entity’s cash and cash Equivalent
●​ Cash comprises cash on hand and demand deposits
●​ Cash Equivalents are short-term term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk of
change in value
●​ Philippine Accounting Standards (PSA) Paragraph 7, states that an investment is
qualified as a cash equivalent when it has a short maturity of three months or
less from the date of the acquisition
●​ Bank overdrafts are repayable on demand and are a component of cash and cash
equivalents.
●​ Bank balance often fluctuates from being positive to overdrawn

Classification of cash flows

●​ Cash flows are inflows and outflows of cash and cash equivalent
●​ The statement shall report the cash flows during the period.

●​ Operating activities’ cash flows are derived from the principal


revenue-producing activities. Transactions and other events that enter into the
determination of net income or loss

●​ Investing activities cash flows from disposal or acquisition of long-term assets


and other investments. Note this is not included in cash equivalents due to their
long-term nature.
●​ Also involves transactions of nonoperating assets

●​ Financing Activities cash flows derived from equity or borrowings


❖​ Equity Financing, and debt financing
●​ Involves nontrade liabilities and equity transactions of an entity

Noncash transactions

Noncash investing and financing transactions shall be disclosed in notes to financial


statements, separate schedules, or in a way that provides relevant information about
these transactions. This is because a Statement of Cash flows is strictly a cash
concept

Interest paid and interest received

PAS 7, Paragraph 33
-​ Interest paid and interest received are to be classified as operating cash flow.
This only applies to financial institutions.

Interest Paid Alternate class


-​ Can be classified as financing cash flow because it is a cost of obtaining financial
resources

Interest received Alternate class


-​ Can be classified as investing cash flow because of ROI.

Dividends Received

PAS 7, Paragraph 33
-​ Dividends received shall be classified as operating cash flow because it enters
into the determination of net income

Alternate
-​ The dividend received is classified as investing cash flow because it is an ROI.

Dividends Paid

PAS 7, paragraph 34
-​ Dividend paid shall be classified as financing cash flows because it is similar to
interest paid
Alternate class
-​ Dividend Paid may be classified as operating cash flow in order to assist users in
determining the ability of the entity to pay dividends out of operating cash
flows.

Chapter 11 Conceptual Frameworks of Accounting Summary

Accounting Policies
●​ Rules that govern an entity’s preparation and presentation of financial
statements
●​ An entity is required to outline all significant accounting policies applied in
preparing financial statements
●​ Must be consistent, in other words, the accounting policies of this period must
be applied to the next period in order to achieve comparability.

Changes in accounting policy


Changes should be made if:
➢​ Required by an accounting standard
➢​ The change is relevant and will more faithfully represent financial statements.

A change in accounting policy arises when an entity adopts a generally accepted


principle that is different from the policy applied by an entity to its previous period.

How to report a change in accounting policy?

1.​ It shall be applied in accordance with the transitional provisions therein


2.​ Applied retrospectively if (1) contains no transitional provisions and (2) if an
accounting policy is changed voluntarily.

Retrospective Application

●​ Applying a new policy as if that policy had always been applied


●​ Instead of changing the old financial statements, the company adjusts the
opening balance of retained earnings of the CURRENT PERIOD
●​ If comparative information is presented, financial statements prior shall be
restated to conform with the new accounting policy.
Accounting estimate

PAS 8, Paragraph 5
-​ The monetary amount in the financial statements is subject to measurement of
uncertainty.

Measurement uncertainty
-​ Monetary amounts in the financial statements cannot be observed directly and
are in need of an estimate.

IASB
-​ Nonmonetary amounts are unnecessary to include in the definition because the
change of an input in developing an accounting estimate is a change in the
accounting estimate.

●​ Accounting estimates may change if the base of the accounting estimate


changes.
●​ Accounting estimates are not corrections of the previous period rather it is a
normal recurring corrections or adjustments in the current or next periods.

How to report a change in the accounting estimate

It shall be recognized currently and prospectively by including it in income or loss of


such:

➢​ If the change affects only the current period, the adjustments are included in
the income or loss of that period
➢​ If it affects the current period and the next, the adjustments are spread over
those periods.

Prospective recognition
-​ When a company changes an accounting estimate, it only applies the change
moving forward, without adjusting past financial statements.
Change in reporting entity
●​ Changes in reporting entity is a change whereby entities change their nature and
report their operations in such a way that the financial statement are in effect
those of a different entity
●​ It is a change in accounting policy and therefore shall be treated
retrospectively.

Prior Period errors


●​ Ommisions and misuse in the financial statements it will result into misuse or
failure to use reliable information

To treat such errors one should follow the laws of retrospective application

➢​ Treat errors retrospectively as if these errors were not even done in the first
place. This is called Retrospective restatement
➢​ If comparative statements are there prior financial statements shall be
restated
➢​ Corrected retrospectively by adjusting the opening balances of retained
earnings and affected assets and liabilities.

Chapter 12 Conceptual Frameworks of Accounting Summary

Pas 10, Paragraph 3


-​ Defines events after the reporting period as those events, whether favorable or
unfavorable, that occur between the end of reporting period and the date on
which the financial statements are authorized for issue.

There are 2 types of events

1.​ Adjusting events


-​ Those that provide evidence of conditions that exist at the end of the reporting
period

2.​ Nonadjusting events


-​ Those that are indicative of conditions that arise after the end of the reporting
period
Financial Statements authorized for issue

➢​ Financial statements are authorized for issue when the board of directors
reviews the financial statements and authorizes them issue.
➢​ In some instances they are required to submit the financial statement to
shareholders for approval after the financial statements have been issues

“ In such cases, the financial statements are authorizes for issue on the date of issue
by the board of directors and not on the date when shareholders approve the
financial statements”

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