MIDTERM TOPICS OCT I- OCT 9 FINANCIAL Statement of comprehensive income STATEMENTS Statement of changes of equity Statement of financial position Statement of cash flows Notes to financial statements ELEMENTS OF FS Assets, Liabilities, Equity, Income, and Expenses Statement of financial Assets, Liabilities, Equity position Statement of financial Income and expenses perf. ASSET A present economic resource is a right that has the potential to produce economic benefits controlled by the entity as a result of past events. Right Rights that have the potential to produce economic benefits include 1. Right to receive cash, goods and services 2. Right to exchange economic resources with another party on favorable terms 3. Right to benefit from an obligation of another party to transfer an economic resource if a specified uncertain future events occurs 4. Right over physical object 5. Right to use intellectual property Potential to An economic resource can produce economic benefits for produce economic an entity in many ways. The following are some examples: benefits 1. Asset may be sold, leased, transferred or exchange for other assets 2. Asset may be used in combination with oth: assets to produce goods or service 9. Asset may be used to enhance the value of other assets 4. Asset may be used to promote efficiency and cost savings 5. Use to settle a labilityControl LIABILITIES Obligation Transfer of Economie Resource Present obligation as a result of past events equity Tt means the entity has the exclusive right over the benefits of an asset and the ability to prevent others from accessing those benefits Control does not mean that the entity can ENSURE that the resource will produce economic benefits. It only means that IF the resource produces benefits, it is the entity who will obtain those benefits and not another party. If an entity controls only a portion of an economic resource, the entity accounts only that portion and not the entire resource. A present obligation of the entity to transfer an economic uit of past events Obligation Is a duty or responsibility that an entity has no practical ability to aveld. Can either be Legal or Constructive An obligation to transfer an economic resource may be an obligation to 1. Pay cash, deliver goods or render services 2. Exchange assets with another party on unfavorabl terms 3. Transfer assets if a specified uncertain future events 4. Issue a financial instrument that obliges the entity to transfer an economic resource A present obligation exists as a result of past events if The entity hos alr ady obtained economic benefits or taken an action and 2. The entity has alr ady obtained economic benefits or taken an action and 3. As a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer. The residual interest in the assests of the entity after deducting all its liabilitiesINCOME EXPENSE INCOME vs. EXPENSES Recognition Derecognition MEASUREMENT Monetary basis An increase in asset 1 or decreases in liabilities, that result in increases In equity, other than tho: relating to contributions from holders of equity claims A decrea! In assets, or increases In liabilities, that result in decreases in equity, other than those relating to distribution to holders of equity claims. Income Expense Increase in asset or Decrease in asset or decrease in liability Increase in liability Result in increase in equity Result in decrease in equity Exclude contributions from Exclude distributions to entity’ s owner entity’ s owners The process of including in the statement of financial position or statement of financial performance an item that meets the definition of one of the elements of financial statement. The process of removing of a previously recognized asset or liability from the entity’ s statement of financial position. Recognition requires quantifying an item in monetary terms, thus necessitating the selection of an appropriate measurement basis Current Cost and Historical Cost are entry values (They reflect prices in acquiring an asset or incurring @ liability) Fair Value, Value in use and Fulfilment Value are exit values (They reflect prices in selling or using an asset or transferring or fulfilling @ liability) 1. historical cost 2. current costHISTORICAL COST CURRENT cost FAIR VALUE Value in use and fullfilment @. fair value b. value in use and fullfilment value €. current cost Historical cost of an asset is the consideration paid to acquire the asset plus transaction cost Historical cost of a liability Is the consideration received to incur the liability minus transaction cost, Historical cost does not reflect changes in value but Is updated overtime Current Cost of an asset is the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date dat that plus the transaction costs that would be Incurr date Current Cost of a liability Is the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be Incurred at that date. The price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date Fair Values reflects the perspective of market participants Fair Values can be measured dir etly by observing prices in an active market or indirectly using measurement techniques Fair Values is not adjusted for transaction costs Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of as * and from its ultimate disposal. Fulfilment Value is the present value of cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils the liability. Value in Use and Fulfilment Value reflect entity-specific assumptions rather than assumptions by market participantsCAPITAL Financial Capital Maintenance Concept Physical Capital Maintenance Concept Value in Use and Fulfilment Value do not include transaction cost in acquiring an asset or incurring @ Hability but include transaction cost expected to be incurred on the ultimate disposal of the asset or fulfilment of the lability Financial Concept of Capital -Capital is regarded as the invested money or Invested purchasing power. Physical Concept of Capital Capital is regarded as the entity’ s productive capacity Under this concept, Profit is earned if the net assets at the end of the period exceeds the net assets at the beginning of the period, after excluding any distribution to, and contributions from, owners during the period Under this concept, Profit is earned If the entity’ s productive capacity at the end of the period exceeds the entity’ s productive capacity at the beginning of the period, after excluding any distribution to, and contributions from, owners during the period.