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Rona Emily R.

Garcia

AB1AB

ASSIGNMENT
1. What is the objective of financial statement?
The objective of financial statements is to provide information about the financial position, performance
and changes in financial position of an enterprise that is useful to a wide range of users in making economic
decisions. <Wikipedia>
According to http://accountlearning.blogspot.com/
*Assessment of Past Performance
Past performance is a good indicator of future performance. Investors or creditors are interested in the trend
of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These
trends offer a means for judging management's past performance and are possible indicators of future
performance.
*Assessment of current position
Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a
business firm and the different liabilities due against the enterprise.
*Prediction of profitability and growth prospects
Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in
earning which are used by investors while comparing investment alternatives
*Prediction of bankruptcy and failure
Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of
business failure.
*Assessment of the operational efficiency
Financial statement analysis helps to assess the operational efficiency of the management of a company. The
actual performance of the firm which are revealed in the financial statements can be compared with some
standards set earlier and the deviation of any between standards and actual performance can be used as
the indicator of efficiency of the management.
2. What are the qualitative characteristics of financial statement?
According to accountingtools.com
*Understandability.
The information must be readily understandable to users of the financial statements. This means that
information must be clearly presented, with additional information supplied in the supporting footnotes as
needed to assist in clarification.
*Relevance.
The information must be relevant to the needs of the users, which is the case when the information
influences the economic decisions of users. This may involve reporting particularly relevant information, or
information whose omission or misstatement could influence the economic decisions of users.

*Reliability.
The information must be free of material error and bias, and not misleading. Thus, the information should
faithfully represent transactions and other events, reflect the underlying substance of events, and prudently
represent estimates and uncertainties through proper disclosure.
*Comparability.
The information must be comparable to the financial information presented for other accounting periods, so
that users can identify trends in the performance and financial position of the reporting entity.
3. Give and define the elements of the financial statement.
According to http://highered.mheducation.com/
Assets represent probable future economic benefits controlled by the enterprise.
Liabilities represent obligations to other entities.
Equity is a residual amount, the owners interest in assets after subtracting liabilities.
Investments by owners and distributions to owners are transactions describing any owner contribution to and
withdrawal from the company.
Revenues are gross inflows resulting from providing goods or services to customers.
Expenses are gross outflows incurred in generating revenues.
Comprehensive income often does not equal net income.
4. What are the typical account titles used? Define each.
Cash Cash includes: currency and coins, checks, money orders, bank drafts and demand deposit accounts.
Held for Trading Securities Temporary investments of excess cash which are primarily held for short term
gain.
Loans and Receivables include trade receivables and non trade receivables. Trade Receivables are claims
against others which arise in the ordinary course of doing business. Examples are: Trade accounts
receivable- these are claims against customers arising from the provision of services or delivery of goods on
credit.
Trade Notes Receivable A note receivables is a written promise from the customer to pay a fixed amount
of money on a certain future date. Being a formal and written document. It offers more security than
accounts receivable.
Non Trade Receivables represent all other claims which are not trade. They may be non-trade accounts
receivable or non-trade notes receivable.
Inventories These are assets which are (a) held for sale in the ordinary course of business; (b) in the
process of production for such sale; (c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
Prepaid Expenses These are expenses paid for by the business in advance. Examples are Prepaid Rent and
Prepaid Insurance. Prepaid expenses are assets when they are paid for. Subsequently, they become expenses.

Long-term Investments An investment is an asset held by an enterprise for the accretion of wealth through
capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other
benefits to the investing enterprise such as those obtained through trading relationships. Investments are
classified as long term when they are intended to be held for long periods of time.
Property, Plant and Equipment These are tangible assets held by an enterprise for use in the production or
supply of goods or services, or for rental to others, or for administrative purposes and which are expected to
be used during more than one accounting period. Examples are land, building, transportation and delivery
vehicles, furniture and fixtures, machinery and equipment.
Intangible Assets These assets are identifiable, non monetary assets without physical substance. These
include patents, copyrights, licenses, franchises and trademarks.
LIABILITY ACCOUNTS
Accounts Payable This account is the opposite of accounts receivable. Examples include purchasing goods
or receiving services for which the buyer agrees to pay in the near future.
Notes Payable A note payable is like a note receivable, except that this time the enterprise is the one who
promises to pay (not the one who receives the promise)
Accrued Liabilities These are amounts owed to others for unpaid expenses. They are similar to accounts
payable, except that accounts payable are for items which have already been consummated (such as the
purchase of goods), while accrued expenses are for items which are continuing in nature (such as utility
services like electricity and water). Examples are salaries payable, interest payable, taxes payable and
accruals for utility expenses.
Unearned Revenues Sometimes the enterprise receives payment before providing its customers with goods
or services. This creates an obligation on the part of the enterprise to deliver goods or provide services. Once
the enterprise complies with what is required of it, the advance collections from customers are already
earned and become part of income.
Mortgage Payable This account is used for recording long-term debt(s) of an enterprise for which the
company has pledged certain assets as security for the debt (collateral).
Bonds Payable A bond is a contract between the issuer and the lender specifying the terms of repayment as
well as the interest to be p aid.
EQUITY ACCOUNTS
Equity or Capital is used to record the original and additional investments of the owner of the business
entity. Capital is increased by net income earned during the year. Conversely, a net loss decreases capital.
Withdrawals When the proprietor (or a partner in a partnership) withdraws cash or others assets for non
business use, such withdrawals are reflected in the withdrawals account. Some accounting references use
the term drawings or personal instead of withdrawals
Income Summary It is temporary account used to summarize all income and expenses for a given period. If
total income is greater than total expenses, a net income results. If the opposite happens, a net loss was
sustained by the business. Some accounting references use the term Profit or Loss Summary instead of
Income Summary.
INCOME ACCOUNTS

Service Income or Fees Income Revenues earned by performing services for customers.
Sales Revenues earned as a result of sale of merchandise.
EXPENSE ACCOUNTS
Cost of Sales the cost incurred to purchase or to produce the products sold to customers during the period.
For a service business, any expense which could be directly attributed to the provision of services is called
cost of services.
Salaries and Wages Expense Includes all payments as a result of an employer-employee relationship such
as salaries and wages, 13th mo. pay and other related employee benefits.
Utilities Expense (Telephone, Electricity, Fuel and Water Expenses) Expenses related to use of
communication facilities, the consumption of electricity and water.
Rent Expense Expense for leased office space,, equipment, or other assets rented from others.
Supplies Expense The account used for recording the usage of supplies (e.g. office supplies) in the normal
course of business.
Insurance Expense Portions of premiums paid on insurance coverage which has expired.
Depreciation Expense The portion of the cost of a tangible asset allocated or charged as expense during the
accounting period.
Bad Debts Expense The amount of receivables estimated to be uncollectible and charged as expense
during an accounting period. Also known as Uncollectible Accounts Expense.
Interest Expense An expense related to use of borrowed funds. Also known as finance cost.

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