Chapter 7 Flashcards by Anj Costelo

It shall be applied in the presentation and preparation of the General Purpose Financial Statements (GPFS).

Provisions of PPSAS 1, Presentation of Financial Statements and the applicable Philippine Application Guidance

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Objectives of General Purpose Financial Statements (GPFS)

To provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making and evaluation decisions about the allocation of resources.

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Objectives of General Purpose Financial Reporting in the public sector (2)

To provide information useful for decision-making
to demonstrate the accountability of the entity for the resources entrusted to it.

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These are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

Accounting policies

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It comprises cash on hand and cash in bank (held under current and savings accounts) and cash treasury accounts.

Cash

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These are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash Equivalents

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These are inflows and outflows of cash and cash equivalents.

Cash Flows

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This is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. This results from new information or new developments, and accordingly, are not correction of errors.

Change in accounting estimate

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It is the process of preparation, presentation, and submission of general purpose financial statements and other reports. Its objective is to provide information about the entity that is useful to users for accountability purposes and decision-making.

Financial Reporting

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These are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their particular information needs.

General Purpose Financial Statements

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These are material if they could, individually or collectively, influence the decisions or assessments of users made on the basis of the financial statements. Materiality depends on the nature or size of the omission or misstatement judged in the surrounding circumstances. The nature of size of the item, or combination of both, could be the determining factor.

Material omissions or misstatements of items

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These contain information in addition to that presented in the Statement of Financial Position, Statement of Financial Performance, Statement of Changes in Net Assets/Equity, and Statement of Cash Flows. These provide narrative descriptions or disaggregation of items disclosed in those statements and information about items that do not qualify for recognition in those statements.

Notes

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This means applying the new accounting policy to transactions, other events, and conditions occurring after the date as at which the policy is changed.

Prospective application of a change in accounting policy

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This means recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change.

Prospective application of recognizing the effect of a change in an accounting estimate

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This is applying a new accounting policy to transactions, other events, and conditions as if that policy had always been applied.

Retrospective application

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This is correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occured.

Retrospective restatement.

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Purpose of Financial Statements

A. Financial statements are a structured representation of the financial position and financial performance of an entity
B. General purpose financial statements can also have a predictive or prospective role, providing information useful in predicting the level of resources required for continued operations, the resources that may be generated by continued operations, and the associated risks and uncertainties.
C. Financial statements provide information about an entity

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How are the objectives of general purpose financial reporting in the public sector achieved? (5)

providing information about the sources, allocation, and uses of financial resources;
providing information about how the entity financed its activities and met its cash requirements;
providing information that is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments;
providing information about the financial condition of the entity and changes in it;
providing aggregate information useful in evaluating the entity’s performance in terms of service costs, efficiency and accomplishments;

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What are other infomation provided to users by financial reporting? (2)

indicating whether resources were obtained and used in accordance with the legally adopted budget; and
indicating whether resources were obtained and used in accordance with legal and contractual requirements, including financial limits established by appropriate legislative authorities.

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What are information about an entity that are provided by financial statements? (8)

Assets
Liabilities;
Net assets/equity;
Revenue;
Expenses;
Other changes in net assets/equity;
Cash flows; and
Comparison of budget and actual amounts.

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Who is responsible for the fair presentation and reliability of financial statements?

The management of the reporting entity, particularly the head of finance/accounting office and the head of entity or his authorized representative.

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It shall serve as the covering letter in transmitting the entity financial statements to the COA, and other regulatory agencies and other entities.
It shows the entity’s responsibility for the preparation and presentation of the financial statements.

Statement of Management Responsibility for Financial Statements

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What are the components of Financial Statements? (6)

Statement of Financial Position (SFP) (Annex A);
Statement of Financial Performance (SFPer) (Annex B);
Statement of Changes in Net Assets/Equity (SCNA/E) (Annex C);
Statement of Cash Flows (SCF) (Annex D);
Statement of Comparison of Budget and Actual Amount (SCBAA) (Annex E); and
Notes (Annex F), comprising a summary of significant accounting policies and other explanatory notes. (Par. 21, PPSAS 1)

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What are the qualitative characteristics of Financial Reporting? (11)

Understandability
Relevance
Materiality
Timeliness
Reliability
Faithful representation
Substance over form
Neutrality
Prudence
Completeness
Comparability

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It consists of accounting system on accrual basis and budget reporting system on budget basis under the statutory responsibility of the NGAs, Bureau of Treasury (BTr), Department of Budget and Management (DBM) and the COA

Financial Reporting System for the National Government

When the presentation or classification of items in the financial statements is amended, comparative amounts shall be reclassified unless the reclassification is impracticable. When comparative amounts are reclassified, an entity shall disclose: (3)

1. The nature of the reclassification; 2. The amount of each item or class of items that is reclassified; and 3. The reason for the reclassification.

When it is impracticable to reclassify comparative amounts, an entity shall disclose: (2)

1. The reason for not reclassifying the amounts; and 2. The nature of the adjustments that would have been made if the amounts had been reclassified.

The following information shall be displayed prominently, and repeated when it is necessary for a proper understanding of the information presented: (6)

1. The name of the reporting entity or other means of identification, and any change in that information from the preceding reporting date; 2. Whether the financial statements cover the individual entity or a group of entity; 3. The reporting date or the period covered, whichever is appropriate to that component of the financial statements; 4. Name of fund cluster; 5. The reporting currency; and 6. The level of rounding used in presenting amounts

Financial statements shall be presented ______

At least annually

When an entity’s reporting date changes and the annual financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:

1. The reason for using a longer or shorter period; and 2. The fact that comparative amounts for certain statements such as the statement of financial performance, statement of changes in net assets/equity, cash flow statement, and related notes are not entirely comparable.

It includes the preparation and submission of trial balances, financial statements, and other reports needed by fiscal and regulatory agencies.

Financial reporting

Sub-systems of financial reporting (2)

1. Preparation and submission of trial balances and other reports. 2. Preparation and submission of financial statements.

It is a listing of general ledger accounts with their corresponding debit and credit balances. - the accounts are listed in order in which they appear in the RCA, with the debit balances in the left column and the credit balances in the right column.

Trial Balance

When is the Trial Balance prepared and submitted?

Monthly, Quarterly, and Annually

What are the purposes of Trial Balance?

1. To prove the mathematical equality of the debits and credits after posting 2. To check the accuracy of the postings 3. To uncover errors in journalizing and posting 4. To serves as basis for the preparation of the financial statements

These are made at the end of an accounting period to allocate revenue and expenses to the period in which they are actually incurred.

Adjusting Journal Entries

What are the two main types of adjustments?

a. Accrued items b. Deferred items

These are adjusting entries for economic activities already undertaken but not yet recorded as an asset and revenue accounts or a liability and expense accounts.

Accrued Items

These are adjusting entries transferring data previously recorded in the asset account to the expense account or data previously recorded in the liability account to the revenue account.

Deferred items

Two types of Accrued Items adjustments

Asset/Revenue Adjustments Liability/Expense Adjustments

These involve assets and income, which exist at the end of the accounting period but are not yet recorded.

Asset/Revenue Adjustments

These involve liabilities and expenses, which already exist at the end of the accounting period but are not yet recorded.

Liability/Expense Account

These involve prepaid expenses, portion of which shall be recorded as expense of the agency at the end of the accounting period. These also include bad debts and depreciation.

Asset/Expense Adjustments

These involve unearned revenue where the agency receives the asset, usually cash, even before the income is actually earned.

Liability/Revenue Adjustments

Two types of Deferred Items adjsutments

a. Asset/Expense Adjustments b. Liability/Revenue Adjustments

It shall be prepared at the end of the year after preparing and posting the closing journal entries in the GJ and posting to the GL.

Post-Closing Trial Balance

These are structured representation of the financial position and financial performance of an entity.

Financial Statements

The responsibility for the prepration of the FSs rests with the following: a. for individual entity/department FSs b. for department entity FSs as a single entity

a.for individual entity/department FSs - the head of the entity/department central office (COf) or regional office (RO) or operating unit (OU) or his/her authorized representative jointly with the head of the finance/accounting division/unit; b. for department entity FSs as a single entity - the head of the entity/department COf jointly with the head of the finance unit

The Statement of Management Responsibility for Financial Statements shall be signed by ______

Director of Finance and Management Office or Comptrollership Office, of the Chief of Office, who has direct supervision and control over the agency's accounting and financial transactions, and the head of Agency or his/her representative.

Each entity of the National Government maintains a complete set of accounting books by FUND CLUSTER which is reconciled with the records of cash transactions maintained by the _____.

Bureau of Treasury

The ____ accounts for the cash, public debt, and related transactions of the NG.

Bureau of Treasury

Each entity maintains budget registries which are reconciled with the budget records maintained by the _____ and the Government Accountancy Sector (GAS), COA.

Department of Budget and Management

The ____ through the _____: 1. maintains budget records showing the overall approved budget of the NG and its execution/implementation 2. consolidates the FSs and budget accountability reports of all NGAs and the BTr with COA's records to come up with an Annual Financial Report for the NG as required in Sec. 4, Article IX-D of the 1987 Philippine Constitution; and 3. Prepare other financial reports required by law for submission to oversight agencies.

Commission on Audit; Government Accountancy Sector

This is a formal statement which shows the financial condition of the entity as at certain date. It shall be prepared from information taken directly from the year-end Post-Closing Trial Balance.

Statement of Financial Position/Balance Sheet/Statement of Assets and Liabilities

It presents only the major sub-classification of Statement of Financial Position accounts in the RCA. It shall be submitted at year-end to the concerned auditor.

Condensed Statement of Financial Position

It presents all Statement of Financial Position accounts in the RCA as a line item in the financial report. It shall be submitted at year-end to the Government Accountancy Sector, COA, as part of the year-end financial statements.

Detailed Statement of Financial Position

It shows the results of the operation/performance of the entity at the end of a particular period. It shall be prepared by the accounting unit from the information taken directly from Pre-Closing Trial Balance and shall be prepared in comparative detailed and comparative condensed format.

Statement of Financial Performance

Circumstances when particular items may be excluded from surplus or deficit for the current period:

1. The correction of prior period errors 2. The effect of changes in accounting policies 3. Gains or losses on measuring available-for-sale financial assets.

It shows the changes in equity between two accounting periods reflecting the increase or decrease in the entity's net assets during the year.

Statement of Changes in Net Assets/Equity

The Statement of Comparison of budget and Actual Amount shall present the following:

a. The original and final budget amount b. The actual amounts on a comparable basis; and c. By way of note disclosure, an explanation of the material differences bet. the budget and actual amounts, which are not included in the financial statements

This occur when the approved budget is prepared on a basis other than the accounting basis

Basis Differences

This occur when the budget period differs from the reporting period reflected in the FSs

Timing Differences

This occur when the budget omits program or entities that are part of the entity for which the FSs are prepared

Entity Differences

It summarizes the cash flows from operating, investing, and financing activities of an entity during a given period.

Statement of Cash Flows

Cash flow information provide users of the financial statements with a basis to assess: (2)

a. The ability of the entity to generate cash and cash equivalents, and b. the needs of the entity to utilize those cash flows

These are held for the purpose of meeting short term cash commitments rather than for investment or other purposes.

Cash equivalents

This method shows each major class of gross cash receipts and gross cash payments.

Direct method (operating cash flows)

This adjusts the accrual-based surplus or deficit for the effects of non-cash transactions.

Indirect method (Operating cash flows)

these are primarily derived form the principal cash-generating activities of the entity.

Cash flows from operating activities

It involves the acquisition and disposal of non-current assets and other investments not included in cash equivalent.

Investing Activities

These give a view on the extent to which outflows have been made for resources that are intended to contribute to the entity's future service delivery.

Information about cash flows arising from investing activities

These are activities concerning buildup of equity capital or borrowings of the entity.

Financing Activities

They provide additional information and help clarify the items presented in the financial statements. It provides narrative description or disaggregation of items in the financial statements and information about them that do not qualify for recognition.

Notes to Financial Statements

Those events, both favorable and unfavorable, that occur between the reporting date and the date when the financial statements are authorized for issue.

Events after the reporting date

Two types of events after the reporting date:

a. Adjusting events after the reporting date b. Non-adjusting events after the reporting date

Those that provide evidence of conditions that existed at the reporting date

Adjusting events after the reporting date

those that are indicative of conditions that arose after the reporting date

Non-adjusting events after the reporting date

These are errors committed and discovered within the same period. It shall be corrected by an adjusting entry, within the same year before the financial statements are authorized for issue.

Current period errors

These are omissions from, and misstatements in the entities' financial statements for one or more prior periods arising from failure to use or misuse of reliable information that: a. was available when FS for those periods were authorized for issue b. could reasonable be expected to have been obtained and taken into account into account in the preparation and presentation of those FS

Prior period errors

These are the financial statements that are required to be prepared at any given period or at a financial reporting period without closing the books of accounts.

Interim financial statements

What are the other reports that are to be submitted to GAS, COA, in addition to the components of financial statements? (3)

a. Pre-closing trial balance b. Post-closing c. Other schedules 1. Regional Breakdown of Income 2. Regional Breakdown of Expenses