Engineering Financial

Accounting

Engr. Keith Patrick Hernandez, CIE

Department of Industrial Engineering
 Learning Outcomes
• To describe the principles, historical
background of accounting.
• To explain the criteria of GAAP or General
Accepted Accounting Principles.
• To describe the types of accounting, and
elements of financial statement
• To explain the importance of financial
accounting to Industrial Engineers
 Introduction
• Accounting
– Is the system that measures business
activities, processes that information into
reports and communicates the result to
decision makers
– Relevant in all walks of life and it is absolutely
essential in the world of business.
– Called the language of business.
• Accountant
– The scorekeeper of business
 Development of Accounting
Primitive Accounting
• 8500 B.C the date archeologist have established for certain
clay tokens – cones, disk, spheres and pellets found in
Mesopotamia.
• Tokens represented such as commodities as sheep, bread, oil
etc.
• Tokens sealed in clay balls called bullae – which were broken
on delivery so the shipment could check the invoice.
Middle Ages
• 1340 AD when double entry record first appeared. Double
entry bookkeeping is not discovery of science; it is the
outcomed efforts to meet the changing necessities of trade.
Industrial Revolution and Corporate Organization
• 18th and mid 19th century revolution in England occurred,
changed the method of producing commercial goods from the
handicraft method to factory system.
• The specialized field of cost accounting emerged to meet this
needs for the analysis of various costs.
Information Age
• There is an abundance of accounting applications and
modules to suite the various business needs
• Introduction of E commerce bring another transformation in
field of accounting.
 Accountancy of the Philippines
• Accountancy in the Philippines was
recognized as profession last March 17,
1928 when Act No. 3105 was approved by
6th legislature, entitled “An Act Regulating
the Practice of Public Accounting; Creating
the Board of Accountancy; Providing for
Examination, for the Suspension or
Revocation of Certificates and for Other
Purposes”
 Forms of Business Organizations
• Sole Proprietorship
– This business organization has a single owner called the
proprietor who generally is also the manager.
• Partnership
– Is a business owned and operated by two or more persons who
bind themselves to contribute money, property or industry to
common fund with the intention of dividing the profits among
themselves.
• Corporation
– Owned by its stockholders
– It is an artificial being created by operation of law, having the
rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
 Activities Performed by
Business Organization
• Service
– Companies perform services for a fee (e.g law firms,
acctg. and audit firm)
• Merchandising
– Companies purchase goods that are ready for sale
and then sell these to customers (e.g car dealer,
clothing stores and supermarket)
• Manufacturing
– Companies buy raw materials convert them into
products and then sell the products to other
companies or to final consumers. (e.g. paper mills,
steel mills, car manufacturer and drug manufacturers)
• Micro Enterprise
– Enterprise are those with assets, before financing of
P1.5M or less and employ not more than 9 workers
• Small Enterprise
– An enterprise are those with assets before financing
of above P1.5M to P15M and employ 10 to 99
workers.
• Medium Enterprise
– Enterprise have assets before financing of above of
P15M to P100M and employ 100 to 199 workers.
 Definitions of Accounting
• Accounting
– is a service activity. Its function is to provide quantitative
information primarily in financial in nature, about economic
entities that is intended to be useful in making economic
decisions
– Process of indentifying, measuring and communicating
economic information to permit informed judgments and
decisions by users of the information.
– Art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and
events which are in part at least of financial character and
interpreting the result.
• Bookkeeping
– Is an accounting support function that involves the
systematic recording of business transaction in
financial terms.
• Accounting functions at a higher level or degree than
bookkeeping does
• Accountant
– Tend to focus on analyzing and interpreting
information
– Supervise the work of the bookkeeper and prepare
the financial statement and tax return.
 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

• Entity Concepts
– Most basic concept in accounting
– An accounting entity is an organization or a section of an
organization that stands apart from other organization and
individuals as a separate economic unit.
• Going Concern
– Financial statement are normally prepared on
the assumption that an enterprise is a going
concern and will continue in operation for the
foreseeable future.
– This assumption underlies the depreciation of
assets over their useful lives.
• Periodicity Concepts
– An entity’s life can be meaningfully subdivided into equal time
period for reporting purposes.

• Stable Monetary Unit Concepts

– The Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable.
• Accrual Basis
– Financial statement except for the cash flow
statement, are prepared on the accrual basis of
accounting in order to meet their objectives
– The effects of transaction and other events are
recognized when they occur and not as cash or its
equivalent is received or paid.
– Example:
A client paid the Sea Wind Resort in Boracay Island P7,000 on
April 8, 2000 for one day super deluxe accommodation on May
13, 2000. Under accrual basis of accounting, the reciept of
P7000 will be considered as revenues when business has
rendered its services on May 13.
• Relevance principle
– It results information that is meaningful and useful to
those who need to know something about certain
organization.
– To be useful information must be relevant to the decision making
needs of users.
– Confirmatory and predictive roles are principal ingredients of
relevance and are interrelated.
• Confirmatory roles – when it is used to confirm or correct
the decision maker’s earlier expectation.
• Predictive role – when it is used to make predictions of
future cash flows or income.
• Choice of Attributes – monetary attributes that could be
used in financial statements (e.g historical cost, current cost)
• Materiality
– Financial reporting is only concerned with information
that is significant enough to affect evaluations and
decisions.
– One that needs to be considered before considering
the other qualities of information.
– The information is material if its omission or
misstatement could influence the economic decisions
of users taken on the basis of the financial statement.
• Faithful representation
– To be reliable, the information must represent
faithfully the transactions and other events it
either purports to represent or could
reasonably be expected to represent.

• Prudence/ Conservatism
– It is the inclusion of a degree of caution in the
exercise of judgments needed in making the
estimates required under condition of uncertainty
such that assets or income are not overstated and
liabilities or expenses are not understate.
• Substance Over Form
– It is necessary that transactions and other
events are accounted for and presented in
accordance with their substance and
economic reality and not merely their legal
form.

• Understandability
– An essential quality of the information provided in
financial statements is that it is readily understandable
by users. Users are assumed to have a reasonable
knowledge of accounting, business and its economic
activities.
• Comparability
– Users must be able to compare the financial
statements of an enterprise over time in order to
identify trends in its financial position and
performance.

• Timeliness
– Accounting information is communicated early
enough to be used for the economic decisions
that it might influence.
– If there is undue delay in the reporting of
information, it may lose its relevance.
• Objectivity principle
– Accounting records and statements are based on the
most reliable data available so that they will be as
accurate and as useful as possible.

– Result information that is not influenced by the personal bias or

judgment of those who furnish it. It connotes reliability and
trustworthiness.

• Feasibility
– It can be implemented without undue complexity or cost.
• Historical Cost
–This principle states that acquired assets should be recorded at
their actual cost and not at what management thinks they are worth
as at reporting date.

• Revenue Recognition principle

–Revenue is to be recognized in the accounting period when goods
are delivered or services are rendered or performed.

• Adequate Disclosure
–Requires that all relevant information that would affect the users
understanding and assessment of the accounting.

• Consistency Principle
–The firm should use the same accounting method from period to
period to achieve comparability over time within a single enterprise
• Reliability
– To be useful, information must also be
reliable. Information has the quality of
reliability when its is free from material error
and bias and can be depended upon by users
to represent faithfully that which it either
purports to represent or could reasonably be
expected to represent.
• Neutrality
– Free from bias

• Completeness
– Information must be complete within the bounds of
materiality and cost. An omission can cause false or
misleading information and thus be unreliable and
deficient.

• Fair Presentation
– Financial statement are frequently described as
presenting fairly the financial position, performance
and changes in financial position of an enterprise.
 Specialized Accounting Services
• Auditing – is the accounting profession’s most significant service
to the public. It is an independent examination that ensures the
fairness and reliability of the reports that management submits to
users outside the business entity.
• Cost Accounting – deals with the collection, allocation and
control of the cost of producing specific goods and services.
• Financial Accounting – is focused on the recording of business
transactions and the periodic preparation of reports on financial
position and results of operations.
• Internal Auditing – is concerned with the examination of the
information system, records and operation of the entity to ensure
the effectiveness and efficiency of operations and integrity of
records.
• Government Accounting – is concerned with the identification
of the sources and uses of resources consistent with the
provisions of city, municipal, provincial or national laws.
• Tax Accounting – includes the preparation of tax
returns and the consideration of the tax consequences
of proposed business transaction.
• Management Consulting – is the catchall term that
describes the wide scope of advice CPA’s provide to
the business. Services provided include the installation
or modification of acctg. system, financial planning
models, inventory control system and etc.
• International Accounting – addresses the special
problems associated with the international trade of
multinational business organization.
 Accounting Standards in the
Philippines
• November 18, 1918, the Philippine Institute of
Certified Public Accountants (PICPA) created the
Accounting Standards Council (ASC) to establish and
improve accounting standards that will be generally
accepted in the Philippines.
• Creation of the Council received support of the following
– Securities and Exchange Commission
– Central Bank of the Philippines
– Professional Regulation Commission
– Financial Executives Institute of the Phil. (FINEX)
 Business Ethics
• White Collar crime – big sum of money are lost annually due
to fraud, embezzlement, theft of equipment and supplies, false
insurance claims, bribery, kickbacks and other schemes.
• Whistle blowing – refers to going to the authorities or the
media with proof that a company is engage in wrong doing.
• Conflict of interest – arise when a person must play two
conflicting roles in situation.
• Fiduciary responsibilities – are typically those that an
attorney, CPA, financial advisor or executor of an estate have
toward a client
• Sexual harassment – defined as unwanted repeated or
aggressive sexual commentary or advances of a sexual
nature toward another person.
• Discrimination – based on race, religion,
ethnicity, gender, age, marital status or
sexual preference is to be avoided on both
legal and ethical grounds
• International Accounting Standards Committee
(IASC)
– Was formed as a non profit corporation incorporated in the
State of Delaware, USA
– Is the parent entity of the International Accounting Standards
Board and independent accounting standard setter based in
London, UK
• International Accounting Standard Board (IASB)
– Independent private sector body. Its objective is to achieve
convergence in the accounting principles that are used by
businesses and other organizations for financial reporting
around the world.
 The Framework
• Framework for the preparation and
presentation of Financial Statements
– Sets out the concepts that underlie the
preparation and presentation of financial
statements for external users.
 Purpose of the Framework
• Assist the Accounting Standards Council (ASC) in developing
accounting standards that represent generally accepted accounting
principles in the Philippines.
• Assist the ASC in its review and adoption of existing International
Accounting standards.
• Assist preparers of financial statement in applying the Philippine
Accounting Standard and in dealing with topics that have yet to form
the subject of an ASC statement
• Assist auditors in forming an opinion as to whether financial
statements conforms with Philippine generally accepted accounting
principles.
• Assist users of financial statement in interpreting the information
contained in financial statements prepared in conformity with
Philippine generally accepted accounting principles
• Provide those who are interested in the work of ASC with
information about its approach to the formulation of Phil Acctg
Standard
Users and Information Needs
• Investors
– Need information to help them determine whether they
should buy hold or sell.
• Employees
– Are interested in information about the stability and
profitability of their employers.
• Lenders
– Are interested in information that enables them to
determine whether their loans and the related interest will
be paid when due.
• Suppliers and other trade creditors
– Are interested in information that enables them to
determine whether amount owing to them will be paid
when due.
• Customers
– Have an interest in information about the continuance of an
enterprise especially when they have a long term involvement
with or are dependent on the enterprise.
• Government and Agencies
– Are interested in the allocation of resources and therefore, the
activities of the enterprises. They also require information in
order tor regulate the activities of the enterprise, determine
taxation policies and as the basis for national income and similar
statistics.
• Public
– Financial statement may assist the public by providing
information about the trends and recent developments in the
prosperity of the enterprise and the range of its activities.
 Objective of Financial
Statements
• 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
decision.
• Financial statement also show the results
of the stewardship of management, that
is the accountability of management for
the resources entrusted to it by the
owners.
• The management of enterprise has the
primary responsibility for the preparation
and presentation the financial statements
of the enterprise.
 Financial Statements
• Balance Sheet
– Provides information about financial position.
• Income Statement and Statement of
changes in Equity
– Provide information about the financial
performance
• Cash Flow Statement
– Provide information on cash flows
 Elements of Financial
Statements
• Balance Sheet
– Measures the financial position of the
company: Assests, Liabilities and Equity
• Income and Expenses
– Elements directly related to the measurement
of performance in the income statement.
 Recognition of the Elements of
Financial Statements
• Recognition
– Is the process of incorporating in the balance sheet or
income statement an item that meets the definition of an
element and satisfied the criteria for recognition
– An item that meets the definition of an element should be
recognized if
• It is probable that any future economic benefit
associated with the item will flow to or from the
enterprise
• The item has a cost or value that can be measured with
reliability.
 Measurement of the Elements of
Financial Statements
• Measurement
– The process of determining the monetary
amounts at which the elements of the financial
statements are to be recognized and carried
in the balance sheet and income statement.
– The measurement basis most commonly
adopted by enterprise in preparing financial
statement is historical cost.
 Concept of Capital and Capital
Maintenance
• Financial concept of capital
– Such as invested money or invested purchasing power,
capital is synonymous with the net assets or equity of the
enterprise. Profit is earned only if the financial (or money
amount of the nets assets at the end of the period exceeds
the financial (or money) amount of net assets at the
beginning of the period
• Physical Concept
– Such as operating capability, capital is regarded as the
productive capacity of the enterprise base on units of
output per day.
 Why Industrial Engineers need Financial
Accounting?
• Cost Analysis: Industrial engineers often work on projects aimed at
optimizing processes, reducing waste, and increasing efficiency.
Understanding financial accounting helps them analyze the cost
structure of these processes and identify areas where cost reductions
or efficiency improvements can be made. This knowledge can be crucial
when making decisions about process redesign or investment in new
technology.
• Budgeting and Resource Allocation: Industrial engineers are often
involved in planning and budgeting for projects or production processes. A
solid grasp of financial accounting principles is essential for creating
accurate budgets, allocating resources effectively, and ensuring that
projects stay within budget constraints.
• Decision-Making: Industrial engineers frequently need to make decisions
that have financial implications. Whether it's choosing between different
manufacturing methods, equipment purchases, or process improvements,
having a basic understanding of financial accounting can help them
evaluate the financial impact of these decisions and make more
informed choices.
• Performance Measurement: Industrial engineers may be responsible for
evaluating the performance of a production line or a manufacturing process.
Financial accounting metrics such as cost per unit, return on investment
(ROI), and profitability ratios can be used to assess performance and
identify areas for improvement.
• Communication with Finance Teams: In many organizations, industrial
engineers collaborate with finance teams or professionals when
working on cost-saving or process improvement initiatives. Being able
to speak the language of finance and understand financial reports can
facilitate effective communication and collaboration between these
departments.
• Project Justification: When proposing new projects or process
changes, industrial engineers may need to provide a financial
justification. This involves estimating the costs and expected financial
benefits of the proposed changes, which requires a foundation in financial
accounting concepts.
• Compliance and Regulations: Industrial engineers working in regulated
industries may need to ensure that their processes and projects comply with
financial regulations and accounting standards. Understanding financial
accounting is essential for ensuring compliance and avoiding legal or
financial risks.
 Thank you!!!

“Be the best IE that you can be!” ☺