Objective of financial statements

The objective of general purpose financial statements is to

provide information about the financial position, financial
performance and cash flows of an entity that ts useful to a
wide range of users in making economic deciatons.
Financial statements also show the results of the stewardship
of management of the resources entrusted to it.
To meet this objective, financial statements provide information
about the following:
a. Assets
‘b. Liabilities
Equity
D.Income and expenses, including gains and losses
e. Contributions by and distributions to owners in their
capacity as owners
f. Cash flows
Such information, along with other information in the notes,
would assist users of financial statements in predicting the
entity's cash flows and in particular their timing and certainty.
However, financial statements do not provide all the
information that users may need to make economic decisions.
The reason is that the financial statements largely portray the
financial effects of past events and do not necessarily provide
nonfinancial information.
Financial position
The financial position comprises the assets, liabilitie
, se § an
equity of an entity at a particular momen oan tone. f
Specifically, financial position pertains to the liquidity,
aE ; Solvency,
and the need of the entity for additional financing. ,
This information is pictured in the statement of financia,
position. ,
Financial performance
The financial performance comprises the revenue, expenses
and net income or loss of an entity for a period of time.
Performance is the level of income earned by the entity through
the efficient and effective use of its resources. :
The financial performance of an entity is also known as results
of operations and is portrayed in the income statement and
statement of comprehensive income,
Cash flows
Cash flows are the cash receipts and cash payments arising
from the operating, investing and financing activities of the
entity.
The information about cash receipts and cash payments is
presented in the statement of cash flows.
Cash flow information is useful in assessing the ability of the
entity to generate cash and cash equivalents.
uh
a eet Bet

es a i lls lt liletin ilad some

nee seed .
Financial reporting
Financial reporting is the provision of financial information
about an entity to external users that ia useful to them in making
economic decisions and for assessing the effectiveness of the
entity's management.
The principal way of providing financial information to external
users is through the annual financial statements.
However, financial reporting encompasses not only financial
statements but also other means of communicating information
that relates directly or indirectly to the financial accounting
process.
Financial reports include not only financial statements but also
other information such as financial highlights, summary of
important financial figures, analysis of financial statements and
significant ratios.
Financial reports also include nonfinancial information such
as description of major products and a listing of corporate
officers and directors.
Objective of financial reporting
Under the Revised Conceptual Framework for Financial
Reporting, the objective of financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
Simply stated, the overall objective of financial reporting is
to provide information that is useftl for decision making.
Financial position
“ye ises the assets, liahi):
5 ition compris s,liabitg
The oe has cag at a particular moment in time. ieg s
equity ©
on pertains to the liquidity
. cial positi a ,
Specifically. finan dori’ dditional financing. oy
and the need of the entity
This information is picture
position.
Financial performance
mance comprises the revenue, expe
Dseg
The financial perfor
Joss of an entity for a period of tim,
and net income or
e level of income earned by the entity thro
Performance is th
ffective use of its resources. Ugh
the efficient and e
The financial performance of an entity is also known as resu|
of operations and is portrayed in the income statement a i
statement of comprehensive income.
Cash flows
Cash flows are the cash receipts and cash payments arising
from the operating, investing and financing activities of the
entity,
The information about cash receipts and cash payments is
presented in the statement of cash flows.
Cash flow information is useful in assessing the ability of the «
entity to generate cash and cash equivalents
d in the statement of fin /
: Aneja)
Financial reporting
g is the provision of financial information
ternal users that is useful to them in making
d for assessing the effectiveness of the
Financial reportin
about an entity to ex
economic decisions an
entity's management.
The principal way of providing financial information to external
users is through the annual financial statements.
However, financial reporting encompasses not only financial
statements but also other means of communicating information
that relates directly or indirectly to the financial accounting
process.
de not only financial statements but also
h as financial highlights, summary of
analysis of financial statements and
Financial reports inclu
other information suc
important financial figures,
significant ratios.
Financial reports also include nonfinancial information such
as description of major products and a listing of corporate
officers and directors.
Objective of financial reporting
Under the Revised Conceptual Framework for Financial
Reporting, the objective of financial reporting ts to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
Simply stated, the overall objective of financial reporting 1s
0 provide information that ts useful for decision making.
ers of financial reporting
e financial reporting is directed primarily
potential investors, lenders and other cael, 2
ry user group. ts
Target us
General purpos
the existing and :
which compose the prima
nd potential investors, lende
: : Ts
t critical and immediate and
The reason is that existing 4
neeq
other creditors have the mos
for information in financial reports.
As a matter of fact, the primary users of financial informatj,
are the parties that provide resources to the entity. 0
Moreover, information that meets the needs of the specifieg
primary users is likely to meet the needs of other users such
employees, customers, governments and their agencies, “s
The management of a reporting entity is also interested ;.
financial information about the entity. "
However, management need not rel
ver, ly on general purpo
financial reports because it is able to obtain or access additional
financial information internally.
Specific objectives of financial reporting
Specifically, the Revised Conceptual Framework for
Financial R p rtin
stat i jecti ves of
: e oO 5 g es the following obj
a. ide j i
7 penide information useful in making investing and
cistons about providing resources to the entity.
b. wy, ;
mee ie oie useful in assessing the cash flow
c. To Provide information about e ti } “
changes in resources and claime. ee satin and
mis
i
. oe

™)
¥
Limitations of financial reporting
General purpose financial reports do not and cannot
provide all of the information that existing and potential
investors, lenders and other creditors need.
b. General purpose financial reports are not designed to
show the value of a reporting entity but these reports
provide information to help the primary users estimate
the value of the entity. /
General purpose’ financial reports are intended to
mmon ‘information to users and cannot
e every specific request for information.
a.
c}
provide co
accommodat
d. Toa large extent, financial reports are based on estimate
and judgment rather than exact depiction. :
Responsibility for financial statements
The management of an entity has the primary responsibility for
the preparation and presentation of financial statements.
The Board of Directors in discharging its responsibilities
reviews and authorizes the financial statements for issue before
these are submitted to the shareholders of the entity.
Management is accountable for the safekeeping of the
resources and their proper, efficient and profitable use.
Shareholders are interested in information that helps them
assess how effectively management has fulfilled this role as
this is relevant to the decision concerning their investment
and the reappointment or replacement of management.
General features of financial statements
1. Fair presentation and compliance with PFRS
2. Going concern
Accrual basis
Materiality and aggregation
Cffsetting
Frequency of reporting
Conparative information
Coxsistency of presentation
02 I OTB fe
\ 7
nella
as
F air Presentation
The & oe
poctgnancial statements shall present fairly the financia|
‘on, financial performance and cash flows of an entity
eels in all circumstances, fair presentation is achieveg
the Pee statements are prepared in accordance with
ag ilippine Financial Reporting Standards which
Present the GAAP in the Philippines.
The eats ape ; ; .
we application of Philippine Financial Reporting Standards
vos nel disclosure when necessary, is presumed fa
Suit in financial statements that achieve a fair presentation
an a ae financial statements comply with PFRS shail
Make an explicit aid unreserved stalem |
pe ment of such compliance
as presentation is defined as faithful representation of the
rffecis of transactions and other events in accordance with
the. definitions and recognition criteria for assets, liabilities
Mmcouie and expenses laid down in the Conceptual Framework.
Fair ese ati 1 ity:
eat p ‘ talon reduires an entity:
epee ee .
a. Ieee and apply accounting policies in accordance with
4
wernt tS.
mab dere og .
Des hes EEATE information, including accounting policies, in a
manner that provides relevant and {ai :
n vv that faithfull : f
financial information. orepRSCIaE
rah) oirha® * Wa 1
ce. ‘To provide additional disclosures necessary for the users
fo understand the entity's financial statements :
f
a mu i ome rectify imappropriate accounting policies either
vw disclose of the accounting polici 5
1 : tele
explanatory vitormation, ® Raeowyenighacee

Departure from standard

mstances in which management
h a requirement in a standard
hall depart from that
latory Canceptual
hibit, such a
In the extremely rare circu
conchides that comphance wit
ing, the entity §
would be so mislead
requirement provided the relevant regu
Framework requires, or otherwise does not pro
departure.
‘Thus, an entity is permitted to depart from a standard:
In extremely rare circumstances.
a.
des that compliance with the
b. When management conclu
standard would be misleading.
When the departure from the standard is necessary to
achieve fair presentation.
When the regulatory Conceptual Framework requires or
otherwise does not prohibit such a departure.
In such circumstances, it is incumbent upon the entity to
disclose the following:
1. The management has concluded that the financial
statements present fairly the financial position, financial
performance and cash flows of the entity.
2. That the entity has complied with applicable standards
except that it has departed from a particular requirement
to achieve a fair presentation.
3. The title of the standard from which the entity has departed,
the nature of the departure, including the treatinent that
the standard would require, the reason why that treatment
would be so misleading and the treatment adopted.
4. For each period presented, the financial impact of the
departure on each item in the financial statements that
would have been reported in complying with the
requirement.
Going concern
s that the accounting entity is viewed
: cern mean. Zs .
Going cone on indefinitely in the absence of ey; den!
Ce
continuing in operati
to the contrary.
Going concern is also known as continuity assumption,
In other words, financial statements are prepared normal}
on the assumption that the entity shall continue in Operation
for the foreseeable future.
Thus, assets are normally recorded at original a qUisition
cost. As a rule, market values are ignored. ;
However, some standards require measurement of certain
assets at fair value.
Going concern is particularly relevant when management
shall make an estimate of the expected: outcome of future
events, such as the recoverability of accounts receivable and
the useful life of noncurrent assets.
This postulate is the very foundation of the cost principle.
Financial statements shall be prepared on a going concern
basis unless management intends to liquidate the entity or
cease trading or has no realistic option but to do so.
When upon assessment it becomes evident that’ there are
material uncertainties regarding the ability of the entity to
continue as a going concern, those uncertainties shall be
fully disclosed.
In making the assessment about the going concern
assumption, management shall take into account all available
information about the future which is at least twelve
months from the end of reporting period.
If the financial statements are not prepared on a going
concern basis, such fact shall be disclosed together with the
measurement basis and the reason therefor.
10

Accrual basis
An entity shall prepare the financial statements, using the
accrual basis of accounting except for cash flow information.
Under accrual basis, the effects of transactions and other
events are recognized when they occur and not as cash or
cash equivalent is received or paid, and they are recorded
and reported in the financial statements of the periods to
which they relate.
In the simplest language, accrual basis means that assets
are recognized when receivable rather than when physically
received, and liabilities are recognized payable rather than
when actually paid.
Accrual accounting means that income is recognized when
earned regardless of when received and expense is recognized
when incurred regardless of when paid.
The essence of accrual accounting is the recognition of
accounts receivable, accounts payable, prepaid expenses,
accrued expenses, deferred income, and accrued income.
Materiality and aggregation
An entity shall present separately each material class of
similar items.
An entity shall present separately items of dissimilar nature
or function unless they are immatenial.
Financial statements result from processing large number of
transactions or other events that are aggregated into classes
according to their nature or function.
The final stage in the process of aggregation and classification
is the presentation of condensed and classified data which form
line items in the financial statements.
For example, cash on hand, petty cash fund, cash in bank
and cash equivalent shall be presented as one item “cash and
‘cash equivalents”.
Finished goods, goods in process, raw materials and
manufacturing supplies are aggregated and presented as one
item “inventories”.
11
Welle. ia

If a line item is not individually material, it is ABEregate

with other items either in those statements or in the notes
For example, an investor's share in the net income of
associate is presented as a separate line item in th
statement,
. an
e Income
However, if this amount is not individually materi
; al, it
be aggregated with other income. May
Materiality dictates that "an entity need not provide q Specific
disclosure required by PFRS if the information js nat
material”.
When is an item material?
There is no strict or uniform rule for determining whether
an item is material or not.
Very oflen, this is dependent on good judgment, professional]
expertise and common sense.
However, a general guide may be given, to wit:
An item is material if knowledge of it would affect the decision
of the primary users of the financial statements.
For example, small expenditures for tools are often expensed
immediately rather than depreciated over their useful life
to save on clerical costs of recording depreciation.
In such a case, the effect on the financial statements is not
large enough to affect economic decision.
Another example is the common practice of large enn of
rounding amounts to the nearest thousand pesos in their
financial statements.
Small entities may round off to the nearest peso.
12
ey

ae

New definition of materiality

The IASB provided the following new definition of
materiality.
Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence the economic
decisions that primary users of general purpose financial
statements make on the basis of those statements which provide
financial information about a specific reporting entity.
In other words, an information is material if the omission,
misstatement and obscuring of the information could
reasonably, affect the econome decision of primary users.
The revised definition of materiality highlights three
important aspects:
a. Could reasonably be expected to influence
b. Obscuring information ,
c. Primary users
Could reasonably be expected to influence
The could reasonably be expected to influence threshold adds
an element of reasonability of financial information on which
economic decision is based.
By including the term could reasonably be expected to
influence in the new definition, material information shall
be limited to the economic decision of primary users rather
than to all users which is too broad in scope.
Moreover, the could reasonably be expected to influence
threshold insures that information capable of influencing
economic decision of the primary users shall be included in
the financial statements.
13
ring information
Obscu a new concept added to the ney,
Obscuring ne
a m —
definition © edit presenting oF communicating j,
1s On effect as omitting or misstating jp,
rmation is
ateriality-
Information rbs¢
would have @ simile
information.
Obscuring ee
information not re . .
i mation may be characterized by deliberg;,
ring informat '
Obseurine ‘ambiguity and absiruseness
tion means the presentation of financia}
dily understood or not clearly expresseq
Examples of obscured material information are:
is vague or unclear.
: The ae ton is scattered throughout the financia)
ts. . z
- ar items are aggregated inappropriately.
a Similar items are disaggregated inappropirately.
Primary users
iti soil ows the definition to
new definition of materiality narr
aes users who are primarily affected by general purpose
financial statements.
The primary users include the existing and potential investors,
lenders and other creditors.
The other users include the employees, customers,
government agencies and the public in general.
The new definition specified that only primary users of
financial statements are considered because these groups are
the users to whom, general purpose financial statements are
primarily directed.
Such primary users cannot require reporting entities to
provide information directly to them and therefore must rely
on general purpose financial reports for how much financial
information is needed.
14

er
er
Materiality is a relativity
Materiality of an item depends on relative size rather than
absolute size.
What is material for one entity may be immaterial for another.
An error of P100,000 in the financial statements of a
multinational entity may not be important but may be so
critical for a small] entity.
Factors of materiality
In the exercise of judgment in determining materiality, the
following factors may be considered:
a. Relative size of the item in relation to the total of the group
to which the item belongs.
For example, the amount of advertising in relation to total
distribution costs, the amount of office salaries to total
administrative expenses, the amount of prepaid expenses
to total current assets and the amount of leasehold
improvements to total property, plant and equipment.
b. Nature of the item — An item may be inherently material
because by its very nature it affects economic decision.
For example, the discovery of a P20,000 bribe is a material
event even for a very large entity.
Offsetting
Assets and liabilities, and income and expenses, when material,
shall not be offset against each other.
Offsetting may be done when it is re
uired or permitt
another PFRS. 4 permuited:/by
15
“kaw he
Examples of offsetting
Gains and losses on disposal of pr Sa ati are
reported by deducting from the proceees anaes S Amon
of the assets and the related selling exp
Expenditure related to a provision and reimbursed under
contractual arrangement with a third party may be Netteq
against the related reimbursement.
In other words, the expenditure related to a provision an
any reimbursement from a third party can be offset, and Only
the net expenditure is presented as expense.
In addition, gains and losses arising from a group of similay
transactions are reported on a net basis.
For example, foreign exchange gains and losses or gains and
losses arising from trading securities are netted against the
other.
However, if material, such gains and losses are reported
separately,
The measurement of assets net of valuation allowance is
permitted because technically this is not offsetting,
Thus, accounts receivable may be shown net of allowance for
doubtful accounts,
Frequency of reporting
An entity shall present a complete set of financial statements
at least annually.
When an entity changes the end
presents financial statements
than one vear, the entity shal
of the reporting period and
for a period longer or shorter
1 disclose:
a. The period covered by
the financial statements.
b.
The reason for using a longer or shorter period.
c. The fact that amo.
ints presented j i i
statements are not in the financial
nurely comparable.
16
7” ee
t

pic cit Dorada atta ath bid White Ag Micali, ae a a ma <=

Comparable information
Except when permitted or required otherwise by standard, an
entity shall disclose comparative information in respect of the
previous period for all amounts reported in the current period's
financial statements.
In other words, the financial statements of the current period
shall be presented with comparative figures of the financial
statements of the immediately preceding year.
Comparative information shall be included for narrative and
descriptive information when it is relevant to an understanding
of the current period's financial statements.
.
For example, details of a legal dispute, the outcome of which
was uncertain at the end of the preceding reporting period and
is yet to be resolved, are disclosed in the current period.
Users shall benefit from information that an uncertainty
existed at the end of the immediately preceding reporting
period, and steps have been taken during the current period
to resolve the uncertainty.
Third statement of financial position
A third statement of financial position is required when an
entity:
Applies an accounting policy retrospectively.
Makes retrospective restatement of items in the
financial statements.
c. Reclassifies items in the financial statements.
Under these circumstances, an entity shall present three
statements of financial position as at:
1, The end of the current period
2. The end of the previous period
3. The beginning of the earliest comparative period
17
ted
Consistency of presentation
Implicit in the presentation of comparable information jg the
Principle of consistency.
The principle of consistency requires that the account;
methods and practices shall be applied on a uniform basi,
from period to period.
The presentation and classification of financial stateme
; : ht
items shall be uniform from one accounting period to the
next.
An entity cannot use the FIFO method of inventor
in one year, the average method in the next
method in succeeding year and so on. .
If the FIFO method is adopted in one year, such method is
followed from year to year.
y valuation
year, another
Consistency is desirable and essential to -achieve
comparability of financial statementa.
However, consistency does not mean
: that no change in
accounting method can be made.
If the change will result to information that is faithfully
represented and more relevant to the users of
financial
statements, then such change should be made.
But there should be
full disclosure of the change and the
peso effect of the cha
nge.
A change in th
e presentation and c
the financial s
lassification of items in
tatements is allowed:
2 When it is required by another Standard.
‘, When a significant change j i
ge in the natur
of the entity will demo pF ee
\ nstrate a more appropriate revised
Presentation and classification. nee

Identification of financial statements

Financial statements shall be clearly identified and
distinguished from other information in the same published
document.
Each component of the financial statements shall be clearly
identified.
In addition, the following information shall be prominently
displayed:
a. The name of the reporting entity.
b. Whether the financial statements cover the individual
entity or a group of entities.
The end of the reporting period or
the period covered by
the financial statements or notes.
d. The presentation currency.
. The level of rounding used in the amounts in the financial
statements.
Financial statements are often made more understandable
by presenting information in thousands or millions of units
of the presentation currency,
This is acceptable as long as the level of rounding in
presentation is disclosed and relevant and material
information is not lost or omitted.
19
QUESTIONS
1. Define financial statements:
: ments.
2. Explain general purpose financial take
2 +)
3. What are the components of financial statements’
; ts.
4. Explain the objective of financial statemen
5. To meet the objective of financial statements, what
information is necessary?
6. Explain financial position, financial performance and
cash flows of an entity.
7. Explain financial reporting.
8. Explain the target users of financial reporting.
9, What is the objective of financial reporting under the
Conceptual Framework for Financial Reporting?
10. What are the specific objectives of financial reporting?
11. What are the limitations of financial reporting?
12. Explain the responsibility for the preparation and
presentation of financial statements.
13. What are the general features of financial statements?
14. Explain fair presentation of financial statements.
15. Specifically, what are the requirements of fair
presentation?
16. Explain the requirements when there is a departure from
an accounting standard.
20

. a t pbb ld eal tb aaa adh D8 D6 hhh 1 4 cease AO

17. Explain going concern.
18. Explain accrual basia of accounting.
19. Explain materiality and aggregation.
20, What is the new definition of materiality?
21. What are the factors in determining materiality?
22. Explain the rule on offsetting.
’ 93. Explain the frequency of reporting financial statements.
24. What are the necessary disclosures when an entity
presents financial statements for a period longer or
shorter than one year?
25. Explain the requirement for comparable information.
26. What are the circumstances when three statements of
financial position are required?
27. What is consistency of presentation?
28. When is a change in the presentation and classification
of items in the financial statements allowed?
29. What is identification of financial statements?
30. What information shall be prominently displayed in
identifying financial statements?
21
a i
PROBLEMS
problem !-
1 Multiple choice (PAS 1)
financl
1. A complete set es excep
following °°
+ of financial position’
t of changes in equity
‘ ial statements
of financial statements?
9, What is the objective
provide information about the financial
cial per ’
eG eet to a wide range of users
+ of comprehensive income
c. To present relevant, reliable, comparable an
understandable information
d. To prepare financial statements in accordance With
all applicable standards
3. The primary responsibility for the preparation of the
financial statements is reposed in
a. Management of the entity
b. Internal auditor
c. External auditor
d. Controller
4. The major financial statements include all, except
a. Statement of financial position
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
5. The major financial statements include all, except
a. Statement of financial position
b. Statement of changes in financial position
c. Statement of comprehensive income
d. Statement of changes in equity
22
al statements includes al} o¢ &
. a
ts and value added statemen,
Positig
Clan "
formance and changes in financiy
are a statement of financial position ang
——
se a

Problem 1-2 Multiple choice (IFRS)

1. When an entity changed the reporting period longer or
shorter than one year, an entity shall disclose all of the
following, except
a. Period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial
statements are not entirely comparable.
d. The fact that similar entities in the geographical area
in which the entity operates have done 80.
2. Which of the following is not a component of the financial
statements?
a. Statement of financial position
b. Statement of changes in equity
c. Report of board of directors
d. Notes to financial statements
3. Which of the following is included in a complete set of
financial statements? .
a. A statement by the board of directors of compliance
with local legislation
b. A statement of changes in equity
e. Statements of financial position for the last five years
d. Value added statement
4. Which of the following is included within the financial
statements?
a. A statement of retained earnings
b. Accounting policies
c. An auditor's report
d. Board of directors' report
5. An entity shall clearly identify each financial statement
and display all of the following, except
Name of the reporting entity.
Names of major shareholders of the entity.
The presentation currency. .
Whether the financial statements cover the individual
entity or a group of entities.
BP oP
23
j h
Problem 1-3 Multiple ¢
oice (PAS 1)
speorrect concerning faj,
is 1 5
1. Which statement 1! jinsemente!
presentation of financa
a.
b.
on requires the faithful representation op
the eet aes ions ‘and other events.
the effec!
t fairly the finang al
ama nts shall presen
EE Ee oul performance and cash flows of an
position,
entity. 5 ces, a fair presentation j,
irtually all circumstances, © ©
ah ae by compliance with applicable PFRS.
An entity whose financial statements comply with
PFRS shall not make an explicit and unreserveg
statement of such compliance in notes.
2. Which of the following cannot be considered fai;
Presentation of financial statements?
a,
To present information in a manner that Provides
relevant and faithfully represented financia]
information.
To provide additional disclosures when compliance
with specific PFRS is insufficient to understand the
financial position and financial performance.
To select and apply accounting policies in accordance
with applicable PFRS.
To rectify inappropriate accounting policies either by
disclosure of the accounting policies used or by notes
or explanatory information.
3. Which statement indicates a going concern?
a.
b.
c.
Management intends to liquidate the entity.
entity. ntends to cease the operations of the
Management h
the operations
None of these
48 no realisti
of the entity
would indicate 80ing concern
24

¢ alternative but to cease

4.An entity is permitted to depart from a particular

standard if all of the following conditions are satisfied,
except
a. In extremely rare circumstances.
b. When management concludes that compliance with
the standard would be misleading.
c. When the departure from the standard is necessary
to achieve fair presentation.
d.
When the Conceptual Framework for Financial
Reporting prohibits such a departure.
5. The effects of transactions and other events on economic
resources and claims are depicted in the periods in which
those effects occur even if the resulting cash receipts and
payments occur in a different period.
a.
b.
c.
d.
a
b
c.
d
Accrual accounting
Cash accounting
Modified acerual accounting
Modified cash accounting
. Financial statements must be prepared at least
. Annually
Quarterly
Semiannually
. Every two years
- Technically, offsetting in financial statements is
accomplished when
a.
b.
a9
The allowance for doubtful accounts is deducted from
accounts receivable,
The accumulated depreciation is deducted from
property, plant and equipment.
The total liabilities are deducted from total assets.
Gain or loss from disposal of noncurrent asset is
reported by deducting from the proceeds the carrying
amount of the asset and the related disposal cost.
25
period to the next.
a. Consistency of presentation
b. Materiality _
c. Aggregation
d. Comparability
9. Athird statement of financial position as at beginning of
" the earliest comparative period grenentalh Pe aiined
a. When an entity applies an accounting Policy
etrospectively. ;
b When vn entity makes a retrospective restatement of
"G j ] tements.
items in the financial sta emer .
c. When an entity reclassifies items 1n the financia|
statements. ;
d. Under all of these circumstances
10. Which statement in relation to financial statements in
incorrect?
financial statements do not and
* Cnet provide all of the information that primary
b. See ey gurnORe financial statements are designed
to show the value of the reporting entity.
c, General purpose financial statements are intended
to provide common information to users.
d. Financial statements are largely based on estimate
and judgment rather than exact depiction.
26
ARES EE
t
we
Problem 1-4 Multiple choice (IFRS)
1. Items of dissimilar nature or function
a. Must always be presented separately.
b. Must not be presented separately.
c. Must be presented separately if material,
d. Must be presented separately even if immaterial.
2. Materiality depends on
a. The nature of the omission, misstatement or obscured
information.
b. The absolute size of the omission or misstatement.
ec. The relative size and nature of the omission,
misstatement or obscured information.
d. The judgment of management.
3..An entity must disclose comparative information for
a. The previous comparable period for all amounts.
b. The previous comparable period for all amounts and
for all narrative and descriptive information.
c. The previous comparable period for all amounts and
for all narrative and descriptive information when it
is relevant to an understanding of the current period's
financial statements.
d. The previous two comparable periods for all amounts.
4. When the classification of items in the financial
statements is changed, the entity
a. Must not reclassifiy the comparative amounts.
b. Can choose whether or not to reclassify.
c. Must reclassify the comparative amounts unless it is
impracticable to do so.
d. Must reclassify the current year amounts only.
5. An entity shall present
a. The statement of cash flows more prominently.
b. The statement of financial position more prominently.
c. The income statement more prominently. ;
d. Each financial statement with equal prominence.
27
em ee Te |
on
Pr
oblem 1-5 Multiple choice (IAA)
iL, hexose
’ rall objectj . .
inform ation Dieetive of financial reporting is to proy; de
a. :
Abat js useful for decision making
bl About feo liabilities and equity
a ancial performance during a period
assesses performance of management
2. The objective o
Bettie ao sa, f financial reporting is based on
| sie need for conservatism
eerie ee on management stewardship
- Generally accepted accounting principles
The needs of the users of the information
3. The primary focus of financial reporting has been on
Seting the needs of which of the following groups?
eadiiecrme the yy pes
lutte :\Management *
. b. Existing and potential investors, lenders and other
hear “lereditors —
Hi ney! ‘National taxing authorities
2'Ieds «Jndependent CPAs
4; he primary objective of financial reporting is to provide
useful information to
[sro ad ale
a. Management
b. Capital providers
c. Regulatory body
"ni id,,-Gavernment
5, Which is an objective of financial reporting?
a. To provide information that is u i i
seful in makin
investing and credit decisions. °
b. To provide information that i
ide i is useful to m .
_.¢, "To provide information to investors. ani
d. To provide inf . ‘
conflicts. niormation about internal and external
28

6. Which is an objective of financial reporting?

a.
b.
c.
d.
Bo Sf
a.
b.
To provide information useful to management.
To identify nonfinancial transactions.
To provide information useful to assess the amount,
timing and uncertainty of prospective cash receipts.
To provide information that excludes claims.
An objective of financial reporting is to provide
Information about the investors in the entity.
Information about the liquidation value of the entity.
Information useful in assessing cash flow prospects.
Information that will attract new investors.
Assessing cash flow prospects is interpreted to mean
Cash basis accounting is preferred over accrual! basis.
Information about the financial effects of cash receipts
and cash payments is generally considered the best
indicator of ability to generate favorable cash flows.
Over the long run, trends in revenue and expenses
are generally more meaningful than trends in cash
receipts and disbursements.
All of the choices are correct regarding assessing cash
flow prospects.
29
ites -
li.
=
eee],
Proble
™m 1-6 Multiple choice (AICPA Adapted)
1. Durin riod
NEA per;
r part, ot mene an oe is under the direct
at i : ement, fi :
nsirectly provide information ee reporting
Alig
- Entity pe
aie rai and management performance
c. Entity Barton performance but not entity performa,,
Noatenncn mance but not management performa 2
entity nor management performance ee
On of
Will
2K . .
F eiiinaial reporting pertains to
eae business entities, rather than to industries
b. Aor ee or to members of society as consumer,
mene ' usiness entities and an economy or to
ae oe rs of society as consumers
: ndividual business entities and an economy rathe
ini a to industries or to consumers ‘ *
! Individual business entities, industries and ap
aq ele
eV ry
~Iqrer@eonomy rather than to members of society a
nod wtOnsumers °
ean Th dee
3. Which is. not an objective of financial reporting?
tlete wo :
‘a. ''Financial reporting: shall provide information about
resources, clai 1 i
(ew “them. - ims against resources and changes in
b. F inancial reporting shall provide information useful
in evaluating stewardship of management.
c. Financial reporting shall provide information useful
in investment, credit and similar decision.
d. Financial reporting shall provide information useful
in assessing cash flow prospects.
4. Which is not an objective of financial reporting?
a, To provide information about as ;
. se n
against those assets ts and claims
be Se nator useful in assessing cash flows
. To provide information useful i ;
a investing decisions in lending and
. To provide in ; a
ari batity formation about. the liquidation value of
30
Problem 1-7 Multiple choice (IAA)
1. Which would likely prepare
forecast for an entity based on emp
the most accurate financial
irical evidence?
sing statistical models
a. Investors u
ment
b. Corporate manor
c. Financial ana ysts ;
d. Independent certified public a
information in predicting future
ccountants
2, What is the most useful
cash flows?
out current cash flows
Current earnings based on accrual accounting
Information regarding the accounting policies used
Information regarding the results. obtained by using
a wide variety of accounting policies
Information ab
Bo Op
The accrual basis of accounting is most useful for
nt of income tax liability.
financial performance.
financial performance.
f dividends to shareholders.
a. Determining the amou
b. Predicting short-term
c. Predicting long-term
d. Determining the amount o.
4. In measuring financial performance, accrual accounting
is used because
a. Cash flows are considered less important.
b. It provides a better indication of ability to generate
cash flows than cash basis.
c. It recognizes revenue when cash is received and
expenses when cash is paid.
d. It is one of the implicit assumptions.
5. The financial statements prepared under GAAP
Do not articulate with one another.
Reflect a single measurement which is historical cost.
c. Are not highly precise because estimate and judgment
must be made.
d. Contain a limited number of future projections.
dad
31
CHAPTER 2
STATEMENT OF FINANCIAL POSITION
TECHNICAL KNOWLEDGE
To know the nature of a statement of financial position,
To understand the current and noncurrent classifications
of assets and liabilities.
To understand refinancing of a currently maturing debt,
To identify the components of equity in a corporation.
To identify the minimum line items in a statement of
financial position.
To be able to prepare a statement of financial position using
\,,,, Philippine format and IFRS format.
32
b

STATEMENT OF FINANCIAL POSITION

A statement of financial position is a formal statement showing
the three elements comprising financial Position, namely
assets, liabilities and equity.
Investors, creditors and other statement users analyze the
statement of financial position to evaluate such factors as
liquidity, soluency and the need of the entity for additional
financing.
Liquidity is the ability of the entity to meet currently
maturing obligations.
Solvency is the availability of cash over the longer term to
meet maturing obligations.
Information about liquidity and solvency is useful in
predicting the ability of the entity to comply with future
financial commitments and to pay dividends to shareholders.
Current and noncurrent distinction
PAS 1, paragraph 60, provides that an entity shall present
current and noncurrent assets, and current and noncurrent
liabilities, as separate classifications in the statement of financial
position.
When an entity supplies goods or services within a clearly
identifiable operating cycle the separate classification of
current and noncurrent assets and liabilities is a useful
information.
It highlights assets that are expected to be realized within
the current operating cycle, and liabilities that are due for
settlement within the same period.
For some entities, such as financial institutions, a
presentation of assets and liabilities in increasing or
decreasing liquidity provides information that is faithfully
represented and more relevant.
33
, ae
Assets
} Framework defines an asset asa pre sen
The Revised Conceplua :
trolled by the entity as @ result of Ris,
economic resource con
events.
An economie resource is a right that has the potential to Produce
economic benefits.
In layman's language and in short, assets are properties own, d
The essential characteristics of an asset are: .
a. The asset is controlled by the entity.
b. The asset is the result of a past event.
c. The asset has the potential to produce economic benefits
Current assets
PAS 1, paragraph 66, provides that an entity shall classify an
asset as current when: ,
a. The asset is cash or a cash equivalent unless the asset is
restricted to settle a liability for more than twelve months
after the reporting period. :
b. The entity holds the asset primarily for the purpose of §
trading.
c. The entity expects to realize the asset within twelve
months after the reporting period.
d. The entity expects to realize the asset or intends to sell
or consume it within the entity's normal operating cycle.
34

iw Po he aE Bob ee al pete ene

Cash and cash equivalents
This category includes cash on hand, petty cash fund, cash in
bank and any cash equivalent.
However, the cash and cash equivalent shall be unrestricted
in use, meaning available anytime for the payment of current
obligations.
PAS 7, paragraph 6, defines cash equivalents as short-term,
highly liquid investments that are readily convertible into known
amount of cash and which are subject to an insignificant risk of
changes in value.
For an investment to qualify as a cash equivalent, it must be
readily convertible into a known amount of cash and be subject
to an insignificant risk of changes in value.
Therefore, an investment normally qualifies as a cash equivalent
only when it has a short maturity of three months or less from
the date of acquisition.
Examples of cash equivalents
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months
before date of maturity
c. Three-month time deposit
d. Three-month money market instrument
Note that what is important is the date of purchase which
should be three months or less before maturity.
Thus, a BSP treasury bill that was purchased three years ago
cannot qualify as cash equivalent even if the remaining maturity
is three months or less. .
Equity securities cannot qualify as cash equivalent because
shares do not have a date of maturity.
However, preference shares with specified redemption date and
acquired three months before redemption date can qualify as
cash equivalents.
35
Held for trading wat
ides that a
‘. A of PFRS 9 provi t
eas held for trading when:
lly for the purpose of selling it in
d financial asge, :
Appen
classifie
It is acquired principa:
a.
the near term.
weg ition, it is part of a portfolio of identi,
b. On initial recogn hat are managed together atid leq
ancial instruments ¢ fe
which there is evidence of a recent actual patterp af
short-term profit taking.
It is a derivative, except for a derivative that is a financial
guarantee contract or a designated and an effectivg
hedging instrument.
Simply stated, financial assets held for trading or "tradin
securities" are debt and equity securities that are purchased with
the intent of selling them in the "near term" or very soon in oy, a
to generate short-term gains or profits.
Expected to be realized within twelve months
This category refers to short-term nontrade receivables,
Nontrade receivables represent claims arising from sources
other than the sale of merchandise or services in the ordinary
course of business.
Nontrade receivables are classified as current assets if
collectible within one year from the end of reporting period
the length of the operating cycle notwithstanding.
Otherwise, the nontrade receivables are classified as
noncurrent assets. .
Realized, sold or consumed
This current asset category refers to trade receivables,
inventories and prepayments.
ines pci are classified as Current assets because they are
pected to be realized, sold or consumed within the normal
Operating cycle or one year, whichever is longer.
36
pia a t@ ee ee Ee

(ia eee
Operating cycle
ia the time between the
erating cycle of an entity meen th
ea Pas and their realization in
acquisition of asseta for processing
cash or cash equivalente.
When the normal operating cycle ia not clearly identifiable,
the duration is assumed to be twelve months.
The operating cycle of a trading entity is the average period
of time that it takes to acquire the merchandise inventory,
sell the inventory to customers and ultimately collect cash
from the sale.
The operating cycle of a manufacturing entity 18 defined as
the period of time between acquisition of materials entering
into a process and their realization in cash or an instrument
that is readily convertible into cash.
The normal operating cycle is significant as it is the basis of
determining the proper classification of aaseta into either
current or noncurrent.
Presentation of current assets
Current assets are usually listed in the statement of financial
position in the order of liquidity.
PAS 1, paragraph 54, provides that as a minimum the line
items under current assets are:
a. Cash and cash equivalents
b. Financial assets at fair value through profit or loss, such
as trading securities and other investments in quoted
equity instruments
Trade and other receivables
Inventories
e. Prepaid expenses
a0
37
. ssets
Noncurrent a . | -
tion noncurrent assels 18 & residual definition,
The capt
PAS 1, parag
classify all other assets
assets”. -
. i in the definition of
shat is not included in t —
In other words we aluded All others are classified as noneurreny
anes "\auedinely noncurrent assets include the following:
assets. ,
i tes that “ an entity
h 66, simply sta ’
rapl not classified as current as NONCUrren,
a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Other noncurrent assets
PAS 1, paragraph 56, provides that deferred tax asset ig
classified as noncurrent asset.
Property, plant and equipment
i ty, plant and equipme
aragraph 6, defines proper '
PAS aibte ieee which are held by an entity for use ip
ene ee or supply of goods and services, for rental to others
on for administrative purposes, and are expected to be used
during more than one period.
=
The major characteristics of the definition of property, plant
and equipment are:
a. The property, plant and equipment are tangible assets,
meaning with physical substance. i
b. The property, plant and equipment are used in business,
, meaning used in production or supply of goods and
services, for rental purposes and for administrative
purposes.

Assets that are held for sale, including land, or held i

investment are not included in property, plant an
equipment.
—_-
c. The property, plant and equipment are expected to be
used over a period of more than one year.

38 I

Examples of property, plant and equipment

a. Land g. Motor vehicle
b. Land improvement h. Furniture and fixtures
c. Building i. Office equipment
d. Machinery . j. Patterns, molds and dies
e. Ship k. Tools
f. Aircraft l. Bearer plants
The old term for property, plant and equipment is fixed
assels.
Long-term investments
The International Accounting Standards Committee defines
investment as an asset held by an entity 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 entity such as those obtained through
trading relationship.
A current investment is an investment that is by nature
readily realizable and is intended to be held for not more
than one year.
A noncurrent or long-term investment is an investment other
than a current investment or investment intended to be held
for more than one year.
Examples of long-term investments
Investments in shares and bonds
Investments in subsidiaries
Investments in associates
Investments in funds such as
expansion fund and preference
Investment property
Cash surrender value of life insurance policy
g. Investment in joint venture
ae op
sinking fund, plant
share redemption fund
ho
39
2
Intangible assets
: defines an intangible gq
Ss 38, aragraph &, simply y Sse;
r A ‘dent if ble nonmonetary asset without physical subst Gna
Paragraph 8 further states that “the intangible asset mus
controlled by the entity as a result of past event and from Whie
future economic benefits are expected to flow to the entity»
Intangible assets do not have physical substance but ate
expected to provide future economic benefits to the entity
The essence of intangible assets is the future econom;,
benefits that will flow to the entity.
PAS 38, paragraph 12, provides that an intangible asgsq, is
identifiable:
a. When it is separable or capable of being sold, transferreg
licensed, rented or exchanged separate from the entity,
b. When it arises from contractual or other legal right,
The common examples of identifiable intangible agget,
include patent, franchise, copyright, trademark ang
computer software. 7
Anexample of an unidentifiable intangible asset is goodwill,
Other noncurrent assets
Other noncurrent assets are those assets that do not fit into
the definition of the previously mentioned noncurrent assets.
Examples of other noncurrent assets include long-term
advances to officers, directors, shareholders and employees,
or abandoned property and long-term refundable deposit.

Liabilities
Under the Revised Conceptual Framework, a ltability ta
defined as a present obligation of an entity to transfer an
economic resource as a result of past events.
The essential characteristics of a liability are:
a. The entity has a present obligation.
The entity liable must be identified.
It is not necessary that the payee or the entity to whom
the obligation is owed be identified.
b. The obligation is to transfer an economic resource.
This is the very heart of the definition of a liability.
Specifically, the obligation must be to pay cash, transfer
noncash asset or provide service at some future time.
c. The liability arises from past event.
This means that the liability is not recognized until it is
incurred.
Current liabilities
PAS 1, paragraph 69, provides that an entity shall classify a
liability as current when:
a. The entity expects to settle the liability within the entity's
normal operating cycle.
b. The entity holds the liability primarily for the purpose of
trading.
c. The liability is due to be settled within twelve months
after the reporting period.
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period.
41
Examples of
a. Trade payable
current liabilities
and accruals for employee ay
§
operating costs
i le.
the entity's normal operating eye :
s are classified as current ]j, 7
led more than twelve month, |:
aft,
Such operating ee
n if they are §
is end of reporting period.
Obligations that are not settled as part of the y
ee i
erating cycle but are due for settlement within 4 mal
op .
i . We]
months after the end of reporting period. i
, bligations are bank oy,
s of such current 0 e
a payable, income taxes, other nontrade
and current portion of noncurrent financial liab
drag
Payaby
ilities *
Financial liabilities held for trading are fin
liabilities that are incurred with an intent
repurchase them in the near term.
ANeig|
10n, to
An example of a financial liability held for trading jg a
quoted debt instrument that the issuer may buy back in
the near term depending on changes in fair value.
Long-term debt currently maturing
PAS 1, paragraph 72, provides that a liability which is duet,
be settled within twelve months after the end of reporting
period is classified as current, even if:
a.
However, if the refinancing on a long-term basis is completed
on or before the end
refinancing is an a
is classified as no
The original term was for a period longer than twelve .
months.
An agreement to refinance or to reschedule payment on
a long-term basis is completed after the end of reporting
period and before the financial statements are authorized —
for issue.
of the reporting period, the
djusting event and therefore the obligation
neurrent.
42
are part of the working capital re .
Discretion to refinance
PAS 1, paragraph 73, provides that if the oan hee the
discretion to refinance or rall over an ouhaaie a
twelve months after the reporting period under a Beioting
loan facility, the obligation is clasaified as pordirre
if it would otherwise be due within a shorter period.
Note that the refinancing or rolling over muat be at the
discretion of the entity.
i i i i ia not at the
Otherwise, if the refinancing or rolling over is n
discretion of the entity, the obligation is classified as a
‘current liability.
Covenants
Covenants are often attached to borrowing agreements which
represent undertakings by the borrower.
These covenants are actually restrictions on the borrower
as to undertaking further borrowings, paying dividends,
maintaining specified level of working capital and so forth.
Under these covenants, if certain conditions relating to the
borrower's financial situation are breached, the liability
becomes payable on demand.
PAS 1, paragraph 74, states that such a liability is classified
as current even if the lender thas agreed, after the end of
reporting period and before the statements are authorized
for issue, not to demand payment as a consequence of the
breach.
However, Paragraph 75 states that the liability is classified
as noncurrent if the lender has agreed on or before the end of
reporting period to provide a grace period ending at least
twelve months after the end of reporting period.
In this context.
th
le
, the Brace period is a period within which
e borrower can rectify the breach and during which the
nder cannot demand immediate payment.
43
iabilities
Presentation of current liab
soe
4, provides that as a minimum, the te
sncial position shall include the ti .
np
t liabilities:
PAS 1, paragraph 5
the statement of fin
en :
line items for curt
Trade and other payables
Current provisions
ing
t-term borrowin debt
Scent portion of long-term
Current tax liability
omer p
les" is a line j
" d other payab : ite
te “RoE payable, accrued interest oy
ayable and accrued expenses, .
The term
accounts payable,
payable, dividends P
No objection can be raised if a trade accounts ang ing
payable are separately presented.
Noncurrent liabilities
The term noncurrent liabilities is a residual definition,
that all liabilitie
aph 69, simply states dng
Be Eel ep cussat Jiabilities are classified as noncurzey,
liabilities.
Examples of noncurrent liabilities
Nonecurrent portion of long-term debt
Lease liability vitit
Deferred tax liability
Long-term obligations to entity officers
Long-term deferred revenue
oae of
PAS 1, paragraph 56, provides that deferred tax liability:
classified as noncurrent liability.
44
oo ea ee a
Working capital
The entity's liquidity ia of primary concern to moat statement
users and thia can be properly evaluated through the current
and noncurrent classifications.
For example, working capital is the exceas of current assets
over current liabilities and the working capital ratio ig
current assete divided by current liabilities.
Estimated liabilities
Estimated liabilities are obligations which exist at the end of
reporting period although the amount is not definite.
In many cases, the date when it is due or payable is not also
definite and in some instancea, the exact payee cannot be
identified or determined.
Common examples of estimated liabilities include estimated
liability for Premiums, estimated liability for warranties and
estimated liability under customer loyalty program.
Estimated liabilities may be classified either as current or
noncurrent:
Contingent liability
PAS 37, paragraph 10, defines a contingent liability in two ways:
A contingent liability is a possible obligation that arises from
past event and whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the entity.
A contingent liability 18 a present obligation that arises from
past event but is not recognized because:
a. It is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation.
b, The amount of the obligation cannot be measured reliably.
. . 465
Range of outcome
The range of outcome of uncertainty relating to future even,
may be described as:
a. Probable
The future event is likely to occur. As a rule of thumb
probable means more than 50% likely. ‘
b. Possible
The future event is less likely to occur. The Occurrence
is 50% or less.
c. Remote
The future event is least likely to occur or the chance of
the future event occurring is very slight.
The occurrence is 10% or less.
Treatment of contingent liability
A contingent liability is not recognized in the financial
statements. A contingent liability shall be disclosed only,
The required disclosures are:
a. Brief description of the nature of the contingent liability
b. An estimate of the financial effects
c. An indication of the uncertainties that exist
d. Possiblity of any reimbursement
If the contingent liability is remote, no disclosure is
necessary.
If the present obligation is probable and the amount can be
measured reliably, the obligation is not a contingent liability
but shall be recognized as a provision.
An expense and an estimated liability shall be recorded in
recognizing a provision.
Thus, a contingent liability is either probable or measurable
but not both.
46°
~<a!
bee i Ms octet Dads cae Alt ca ae i doe a OR

Contingent asset
PAS 37, paragraph 10, defines contingent anset as a possible
asset that arises from past event and whose existence will
be confirmed only by the occurrence or nonoccurrence of one
or more uncertain future events not wholly within the control
of the entity.
Contingent assets usually arise from unplanned or other
unexpected events that give rise to the possibility of an
inflow of economic benefits to the entity.
An example is a claim that an entity is pursuing through
legal processes when the outcome is uncertain.
Treatment of contingent asset
A contingent asset shall not be recognized because this may
result to recognition of income that may never be realized.
However, when the realization of income is virtually certain,
the related asset is no longer contingent asset and its
recognition is appropriate.
The outcome of a contingent asset is reported as follows:
a. A contingent asset is recognized in-the period when
realized.
b. A contingent asset is only disclosed when it is probable.
c. If the contingent asset is possible, no disclosure is
required.
d. Ifthe contingent asset is remote, no disclosure is required.
47
“i:
Equity
The term equity is the residual interest in the asse
ee ts
entity after deducting all of the liabilities. Of the
Simply stated, equity means net assets or total assets mi
liabilities. Tug
Equity is increased by profitable operations and contributi,
by owners. n
Conversely, equity is decreased by unprofitable Operation
and distribution to owners. 8
The terms used in reporting the equity of an entity depengj
i n
on the form of the entity are: g
a. Owner’s equity in a proprietorship
b. Partners’ equity in a partnership
c. Shareholders’ equity in a corporation
However, the term equity may simply be used for all business
entities.
Shareholders’ equity
Shareholders’ equity or stockholders’ equity is the residual
interest of owners in the net assets of a corporation measured
by the excess of assets over liabilities.
Generally, the elements constituting shareholders’ equity
with their equivalent [AS term are:
Philippine term IAS term
Capital stock Share capital
Subperibed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
48
Share capital and share premium
Share capital is the portion of the paid in capital representing the
total par or stated value of the shares ‘aguad. me
Subscribed share capital is the portion of the authorized
share capital that has heen subscribed but not yet fully paid
and therefore still unissued.
Subscriptions receivable shall preferably be reflected as a
deduction from the related subscribed share capital.
However, subscriptions receivable collectible within one year
shall be classified as current asset.
Share premium is the capital contributed by the shareholders
in excess of the par or stated value of the shares subscribed
and issued.
Retained earnings
Retained earnings represent the cumulative balance of periodic net
income or loss, dividend distributions, prior period errors, changes
in accounting policy and other capital adjustments.
Unappropriated retained earnings represent that portion
which is free and can be declared as dividends to the
shareholders.
Appropriated retained earnings represent that portion which
is restricted and therefore not available for any dividend
declaration.
A deficit is a debit balance in retained earnings. The deficit
is not presented as an asset but as deduction from
shareholders’ equity.
1
Revaluation surplus
Revaluation surplus is the excess of sound value over carrying
amount of the revalued asset.
Sound value is equal to the fair value or depreciated
replacement cost.
Depreciated replacement cost is equal to replacement cost
minus accumulated depreciation.
Carrying amount is computed by deducting accumulated
depreciation on cost from historical cost.
49
Treasury. shares
sare an entity's own shares that hay
Treasury share uired but not canceled. . 8 bee,
issued and then reacq
Treasury shares are usua'ly recorded at cost and are
h
recognized a9 an asset. an
The cost of treasury shares shall be reported as a det
from the shareholders’ equity. ded :
ired, the retained .
When treasury shares are acquired, inns
must be appropriated to the extent of the cost of the tres Neg
By
shares. %
Reserves
The term “reserves” is not officially defined in any
standard or in the Conceptual Framework.
Under international accounting standard, the use of equit,
reserves is based on whether a reserve is part of distributati,
equity or nondistributable equity.
Sccounting
Distributable equity is that portion that can be distributeg to
shareholders as dividends without impairing the legal capital
of the entity.
Distributable equity squarely pertains to unappropriateg
retained earnings.
Nondistributable equity is that portion that cannot be distributed
to the shareholders in any form during the lifetime of the entity.
Generally, nondistributable equity reserves represent those
items of equity other than the aggregate par or stated value
of share capital and retained earnings unappropriated.
Examples of reserves
a, Share premium reserve or additional paid in capital
b. Appropriation reserve or technically known as retained |.
earnings appropriated
Asset revaluation reserve or revaluation surplus
d. Other comprehensive income reserve
50
3

ia
\
r

s«
Line items ~ Statement of Financial Position
PAS 1, paragraph 44, states that aaa minimum, the statement
of financial position shall include the following dine ttems:
Cash and cash equivalents
Financial assets (other than 1, 3 and 6)
Trade and other receivables
Inventories
Property, plant and equipment
Investment in associates using the equity method
Intangible assets
Investment property
Biological assets
Total of assets classified as held for sale and assets
included in disposal group classified as held for sale
11. Trade and other payables
12. Current tax asset and liability
18. Deferred tax asset and deferred tax liability
14. Provisions
DeMIAgaawNr
-15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group held for sale
17. Noncontrolling interest
18. Share capital and reserves
The listing of the line items is not exclusive.
Paragraph 54 simply provides a list of items that are
sufficiently different in nature and function to warrant
separate presentation on the face of the statement of financial
position.
. Paragraph 55 provides that additional line items, headings
and subtotals shall be presented on the face of the statement
of financial position when such presentation is relevant to the
understanding of the financial position of an entity.
The judgment on whether additional line items are presented
separately is based on the assessment of the following:
a. Nature and liquidity of assets
b. Function of assets within the entity
c. Amount, nature and timing of liabilities
51
f statement of financial position
Forms 0 ’ a
Ke gormnat of a-statement of financial position ig a
The forma
specified in PAS 1. . |
In practice, there are two customary i in presenting the
statement of financial position, namely:
a, Report form
This form sets fort
downward sequence 0
b. Account form
As the title suggests, the presentation follows that of an
account, meaning, the assets are shown on the left 3i de
and the liabilities and equity on the right side of the
statement of financial position.
ial position is an expang;
ctually, the statement of financia tion i sion
tite accounting equation “asset equals liability plus equity”
h the three major sections j,
f assets, liabilities and equity,
i it the standard doe
PAS 1, paragraph 57, provides that the stan 8 not
presente the order or format in which line items are io be
presented.
Under Philippine jurisdiction, the common practice ig to
present in the statement of financial position current assets
before noncurrent assets, current liabilities before
noncurrent liabilities, and equity after liabilities.
Other formats may be equally appropriate provided the
distinction is clear in accordance with paragraph 7 of the
Preface to LAS L.
Note that the format of the statement of financial position as
illustrated in the appendix to IAS 1 is in the following order:
Noncurrent assets
Current assets
Equity
Noncurrent liabilities
Current liabilities
This may be the practice in other jurisdiction, like the United
Kingdom.
52

Illustration - report form

SAMPLAR COMPANY
Statement of Financial Position
December 31, 2020
ASSETS
Note
Current agseta:
“Cashandensh equivalenta (1) 600.000
Financial assets at fair value 200.000
Trade and other receivablee (2 700,000
Inventories (3) 906.000
Prepaid expenses (4) ___ 50.000
Total current aaseta 2,350,000
Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associate, at equity 1,000,000
Long-term inveatments (6) 5,100,000
Intangible asseta (7) 2.000.000
Other noncurrent assets (8) _ 100,000
Total noncurrent assets 13,200,000
Total assets 15,550,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade and other payables (9) 750,000
Note payable - short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities 1,400,000
Noncurrent liabilities:
Bonds payable - remaining portion 1,800,000
Note payable - due July 1, 2022 600,000
Deferred tax liability 100,000
Total noncurrent liabilities 2,500,000
Shareholders’ equity
unre capita »P100 par “8 : 000.500
Retained earnings A eso.bGp
Total shareholders’ equity 11,650,000
Total liabilities , i
ities and shareholders’ equity 15,550,000
53
“gf 4
Note 1 - Cash and cash equivalents
Cash on hand
Cash in bank
d
FE ee bill, purchased on December 1, 2020
and due March 1, 2021
Total cash and cash equivalents
Note 2 - Trade and other receivables
Accounts receivable
Allowance for doubtful accounts
Notes receivable ;
Accrued interest on notes receivable
Advances to employees, collectible currently
Total trade and other receivables
Note 3- Inventories
Finished goods
Goods in process
Raw materials
Manufacturing supplies
Total inventories
Note 4- Prepaid expenses
Office supplies unused
Prepaid insurance
Total prepaid expenses
Note 5 - Property, plant and equipment
Land
Building
Machinery and equipment
Furniture and fixtures
Patterns, molds, dies and tools, net
Total
Accumulated depreciation
Carrying amount
54
1,500,000
4,500,000
1,000,000
300,000
100,000
7,400,000
(2,400,000)
5,000,000
Accumulated depreciation:
Building
Machinery and equipment
Furniture and fixtures
Total accumulated depreciation
Note 6 - Long-term investments
Plant expansion fund
Financial assets at amortized cost
Cash surrender value
Total other long-term investments
Note 7 - Intangible assets
Patent
Trademark
Total intangible assets
Note 8 - Other noncurrent assets
Long-term refundable deposit
Long-term advances to officers
Total other noncurrent assets
Note 9 - Trade and other payables
Accounts payable
Notes payable
Accrued interest on note payable
Income tax payable
Dividends payable
Accrued expenses
Total trade and other payables
Note 10 - Reserves
Share premium
Retained earnings appropriated for contingencies
Total reserves
55
190) 000
350 000
__156,.000
2,460,000
2,000,000
3,000,000
100,000
5.100.000
500,000
1,500,000
2,000.000
20,000
80,000
100.000

2,000,000
1,000,000
3,000,000
Ilustration — account form
SAMPLAR COMPANY
Statement of Financial Position IHustration - United Kingdom Style
December 31, 2088 SAMPLAR COMPANY
LIABILITIES Statement of Financial Position
ASSETS a) AND EQuiny December 31, 2020
Current rssets: Current liabilities:
Cash and cash equivalents 500,000 Trade and other Payables 7 ASSETS
Financial assets at fair value 200,000 Note payable - short-term - ; t
Trade and other receivables 700,000 debt 4 oncurrent asset. :
00.06 Property, plantandequipment 5,000,000
7 t 0 #
Inventories pone Curren ‘Portion of bonds Investment in associates 1,000,000
Prepaid expenses ___50,000 Ce co: 200, Long-term investments 5,100,000
Total current assets =—2,350,000 Warranty lability 50,00, : Intangible assets
2,000,000
Total current liabilities 1.400 og, Other noncurrent assets 100,000 = =13,200,000
ae =
Noncurrent assets: Noncurrent liabilities: Current assets: :
d Bond simagcnan 5 Cash and cash equivalents 500,000
Property, plant am ones payable-remaining Financial assets at fair value. 200,000
equipment 5,000,000 portion 1,800,099 I Trade and other receivables 700.000
Investment in associates 1,000,000 Note payable-due duly 1, Inventories 900,000
Long-term investments 5,100,000 2022 600,09 Prepaid expenses ___ 50,000 _2,350.000
Intangible assets 2,000,000 Deferred tax liability 100.0 : Total assets 15,550,000
Other noncurrent assets 100,000 Total noncurrent ~~~ : TO
Total noncurrent assets 13,200,000 liabilities 2,500,009 EQUITY AND LIABILITIES
uity: _——
a capital, P100 Kiquity- ;
5 Par 5,000,009 Share capital 5,000.000
eserves 3,000,000 Reserves 3,000,000
Retained earnings 3,650,000 Retained earnings 3,650,000 =‘ 11,650,000
2.650.000 SS
Total equi ‘
olahequity 11,650,000 Noncurrent liabilities:
Total aascta 15,550,000 Total liabilities and equity 15,550,000 Bonds payable-
remaining portion _ 1,800,000
SS oe —=— Note payable — due July 1, 2022 600,000
Deferred tax liability 100,000 2,500,000
- | Current liabilities: es
Trade and other payables 750,000
Note payable ~ short-term 400,000
: Current portion of bonds payable 200,000
i Warranty liability 50,000 1,400,000
| Total liabilities 3,900,000
; Total equity and liabilities 15,550,000
4
} 57
56
QUESTIONS
financial position.
1. Define a statement of |
sets and liabilitie, ‘
jon of as
‘ tatl
2. Explain the presen al position.
statement of financi
3. Define assets.
haracteristics of assets?
4. What are the essential ¢
5. Define current assets.
6. Explain briefly an operating cycle.
e items that should be shown ik,
7, What are the lin
current assets on the face of the statement of finang; F
position?
8. Define noncurrent assets.
9. Define property, plant and equipment.
10. Define investments.
11. Define intangible assets.
12. Define other noncurrent assets.
13. Define liabilities.
14. What are the essential characteristics of liabilities?
15. Define current liabilities.
16. Explain fully the treatment of currently maturin
long-term debt.
17. What are covenants?
58
Be ee
cok BT met
18. Explain the classification of a liability if the related
covenants are breached.
e items that should be shown under
19. What are the lin
f the statement of financial
current liabilities on the face o'
position?
20. Define noncurrent liabilities.
21. What is working capital?
22 What are estimated liabilities?
23. Define a contingent liability.
24. Explain the treatment of a contingent liability.
25. Define a contingent asset.
26. Explain the treatment of a contingent asset.
27. Define equity.
28. What are the components of shareholders' equity?
29. Explain share capital, subscribed share capital and share
premium.
30. Explain treasury shares,
31. Explain retained earnings.
32. Explain revaluation surplus. °
33. Discuss the meaning of the term reserves.
34. What are the line items that are required to be shown on
the face of the statement of financial position?
35. Explain the forms of statement of financial position.
59
PROBLEMS
Problem 2-1 (IAA) ‘ng inf .
Company provided the following information 9,
Dilemma
ber 31, 2020:
Decem 800.000
h 00
eines receivable ii 50.000
Allowance for doubtful accoun 160,009
Prepaid expenses ~ 1,000,009
Inventory : 690,000
pinienete assets at fair value 5 ocr
Lan ‘ :000,000
Building in process i eon.c0p
ten < : ’
Machines and equipment 300 ie
Accumulated depreciation 200.000
Discount on bonds payable 900,000
Accounts payable 150,000
Accrued expenses 250,000
Note payable due July 1, 2022 2,000,000
Bonds paya oY 3,000,000
Share capital — ; 4,000,000
Retained earning: 150,000
Retained earnings appropriated for contingencies
i i i include Dilemma
* The financial assets at fair value inc
Company shares acquired at cost of P250,000.
* The bonds pay 10% interest semiannually on April 1 and
Sciher 1 and mature on April 1, 2023. No interest has
been accrued on the bonds.
* Forty thousand shares, P100 par, are authorized, of which
30,000 shares are issued including 2,000 shares in the
treasury.
*. The retained earnings appropriated balance of P150,000 was
created in anticipation for the result of a pending lawsuit.
Shortly after the end of reporting period, the suit was
amicably settled and the entity paid P100,000.
Required:
Prepare statement of financial position,
60
carer rss UmD,TOUmUlUU ee ee” |

Problem 2-2 (LAA)

Socorro Company provided the following information on
December 31, 2020:
Current assets 3,100,000 Current liabilities 1,000,000
Other assets 5,900,000 Longterm habilities = 1,000,000
Capital 7,000,000
Cash (including P200,000 invested in money market
and restricted foreign deposit of P300,000) 1,000,000
Land held for undetermined use 506,000
Accounts receivable less allowance of P50,000 700.000
Inventories 600.000
Socorro Corporation share capital, at cost __ 300.000
Total current assets 3,100,000
Store supplies 50,000
Building less allowance of P500,000 3,000.000
Equipment less allowance of P250,000 750,000
Financial assets at amortized cost 1,000,000
Trademark 300,000
Advances to officers-indefinite repayment 150,000
Patent 250,000
Land 400,000
Total other assets 5,900,000
Accounts payable 500,000
Note payable, due December 31, 2021 100,000
Income tax payable 150,000
Share premium 250,000
Total current liabilities 1,000.000
Unearned leasehold income (five years starting 2021 350,000
Stock dividend payable 150,000
Serial bonds payable (P100,000 maturing annually) 500,000
Total long-term liabilities 1,000,000
Retained earnings 1,500,000
Share capital, P100 par 5,000,000
Retained earnings appropriated for plant expansion 500,000
Total capital 7,000,000
Required:
Prepare statement of financial position with supporting
notes and computations.
61
EE he fin tlie a a oh lll th an i All
Problem 2-3 (IAA)
Magna Company report
financial position on Decem
ed the following statemen,
ber 31, 2020. of Problem 2-4 (AICPA Adapted)
Current liabilities 1,500.09,
Boracay Com
Pany prepared the following conden
statement of financial position on December 33, 2020. ned
ee ee

2,000,000 Set acageits

poe 400,000 Long term liabilities 2,000,004
Tangible assets 7,150,000 Equity 8,450,009 Current assets
Intangible assets __ 400,000 ——_. Current liabilities + 500 ban
9,950,008 2.950.009 eae capital 2 500,000
‘ a other assetg ee
: ference share capital, no par value, P5 , : 1,800,000
° EE ae eed 300,000 shares, issued 150,000 share ot - va s eer Plus other assets
4.300.000
P1,000,000, and ordinary share capiras peo par value edue other liabilities __ 100,000
authorized 400,000 shares, issue 1000 shares of P30 p¢, Metasnaets 4,200,000
share. oss Money market placement — three month
Tangible assets include building P5,000,000 less accumulate Cash in bank ° ropane
depreciation P1,600,000, equipment P1,400,000 legs Accounts receivable pe oon
accumulated depreciation P400,000, land P1,250,000, and Notes receivable sore
land held for future plant site P1,500,000. paniacicial assets at fair value 400.000
‘ ‘ : Aventory 1,300,000
urrent assets include: Cash P400,000, accounts receivable Goodwill rade,
eR 000 less P50,000 for allowance for doubtful accounts oodw —! 00.000
; and prepaid expenses P100,000, Total current assets 4,000.000
The inventory account was found to include the cost of office
inventories P800,000,
de the cash surrender value of a lif,
[ tments inclu
etait contract P50,000, investment in SeCUrities,
short-term, P100,000, and long-term, P250,000.
clude a franchise P100,000, goodwil] |
ts in
Intangible assets on bonds payable P100,000.
P200,000 and discoun
include accounts payable P400,000, notes
jabilities
Current a e eon debt P450,000, and long-term P300,000, .
le-s ae : :
aye ble P150,000, and appropriation for contingencies ,
P200,000. |
bilities comprised solely of 12% bonds ©
Long-term lia
payable due on December 31, 2023.
Required:
supplies of P50,000 and office equipment acquired
of 2020 at a cost of P250,000. quip cquired at the end
Other assets included land and building acquired on January
1, 2019 for P4,000,000, less mortgage of P2,000,000 and
accrued interest on the mortgage of P200,000.
At the time of purchase, the land was worth P1,000,000. The
building on December 31, 2020 has a remaining life of 18 years.
Current liabilities represented balances that were pavable to trade
creditors. Other liabilities consisted of withholding tax pavable.
However, no recognition was given to accrued salaries of P250,000.
The entity was originally organized in 2019 when 30,000
ordinary shares with par value of P100 were issued in
exchange for assets with fair value of P3,200,000.
Required:
Prepare a statement of financial position.
Prepare in good form a properly classified statement of
financial position with appropriate notes.
63

62
Es
- ded the following statement of Financia |
Problem 2-5 aaa)
; d
Dakak Company ber 31, 2020:
position on Current liabilities 2,500
me 909
.000 iabilities 2,000
ts 2,700 Other liabi , 00g
curentanm Sop an0 Oe, 0 8
_—_— 9,300
9,300,000 ——
iscloses the following:
. rent assets disc
* Analysis of cur
j 500.09
uivalents OO
Carel cash fe held for trading 7000
aroun receivable 850 004
Inventories a
2,700,009
* Other assets include:
Property, plant and equipment, cost P6,000,000 3 000,009
s to subsidiary 250,009
teil recorded on the books to cancel losses
incurred by the entity in prior years —350,000
8.600.009
* Current liabilities include:
Accrued expenses oan
i ' deposit .
Ad Tanne bern ottieey; not payable currently 200,000
Accounts payable 1,000,000
Note payable-bank due December 31, 2022 _ 800,000
2,500,000
* Other liabilities include:
Bonds payable in annual installment of P500,000 2,000,000
Share capital, 50.000 shares, P100 par, was originally —
issued and credited for a total consideration of P5,500.000
but the losses of the entity for past years were charged
against the share capital balance.
|
Required: |
Prepare a properly classified statement of financial position. |
64

Problem 2-6 (IFRS)

Darwin Company provided the following information at
year-end:
Cash 1,500,000
Accounts receivable
1,200,000
Inventory, including inventory expected in the ordinary
course of operations to be sold beyond 12 months
amounting to P700,000
1,000,000
Financial asset held for trading 300,000
Equity investment at fair value through other
comprehensive income 800,000
Equipment held for sale 2,000,000
Deferred tax asset 150,000
What amount should be reported as total current assets at
year-end?
a. 6,000,000
b. 4,000,000
c. 6,800,000
d. 4,800,000
Problem 2-7 (AICPA Adapted)
At year-end, the current assets of Hazel Company revealed
cash and cash equivalents of P700,000, accounts receivable of
P1,200,000 and inventories of P600,000. The examination of
accounts receivable disclosed the following: :
Trade accounts
930,000
Allowance for doubtful accounts { 20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Hazel
on consignment at 130% of cost and not
included in ending inventory 260,000
Total accounts receivable 1,200,000
What total amount should be reported as current assets at
year-end?
2,412,000
2,440,000
2,240,000
2,500,000
ao op
65
m 2-8 (AICPA Adapted)
Proble
the following current aage
Petite Company reported 7 .
December 31, 2020:
5,000, 004
Cash be
cea en goods received on ea
siepaah La recindi ng a deposit of i made 009
on inventory to be delivered in 18 months 150
Total current assets 7980 00
Cait ae SEE ots payable in 2022 Toop
Cash held to pay value added taxes 500,000
Total cash 800,00
What total amount of current assets should be reported op
December 31, 2020?
6,750,000
6,700,000
7,700,000
7,750,000
Problem 2-9 (AICPA Adapted)
At the beginning of current year, Rice Company was
incorporated with P5,000,000 from the issuance of share
capital and borrowed funds of P1,500,000. During the first
year, net income was P2,500,000.
On December 15, the entity paid a P500,000 cash dividend.
On December 31, the liabilities had increased to
P 1,800,000.
What amount should be reported as total assets at year-end?
6,500,000
9,300,000
8,800,000
6,800,000
Boop
aoe
66
ade
ee Pt eee
7 dh ind at be OE
be a cee oe mean ll
Problem 2-10 (AICPA Adapted)
Arabian Company reported the following at year-end:
cs suo
Accounts receivable 500,
Notes receivable, net of discounted note P500,000 oon eco
Inventory 000,
18,000,000
An analysis disclosed that accounts receivable comprised the
following:
Trade accounts receivable 5.000.000
Allowance for doubtful accounts ( 500,000)
Selling price of Arabian Company's unsold goods sent
to Tar Company on consignment at 150% of cost
and excluded from Arabian’s ending inventory 3,000,000
7,500,000
What amount should be reported as total current assets at
year-end?
a. 17,000,000
b. 17,500,000
c. 15,000,000
d. 16,500,000
_ Problem 2-11 (AICPA Adapted)
At the beginning of current year, Mirr Company was
incorporated with proceeds from the issuance of P7,500,000
in share capital and borrowed funds of P1,100,000.
During the first year, revenue from sales and consulting
amounted to P8,200,000, and operating costs and expenses
totaled P6,400,000.
On December 15, the entity declared a P300,000 dividend,
payable to shareholders on January 15 of next year. The
liabilities increased to P2,000,000 by December 31.
What amount should be reported as total assets at year-end?
a. 11,000,000
b. 11,300,000
ce. 10,100,000
d. 12,100,000
67
dl
12 (AICPA Adapted)
2- .
Problem reported the following current assets m
ny
East Compa ‘
year-end: $5
000,099
its receivable 200 no
Inventory ~ 200.09
Prepaid insurance sae
current assets 2.200.009
Total aan
, accounts 200 (00
Paploscce account-current epee
Advances tocubsidiany ats ( ue
Allowance tothe not collectible currently 31,000,099
Subscription me
Total accounts receivable 3.000099
‘ted as current asset
What total amount should be reporte at
year-end? .
a. 8,000,000
b, 9,500,000
c. 8,500,000
d. 9,000,000 .
Problem 2-13 (AICPA Adapted)
Gar Company reported the following account balances on
December 31, 2020:
Accounts payable accor
Bonds payable Gt bor
Premium on bonds payable cen
Deferred tax liability Te
Dividend payable aoniaee
Income tax payable ue
Note payable, due December 31, 2021 :
On December 31, 2020, what total amount should be reported
as current liabilities?
a. 7,100,000
b. 4,300,000
c. 3,900,000
d. 4,100,000
68

Problem 2-14 (PHILCPA Adapted)

Burma Company disclosed the following liabilities:
Accounts payable, after deducting debit balances
in suppliers’ accounts amounting to P100,000
4,000,000
Accrued expenses 1,500,000
Credit balances of customers’ accounte 500,000
Share dividend payable 1,000,000
Claims for increase in wages and allowance by
employees, covered ina pending lawauit 400,000
Estimated expenses in redeeming prize coupons 600,000
What total amount should be reported as current
liabilities?
6,700,000
6,600,000
7,100,000
7,700,000
poop
Problem 2-15 (AICPA Adapted)
Brite Company provided the following data on December
31, 2020: ,
Accounts payable 550,000
Note payable, 8% unsecured, due July 1, 2021 4,000.000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Bonds payable, 7%, due March 31, 2021 5,000,000
Premium on bonds payable 500,000
The contingent liability is an accrual for possible loss on a
P1,000,000 lawsuit filed against the entity.
The deferred tax liability is not related to an asset for
financial reporting and is expected to reverse in 2021.
When total amount should be reported as current liabilities
on December 31, 2020?
a, 10,350,000
b. 10,150,000
c. 10,400,000
d. 10,950,000
69
dapted)
16 (AICPA A «eee
Problem 2-16 parted the following liability balance, on
Mazda Company "©
December 31, 20 2019,
10% note payable issued an Ochna " 2,000,099
. tober 1, 2U=
maturing Octo hen March 1, 2019, 4, 08
te payable is a
eae on March 1, 2021
nancial statements were issued on March a1,
The 2020 fi
2021. bl .
the 10% note payable, the en,
Under the loan agreement 10" the obligation for at least twe),”
discretion to reft
hae after December 31, 2020.
the entire P4,000,000 balance of the 124,
1, i
or eae aes refinanced through issuance ofa long-tery
obligation payable lump sum. _*
What amount of the notes payable should be classifieg i
current on December 31, 2020?
a. 6,000,000
b. 4,000,000
c. 2,000,000
d. 0 .
Problem 2-17 (AICPA Adapted)
Willem Company reported the following on December 3},
2020:
Accounts payable | 2,000,000
Short-term borrowings 1.500, 00
Bonds payable due 2022 000.000
Discount on bonds payable ; ‘ 5 500,000
Mortgage payable, current portion P500,00 a 00
Bank loan, due June 30, 2021
The P1,000,000 bank loan was refinanced with a 5-year loan
on December 31, 2020. The financial statements were issued
March 1, 2021. /
What total amount should be reported as current liabilities
on December 31, 2020?
7,500,000
5,000,000
8,500,000
4,000,000
Boop
70
pra ae Bote eo + he

ae: Al eS a a Od, BE Be eee

wh Hoan, Ue des cnet oe = ates = a (a i A
Problem 2-18 (AICPA Adapted)
Ronna Company provided the following information on
December 31, 2020:
Accounts payable, net of creditors’ debit
balances P200,000 2,000.000
Accrued expenses 800.000
Bonds payable due December 31, 2022 4,500.000
Premium on bonds payable 500.000
Deferred tax liability 500,000
Income tax payable 1,100,000
Cash dividend payable 600.000
Share dividend payable 400,000
Note payable - 6%, due March 1, 2021 1,500,000
Note payable — 8%, due October 1, 2021 1,000,000
The financial statements for 2020 were issued on March 31,
2021.
On December 31, 2020, the 6% note payable was
refinanced on a long-term basis.
Under the loan agreement for the 8% note payable, the entity
has the discretion to refinance the obligation for at least
twelve months after December 31, 2020.
1. What amount should be reported as total current
liabilities?
7,200,000
4,700,000
6,200,000
5,100,000
Bere
2. What amount should be reported as total noncurrent
liabilities?
8,400,000
5,500,000
8,000,000
7,500,000
ae op
71
—~“_F
OE
blem 2-19 (AI og
Proble ‘ithe following trial balance on Jung
Problem 2-20 (AICPA Adapted)
Gold Company provide
30, 2020: Trey Company provided the following trial balance on
‘ 100,009 December 31, 2020 which had been adjusted except for income
Cash overdraft 350,000 tax expense:
Accounts receivable 580,000
iawentory 120,000 Cash 6,000,000
Prepaid expenses 1,000,000 ‘ae receivable, net Soe abe
Land hele aro equipment, net 950,000 Fin one ae Reon 60
roe nayable LEO ane Property, plant and equipment 17,000,000
cme ed expenses ; 250 oN Accounts payable 10,000,000
Share premium 1,500,009 Shave capital . caper
Share capital 800,005 oo rane he lation adjustment 2,500,000 6,000,090
: ‘ 0 ‘oreign currency translation adjustment 2,500,
Retained earnings 3,000,000 3,000,009 Revenue 15,000,000
—=_ =. Expenses 10,000,000
i itten to vendors
ting to P300,000 were writ and
ied a eed 2020 resulting in a cash overdraft of
P100,000. The checks were mailed on July 9, 2020.
50,000,000 50,000,000
During 2020, estimated tax payments of P1,500,000 were
charged to prepaid taxes. The entity has not yet recorded
Land held for sale was sold for cash on July 15, 2020. income tax expense. The tax
rate is 30%.
The entity issued the financial statements on July 31, 20299.
The accounts receivable included P3,000,000 due from a
1, What total amount should be reported as current assets? customer. Special terms
granted to this customer require
2,250,000 payment in equal semiannual installments of P500,000 every
b 205 0000 April 1 and October 1.
¢. 1,950,000
4. 1/250,000 1. On December 31, 2020, what total amount should be
2. What total amount should be reported as current reported as current assets?
liabilities? a. 21,000,000
a, 450,000 b. 18,500,000
b. 350,000 ec. 17,000,000
ce. 650,000 d. 19,500,000
d. 300,000 ;
3. What total amount should be reported as shareholders 2, On December 31, 2020, what
amount should be reported
equity? as total retained earnings?
a. 2,550,000 a. 9,000,000
b. 1,750,000 b. 8,500,000
¢. 1,500,000 .
1900, c. 5,750,000
9° , 750,
d. 2,300,000 d. 6,000,000
712 73
ICPA Adapted)
‘ollowing account balang
h had been adjusted excen os
ded
i
Oy
i mpany i
Mint oper Jl 2020 whic
tax expense:
income 7
bl net tracts 3,509 0m
rofbill , i 1,609 00"
Accounts Fe! ivable, "os on long term contr i soon
oe pied ay ost on long-ter™ contrac fo
LAINE - - F iy
a ra and equipment, net aioe
Note payable _noncurrent ‘20
Share capital 2 cane
miu . hy
Shere earnings OnaPTe or te payable 900.99,
Retained earnings restricted for na p ‘ 160
Earnings from long-term contracts 6, 0
Costs and expenses . 180,90
receivables on long-term contracts are considered toby
collectible within 12 months.
ar, estimated tax payments of P450,000 wen
During the year; ; s not recorded j
charged to prepaid taxes- The ¢ ntity ba rded incor
tax expense. The tax rate 18 30%.
@n December 31, 2020, what amount should be reported ag
1. Total retained earnings?
a. 1,950,000
b 2,110,000
c. 2,400,000
d, 2,560,000
2. ‘Total noncurrent lia
a. 1,620,000
b. 1,780,000
ce. 2,320,000
d. 2,480,000
bilities?
3. Total current assets?
a. 5,000,000
b. 4,100,000
. 5,700,000
d. 6,150,000
4, Total shareholders’ equity? -
2,940,000
b. 2,780,000
c. 4,890,000
d. 4,730,000
>
74
“as .
Jop-peetphedAeinnshtnedateiy

Problem 2-22 (AICPA Adapted)

Shaw Company provided the following trial balance on
December 31, 2020 which had been adjusted except for
income tax expense:
Cash 600,000
Accounts receivable 2,800,000
Inventory 2,000,000
Property, plant and equipment 10,500,000
Accounta payable and accrued liabilities 1,800,000
Income tax payable 1,500,000
Deferred tax liability 700.000
Share capital 2,500,000
Share premium 3,000,000
Retained earnings, January 1 3,500,000
Net sales and other revenue 15,000,000
Costs and expenses 10,000,000
2,100,000

Income tax expense

28,000,000 28,000,000
The accounts receivable included P1,000,000 due from a
customer and payable in quarterly installments of P125,000.
The last payment is due December 30, 2022.
x payment of P600,000 was
During the year, estimated ta
The income tax rate is 30%.
charged to income tax expense.
On December 31, 2020, what amount should be reported as
1. Total current assets? ’
a. 3,400,000
b. 4,400,000
c. 5,400,000
d. 4,900,000
2. Total current liabilities?
a. 2,700,000
b. 3,300,000
c. 4,050,000
d. 3,450,000
3. Retained earnings?
a. 8,500,000
b.
c.
d.
6,400,000
7,000,000
3,500,000
75
4)
m 2-23 (AICPA Adapted)
provided the following informatio,
Proble
Charice Company 4
December 31, 2020: h
for goods and services purch
* Accounts payable or fto P500,000 and accrue ass
nt amoun x Op
eealed P300,000 on December 31, 2020. Peng,
* On December 15, 2020, the entity declared , :
dividend of P7 per share, payable on January 15, 299;
shareholders of record on December 31, 2020, it
The entity had 100,000 shares issued and outstang
throughout 2020. Ing
* On July 1, 2020, the entity issued P5,000,000, g% bon
for P4,400,000 to yield 10%. The bonds mature on Iu
30, 2025, and pay interest annually every June 30, me
On December 31, 2020, the bonds were trading ip th
open market at 86 to yield 12%. The entity use the
effective interest method to amortize bond discount, :
* The pretax financial income was P8,500,000 and taxable
income was P6,000,000.
The difference is due to P1,000,000 permanent difference
and P1,500,000 of taxable temporary difference which js
expected to reverse in 2021.
* The entity is subject to income tax rate of 30% and made
estimated income tax payments during the year of
P 1,000,000.
What total amount should be reported as current liabilities
on December 31, 2020?
8,500,000
2,700,000
2,300,000
2,500,000
ao oP
76
.*
a es
ae he ae
os pen els Me hamden
Problem 2-24 (IAA)
Kaye Company reported the following liabilities on
December 31, 2020:
Accounts payable Sn
Bank note payable ~ 10% pega
Bank note payable —- 11% vege
Mortgage note payable — 10% 4000.00
Bonds payable
* The P3,000,000, 10% note was issued March 1, 2020,
payable on demand. Interest is payable every #1x months.
* The one-year P5,000,000, 11% note was issued January
15, 2020.
On December 31, 2020, the entity negotiated a written
agreement with the bank to replace the note with a
2-year, P5,000,000, 10% note to be issued January 15,
2021.
* The 10% mortgage note was issued October 1, 2018 with
a term of 10 years.
Terms of the note give the holder the right to demand
immediate payment if the entity fails to make a monthly
interest payment within 10 days from the date the
payment is due.
On December 31, 2020, the entity is three months behind
in paying the required interest payment.
* The bonds payable are ten-year, 8% bonds, issued June
30, 2011. Interest is payable semiannually on June 30 and
December 31. .
* The entity has not prepared the adjustment for any
accrued interest on the liabilities.
What total amount should be reported aa current liabilities
on December 31, 2020?
15,650,000
11,650,000
20,650,000
13,650,000
po op
17
Problem 2
1. When there is much va
25 Multiple choice (PAS 1)
riability, the operating cyq), ig
measured at
a.
b.
c.
d.
The mean value
The median value
Twelve months
Three years
2. The operating cycle of an entity
a.
b.
c,
d.
Is the time between the sequisim? of materia),
entering into a process and es rea ue ion in cash
Is the period of time normally e epee in converting
accounts receivable back into cash.
Is a period of one year. —
Refers to the seasonal variation experienced i
entities.
3. An entity shall classify an asset as current under al} of
the following conditions, except
The entity expects to realize the asset or intends ty
sell or consume it within the entity's normal operating
cycle.
The entity holds the asset for the purpose of trading
The entity expects to realize the asset within twelve
months after the reporting period.
The asset is cash or a cash equivalent that is restricted
to settle a liability for more than twelve months after
the reporting period.
4. An entity shall classify a liability as current when under
all of the following conditions, except
a,
b.
c,
The entity expects to settle the liability within the
entity’s normal operating cycle.
The entity holds the liability primarily for the purpose
of trading.
The liability is due to be settled within twelve months
after the reporting period.
The entity has an unconditional right to defer
settlement of the liability for at least twelve months
after the reporting period,
78
. Which obligations are classified as current even if these
are due to be settled after more than twelve months from
the end of the reporting period?
a. Trade payables and accruals for employee and other
operating cost
b. Current portion of interest-bearing liabilities
c. Bank overdrafts
ad. Dividends payable
. Current and noncurrent presentation of assets and
liabilities provides useful information when the entity
a. Supplies goods or services within a clearly identifiable
operating cycle
b. Is a financial institution
c. Is a public utility
d. Is a nonprofit organization
. A presentation of assets and liabilities in increasing or
decreasing order of liquidity provides information that is
reliable and more relevant than a current and noncurrent
presentation for
a. Financial institution
b. Public utility
c. Manufacturing entity
d. Service provider
. Under Philippine jurisdiction, the common practice is to
present in the statement of financial position
a. Current assets before noncurrent assets, current
liabilities before noncurrent liabilities and equity after
liabilities.
b. Noncurrent assets before current assets, noncurrent
liabilities before current liabilities and equity after
liabilities.
c. Current assets before noncurrent assets, noncurrent
liabilities before current liabilities and equity after
_ liabilities.
d. Noncurrent assets before current assets, current
liabilities before noncurrent liabilities and equity after
liabilities.
79
9. A financial hi
reporting period §
pility due within twelve months af,
abDl
r
"| be classified a8 noncurreng ty
long-term basis beg,
+. <a wefinanced on & Te 5
a. When it 1s re
b.
c.
d.
h
i ts. .
issue of financial statemen’
. discretion to refinance
When the entity Lvs no he .
least twelve months. ccpsarattaclates
When it is eingie on a long ee oy
i eriod. |
ets Feenanced on a long-term basis on oy
befo,
e
the end of reporting period.
: long-term loan agre
ntity breaches under a | ’ emen
10. aoe alice the end of the reporting period with the ete
that the liability becomes payable on demand, the Habitit,
is classified as
a
b.
c.
a.
Current under all circumstances
Noncurrent under all circumstances
Current if the lender has agreed after the reporting
period and before the issuance of the statements Not ty
demand payment as a consequence of the breach,
Noncurrent if the lender agreed after the reportin
period to provide a grace period for at least twelve
months after the reporting period.
80

Problem 2-26 Multiple choice (IFRS)

1. In presenting a statement of financial position, an entity
a.
b.
c.
Must make the current and noncurrent presentation.
Must present assets and liabilities in order of liquidity.
Must choose either the current and noncurrent or the
liquidity Presentation, meaning free choice of
presentation.
Must make the current and noncurrent presentation,
except when a presentation based on liquidity provides
information that is reliable and more relevant.
2. Assets to be sold, consumed or realized as part of the normal
operating cycle are
a
b.
c
d.
. Current assets
Noncurrent assets
Classified as current or noncurrent in accordance with
other criteria
Noncurrent investments
Liabilities that an entity expects to settle within the normal
operating cycle are classified as
a.
b,
c.
d.
Noncurrent liabilities
Current or noncurrent Liabilities in accordance with
other criteria
Current liabilities
Equity
In which section of the statement of financial position
should cash that is restricted for the settlement of a
liability due 18 months after the reporting period be
presented? ‘ :
Ro 7 8
Current assets
Equity
Noncurrent liabilities
Noncurrent assets
81
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boy
5. In which section
the statement of financial po
ment of financial Positi,
f the state h
‘ taxes that are due for settlemen;, in
9. Which o .
f the following must be included as a line item
should employme?
15 months’ time be presente ih ti
o geeaagl ment of financial position?
a. Current liabilities }
b. Current assets “ties : contigs, ‘er
i Re “a c. seers plant and equipment analyzed by cla
a eon d. Defer, ol anu reserves analyzed by clase “
oo, ‘ erred tax
An entity has a loan due for nepesyien in six monthy ani
. he option to retinance f. 10. Which
. ut the entity has t : ce fo, . vtimaen |
movment pie ag later. ent eee refinanog is not true? out the statement of financial
position
this loan. In which section of the atstement of financial
nted? a
= a. Biological assets should be reported in the statement
his loan be prese
of financial position.
position should t
b. The number of shares authorized for issue should be
a. Current liabilities
b. Current assets ieee in the statement of financial position or the
c. Noncurrent liabilities ‘ c Provisions = Phanmee in equity or in the notes.
d. Noncurrent assets sions should be recognized in th
a poanceal position. e statement of
Which of the following must be included on the face of L. uss surplus on a noncurrent
asset in the
nt year should be recognized in the income
sition?
statement.
Investment property
Number of shares authorized
Contingent asset
Shares in an entity owned by that entity
ao op
Which of the following is not required to be presented as
minimum information on the face of the statement of
financial position?
Investment property
Investment accounted under the equity method
Biological asset
Contingent liability
ao 5p
82 83
y
Problem 2-27 Multi
L In analyzing
statement wou
assess liquidity 4
Boop
ple choice (AICPA Adapted)
statements, which financial
tial investor primarily Use to
al flexibility?
financial
Id a poten
nd financl
Statement of financial position
t
Income statemen!
Statement of retained earnings
Statement of cash flows
is an essential characteristic of an asset?
2, Which
a. The claims to the benefits are legally enforceable
b. An asset is tangible
c. An asset is obtained at a cost |
d. An asset is a present economic resource
3. Conceptually, asset valuation accounts are
a. Assets So
b. Neither assets nor liabilities
c. Part of shareholders’ equity
d. Liabilities
4. Working capital is
a. Assets which enable the entity to operate profitably.
b. Capital which has been reinvested in the business.
c. Unappropriated retained earnings.
d. Current assets less current liabilities.
5. The basis for classifying assets as current or noncurrent
is the period of time normally elapsed from the time the
entity expends cash to the time it converts
a. Inventory back into cash or 12 months, whichever is
shorter.
b. Receivables back into cash or 12 months, whichever
is longer.
c. Tangible fixed assets back into cash or 12 months,
whichever is longer.
d. Inventory back into cash or 12 months, whichever 1s
longer.
84

10.
Th .
€ operating cycle concept
a. Causeg the dist
noncurrent to
year. ape
b. permite some
though more th
anon
‘. ae become obsolete Teena Se cena
; ects the income statement only.
. When ifyi
classifying assets as current and noncurrent
Current asse
sets must reflect realizabl
le cash value.
Prepayments are included in other assets. ve
ae op
Assets are classified as current if reasonably expected
to be realized in cash or consumed during the normal
operating cycle.
. The term net assets represents.
Betained earnings
urrent assets less current liabiliti
Total contributed capital _
Total assets less total liabilities
moo
. Treasury shares should be reported as
a. Current asset
b. Investment
c. Other asset
d. Reduction of shareholders’ equity
The term deficit refers to
a. An excess of current assets over current liabilities
b. An excess of current liabilities over current assets
c. A debit balance in retained earnings
d. A prior period error
85
inction between current and
nd on cash realization within one
assets to be classified as current even
urrent assets are determined by the seasonal nature.
a.
%
ice (AICPA Adapted)
9
ld be classified as current asset?
receivable norm
n of preference shares
ich shou
1. Whic ally collectible jy 18
Trade accounts
months ;
b. Cash for the oere
: r va a
d Cash sure machinery ordered within six month,
ild not be considere
ts receivable due over 18 months jp
rade practice
d as a current asset?
9, Which shov
Installment a¢
accordance W!
b. Prepaid insur
Financial asset
Cash surrender value
ts should. never include
ible within one year
ccoun
th normal t
nce ‘
held for trading
a.
c.
d.
3. Current asse
a. A receivable not collect
_ Current tax asset
: Goodwill arising in a business combination
d. Premium paid on a bond investment
4. Equity investments held to finance construction of
additional plant should be classified as
a. Current assets ;
b. Property, plant, and equipment
c. Intangible assets :
d. Noncurrent investments
5. Which of the following is not a noncurrent investment?
Cash surrender value
Franchise
Land held for speculation
A sinking fund
ae op
86

Problem 2-29 Multiple choice (IAA)

1. For a liability to exist
a mere Must be a past event,
ti lig Benet! must be known
. entity of th the liability i
misebe en e party to whom the liability is owed
_ Th an obligati
ere must be an obligation to pay cash in the future
9 .
2. Which statement best describes the term liability?
2 petals of equity over current assets
~ a vant he meet financial commitments when due
interest in the asscts of the entity afte
deduction all of the liabilities ‘
d. A present obligation arising from past event
3. Which item is not a current liability?
a. Unearned revenue
b. one dividend payable
c. e currently maturing i
portion of long-
d. Trade accounts payable néterm debe
4. Noncurrent liabilities include
a. Bonds payable
b. Short-term obligation refinanced on a long-term basis
at the end of reporting period
c. Deferred tax liability
- d. All of these are noncurrent Habilities
5. Which is not within the definition of a liability?
a. The signing of a three-year employment contract at a
fixed annual salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. A present obligation that is estimated in amount
87
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P|
i otes
Order of presenting the n
14, provides that an entity normaly
ing order tO A8Sist ug,
he following
presents notes im ncial statements and to compare ther
; - ities:
TEE al statements of other ent
Wi
f compliance with PFRS
PAS 1, paragraph 1
a. Statement 0
b. Summary of significant accounting policies used
. Sum
wos computation for line iten,
ting information or .
° See iad fi the financial statements
r di ntingent liabilitie
- disclosures, such co 8,
d. One ined contractual commitments and nonfinang; al
disclosures.
In some circumstances, it may be necessary or Sestaile to
vary the order of specific items within the notes. lowever,
the entity must retain the systematic presentation anq
structure of the notes as far as practicable.
Compliance with PFRS
PAS 1, paragraph 16, provides that an entity whose financial
statements comply with Philippine Financial Reporting
Standards shall make an explicit and unreserved statement
of such compliance in the notes.
An entity shall not describe financial statements as complying
with PFRS unless they comply with all the requirements of
each applicable Philippine Financial Reporting Standard.
Accounting policies
Accounting policies are defined as the specific principles,
methods, practices, rules, bases and conventions adopted by
an entity in preparing and presenting financial statements.
Accounting standards set out the required recognition and
measurement principles that an entity shall follow in
preparing its financial statements, and shall often prescribe
the accounting policy to be adopted.
90
_ in the summar
Significant accounting policies
The summa ini si
the-falliv The of significant accounting policies shall disclose
a. The measurement basis used
b. The accounting policies used
Disclosure of measurement basis
It is important for an entit i
: , y to inform users of the
poagucerent basis used in the financial statements because
the basis on which the entity prepares the financial
statements significantly affects the users' analysis.
Under the Revised Conce
: e ptual Framework, the measurement
bases are historical cost and currrent value.
Current value includes fair value, value in use, fulfillment
value and current cost.
Disclosure of accounting policies
In deciding whether’ a particular accounting policy should
be disclosed, management shall consider whether the
disclosure would assist users in understanding how
transactions, other events and conditions are reflected in
the financial statements.
Disclosure of particular accou
useful to users when those
alternatives allowed in Phili
Standards.
nting policies is especially
policies are selected from
ppine Financial Reporting
Disclosure of judgment
PAS 1, paragraph 122, provides that an entity shall disclose
y of significant accounting policies the
judgments that management has made in the process of
~ applying accounting policies and that have a significant effect
on the amounts recognized in the financial statements.
For example, management makes judgment in determining
the following:
a. Whether financial assets are to be measured at fair value
or at amortized cost.
b. Whether in substance particular sales of goods are
product financing arrangement and therefore do not give
rise to revenue.
. ol
ation uncertainty
. f estim
Disclosure © :
125, provides that an entity shall disco,
tions it makes about the fut
; ut the assump : Up
po or sources of uncertainty at the end of Teport,
and other male significant risk of resulting in a Mate; °
a : Via)
d that ihe carrying amount of assets and liabijigi!
§
t financial year.
PAS 1, paragraph
perio
adjustment
within the nex
to those assets and liabilities, the noteg shal
and carrying amount of the assets ina
d of reporting period.
With respect
include the nature
liabilities at the en
Other disclosures
PAS 1, paragraph 138, provides that an entity shall Bisclog
the following:
wit f the entity, its coun;
_ The domicile and legal form o bi
a incorporation and the address of the registered offica z
principal place of business.
b. A description of the nature of the entity’s operations and
its principal activities.
The name of the parent and the ultimate parent of th.
group.
Paragraph 137 provides that an entity shall disclose the
following:
a. The amount of dividends proposed or declared before the
financial statements were authorized for issue but not
recognized as distribution during the period and the
related amount per share.
b. The amount of any cumulative preference dividends not
recognized.
92
Examples of notes to financial statements
(amounts are assumed)
Note 1 - Compliance with PFRS
The financial statements have been prepared in compliance
with the Philippine Financial Reporting Standards and rules
and regulations of the Philippine Securities and Exchange
Commission.
The accounting policies adopted in the preparation of financial
statements have been applied on a consiatent basis.
Note 2 - Significant accounting policies
Measurement basis — The financial statements have been
prepared on the basis of historical cost, and except where
stated, do not take into account changing prices and current
cost of noncurrent assets,
Inventories — Inventories are measured at the lower of FIFO
cost and net realizable value.
Store preopening costs ~ Such costs are charged to expense
in the year incurred.
Property, plant and equipment — Property, plant and equipment
are recorded at cost. The straight line method is used in recording
depreciation on the basis of the estimated useful life of the assets.
Capital expenditures —Expenditures incurred subsequent to the
acquisition of property, plant and equipment are expensed
outright if the amounts are P5,000 and below.
Such expenditures amounted to P100,000 in 2021 and P30,000
in 2020 on the aggregate,
Cash equivalents ~ The entity considers all highly liquid’
investments with maturities of three months or less when
purchased as cash equivalents.
93
Ay
s- Goodwill represents the diffe,
‘ce of an acquired entity én ene,
qty
P :
the Pp
oe eral values of net assets acquired. e
“1: i t tested for impairment
Goodwill is not amortized bu | annual,
hts and other intangible ite
, copyTig
d useful life. The st, Set,
Alght
The cost of patents, CO]
are amortized over their estimate
line method is used for amortization.
development — All expenditures for Teseay, ;
c
Research and :
harged to expense in the year incurre4
and development are c
_ Income taxes include deferred income tay
ll taxable and deductible tempo,,°
mount for financial reper
assets and liabilities. "8
Income taxes
that result from a
differences between carrying 4
and tax base for tax reporting of
Earnings per share — Earnings per share amounts are based 4
the weighted average number of ordinary shares outstandin,
after recognition of preference dividends. Potential ording
shares are not material. : "y
94
ths ae nd lle te TT aS
Note 3 - Inventories
The components of year-end inventories are as follows:
December 31,2021 December 31, 2020
Finished goods 3,000,000 2,500,000
Goods in process 2,000,000 1,800,000
Raw materials 1,500,000 1,200,000
Manufacturing supplies 400,000 300,000
Allowance for inventory ‘
writedown (. 700,000) ( 500,000)
6,200,000 5,300,000
Note 4 - Property, plant and equipment
On February 1, 2021, the entity entered into a contract with a
contractor for the construction of an office building.
The fixed contract price is P8,000,000. The building is expecte
000,000. is e
to be completed in 12 months. = .
December 31,2021 December 31, 2020

Aoitha 5,000,000 5,000,000

Machi gs ; 20,000,000 20,000,000
achinery and equipment 4,000,000 2,000,000
Furniture and fixtures 2,000,000 1,500,000
Patterns, molds, dies and tools 1,000,000 "800,000
Total
a 32,000,000 29,300,000
Accumulated depreciation (14,000,000) (12,300,000)
Carrying amount 18,000,000 17,000,000
95
Note 5 - Contingent liability
The entity is a defendant in a patent infringement SUit sea).
damages of P2,000,000. The suit is still pending and inp
oa i th
entity’s legal counsel firmly believed that the case will,"
Ot
prosper.
Note 6 - Long term debt
The bonds payable of P5,000,000 mature on Decembe,
2025, pay semiannual interest of 12% on June 3
December 31.
31,
ang
The bonds require sinking fund deposit of P1,000 09
annually, starting December 31, 2022. . U0
Note 7 - Shareholders’ equity
Preference share capital — P100 par value, 100,000 shares
authorized, issued and outstanding at both Decembey 31
2021 and December 31, 2020.
The preference share is cumulative and there are no dividends
in arrears.
Ordinary share capital — P50 par, 1,000,000 shares
authorized, and 800,000 shares issued at both December 3},
2021 and December 31, 2020 of which 50,000 shares are held
in treasury and recorded at cost of P3,000,000.
Retained earnings are appropriated to the extent of the cost
of the treasury shares.
The balance of retained earnings represents unrestricted
amount legally available for dividends.
Note 8 — Share options
On December 1, 2021, the shareholders of the entity approved
the share option plan which provides for granting of pptions
purchase 50,000 ordinary shares at 100% of fair value at
date of grant. The options are exercisable immediately.
96

4 2. ie
2 ee deeds sath Dt Bid ES
a nek lente
ane eee
RELATED PARTIES
Related party — Parties are considered to be related if one party
has:
a. The ability to control the other party.
b. The ability to exercise significant influence over the other
party.
c. doint control over the entity.
Control is the power over the investee or the power to govern the
financial and operating policies of an entity so as to obtain
benefits.
Control is ownership directly or indirectly through subsidiaries
of more than half of the voting power of an entity.
. Significant influence is the power to participate in the financial
and operating policy decision of an entity, but not control of
those policies.
Significant influence may be gained by share ownership of 20%
or more.
If an investor holds, directly or indirectly through subsidiaries,
20% or more of the voting power of the investee, it is presumed
that the investor has significant influence, unless it can be
clearly demonstrated that this is not the case.
Beyond the mere 20% threshold of ownership, the existence of
significant influence is usually evidenced by the following
factors:
Representation in the board of directors
Participation in. policy making process
Material transactions between the investor and the investee
Interchange of managerial personnel
Provision of essential technical information
ono op
Joint control is the contractually agreed sharing of control over
an economic activity. ,
97
‘} santitres that directly or indirectly through One
intermediaries, control or are controlled by o
common control with the reporting entity.
Such entities pertain squarely to aff iliates, Meanin
parent, the subsidiary and fellow subsidiaries, 8 the
2. Associates — These are the entities over
which One p
exercises significant influence. arty
Subsigia .
Arigg
of the associate.
3. Venturer in a joint venture.
Subsidiaria,
the joint venture. of
4. Key management personnel are those persons havin
authority and responsibility for planning, directing ai,
controlling the activities of the entity, directly or ing;
direct).
including any executive director or nonexecutive directo,
5. Close family members of an individual are those family
members who may be expected to influence or be influence
by that individual in their dealings with the entity,
Close family members of an individual include:
a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or the individual's spouse,
6. Individuals owning directly or indirectly an interest in
the voting power of the reporting entity that gives them
Significant influence over the entity, and close family
members of such individuals.
7. Postemployment benefit plans for the benefit
employees of an entity, or of any entity that is a relate
party to that entity.
98
Examples of related Party transaction
Y transaction is a transfer of resources or
lated ‘Parties, regardless of whether a
PAS 24, Paragraph 20, provides the following examples of
related party transaction:
Purchase and sale of goods
Purchase and sale of property and other asset ~~
Rendering or receiving services
Leases
Transfer of research and development
License agreement
Finance arrangements, including loans and equity
contributions in cash or in kind
Guarantee and collateral
Settlement of liabilities on behalf of the entity or by the
entity on behalf of another party.
NAA Popp
§© go
. Related party disclosures
| PAS 24, paragraph 12, requires disclosure of related party
relationships where control exists irrespective of whether there
have been transactions between. the related Parties.
In other words, relationships between parents and subsidiaries
shall be disclosed regardless of whether there have been
transactions between those related parties,
An entity shall disclose the name of the entity's parent and if
different, the ultimate controlling party.
If neither the entity's parent nor the ulti nate controlling party
produces financial statements available for public use, the name
of the next most senior parent that does so shall also be
disclosed.
99
rty transaction
a
oO . that tf there ha
seclosures vides ; ve ;
Dise caph 17, pre tie gan entity oud disclys
n relate J qtionship as Wel A8 Infor, Ihe
ty re balances necessay,"®
, std
“ons and oe cal statements. J fy,
gisclosutes of related party ransacy,
e h
action.
balance, terms and cong
a, and nature of consid
t of the trans
tstanding
r unsecure
in settlement. .
ful accounts related to
the
ition,
fratig,
ance for doubt
zed during the period in regpe,
ogni
* Laer due from related parties.
ou
tof
transactions were made on te :
is that related party tran ms
aie valent 1 those that prevail in arm’s length transaction,
aay ade only if such terms can be substantiated.
gement personnel compensation
Key mana
PAS 24, paragraph 16, provides that an entity shall disclose .
key management personnel compensation in total and for |
each of the following categories:
a. Short-term employee benefits
b. Postemployment benefits, for example, retirement
pensions
Other long-term benefits
d. Termination benefits
e. Share based payment transactions, for example, share
options
100
an
were
ne ee
Unrelated parties
Unrelated parties include the following:
1. Two entities simply because they have a director or key
management personnel in common.
9 Providers of finance, trade unions, public utilities and
government agencies in the course of their normal dealings
with an entity by virtue only of those dealings.
3. Asingle customer, supplier, franchisor or general agent with
whom an entity transacts a significant volume of businese
merely by virtue of the resulting economic dependence.
4. Two venturers simply because they share joint control over
a joint venture.
Transactions with government-related entities
A reporting entity is exempted from providing the normal
disclosures for transactions with:
a. A government that has control, joint control or significant
influence over the entity.
b. Other entities controlled, jointly controlled or
significantly influenced by the same government.
In applying the exemption, the reporting entity is required
to disclose only the following:
a, The name of the government and the nature of the ©
relationship with the reporting entity.
b. The information on the nature and amount of each
"individually" significant transaction with the
government.
101
eee: x... i=‘?
¢ required
d party disclosures 1°
Relate
ph 3 requires disclosure of relate
a 1
PAS 24. paragr
transactions an arent, subsidiary, associate or vent
” ‘
‘ay
statements of a P
Urey Cy
: intragroup rel
rovides that 1 ote, |
However. Paragraph 4 P ding balances are eliminate Par
‘ons and outstanalne ial statements of th
transactron of consolidated financial sta OF the gra
preparation of con Pup,
Pricing policies
iti transfer of resources jg
Accounting recognition en between the partie Rormayy,
based on the price agreed upon elemine 8. Ba -
unrelated parties, the price is an arm's length price, th
i ay be a degree of flexi ‘lite:
n related parties, there m ty
hort setting process that is not present between unre
parties. a
PAS 24 did not provide for the measurement of rela
transactions. However, a variety of methods is use
transactions between related parties.
ted Par
d to Price
1. Uncontrolled price method —- This sets the Price by
reference to comparable goods sold in an econom
comparable market to a buyer unrelated to the selley.
2. Resale price method — This method is often used wher
goods are transferred between related parties before a sale
to an independent party is made.
This reduces the resale price by a margin, representing an
amount from which the reseller would seek to recover costs
and make an appropriate profit.
appropriate markup to the supplier's cost.
4. No price method — Literally, no price is charged, as in the
case of free provision of
management services and the
extension of free credit on a debt.
102
ically
d outstanding balances in the sep orate fing Any
outs
‘Ated
Cost plus method — This method seeks to add an.

EVENTS AFTER REPORTING PERIOD

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,
Events after the re
porting period are also known as
subsequent events,
Such events may require either adjustment or disclosure.
Types of events after the reporting period
a. Adjusting events after the reporting period are those that
provide evidence of conditions that exist at the end of
reporting period.
Nonadjusting events after reporting period are those that
are indicative of conditions that arise after the end of
' reporting period. *
It is appropriate to adjust the financial statements for all
events that offer clarity concerning the conditions that
existed at the end of reporting period and that occur prior to
the date the financial statements are authorized for issue.
Accordingly, an entity must a
in the financial statements
evidence of conditions that
period.
djust the amounts recognized
for adjusting events that provide
existed at the end of reporting
However, an entity does not recognize events after the
- reporting period that relate to conditions that only arose
after the reporting period.
The entity is required onl
y to disclose significant
nonadjusting events. ,
103
* sg
ajusting events
s of 8
Example nts after the reportin
rusting eVeM” es its fi tr, |
Examples of age ntity #0 adjust 18 financial state
which require the So
are:
ting period of a coy
ter the reportine rt
1. Settle rms that the entity already had g 0
C.
bligation at the end of reporting period.
0 ;
fag,
"een,
9. Bankruptcy of a customer which occurs after th
: § &
reporting period.
i i the reporting period ma, .
le of inventories after tt 1
3. dene about the net realizable value at reporting a
4. The determination after the reporting period of the "
of assets purchased or the proceeds from assets aa
before the end of reporting period. .
5. The determination after the reporting period of the prof ‘
sharing or bonus payment if the entity has the pres,
obligation at the end of reporting period to make atch :
payment. —
. The discovery of fraud or errors that show the financial
statements were incorrect.
104
STR le
Examples of nonadjusting events
1. Business combination after the reporting period.
2. Plan to discontinue an operation.
3. Major purchase and disposal of asset or expropriation of
major asset by government.
4. Destruction of a major production plant by a fire after
the reporting period.
5. Major ordinary share transactions and potential ordinary
share transactions after the reporting period.
6. Announcing or commencing the implementation of a major
restructuring.
4. Abnormally large changes after the reporting period in
asset prices or foreign exchange rates.
8. Entering into significant commitments or contingent
liabilities, for example, by issuing guarantees.
9. Commencing major litigation arising solely from events
that occurred after the reporting period.
10. Change in tax rate enacted or announced after the end of
reporting period that has a significant effect on current
and deferred tax asset and liability.
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 cases, an entity is required to submit its financial
statements to the shareholders for a i
pproval after the fi
statements have been issued. : nancial
In such cases, the financial statements are authorized for
issue on the date of issue by the board of direc
tors and not on
the date when shareholders approve the financial statements.
106
Illustration
fanen
management 0
Dente for the year en
O21. . }
1,2 91. the board of directors reviey,
Gj e
fi 3 Maoh ments and authorized them for issue. a the
nancia
The entity announced the profit and selected 4;
information on March 15, 2021.
tatements were made available to share,
tity completed draft of the fi
ded December 31, 20200n Feb
Ary
"Aneia
The financial s Idep,
on April 1, 2021. . .
The shareholders approved the financial statements at thei, |
annual meeting on April 10, 2021.
The approved ‘financial statements were then filed with She
on April 15, 2021.
. . ized for issue on M,
ancial statements are authorize ris. arch
rs finan date of the board authorization for issue. 1
Disclosure of date of authorization for issue

) ‘ovides that an entity shall disc), |

AS 10, paragraph 17, provides clos |
the date phen the financial statements are authorized for issye
and who gave the authorization.

If the entity's owners or others have the power to amend the |

financial statements after issue, the entity shall disclose such, |
fact. ; |
It is important for users to know when the financial
statements are authorized for issue because the financaal
statements do not reflect events after this date. .
. | 106
QUESTIONS
1.
2.
3.
11.
13.
14.
15.
Explain notes to financial statements.
What is the purpose of notes to financial statements?
What ie the order of presenting the notes to financial
statements?
. Explain the disclosure of compliance with PFRS,
. What information shall be disclosed in the summary of
significant accounting policies?
. Explain the disclosure of judgments and estimation
uncertainty..
. Define each of the following:
Related party
Related party transaction
Control
Significant influence
Joint control
ono op
. Give examples of related parties.
. Explain related party disclosures.
10.
What are the minimum disclosures for related party
transactions?
Explain key management personnel compensation.
‘ Explain the pricing policies for related party transactions.
Define events after the reporting period.
Explain the two types of events after the reporting period.
When are financial statements considered authorized for
issue?
107
PROBLEMS
Problem 3-1 Multi ;
1. Which is a purpose of notes ts Srencial Statements)
a.
b.
c.
d
2. What is the first item in presenting the notes?
a.
b.
c.
d.
3. An entity whose financial statements comply with PPRg
shall
a.
b.
c.
d.
ple choice (PAS 1)
information about the basis of pre
of pron ee and accounting policies used tog
To disclose the information required by pp 5
presented elsewhere in the financial statement, Not
To provide additional information not presen ted
necessary for a fair presentation. ut
All of these can be considered a purpose of the i
8,
Statement of compliance with PFRS
Other disclosures, such as contingent liab
unrecognized contractual commitments
Supporting information for items presented on th
face of the financial statements _
Summary of significant accounting policies,
ilities an, d
Make an explicit statement of compliance in th
Make an unreserved statement of complian
notes. .
Make an explicit and unreserved statement of
compliance in the notes.
Not describe financial statements as complying with
PFRS.
© Notes,
4. An entity is required to disclose all of the following
nonfinancial information, except
a.
. The name of the parent entity and the ultimate parent. |
c.
d.
A description of the nature of the entity's operations,
Domicile and legal form of the entity, the country of
incorporation and address of the registered office.
Names and addresses of directors and officers.
5. Notes to financial statements
Bo Op
Are relatively unimportant facts
Document the source of financial statement facts
Are an integral part of financial statements
Are irrelevant and immaterial facts
108
Ce in the ;
<8:
Problem 3-2 Multiple choice (IFRS)
1. The presentation of the
é notes to financial statements in a
systematic manner
a. Is voluntary
b. Is mandatory
c. Is mandatory, as far as practicable
d. Depends on the industry
2. The cross-reference between each line item in the
financial statements and any related information
disclosed in the notes to financial statements
a. Is voluntary
b. Is mandatory
c. Depends on the industry
d. Is either voluntary or mandatory
. Disclosure of information about key sources of estimation
uncertainty
a. Is voluntary
b. Is mandatory
ce. Is either voluntary or mandatory
d. Depends on the industry
- Disclosure of information about judgments
a. Is voluntary
b. Is mandatory
ec. Is either voluntary or mandatory
d. Depends on the industry
5. Which best demonstrates the
Het standard of adequate
isclosure?
The separate income statement
The auditor's reeport
The tax return
The notes to financial statements
ae of
109
tiple ch
Problem 3-3 Mul ct regarding notes to fing
eg
{
1. Which stateme”
statements: "ag te disclosures ;
c no In
ures specifi “lug,
a. IFRS requ of inventories.
disageregaion © aturity analysis for reelVableg
_ TFRS requires all notes should be clear
: IFRS req ond that jontechnical in nature. Simp,
rs i
d Al of the choices are correc
s to financial statem
ifiable.
a. Must be quantifia element.
b. Must qualify as ar ted in the financial state
lify items prese
d alr of oe choices are correct
ethod of disclosing Pertinen,
tis jncorre
N ents
2. Note
3.Which is not @ m
information?
a. Supporting schedule |
_b, Parenthetical explanation —
c. Cross reference and contra item hos;
d. All of these are methods of disclosing Pertinen,
information
disclosure of accounting policies is important 4,
4. The les
t users in determining
financial statemen
a. Net income for the year. _ _*
b. Whether accounting policies are consistently applieq
from year to year. ;
c. The value of obsolete goods in ending inventory,
d. Whether the working capital position is adequate,
5. The standard of full disclosure is best described by which
of the following?
a. All information related to operating objectives must
be disclosed in the financial statements.
b. Information about each account balance appearing in
the financial statements is included in the notes.
c. Enough information should be disclosed in order that
a prospective investor can make a wise decision.
d. Disclosure of any financial facts significant enough to
influence the judgment of a primary user.
110
ode
wae ete
ancient iene et ice,
ar canta tian cnet
eee te MF gg
6. Application of the full disclosure principle
a. Is theoretically desirable but not practical. oe
b. Is violated when important financial information 18
buried in the notes to financial statements.
c. Is demonstrated by the use of supplementary
information presenting the effects of changing prices.
d. Requires that the financial statements should be
consistent and comparable.
7. Accounting policies disclosed in the notes to financial
statements typically include all of the following, except
a. The cost flow assumption
b. The depreciation method
c. Significant estimates
d. Significant inventory purchasing policies
8. Significant accounting policies may not be
Selected on the basis of judgment.
Selected from existing acceptable alternatives.
Unusual or innovative in application.
Omitted from financial statement disclosure.
Poop
g. An inventory accounting policy that should be disclosed
in a summary of significant accounting policies is
a. Composition of inventory into raw materials,
work in process and finished goods
b. Major backlog of inventory orders
c. Method used for pricing inventory
d. All of these should be disclosed in the summary of
significant accounting policies.
10. Which of the following should be disclosed in a summary
of significant accounting policies?
Type of executory contract
Cumulative effect of change in accounting policy
Claims of equity holders
Depreciation method
Be op
111
Multiple choice (AICPA Adapted)
lem 3-4 .
Prob f information presented in the Note,
i ge 0
tis the purpe p
ve nancial statements:
To provide disclosures requ
a. : inciples zi
n rincip : ”
b acer ac improper presentation in the financia:
. To
t ; .
statem de recognition of amounts not included in the
“ watal of the financial statements cya
d To present management respo 0 aUdity,
comments
ired by generally Accept,
llowing information should be disclog 4
2. Which of the fo f significant accounting policies?
in the summary 0
Refinancing of debt an seaye ta the reporting Periog
i ers
antee of indebtedness of o ‘
Gucotts for determining which investmentg de
d as cash equivalents ;
Go aay of pension plan assets relative to the defineg
benefit obligation
3, Which of the following is not a required disclosure gf
accounting policies?
The measurement basis used
Key management personnel involved in drafting the
summary of significant accounting policies
c. Disclosures required by Standards o
d. The nature of operations and the policies that the
oP
users of the financial statements would expect to be
disclosed
4. The notes to financial statements should not be used to
a. Describe significant accounting policies.
b. Desoribe depreciation method employed.
c. Describe the principles and methods peculiar to the
industry in which the entity operates. ;
d. Correct an improper presentation in the financial
statements.
112
5. An entity shall disclose in the summary of significant
accounting policies
a. The measurement basis used in preparing the financial
statements,
b. All the measurement bases irrespective of whether
used by the entity.
c. The measurement basis used in preparing the financial
statements and the accounting policies used.
d. All of the measurement bases and the accounting
policy choices available to the entity irrespective of
whether used.
6. The summary of significant accounting policies should
disclose
a. Proforma effect of retroactive application of an
accounting change
b. Basis of profit recognition on long term construction
contracts
¢. Adequacy of pension plan assets in relation to vested
benefits
d. Future lease payments
7. The summary of significant accounting policies should
disclose
a. The composition of Property, plant and equipment and
the depreciation method used
The composition of property, plant and equipment only
The depreciation method used only
Neither the composition of property, plant and
equipment nor the depreciation method used. ,
Boo
8. Which of the following should be included in the summary
of significant accounting policies?
a. Property, plant and equipment recorded at cost with
the depreciation computed principally by straight line
method
b. A business component was sold during the current year
Breakdown of sales attributable to business components
Future ordinary share dividends are expected to
approximate sixty percent of earnings
(Bo
113
dapted)
piem 3-5 (AICPA ® c
ro e ompany ;
. pany acquired 100% of Me individual eng &
‘om 4 “ye 4 ’ ;
Dean ue _ During the cur? taterents the following. '®s
prior year neit financial s
included in t Dean Morey
760,000 500,094
Kev officers’ salaries au, 100,0¢4
Officers’ expenses 1,250,000 500. 004
Loans to officers 1,500,000
Intercompany sales
| amount should be reported as related Party
What total a he notes to Dean Companys consolida;, a
isclosures in t ay
feancial statements for the current y
1,500,000
1,550,000
1,750,000
3,000,000
aoe
Problem 3-6 (IFRS)
Gibson Company reported that remuneration and othe;
payments made to the entity's chief executive officer during
the current year were:
2,000,000
Annual salary ;
Share options and other share-based payments 1,000,000
Contributions to retirement benefit plan 500,000
Reimbursement of travel expenses for business trips 1,200,000
What total amount should be disclosed as compensation to
key management personnel?
a. 3,500,000
b. 4,700,000
c. 3,000,000
d. 2,500,000
114
aact aaa eee ~
aE
dt emt ae
Problem 3-7 Multiple choice (PAS 24)
1.
Related parties include all of the following, except
a. Parent, subsidiary and fellow subsidiaries
b. Associates
c. Key management personnel and close family members
of such key management personnel
d. Two venturers simply because they share joint control
over a joint venture
. A related party transaction is a transfer
a. Between related parties when a price is charged. ;
b. Between related partics, regardless of whether a price
is charged.
c. Between unrelated parties when a price is charged.
d. Between unrelated parties, regardless of whether a
price is charged.
. Unrelated parties include which of the following?
a. Providers of finance in the course of their normal
dealings with an entity by virtue only of those dealings.
b. Government agencies
.c. Single customer with whom an entity transacts a
significant volume of business merely by virtue of the
resulting economic dependence.
d. All of these are unrelated parties
. Close family members of an individual include all , except
a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or individual's spouse
d. Brothers and sisters of the individual
.The minimum disclosures about related party
transactions include all of the following, except
a. The amount of the transaction
b. Amount of outstanding balance
c. Allowance for doubtful accounts related to the
outstanding balance
d. Nature of the relationship
115
Problem 3-8 Multi
_ Which
' compensation?
a.
b.
c.
“ *
Which of the following is nota mandated disclosure .
2 related party transactions:
a.
b.
Cc.
d.
ple choice (IFRS)
-. not included in key management Personne)
is
fit
hort-term bene
Sf apebasad payment
ee efit
Teen ree of out-of-pocket expenses
boy
i ip between parent and subsidiaries
ela the associates that an entity hag deal,
ry ing the year. —
ee ‘of che entity's parent and, if different, the
ultimate controlling party. . ch
If neither the entity's parent nor : e ultimate
controlling entity produces financia statements
available for public use, then the name of the na
most senior parent that does so.
. wusiaes E feed qin!
_Which of the following is not a require imum
3 disclosure about related party transaction?
a.
b.
c.
The amount of related party transaction
The amount of the outstanding balance
The amount of similar transaction with unrelateq
parties to establish that comparable related party
transaction has been entered at arm 8 length
Doubtful debt related to the outstanding balance
4. Related party transactions include all, except
a.
c.
d.
A venturer sold goods to the joint venture.
Sold a car to the uncle of the entity’s finance director.
Sold goods to another entity owned by the daughter
of the managing director, _
All of these are related party transactions.
5. All of the following are related party transactions, except
Bo op
Transferred goods from inventory to a subsdiary
Sold an entity car to the wife of the managing director
Sold an asset to an associate
Took out a huge bank loan
116

6.
10,
BOR p Boo

An entity that entered into a related party transaction

would be required i
information, dicact to disclose all of the following
a. Nature of the relationship between the par‘ies.
b. Nature of any future transactions planned between
the Parties and the terms involved.
Peso amount of the transaction.
c.
d. Amount due from or to related Parties at the end of
reporting period.
- Which is not a required related party disclosure?
The son of the chief executive officer of the entity
The Parent of the entity
An entity that has a common director with the entity
Joint venture in which the entity is a venturer
of the following are related parties, except
Joint venture in which the entity is a venturer
A postemployment benefit plan for the employees
executive director of the entity
ane Parensr of a key manager is a major supplier of the
entity
. Which of the following is not a related party of an entity?
a. A shareholder of the entity owning twenty percent
. An entity providing banking facilities to the entity
c. An associate of the entity
d. Key management personnel of the entity
Which of the following should be included in key
management personnel compensation?
a. Social security contributions
b. Postemployment benefits
ce. Social security contributions and postemployment
benefits
d. Social security contributions, postemployment benefits
and dividends to shareholders
117
Problem 3-9 (IFRS)
: the following informat;,
, provided n OH
Caroline Company
December 31, 2020:
ivable was wy:
000 of accounts receivable Writt,
1/15/2021- ee the bankruptcy of a major custome,
ect Caroline with ca
ing vessel of ~
ee of P5,000,000 was completely lost at
because of a hurricane.
2/14/2021 iy
Seq
i ing Caroline as the def,
A court case involving U4 endan
was settled and the entity was obligated - be
the plaintiff P1,500,000. Caroline Previous)
recognized a P1,000,000 liability for the ma
because management deemed it probable iss
the entity would lose the case.
3/11/2021
One of Caroline's factories with a carrying
amount.of P15,000,000 was completely razed by
forest fires that erupted in its vicinity.
3/25/2021
The management of the entity completed the draft of the
financial statements for 2020 on February 10, 2021.
On March 20, 2021, the board of directors authorized the
financial statements for issue. The entity announced the
profit and other selected information on March 22, 2021.
The financial statements were made available to shareholders
on April 2, 2021 at the annual shareholders’ meeting where
the financial statements were approved.
The financial statements were filed with the regulatory
agency the very next day.
Required:
1. Prepare adjusting entries on December 31, 2020 to reflect
the adjusting events after reporting period.
2. Prepare the necessary disclosures to reflect the
nonadjusting events after reporting period.
118
=

vests 2 eS
Problem 3-10 (IFRS)
Elaine Company prepared draft financial statements that
showed the profit before tax for the year ended December
31, 2020 at P9,000,000,
The board of directors authorized the financial statements
for issue on March 20, 2021.
A fire occurred at one of Elaine's sitea on January 15, 2021
with resulting damage amounting to P7,000,000, only
P 4,000,000 of which is covered by insurance. The repairs will
take place and be paid for in April 2021.
The P4,000,000 claim from the insurance entity will however
be received on February 14, 2021.
What amount should be reported as profit before tax in the
financial statements?
a. 2,000,000
b. 9,000,000
c. 4,000,000
d. 6,000,000
Problem 3-11 (IFRS)
During 2020, Marian Company was sued by a competitor for
P5,000,000 for infringement of a patent.
Based on the advice of the legal counsel, the entity accrued
the sum of P3,000,000 as a provision in the financial
statements for the year ended December 31, 2020.
Subsequently, on March 15, 2021, the Supreme Court decided
in favor of the party alleging infringement of the patent and
ordered the defendant to pay the aggrieved party a sum of
P3,500,000. ae ae pa
The financial statements were prepared by the entity's
management on February 15, 2021 and approved by the board
of directors on March 31, 2021.
What amount should be recognized as accrued liability on
December 31, 2020?
5,000,000
3,500,000 wes
3,000,000 : 2 motto 5,
1,500,000 So ss
a9 op
119
IFRS)
Problem 3-12 ( . .
ny carried a provision of Pee the q,
Carla Company for the year ended December 37 ost
()
L ts
ial statemen vee
Ae anon to an unresolved court c
ial statement,
2021, when the financia 8 for
O05 ey ee atek 31, 2020 had not yet ie authori,
year en the case: was settled and the court decided the fin d
Cet premier to be paid by the entity at P3,000,000. al
What amount should be adjusted on December 31, 2029 in
relation to this event?
a. 3,000,000
b. 2,000,000
c. 1,000,000
d. 0
Problem 3-13 (IFRS)
; i i tion of th
Pink Company is completing the prepara © dra
financial statements for the year ended December 31, 2029,
The financial statements are authorized for issue on March
31, 2021.
On January 31, 2021, a dividend of P2,000,000 was declareq
and a contractual profit share payment of P200,000 was made,
both based on the profit for the year ended December 31, 2020,
On February 15, 2021, a customer went into liquidation
having owed the entity P900,000 for the past 5 months. No
allowance had been made against this debt in the draft
financial statements.
On March 1, 2021, a manufacturing plant was destroyed by
fire resulting in a financial loss of P2,500,000.
What total amount should be recognized in profit or loss for
the year ended December 31, 2020 to reflect adjusting events
after the end of reporting period?
a. 2,000,000
b. .3,600,000
c. 2,500,000
d. 1,100,000
120
Problem 3-14 (IFRS)
The audit of Anne Company for the year ended December
31, 2020 was completed on March 1, 2021.
The financial statements were signed by the managing
director on March 15, 2021 and approved by the
shareholders on March 31, 2021.
The next events had occurred.
* On January 15, 2021, a customer owing P900,000 to
Anne Company filed for bankruptcy.
The financial statements included an allowance for
doubtful accounts pertaining to this customer of
P100,000.
* Anne Company’s issued share capital comprised 100,000
ordinary shares with P100 par value.
The entity issued additional 25,000 shares on March 1,
2021 at par value.
* Equipment with carrying amount of P525,000 waa
destroyed by fire on December 15, 2020.
Anne Company had booked a receivable of P400,000
from the insurance entity on December 31, 2020.
After the insurance entity completed an investigation
on February 1, 2021, it was discovered that the fire
took place due to negligence of the machine operator.
As a result, the insurer’s liability was zero on this
claim. .
What total amount should be reported as “adjusting events”
on December 31, 2020?
1,300,000
1,200,000
3,800,000
3,700,000
ae op
121
Proble
The end
31, 2020 and t
for issue on
*
mw
RS)
mB-1b (IF ‘od of Norway Company is fF
’ od of N aa ec
oa reper cal statements for 2020 are autho ns
e hn y z
niece 15, *«
20
mber 31, 2020,
On 400,000 from a custom
A iod.
of reporting per! ;
end 15, 2021, a receiver WAS appointed ¢
. : on |
receiver informed Norway th hy
ot ee aid in full by December 3], 2021 the
any had equity investments he]
mber 31, 2020, these investment, ‘a
te
Norway Company had ay,
* eg .
er that is due 60 days eiy
aby,
On January
said custom
P400,000 wou
Norway Comp
- trading. On he tate value of P5,000,000,
recorded at t 16 2001, &&
‘ng the period up to February to, , there wa.
Bae de ine in the fair value of all the shares na
ortfolio, and on February 15, 2021, the fair value had
fallento P2,000,000.
Norway Company had reported a contingent liability ty
December 31, 2020 related to a court case in which
Norway Company was the defendant. The case wag jit
heard until the first week of February 2021.
On February 15, 2021, the judge handed down a decision
against Norway Company. The judge determined tha
Norway Company was liable to pay damages totaling
P3,000,000.
On December 31, 2020, Norway Company had a receivable
from a large customer in the amount of P3,500,000.
On January 31, 2021, Norway Company was advised in
writing by the liquidator of the said customer that the
customer was insolvent and that only 10% of the
receivable will be paid on April 30, 2021.
What total amount should be reported as “adjusting events
on December 31, 2020?
Boop
6,150,000
9,150,000
9,550,000
6,500,000
122
athe re
Problem 3-16 Multiple choice (IFRS)
1. At the end of the current reporting period, an entity
carried a receivable from a major customer who declared
bankcruptcy after the end of reporting period and before
the issuance of financial statements. What should be
reported at the current year-end?
a. Disclose the fact that the customer has declared
bankruptcy.
b. Make a provision for the event after reporting period
in the financial statements.
c. Ignore the event and wait for the outcome of the
bankruptcy.
d. Reverse the sale pertaining to the receivable in the
comparative statement for the prior period.
2. An entity decided to build and operate an amusement
park next year. The entity applied for a letter of guarantee
which was issued before the issuance of the financial
statements of the current year. What is the adjustment
required at the current year-end?
a. Book a long-term payable for the amount of guarantee.
b. Disclose the guarantee as a contingent liability.
c. Increase the contingency reserve.
d. Do nothing
3. An entity built a new factory building during the current
year. Subsequent to the current year-end and before
issuance of financial statements, the building was
destroyed by fire and the claim against the insurance
entity proved futile because the cause of the fire was
negligence on the part of the caretaker of the building.
What should be reported at the current year-end?
a. Write off the carrying amount of the building.
b. Make a provision for one-half of the carrying amount
of the building.
‘c. Make a provision for three-fourths of the carrying
amount of the building.
d. Disclose the nonadjusting event in the notes to
financial statements.
123
ively with lvieclipn Cur,
Is extend) the end of reporting anty
vevauthorization of the issug, 04
transactio of fh :
and Oa mi statements, pent cere sbnage
a sae i foreign ourrent) . a :
fluctuatieat the current year-end:
repo
ear-end bala
: ign exchange Y : ne
a. Adjust fhe orm adverse ines
reflect “ foreign exchange year-en balance
b. Adjuet abnormal fluctuations and not just ady,
refle
moverienre. t-reporting period event.
i the pos
d fenore ii post-reporting period event,
Cs
8 to
Which statement is true in relation to events after "€POrting
period?
i ts should give deta;
tes to the financial statemen ails ¢
a. terial adjusting events included in those financial
tatements.
b Notes to the financial statements should give details r
"material nonadjusting events which could influence the
economic decisions of users.
c. A decline in the market value of investments woul
normally be classified as an adjusting event.
d. The settlement of a long-running court case would
normally be classified as a nonadjusting event,
124

Problem 3-17 Multiple choice (IAA)

1. Which event after the reporting period would require
adjustment?
Loss of plant as a result of fire
Change in the market price of investment
88 On inventory resulting from flood loas
Loss on a lawsuit the outcome of which was deemed
uncertain at year-end
Boom
2. Events that occur after the current year-end but before
the financial statements are issued and affect the
realizability of accounts receivable should be
a. Discussed only in the management annual report.
b. Disclosed only in the notes to financial statements.
ce. Used to record an adjustment to bad debt expense.
d. An adjustment directly to retained earnings.
3. Nonadjusting events include all, except
a. A major business combination after reporting period
Announcing a plan to discontinue an operation
Expropriation of major asset after reporting périod.
Destruction of a major production plant by. a fire
before the end of the reporting period
poo
4. Nonadjusting events ‘include all, except
a. The entity announced the discontinuation of an
operation.
b. The entity entered into an agreement to purchase the
' leased building.
c. Destruction of a building by earthquake after the end
of reporting period.
d. A mistake in the calculation of allowance for
uncollectible accounts receivable.
5. Which event after the end of reporting period would
generally require disclosure?
‘a. Retirement of key management personnel
b. Settlement of litigation when the event that gave rise
to the litigation occurred in a prior period.
c. Strike of employees ;
d. Issue of a large amount of ordinary shares
125