Chapter 9 11

Zerda, Jessa Mae P.
BSA 202
CHAPTER 9
QUESTIONS:
1. Define an income statement

An income statement is a formal statement showing the financial performance of an
entity for a given period. It is also known as the profit and loss statement or the statement of
revenue and expense, the income statement primarily focuses on the company’s revenues and
expenses during a particular period.
2. Explain the usefulness of an income statement.

An income statement is an important financial statement as it shows the overall
profitability of a company. You can also use the income statement to analyze how efficiently
your business can translate expenses into revenues. It is useful because it determines a
company’s financial health and the financial progress it made during a particular period. It is also
useful in predicting future performance and ability to generate future cash flows.
3. Define a comprehensive income

Comprehensive income is the net change in equity for a period not including any owner
contributions or distributions. In other words, it includes all revenues, gains, expenses, and losses
incurred during a period, as well as unrealized gains and losses during an accounting period. In
this sense, it gives external users a full view of all the accounts that affect equity during a period.
4. Distinguish components of profit or loss and components of other comprehensive income

The profit or loss is the total of income less expenses excluding the components of other
comprehensive income. The other comprehensive income comprises items of income and
expense, including reclassification adjustments that are not recognized in profit or loss as
required or permitted by the PFRS.
5. Identify components of other comprehensive income.

 Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income.
 Unrealized gain or loss on debt instrument measured at fair value through other
 Gain or loss from translation of the financial statements of a foreign operation
 Revaluation surplus during the year
 Unrealized gain or loss from derivative contracts designated as cash flow hedge
 “Remeasurements” of defined benefit plan, including actuarial gain or loss
 Change in fair value attributable to credit risk of a financial liability designated at fair
value through profit or loss.
6. Explain the presentation of other comprehensive income

The statement of comprehensive income shall present line items for amounts of other
comprehensive income during the period classified by nature. These line items are group into
two:
a. OCI that will be classified subsequently to profit or loss when specific conditions are met, and
b. OCI that will not be classified subsequently to profit or loss but to retained earnings.
7. What are the components of other comprehensive income that are subsequently
reclassified to profit or loss?
 Unrealized gain or loss on debt instrument measured at fair value through other
 Gain or loss from translating financial statements of a foreign operation.
 Unrealized gain or loss on derivative contracts designated as cash flow hedge.
8. What are the components of other comprehensive income that are not subsequently
reclassified to profit or loss?
 Unrealized gain or loss on equity investment measured at a fair value through other
 Revaluation surplus during the year
 “Remeasurements” of defined benefit plan, including actuarial gain or loss
 Change in fair value attributable to credit risk of a financial liability designated at fair value
through profit or loss.
9. Explain the reclassification of the components of other comprehensive income that are
not reclassified to profit or loss.
The reclassification of the components of other comprehensive income that are not
reclassified to profit or loss will form part or will be reclassified in the retained earnings. The
reason may either because of its characteristic as a component or because the PFRS said so.
10. Explain the two options of presenting comprehensive income.

The two statements of an income statement showing the components of profit or loss. A
statement of comprehensive income beginning with profit or loss as shown in the income
statement plus or minus the components of other comprehensive income. On the other hand, a
single statement of comprehensive income is the combined statement showing the components of
profit or loss as shown and the components of OCI in a single statement. It is called a statement
of financial performance.
11. Identify the common sources of income

 Sales of merchandise to customers wherein the income for sales shall include all sales to
customers during the period.
 Rendering of services. Income from rendering of services, among others, includes
professional; fees, media advertising commissions, insurance agency commissions,
admission fees for artistic performance and tuition fees.
 Use of entity resources. This income category includes interest, rent, royalty and dividend
income.
 Disposal of resources other than products. Examples include gain on sale investments,
gain on sale of property, plant and equipment and gain on sale of intangible assets.
12. Identify the components of expenses.

 Cost of goods sold or cost of sales
 Distribution costs or selling expenses
 Administrative expenses
 Other expenses
 Income tax expense
13. What is the formula in computing cost of goods sold of a merchandising concern?
Beginning Inventory xx
Net purchases* xx
Goods available for sale xx
Less: Ending inventory (xx)
COST OF GOODS SOLD XX
*Gross purchases xx
Freight in xx
Total xx
Less: Purchase returns, allowances & discounts (xx)
Net purchases xx
14. What is the formula in computing the cost of goods sold of a manufacturing entity?
Formula in computing the cost of goods sold of a manufacturing entity:
Beginning raw materials xx

Net purchases xx
Raw materials available for use xx
Less: Ending raw materials (xx)
Raw materials used xx
Direct labor xx
Factory overhead xx
Total manufacturing cost xx
Beginning goods in process xx
Total cost of goods in process xx
Less: Ending goods in process (xx)
Cost of goods manufactured xx
Beginning finished goods xx
Goods available for sale xx
Ending finished goods (xx)
COST OF GOODS SOLD XX
15. Define distribution costs.

Distribution costs are costs incurred to deliver, sell and advertise the product from
the production unit to the end user.
16. Define administrative expenses.
Administrative expenses constitute cost of administering the business. It
ordinarily includes all operating expenses not related to selling and cost of goods sold.
17. Define other expenses.

Other expenses are those expenses which are not directly related to selling and
administrative function.
18. As a minimum, what are the line items that are reported on the face of the income
statement and statement of comprehensive income?
PAS 1, paragraph 82, provides that as a minimum, the income statement and statement of
comprehensive income shall include the following line items:
 Revenue
 Gain and loss from the derecognition of financial asset measured at amortized
cost as required by PFRS 9.
 Finance cost
 Share in income or loss of associate and joint venture accounted for using the
equity method
 Gain or loss on the reclassification of financial asset from amortized cost to fair
value profit or loss
 Gain or loss on the reclassification of financial asset from fair value other
comprehensive income to fair value profit or loss.
 Income tax expense
 A single amount comprising discontinued operations
 Profit or loss for the period
 Total other comprehensive income
 Comprehensive income for the period being the total of profit or loss and other
19. Explain the two forms of income statement.

a. The first form is the functional presentation. This form classifies expenses
according to their function as part of cost of goods sold, distribution costs,
administrative expenses and other expenses. This form is also called “cost of
goods sold”. An entity classifying expenses by function shall disclose additional
information on the nature of expenses, including depreciation, amortization and
employee benefit costs.
b. The second form is the natural presentation. It is referred to as the nature of

expense method. Under this form, expenses are aggregated according to their
nature and not allocated among the various functions within the entity. In other
words, the expenses are no longer classified as cost of goods sold, distributions
costs, administrative expenses and other expenses. The expenses which are the
same nature are grouped or aggregated and presented as one item.
20. Which form of income statement is required?

PAS 1 does not prescribe any format because paragraph 105 simply states that
because each method of presentation has merit for different types of entities, management
is required to select the presentation that is reliable and more relevant.
21. What is a single statement of comprehensive income?

The single statement of comprehensive income is another option in presenting the
components of profit or loss and components of other comprehensive income. This single
statement is the combined income statement and statement of comprehensive income.
22. Define a statement of retained earnings.

A statement of retained earnings is a statement that shows the changes affecting
directly the retained earnings of an entity and relates the income statement of financial
position.
23. What are the common items that directly affect retained earnings?
The important data affecting the retained earnings that should clearly be disclosed I the
statement of retained earnings are:
 Profit or loss for the period
 Prior period errors
 Dividend declared and paid to shareholders
 Effect of change in accounting policy
 Appropriation of retained earnings.
24. Define a statement of changes in equity.

A statement of changes in equity is a basic statement that shows the movements in
the elements or components of the shareholder’s equity.
25. Define a statement of cash flows

A statement of cash flow is a financial statement that shows how changes in
balance sheet accounts and income affect cash and cash equivalents, and breaks the
analysis down to operating, investing, and financing activities.
PROBLEMS:
Problem 9-1 (IAA)

Karla Company provide the following information for the current year:
Required:
(FUNCTIONAL METHOD)
KARLA COMPANY
Income Statement
Year ended December 31, 2020
Note
Net sales (1) 7,700,000
Less: Cost of Goods Sold (2) (5,500,000)
Gross Income 2,700,000
Add: Other income (3) 400,000
Total income 3,100,000
Less: Expenses:
Selling expenses (4) 950,000
Administrative Expense (5) 800,000
Other expenses (6) 100,000 (1,850,000)
Income before tax 1,250,000
Income tax 250,000
NET INCOME 1,000,000
Note 1 – Net Sales

Gross sales 7,850,000
Sales return and allowances (140,000)
Sales discount (10,000)
Net sales 7,700,000
Note 2 – Cost of Goods Sold
Merchandise inventory, Jan. 1 1,000,000
Add:
Purchases 5,250,000
Freight in 500,000
Purchase Returns and Allowances (150,000)
Purchase Discount (100,000)
Net Purchases 5,500,000
Goods available for sale 6,500,000
Less: Merchandise inventory, Dec. 31 (1,500,000)
Cost of sales 5,000,000
Note 3 – Other income

Rental income 250,000
Dividend revenue 150,000
Total 400,000
Note 4 – Selling Expenses

Freight out 175,000
Salesmen’s Commission 650,000
Depreciation - store equipment 125,000
Total selling expenses 950,000
Note 5 – Administrative Expense

Officers’ salaries 500,000
Depreciation - office equipment 300,000
Total Administrative expense 800,000
Note 6 – Other expenses
Loss on sale of equipment 50,000
Loss on sale of investment 50,000
(NATURAL METHOD)
KARLA COMPANY
Income Statement
Note
Net sales revenue (1) 7,700,000
Other income (2) 400,000
Less: Expenses
Increase in inventory (3) (500,000)
Net purchase (4) 5,500,000
Freight out 175,000
Salesmen’s Commission 650,000
Depreciation 425,000
Officers’ salaries (5) 500,000
Other expenses (6) 100,000 (6,850,000)
Income tax (250,000)
Net income 1,000,000
Note 1 – Net Sales revenue

Gross sales 7,850,000
Sales return and allowances (140,000)
Sales discount (10,000)
Net sales revenue 7,700,000

Rental income 250,000
Dividend revenue 150,000
Total 400,000
Note 3 – Increase in inventory

Inventory, December 31 1,500,000
Inventory, January 1 1,000,000
Increase in inventory 500,000
Note 4 – Net purchases

Purchases 5,250,000
Freight in 500,000
Less: Purchase return and allowances (150,000)
Purchase discounts (100,000)
Net purchases 5,500,000
Note 5 – Depreciation
Depreciation - store equipment 125,000
Depreciation - office equipment 300,000
Total 425,000

Loss on sale of equipment 50,000
Loss on sale of investment 50,000
Problem 9-2 (IAA)

Masay Company
Statement of Cost of Goods Manufactured
Year Ended December 31, 2020
Raw materials – January 1 200,000
Purchases 3,000,000
Raw materials available for use 3,200,000
Less: Raw materials – December 31 (280,000)
Raw materials used 2,920,000
Direct labor 950,000
Factory overhead:
Indirect labor 250,000
Superintendence 210,000
Light, heat and power 320,000
Rent – factory building 120,000
Repair and maintenance – machinery 50,000
Factory supplies used 110,000
Depreciation – machinery 60,000 1,120,000
Total manufacturing cost 4,990,000
Goods in process – January 1 240,000
Total Cost of goods in process 5,230,000
Less: Goods in process – December 31 (170,000)
COST OF GOODS MANUFACTURED 5,060,000
(COST OF GOODS SOLD METHOD)
Masay Company
Income Statement
Note
Cost of goods sold (2) (5,120,000)
Gross income 2,330,000
Total 2,540,000
Expenses:
Administrative expenses (5) 590,000
Other expense (6) 300,000 1,720,000
Income before tax 820,000
Income tax expense (320,000)
NET INCOME 500,000
Note 1 – Net sales revenue

Sales 7,500,000
Sales returns and allowances (50,000)
Note 2 – Cost of goods sold

Finished goods – January 1 360,000
Cost of goods manufactured 5,060,000
Finished goods – December 31 (300,000)
Cost of goods sold 5,120,000

Gain from expropriation 100,000
Interest income 10,000
Gain on sale of equipment 100,000
Other Income 210,000
Note 4 – Selling expenses

Sales salaries 400,000
Advertising 160,000
Depreciation – store equipment 70,000
Delivery expenses 200,000
Total Selling expenses 830,000
Note 5 – Administrative expenses

Office salaries 150,000
Depreciation – office equipment 40,000
Accounting and legal fees 150,000
Office expense 250,000
Total Administrative Expenses 590,000

Earthquake loss 300,000
Other Expenses 300,000
(NATURE OF EXPENSE METHOD)
Masay Company
Income Statement
Note
Other Income (2) 210,000
Total income 7, 660,000
Less Expenses:
Decrease in finished goods & Goods in process (3) 130,000
Raw materials used (4) 2,920,000
Direct labor 950, 000
Factory overhead (5) 1,120,000
Salaries (6) 550,000
Advertising 160,000
Depreciation (7) 110,000
Delivery expense 200,000
Accounting & legal fees 150,000
Office expenses 250,000
Other expenses (8) 300,000 (6,840,000)
Income before tax 820,000
Income tax expense (320,000)
NET INCOME 500,000
Note 1 – Net Sales Revenue
Sales 7,500,000
Sales returns & allowances (50,000)
Note 2 – Other Income

Gain from expropriation of asset 100,000
Gain on sale of equipment 100,000
Interest income 10,000
Total other income 210,000
Note 3 – Decrease in Finished Goods and Goods in Process

Jan. 1 Dec. 31 Decrease
Finished goods 360,000 300,000 60,000
Goods in process 240,000 170,000 70,000
Total 600,000 470,000 130,000
Note 4 – Raw Materials Used

Raw materials – January 1 200,000
Purchases 3,000,000
Raw materials – December 31 (280,000)
Note 5 – Factory Overhead

Superintendence 210,000
Light, heat and power 320,000
Rent –factory building 120,000
Repairs & maintenance – machinery 50,000
Factory supplies used 110,000
Depreciation – machinery 60,000
Total 1,120,000
Note 6 – Salaries
Total salaries 550,000
Note 7 – Depreciation
Depreciation – store equipment 70,000
Depreciation – office equipment 40,000
Total 110,000
Note 8 Other Expenses

Earthquake loss 300,000
Other Expenses 300,000
Problem 9-3 (IAA)

Christian Company
Income Statement
Note
Sales revenue 8,000,000
Less: Cost of goods sold (1) (5,100,000)
Gross income 2,900,000
Less: Expenses:
Administrative expenses (3) 930,000 (1,730,000)
Less: Income tax expense (170,000)

Decrease in finished goods 200,000
Note 2 – Selling expenses

Advertising 120,000
Delivery expense 160,000
Total 800,000
Note 3 – Administrative expenses

Office supplies expense 30,000
Doubtful accounts 100,000
Total 930,000
Problem 9-4 (IAA)
Ronald Company
Statement of Cost of Goods Manufactured
Materials – January 1 1,120,000

Add: Purchases 1,600,000
Freight on purchases 220,000
Purchase discounts (20,000) 1,800,000
Materials available for use 2,920,000
Less: Materials – December 31 (1,560,000)
Materials used 1,360,000
Direct labor 2,000,000
Add: Factory overhead:
Heat, light and power 600,000
Repairs and maintenance 100,000
Other factory overhead 340,000
Factory supplies used (300,000+660,000–540,000) 420,000
Depreciation – factory building 280,000 2,100,000
Add: Goods in process – January 1 360,000
Total cost of goods in process 5,820,000
Less: Goods in process – December 31 (320,000)
Ronald Company
Income Statement
Note
Less: Cost of goods sold (2) (5,400,000)
Add: Gross income 1,580,000
Less: Expenses:
Selling expenses 200,000
Administrative expenses 340,000 (540,000)
Less: Income tax expense (200,000)
Note 1 – Net sales revenue
Sales 7,120,000
Sales returns and allowances (140,000)

Finished goods – January 1 420,000
Less: Cost of goods manufactured (5,500,000)
Less: Finished goods – December 31 (520,000)

Interest revenue 160,000
Other Income 160,000
Problem 9-5 (AICPA Adapted)

What amount should be reported as distribution costs?
ANSWER: A. 4,800,000
Solution:
Advertising 1,500,000
Freight out 800,000
Rent (2,200,000 x 1/2) 1,100,000
Sales salaries and commissions 1,400,000
Total distribution costs 4,800,000

What amount should be classified as administrative expenses?
ANSWER: A. 5,250,000
Solution:
Legal and audit fees 1,700,000
Rent for office space (2,400,000 x 1/2) 1,200,000
Officers’ salaries 1,500,000
Insurance 850,000
Total general and administrative expenses 5,250,000
Problem 9-7 (IAA)

What is the cost of goods manufactured for the current year?
ANSWER: A. 5,340,000
Solution:
Beginning raw materials 400,000
Purchases of raw materials 2,300,000
Less: Ending raw materials (340,000)
Add: Factory overhead:
Depreciation on factory building 320,000
Factory supervisor's salary 560,000
Indirect labor 360,000 1,240,000
Add: Beginning goods in process 760,000
Total goods in process 6,340,000
Less: Ending goods in process (1,000,000)

What is the cost of goods sold for the current year?
ANSWER: A. 9,950,000
Solution:
Raw materials purchased 4,300,000
Freight in 250,000
Less: Increase in raw materials (150,000)
Factory overhead 3,000,000
Decrease in goods in process 200,000
Decrease in finished goods 350,000
COST OF GOODS SOLD 9,950,000
1. What is the cost of raw materials used?
ANSWER: A. 3,850,000
Solution:
Beginning raw materials 300,000
Raw material purchases 4,000,000
Less: Ending raw materials (450,000)
RAW MATERIALS USED 3,850,000
2. What is the cost of goods manufactured for the current year?

ANSWER: C. 7,100,000
Solution:
Factory overhead:
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Utilities (60% x 500,000) 300,000 1,700,000
Beginning work in process 400,000
Less: Ending work in process (350,000)
3. What is the cost of goods sold for the current year?

ANSWER: B. 6,900,000
Solution:
Beginning finished goods 500,000
Add: Cost of goods manufactured 7,100,000
Less: Ending finished goods (700,000)
COST OF GOODS SOLD 6,900,000

What amount should be reported as adjusted net income?
Answer: D. 8,700,000
Solution:
Net Income before adjustments 7,410,000
Add: Unrealized loss on foreign currency 540,000
translation
Add: Adjustment of profit of prior year for 750,000
error in depreciation, net of tax effect
Adjusted Net Income 8,700,000
Problem 9-11 (IAA)

What is the income from continuing operations?
Answer: B. 8,000,000
Problem 9-12 (IAA)

What amount should be reported as income from continuing operations?
Answer: B. 1,350,000
Problem 9-13 (IAA)

Answer: A. 1,550,000

What amount should be reported as cost of goods manufactured?
Answer: A. 2,000,000

Answer: A. 1,260,000
Problem 9-15 Multiple Choice (PAS 1)

1. B 6. C
2. C 7. D
3. B 8. D
4. B 9. D
5. D 10. A
Problem 9-16 Multiple Choice (IFRS)
1. D 4. B
2. C 5. A
3. D
Problem 9-17 Multiple Choice (IAA)

1. D 6. C
2. D 7. C
3. D 8. A
4. A 9. D
5. C 10. B

1. C 4. A
2. C 5. A
3. D
Problem 9-19 Multiple Choice (AICPA Adapted)

1. B 4. C
2. B 5. D
3. A

1. D 4. A
2. D 5. C
3. C
CHAPTER 10
QUESTIONS:
1. Define a statement of cash flows.

A cash flow statement is a financial statement that provides aggregate data regarding all
cash inflows a company receives from its ongoing operations and external investment sources. It
summarizes the operating, investing, and financing activities of an entity. It also includes all
cash outflows that pay for business activities and investments during a given period.
2. Explain the primary purpose of a statement of cash flows

The primary purpose of the statement of cash flows is to provide relevant information
about cash receipts, cash payments, and the net change in cash resulting from the operating,
investing, and financing activities of a company during the period.
3. Define cash.
Cash is legal tender—currency or coins—that can be used to exchange goods, debt, or
services. Sometimes it also includes the value of assets that can be easily converted into cash
immediately, as reported by a company. Cash is bills, coins, bank balances, money orders, and
checks. Cash is listed first in the balance sheet, since the reporting sequence is in order by
liquidity, and it is the most liquid of all assets.
4. Define cash equivalents.

Cash equivalents are short-term, highly liquid investments that are readily convertible to
a known amount of cash and are subject to an insignificant risk of change in value. Cash
equivalents have a maturity of three months or less. It should be at minimal risk of a change in
value. Examples of cash equivalents are Marketable securities and Money market funds. To be
classified as a cash equivalent, an item must be unrestricted so that it is available for immediate
use.
5. What are the three classifications of cash flows?

 Operating activities- the cash flows derived primarily from the principal revenue-
producing activities of the entity. It generally results from transactions and other events
that enter into the determination of net income or loss.
 Investing activities- the cash flows derived from the acquisition and disposal of long-
term assets and other investments not included in cash equivalent.
 Financing activities- the cash flows derived from the equity capital and borrowings of
the entity. In other words, financing activities are the cash flows that result from
transactions between the entity and the owners (equity financing) and between the entity
and the creditors (debt financing).
6. Explain operating activities, investing activities and financing activities.

Operating activities include the company’s day-to-day activities, for example, purchasing
raw material or making sales. Cash inflows result from cash sales and collection of accounts
receivable. To generate these revenues, companies have to undertake operations such as
purchasing raw material, manufacturing inventory, paying employees, etc. Thus, cash outflows
resulting from cash payments for raw material, salaries, taxes, etc. Finally, the cash outflows are
subtracted from cash inflows, and the resultant amount is operating cash flow or net cash flow
from operating activities.
Investing activities include the purchase and sale of long-term assets and other
investments. Cash outflows are generated from investments in long-term assets and other
investments, include property, plant and equipment, intangible assets, both long-term and short-
term investments in equity, and debt issued by other organizations. Cash inflows include the sale
of non-trading securities, property, plant and equipment, intangibles, and other long-term assets.
Thereafter, the cash outflows are subtracted from cash inflows, and the resultant amount is
investing cash flow or net cash flow from investing activities.
Financing activities include obtaining or repaying capital, be it equity or long-term debt.

Cash inflows in this category include cash receipts from issuing stock or bonds and from
borrowing through long-term loans. Cash outflows include cash payments to repurchase stock
and to repay bonds and other borrowings. Subsequently, the cash outflows are subtracted from
cash inflows, and the resultant amount is financing cash flow or net cash flow from financing
activities.
7. Explain the treatment of noncash investing and financing transactions.
According to PAS 7, paragraph 43, provides that investing and financing transactions that
do not require the use of cash or cash equivalents shall be excluded from the statement of cash
flows. Noncash investing and financing transactions shall be disclosed elsewhere in the financial
statements, either in the notes to financial statements or in a separate schedule or in a way that
provides all relevant information about these transactions.
8. Explain the treatment of interest paid and interest received in a statement of cash flows.
According to PAS 7, paragraph 33, provides that interest paid and interest received shall
be classified as operating cash flows because such items enter into the determination of net
income or loss. Alternatively, interest paid may be classified as financing cash flow because it is
a cost of obtaining financial resources. Alternatively, interest received may be classified as cash
flow because it is a return on investment investing. For a financial institution, interest paid and
interest received are usually classified as operating cash flows.
9. Explain the treatment of dividend received and dividend paid in a statement of cash
flows.
According to PAS 7, paragraph 33, provides that dividends received shall be classified as
operating cash flow because it enters into the determination of net income. Alternatively, the
dividend received may be classified as investing cash flow because it is a return on investment.
PAS 7, paragraph 34, provides that dividends paid shall be classified as financing cash flow
because it is a cost of obtaining financial resources. Alternatively, the dividend paid may be
classified as operating cash flow to assist users to determine the ability of the entity to pay
dividends out of operating cash flows.
10. Explain the treatment of income taxes in a statement of cash flows.

According to PAS 7, paragraph 35, provides that cash flows arising from income taxes shall
be separately disclosed as cash flows from operating activities unless they can be specifically
identified with investing and financing activities. Tax cash flows are often difficult to match to
the originating underlying transaction, so most of the time, all tax cash flows are classified as
arising from operating activities.
PROBLEMS:

1. A 3. C
2. B 4. D
Problem 10-2 (IAA)

1. A 2. C 3. B
Problem 10-3 (IAA)

1. A 3. C
2. B 4. B
On December 31, 2020, what amount should be reported as cash and cash equivalents?
ANSWER: C. 2,400,000
Solution:
Checking account #101 1,750,000
Checking account #201 ( 100,000)
Time deposit 250,000
90-day treasury bill, due February 28, 2021 500,000
Total cash and cash equivalents 2,400,000

What is the cash balance at the end of current year?
ANSWER: A. 1,200,000
Solution:
Cash balance, beginning of year 1,300,000
Cash flow from financing activities 1,000,000
Cash flow operating services 400,000
Cash flow investing activities (1,500,000)
Cash balance at year-end 1,200,000

In the statement of cash flows, what amount should be reported as net cash used in investing
activities? Answer: D. 4,100,000
Solution:
Purchase of investment (2,600,000)
Sale of investment 3,500,000
Acquisition of 4-year certificate of deposit (5,000,000)
Net cash used in investing activities (4,100,000)

In the statement of cash flows for the current year, what amount should be reported as net cash
used in financing activities? ANSWER: A. 7,170,000
Solution: 950,000 – 7,500,000 – 620,000 = 7,170,000

What is the net cash provided by financing activities?
ANSWER: D. 370,000
Solution: 750,000 – 380,000 = 370,000

1. B 2. C
Problem 10-10 Multiple Choice (PAS 7)
1. C 6. A
2. B 7. D
3. A 8. A
4. B 9. A
5. C 10. A

1. B 4. A
2. B 5. A
3. A

1. D 4. A
2. C 5. C
3. A
CHAPTER 11
QUESTIONS:
1. Define accounting policies.

Accounting policies are the specific principles, bases, conventions, rules, and practices
applied by an entity in preparing and presenting financial statements. These include any
accounting methods, measurement systems, and procedures for presenting disclosures.
Accounting policies differ from accounting principles in that the principles are the accounting
rules and the policies are a company's way of adhering to those rules.
2. Define a change in accounting policy.

Accounting policies are the specific principles, bases, conventions, rules, and practices
applied by an entity in preparing and presenting financial statements. It may be necessary to
enhance the relevance and reliability of the information contained in the financial statements. A
change in accounting policy shall only be made when required by an accounting standard or an
interpretation of the standard. In the absence of an accounting standard that applies specifically
to a transaction, the most authoritative source that an entity should consider in developing and
applying an accounting policy is the most recent pronouncement of other standard setting bodies
that use a similar.
3. Give examples of change in accounting policy.

Examples of changes in accounting policy are the change in the method of inventory
pricing from the FIFO to the weighted average method and the change in the method of
accounting for long-term construction contracts from cost recovery method to percentage of
completion method. Another example is the initial adoption of a policy to carry assets at the
revalued amount is a change in accounting policy to be dealt with as revaluation and the change
from cost model to fair value model in measuring investment property.
4. When is a change in accounting policy allowed?

An entity is permitted to change an accounting policy if it is required by a standard or
interpretation, and if the results of the financial statements provide reliable and more relevant
information about the effects of transactions, other events or conditions on the entity's financial
position, financial performance, or cash flows. Change in accounting policy once selected,
accounting policies must be applied consistently for similar transactions and events.
5. How is a change in accounting policy reported?

A change in accounting policy required by a standard or an interpretation shall be applied
under the transitional provisions therein. If the standard or interpretation contains no transitional
provisions or if an accounting policy is changed voluntarily, the changes shall be applied
retrospectively or retroactively.
6. Explain the adoption of an accounting policy in the absence of an accounting standard.

PAS 8, paragraph 10, provides that in the absence of accounting standard that specifically
applies to a transaction or event, management shall use judgment in selecting and applying an
accounting policy that results in information t is relevant to the economic decision-making needs
of users and faithfully represented. Paragraphs 11 and 12 specify the following hierarchy
guidance which management may use when selecting accounting policies in such circumstances:
1. Requirements of current standards dealing with similar matters
2. Definition, recognition criteria, and measurement concepts for assets, liabilities, income,
and expenses in the Conceptual Framework for Financial Reporting
3. Most recent pronouncements of other standard-setting bodies that use a similar
Conceptual Framework, other accounting literature, and accepted industry practices.
7. Define a change in accounting estimate.

Change in accounting estimate is an adjustment of the carrying amount of an asset or
liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability. These are a normal and expected part of the
ongoing process of reviewing the current status and future benefits and obligations related to
assets and liabilities. A change in estimate arises from the appearance of new information that
alters the existing situation. Conversely, there can be no change in estimates in the absence of
new information.
8. How is a change in accounting estimate reported?

The effect of a change in an accounting estimate shall be recognized prospectively by
including it in profit or loss in the period of the change, if the change affects that period only. Or
the period of the change and future periods, if the change affects both. However, to the extent
that a change in an accounting estimate gives rise to changes in assets and liabilities or relates to
an item of equity, it is recognized by adjusting the carrying amount of the related asset, liability,
or equity item in the period of the change. Changes in Accounting Estimates are to be handled
currently and prospectively, if necessary. Prospective recognition means that the change is
applied to transactions, other events and conditions from the date of change in estimate.
9. Define prior period errors.
Prior period errors are omissions from and misstatements in an entity's financial
statements for one or more prior periods. These errors arise from a failure to use or misuse of
reliable information that was available and could reasonably be expected to have been obtained
and taken into account in preparing those statements. Such errors result from mathematical
mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and
fraud.
10. Explain the treatment of prior period errors.

Prior Period Errors shall be corrected retrospectively by adjusting the opening balances of
retained earnings and affected assets and liabilities. Retrospective application means that the
correction affects only prior period comparative figures. Current period amounts are unaffected.
If comparative statements are presented, the financial statements of the prior period shall be
restated to reflect the retroactive application of the prior errors as a retrospective restatement.
PROBLEMS:

In the statement of retained earnings for 2020, what amount should be reported as the pretax
cumulative effect of this accounting change?
ANSWER: C. 600,000 addition

What pretax amount should be reported in the statement of retained earnings for 2020 as the
cumulative effect of the change in accounting policy?
ANWER: A. 500,000 decrease

What is the depreciation of the machine for 2020?
ANSWER: A. 750,000

What is the accumulated depreciation for the machine on December 31, 2020?
ANSWER: A. 2,920,000
Problem 11-5 (IAA)

What is the depreciation for 2020?
ANSWER: A. 270,000
Problem 11-6 (IFRS)

What is the total depreciation for 2020?
ANSWER: C. 2,550,000

The residual value did not change. What is the depreciation expense on this machine for 2020?
Answer: D. 359,000
Problem 11-8 (IAA)

What is the total charge against income for 2020 as a result of the accounting changes?
ANSWER: A. 940,000
Problem 11-9 (IFRS)

What total amount should be reported as prior period error in the financial statements for the year
ended December 31, 2020?
ANSWER: B. 1,600,000
Problem 11-10 (IFRS)

What adjustment is required to restate retained earnings on January 1, 2020?
ANSWER: A. 280,000

1. A 6. A
2. A 7. D
3. B 8. D
4. B 9. B
5. C 10. A

1. D 4. A
2. B 5. C
3. A

1. C 4. C
2. A 5. A
3. D

1. A 4. C
2. A 5. D
3. B

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Zerda, Jessa Mae P.

1. Define an income statement

2. Explain the usefulness of an income statement.

3. Define a comprehensive income

4. Distinguish components of profit or loss and components of other comprehensive income

5. Identify components of other comprehensive income.

6. Explain the presentation of other comprehensive income

10. Explain the two options of presenting comprehensive income.

11. Identify the common sources of income

12. Identify the components of expenses.

Beginning raw materials xx

15. Define distribution costs.

17. Define other expenses.

19. Explain the two forms of income statement.

b. The second form is the natural presentation. It is referred to as the nature of

20. Which form of income statement is required?

21. What is a single statement of comprehensive income?

22. Define a statement of retained earnings.

24. Define a statement of changes in equity.

25. Define a statement of cash flows

Problem 9-1 (IAA)

Note 1 – Net Sales

Note 3 – Other income

Note 4 – Selling Expenses

Note 5 – Administrative Expense

Note 1 – Net Sales revenue

Note 2 – Other income

Note 3 – Increase in inventory

Note 4 – Net purchases

Note 6 – Other expenses

Problem 9-2 (IAA)

(COST OF GOODS SOLD METHOD)

Note 1 – Net sales revenue

Note 2 – Cost of goods sold

Note 3 – Other income

Note 4 – Selling expenses

Note 5 – Administrative expenses

Note 6 – Other expenses

(NATURE OF EXPENSE METHOD)

Note 2 – Other Income

Note 3 – Decrease in Finished Goods and Goods in Process

Note 4 – Raw Materials Used

Note 5 – Factory Overhead

Note 8 Other Expenses

Problem 9-3 (IAA)

Note 1 – Cost of goods sold

Note 2 – Selling expenses

Note 3 – Administrative expenses

Materials – January 1 1,120,000

Note 2 – Cost of goods sold

Note 3 – Other income

Problem 9-5 (AICPA Adapted)

Problem 9-6 (AICPA Adapted)

Problem 9-7 (IAA)

Problem 9-8 (AICPA Adapted)

2. What is the cost of goods manufactured for the current year?

3. What is the cost of goods sold for the current year?

Problem 9-10 (AICPA Adapted)

Problem 9-11 (IAA)

Problem 9-12 (IAA)

Problem 9-13 (IAA)

Problem 9-14 (AICPA Adapted)

What amount should be reported as income from continuing operations?

Problem 9-15 Multiple Choice (PAS 1)