ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 1

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4201: FINANCIAL STATEMENTS

Purpose of financial statements:
Financial statements are a structured representation of the financial position and financial performance of an
entity. The objective of financial statements is to provide information about the financial position , financial
performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.
Financial statements also show the results of the management stewardship of the resources entrusted to it. To
meet this objective, financial statements provide information about an entity's (a) assets (b) liabilities (c) equity
(d) income and expenses, including gains and losses (e) contributions by and distributions to owners in their
capacity as owners and (f) cash flows. This information, along with other information in the notes, assists users
of financial statements in predicting the entity's future cash flows and , in particular, their timing and certainty.

Complete set of financial statements:

A. A statement of financial position as at the end of the period
B. A statement of profit or loss and other comprehensive income for the period
C. A statement of changes in equity for the period
D. A statement of cash flows for the period
E. Notes, comprising significant accounting policies and other explanatory information
F. A statement financial position as at the beginning of the preceeding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its financial statements,
or when it reclassifies items in its financial statements.

Statement of financial position (balance sheet) – is a statement of financial position that presents the
resources (assets), obligations (liabilities) and equity at a given point in time.

Elements of Statement of Financial Position

Assets – are resources controlled by the entity as a result of past events and from which future economic benefits
are expected to flow to the entity.

Liabilities – are present obligations of the entity arising from past events, the settlement of which are expected
to result in an outflow from the entity of resources embodying economic benefits.

Equity – is the owners’ residual interest in the assets of an entity that remains after deducting its liabilities.

Recognition of Assets and Liabilities:

Assets – are recognized in the balance sheet when it is probable that the future economic benefits will flow to
the entity and the asset has a cost or value that can be measured reliably.

Liabilities – are recognized in the balance sheet when it is probable that an outflow of resources embodying
economic benefits will result from the settlement of a present obligation and the amount at which the settlement
will take place can be measured reliably.

Current and Non-current Classification:

Assets and liabilities should be separately classified on the face of the balance sheet except in circumstances
when a liquidity-based presentation provides more reliable and relevant information.
Current asset-
IAS/PAS 1, paragraph 66: An entity shall classify an asset as current when:
a. It expects to realize the asset or intends to sell or consume it, in its normal operating cycle;
b. It holds the asset primarily for purpose of trading.
c. It expects to realize the asset within twelve months after the reporting period; or
d. The asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting period.

An entity shall classify all other assets as non-current.

Current liabilities –
IAS/PAS 1, paragraph 69: An entity shall classify a liability as current when:
a) It expects to settle the liability in its normal operating cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after the reporting period; or
d) The entity does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period.

An entity shall classify all other liabilities as non-current.

Information to be presented in the statement of financial position:
As a minimum, the face of the balance sheet shall include line items that present the following amounts:
a. Property, plant and equipment
b. Investment property
c. Intangible assets

Page 1 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

d. Financial assets (excluding amounts shown under e, h and i)

e. Investment accounted for using the equity method
f. Biological assets within the scope of IAS 41 Agriculture
g. Inventories
h. Trade and other receivables
i. Cash and cash equivalents
j. The total assets classified as held for sale and assets included in disposal groups classified as held for sale in
accordance with IFRS 5
k. Trade and other payables
l. Provisions
m. Financial liabilities (excluding amounts shown in (K) and (L)
n. Liabilities and assets for current tax as defined in IAS 12 Income taxes
o. Deferred tax liabilities and deferred tax assets as defined in IAS 12 Income taxes
p. Liabilities included in the disposal groups classified as held for sale in accordance with IFRS 5
q. non.controlling interest, presented within equity
r. Issued capital and reserves attributable to equity holders of the parent

Additional line items, headings and subtotals shall be presented on the face of the balance sheet when such
presentation is relevant to an understanding of the entity’s position.

When an entity presents current and non-current assets and current and non-current liabilities as separate
classifications in its statement of financial position, it shall not classify deferred tax assets (liabilities) as current
assets (liabilities).

Information to be presented either in the statement of financial position or in the notes - an entity shall disclose,
either in the statement of financial position or in the notes further subclassifications of the line items presented,
classified in a manner appropriate to the entity. The disclosures vary each item, for example:

• Items of property, plant and equipment are disaggregated into classes in accordance with IAS 16
• Receivables are disaggregated into amounts receivable from trade customers, receivables from related parties
prepayments and other amounts;
• Inventories are sub-classified, in accordance with PAS 2, into classifications such as merchandise, production
supplies, materials, work in progress and finished goods;
• Provisions are disaggregated into provisions for employee benefits and other items; and
• Equity capital and reserves are disaggregated into various classes, such as paid-in capital, share premium
and reserves.

An entity shall disclose the following, either on the face of the balance sheet or in the notes:
• For each class of share capital;
• The number of shares authorized;
• The number of shares issued and fully paid, and issued but not fully paid;
• Par value per share, or the shares have no par value;
• A reconciliation of the number of share outstanding at the beginning and at the end of the period;
• The rights, preferences and restrictions attaching to the class including restrictions on the distribution of
dividends and the repayment of capital;
• Shares in the equity held by the entity or by its subsidiaries or associates; and
• Shares reserved for issue under options and contracts for the sale of shares, including the terms and amounts;
and
• A description of the nature and purpose of each reserve within equity.

Statement of profit or loss and other comprehensive income

The statement of profit or loss and other comprehensive income shall present, in addition to the profit or loss
and other comprehensive income sections:
a) profit or loss
b) Total comprehensive income
c) Comprehensive income for the period, being the total of profit or loss and other comprehensive income

If an entity presents a separate statement of profit or los it does not present the profit or loss section in the
statement presenting comprehensive income.

An entity shall present the following items, in addition to the profit or loss and other comprehensive income
sections, as allocation of profit or loss and other comprehensive income for the period;
(a) P rofit or loss for the period attributable to
(1) non-controlling interests and
(2) owners of the parent

(b) comprehensive income for the period attributable to:

(1) non-controlling interest and
(2) Owners of the parent

Page 2 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

In addition to items required by other IFRSs, the profit or loss section or the statement of profit or loss shall
include line items that present the following amounts for the period;
(a) revenue, presenting separately interest revenue calculated using the effective interest method
(b) Gains and losses arising from the derecognition of financial assets measured at amortized cost
(c) Finance costs
(d) Impairment losses (including reversals of impairment losses or impairment gains
(e) Share of profit or loss of associates and joint ventures accounted for using the equity method
(f) If a financial asset is reclassified out of the amortized costs measurement category so that it is measured at
fair value through profit or loss, any gain or loss arising from the difference between the previous amortized
cost of the financial asset and its fair value at the reclassification date
(g) If a financial asset is reclassified out of the fair value through other comprehensive income measurement
category so that it is measured at fair value through profit or loss, any cumulative gain or loss previously
recognized in other comprehensive income that is reclassified to profit or loss
(h) Tax expense
(i) A single amount for the total of discontinued operation

Forms of Presenting the Statement of Profit or loss and other comprehensive income:
1. Functional presentation – also known as cost of sales method, this form classifies expenses according to
their function as part of cost of sales, selling activities, administrative activities and other activities. At a
minimum, an entity discloses its cost of sales under this method separately from other expenses.

Revenue P xxx
Cost of sales (xxx)
Gross profit xxx
Other income xxx
Distribution costs (xxx)
Administrative costs (xxx)
Other expenses (xxx)
Profit P xxx
Net income after tax P xxx
Other comprehensive income, net of tax:
Unrealized gains P xx
Unrealized losses (xx) xxx
Comprehensive net income P xxx
2. Natural presentation – also known as nature of expense method, this form, expenses are aggregated
according to their nature and not allocated among various functions within the entity. (for example,
depreciation, purchase of materials, transport costs, employee benefits, and advertising costs), and are not
reallocated among various functions within the entity.
Revenue P xxx
Other income xxx
Changes in inventory of finished goods and work in process xxx
Raw materials and consumables used xxx
Employee benefits costs xxx
Depreciation and amortization expense xxx
Other expenses xxx (xxx)
Profit P xxx
Income tax (xx)
Net income after tax P xxx
Other comprehensive income, net of tax:
Gains P xx
Losses ( xx) xxx
Comprehensive net income P xxx
An entity classifying expenses by function shall disclose additional information on the nature of expenses,
including depreciation and amortization expense and employee benefits expense.

Statement of changes in equity.

Information to be presented in the statement of changes in equity:
(a) total comprehensive income for the period, showing separately the total amounts attributable to owners of
the parent and to non-controlling interests.
(b) For each component of equity, the effects of retrospective application or retrospective restatement recognized
in accordance with IAS 8
(c) For each component of equity, a reconciliation between the carrying amount at the beginning and the end of
the period, separately (as a minimum) disclosing changes resulting from (1) profit or loss (2) other
comprehensive income and (3) transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership interest in subsidiaries that do not
result in a loss of control.
Statement of Cash Flows
Cash flow information provides users of financial statements with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the entity to utilize those cash flows. IAS 37 sets out
requirements for the presentation and disclosure of cash flow information.

Page 3 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

1. The major elements of the income statement are

a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations and cumulative effect.
c. revenues, expenses, gains, and losses.
d. All of these.

2. The income statement reveals

a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.

3. Which method of income measurement is used in the preparation of the income statement?
a. Capital maintenance approach.
b. Transaction approach.
c. Cash-flow approach.
d. Income components approach.

4. Which of the following equations expresses the definition of “income”?

a. Income = Revenues – Expenses
b. Income = (Revenues + Gains) – (Expenses + Losses)
c. Income = Revenues + Gains
d. Income = Gains – Losses

5. The definition of expenses includes

a. losses only.
b. expenses and losses.
c. expenses only.
d. expenses, losses and unrealized losses on available-for-sale securities.

6. IFRS requires that a single amount be disclosed within the income statement for
a. the post-tax profit/loss on discontinued operations and the pre-tax gain/loss on the disposal of
discontinued operational assets.
b. the pre-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal of
discontinued operational assets.
c. the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss on the disposal of discontinued
operational assets.
d. the post-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal
of discontinued operational assets.

7. Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income.
b. The condensed income statement.
c. The consolidated income statement.
d. Including gains and losses from discontinued operations of a component of a business in determining net
income.

8. Which of the following is not a selling expense?

a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.

9. Which of the following is included in comprehensive income?

a. Investments by owners.
b. Unrealized gains on non-trading equity securities.
c. Distributions to owners.
d. Changes in accounting principles.

10. Comprehensive income includes all of the following except

a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.

11. Comprehensive income includes all of the following, except

a. revenues and gains.
b. expenses and losses.
c. preference share dividends.
d. unrealized gains and losses on non-trading equity securities.

Page 4 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

12. The statement of financial position is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

13. The statement of financial position can help assess all of the following except
a. Solvency.
b. Financial flexibility.
c. Profitability.
d. Liquidity.

14. The net assets of a business are equal to

a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total shareholders' equity.
d. none of these choices are correct.

15. The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.

16. The basis for classifying assets as current or noncurrent is the period of time normally required by the
accounting entity to convert cash invested in
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 is longer.

17. The current assets section of the statement of financial position should include
a. machinery.
b. patents.
c. goodwill.
d. Inventory.

18. Which of the following is a current asset?

a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.

19. Each of the following are an intangible asset except

a. copyrights.
b. goodwill.
c. plant expansion fund.
d. trademarks.

20. Which of the following is not a long-term investment?

a. Investments in ordinary shares
b. Franchise
c. Land held for speculation
d. A sinking fund

21. Which item below is not a current liability?

a. Unearned revenue
b. Share dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable

22. An example of an item which is not an element of working capital is

a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. short-term investments.

23. Non-current liabilities include

a. obligations not expected to be liquidated within the next year or operating cycle.
b. obligations payable at some date beyond the next year or operating cycle.

Page 5 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

c. deferred income taxes and most lease obligations.

d. All of these choices are correct.

24. Treasury shares should be reported as a(n)

a. current asset.
b. investment.
c. other asset.
d. reduction of equity.

25. The adjusted trial balance of BTS Company includes the following accounts at December31, 2021:

Sales revenue P 8,000,000

Sales returns 500,000
Commission income 30,000
Interest expense 180,000
Inventory, December 31, 2021 ?
Purchases 5,500,000
Sales salaries and commissions 350,000
Administrative staff costs 650,000
Office supplies expense 120,000
Dividends declared 800,000
Dividend income 20,000
Loss on sale of equipment 40,000
Rent expense 250,000
Gain on sale of machinery 50,000
Net unrealized gain on FVOCI 90,000
Depreciation expense- Store Equipment 60,000
Depreciation expense- Office Equipment 70,000
Freight-out 130,000
Freight-in 400,000

Additional information:

1. Inventory, January 1, 2021, P 750,000

2. Gross profit rate is 25% of net sales revenue
3. Rent expense is allocated 55% to selling and 45% to administrative
4. Ignore income tax

Compute the following:

A B C D
Q1. Distribution cost 677,500 540,000 410,000 547,500
Q2. Income from operations 305,000 125,000 165,000 345,000
Q3. Profit or Loss 125,000 215,000 35,000 395,000

26. Ortiz Co. had the following account balances:

Sales revenue P 120,000
Cost of goods sold 60,000
Salaries and wages expense 10,000
Depreciation expense 20,000
Dividend revenue 4,000
Utilities expense 8,000
Rent revenue 25,000
Interest expense 12,000
Sales returns 11,000
Advertising expense 13,000
What amount would Ortiz report as other income in its profit or loss statement?
a. P29,000
b. P17,000
c. P25,000
d. P13,000

27. Ortiz Co. had the following account balances:

Sales revenue P 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000

Page 6 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

Interest expense 18,000

Sales returns 16,500
Advertising expense 19,500
What amount would Ortiz report as income from operations in its profit or loss statement?
a. P73,500
b. P45,000
c. P33,000
d. P15,000

28. For Matter Company, the following information is available:

Cost of goods sold P240,000
Sales discounts 8,000
Income tax expense 24,000
Operating expenses 92,000
Sales revenue 400,000
In Matter’s statement of profit or loss using the natural presentation, gross profit
a. should not be reported.
b. should be reported at P36,000.
c. should be reported at P152,000.
d. should be reported at P160,000.

29. For Rook Company, the following information is available:

Cost of goods sold P270,000
Sales returns and allowances 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rook's statement of profit or loss using the functional presentation, gross profit
a. should not be reported.
b. should be reported at P36,000.
c. should be reported at P168,000.
d. should be reported at P180,000.

30. Use the following information (in thousands):

Service Revenue P1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,160,000
Income before income tax 380,000
Non-operating expenses 20,000

Determine the amount of finance cost.

a. P40,000
b. P160,000
c. P200,000
d. P20,000

31. Use the following information (in thousands):

Service Revenue P1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,000,000
Income before income tax 400,000

Determine the amount of discontinued operation.

a. P40,000
b. P20,000
c. P200,000
d. P160,000

32. Stine Corp.'s trial balance reflected the following account balances at December 31, 2020:
Accounts receivable (net) P24,000
Trading securities 6,000
Accumulated depreciation—equipment 15,000
Cash 21,000

Page 7 of 8 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4201
Week 1: FINANCIAL STATEMENTS

Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2020 statement of financial position, the current assets total is
a. P101,000.
b. P92,000.
c. P87,000.
d. P83,000.

33. The accounts and balances shown below are gathered from Cyclops Company’s adjusted trial balance.

Bonds payable 250,000 Investment at amortized cost 300,000

Cash in bank 175,000 Intangible asset 48,000
Investment at FVPL 600,000 Investment in Associate 700,000
Cash Dividends payable 140,000 Deferred tax liability 228,000
Prepaid expenses 136,000 Accounts payable 248,000
Inventory 820,000 Accounts receivable 366,000
Investment property 525,000 Property, plant and equipment 1,200,000
Petty Cash fund 153,000 Advances to suppliers 450,000
Accumulated depreciation-PPE 400,000 Advances from shareholder 900,000

Compute the following:

A B C D
Q1. Current assets 2,700,000 2,373,000 3,150,000 2,250,000
Q2. Non-current assets 2,700,000 2,373,000 3,173,000 2,823,000
Q3. Current liabilities 388,000 1,288,000 838,000 1,378,000
Q4. Non-current liabilities 478,000 928,000 1,600,000 1,378,000

34. Houston Company has the following items: share capital–ordinary, P820,000; treasury shares, P85,000;
deferred taxes P100,000 and retained earnings, P313,000.

What amount should Houston Company report as total equity?

a. P 948,000.
b. P1,048,000.
c. P1,148,000.
d. P1,218,000.

35. Belle Corp. has two classes of share capital outstanding: 12%, P100 par value preference share and P50
par value ordinary share. Balances on January 1, 2021 were as follows:

Preference Share Capital – 5,000 shares P500,000

Ordinary Share Capital – 50,000 shares 2,500,000
Share premium – Preference 200,000
Share premium – Ordinary 2,000,000
Accumulated profits 4,000,000

The following data summarize the transactions for 2021:

a. Issue of 20,000 shares of ordinary at P50 per share on January 20.
b. Purchase of 5,000 of the company’s own ordinary shares from stockholders at P60 per share on February
20.
c. A 2 for 1 share split on the ordinary on April 1.
d. 20% stock dividend to ordinary shares was declared on April 30 and distributed on May 20. The prevailing
fair value of share on this date was P60 per share.
e. Reissuance of 3,000 reacquired shares at P40 per share on May 3.
f. Donation of 15,000 shares of ordinary by shareholders on June 5.
g. Reissuance of 10,000 donated stocks at P40 per share on July 1.
h. Declaration of P12 cash dividends to preference shares and P3 per share dividends to ordinary on
November 30 to stockholders as of December 20 payable on January 30 of the next year.
i. Total comprehensive income for the year comprises of net income amounting to P1,200,000 and
Unrealized loss on Investment at FVOCI amounting to P200,000.

What is the total Stockholder’s equity as of December 31, 2021?

a. 10,458,000 b. 10,898,000 c. 10,868,000 d. 11,318,000

Page 8 of 8 0915-2303213/0908-6567516  www.resacpareview.com