Santiago City, Philippines

CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

Jimmy I. Peru, JD,MBM,MICB,CPA

FINANCIAL STATEMENTS – PART 1

1. STATEMENT OF FINANCIAL POSITION  Plant expansion fund

a. Also known before as balance sheet.  Contingency fund
b. Discloses the financial position of the company at a  Insurance fund
particular point in time.  Cash surrender value
c. The statement of financial position is used to evaluate: d) Valuation basis differ for different items.
1) Liquidity – nearness of the noncash assets to cash.
2) Financial structure – financial (debt or equity) of assets. 2. Property, plant and equipment – tangible long-
3) Capacity to adaptation – the company’s ability to lived assets used in business operation.
use resources to adapt to change. a) Land
d. Element of the statement of financial position  Land used as plant site
1) Assets = Liabilities + Owners’ Equity  Land held as a future plant site
e. Statement of financial position classifications:
 Agricultural land
1. Form:
b) Land improvements – driveways, parking, fences
a. Account form – assets on left; liabilities and
c) Buildings – stores, offices, factories,
owners’ equity on right.
warehouses
b. Report form – assets on top; liabilities and d) Building improvements
owners’ equity on bottom.
e) Machinery– factory machinery
f) Equipment– store and office equipment,
2. Assets furniture and fixtures, delivery equipment.
a. Current Assets – cash and other assets expected to be
g) Natural resources
converted to cash or used within a year or the operating
h) Reported at historical cost less accumulated
cycle, whichever is longer.
depreciation or depletion less impairment loss
1. Operating cycle – the average time for the i) Land is not depreciated.
company to spend cash for inventory, sell the
inventory, and collect cash. 3. Intangible assets – long-lived assets lacking
2. Generally listed in order of liquidity. physical substance that are used in business
operations.
3. Presentation of Current Assets a) Represent rights or privileges.
a) Cash and Cash Equivalents b) Examples: Patents, copyrights, goodwill,
b) Financial Assets at Fair Value through P/L trademarks, franchises
c) Trade and Other Receivables c) Reported at historical cost less accumulated
d) Inventories amortization less impairment loss
e) Prepaid Expenses d) A separate accumulated amortization account
f) Other current assets is not generally used.
 PPE classified as held for sale shall be
excluded from PPE but presented separately 4. Biological Assets – living plants and animals
as current asset. This asset shall not be
depreciated. 5. Other Noncurrent Assets – assets that do not fit
 Land held for current sale by a real estate any of the other categories.
developer a) Examples: long-term rental prepayments,
long-term refundable deposits.
b. Noncurrent Assets
1. Long-term Investments – items intended to be held 6. Exploration and evaluation asset is classified
for the term and not currently used in business either as tangible asset or an intangible asset.
operations.
a) Investment property 3. Liabilities
 Land held for long-term capital a. Current liabilities – liabilities expected to be satisfied
appreciation by using current assets or creating new current
 Land held for a currently undetermined liabilities.
use 1) Trade and Other Payables
 Building owned and leased out under 2) Current Provisions
operating lease 3) Short-term Borrowing
 Building that is vacant to be leased out 4) Current Portion of Long-term Debt
under operating lease 5) Current Tax Liability
 Property that is being constructed or
developed for future use as investment b. Noncurrent liabilities – all liabilities that are not
property classified as current.
b) Investment Securities 1) Noncurrent portion of Long-term debt
 Equity securities 2) Finance Lease Liability
 Debt securities 3) Deferred Tax Liability
c) Investment in funds 4) Long-term Obligations to Company Officers
 Sinking fund 5) Long-term Deferred Revenue
 Preference share redemption fund

FINANCIAL STATEMENTS page 1

 c. Trade and Other Payable f. Investment in associates accounted for by the equity
1) Accounts payable method
2) Notes payable g. Intangible assets
3) Accrued interest on note payable h. Investment property
4) Dividends payable i. Biological assets
5) Accrued expenses j. Total assets classified as held for sale and assets
included in disposal group classified as held for sale
d. Provision k. Trade and other payables
1) Warranties l. Current tax liability
2) Court case m. Deferred tax asset and deferred tax liability
3) Environmental contamination n. Provisions
4) Decommissioning or abandonment costs o. Financial liabilities (other than 11 and 14)
5) Guarantee p. Liabilities included in disposal group classified as held
for sale
e. Working Capital – Current assets minus current q. Noncontrolling interest
liabilities. r. Share capital and reserves

f. Current Ratio – current assets divided by current 6. Report form of SFP

liabilities.
g. Stock dividend payable is classified as part of equity ABC COMPANY
rather than an accounting liability STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2013
h. Trade payables and accruals for employee and other
operating costs are classified as current liabilities even ASSETS
if they are settled more than twelve months after Current assets
reporting period Cash & cash equivalents xxx
i. Deferred tax liability shall be classified as noncurrent Financial assets @ FV xxx
Trade & other receivables xxx
liability
Inventories xxx
j. Deferred tax asset shall be classified as noncurrent Prepaid expenses xxx
asset Total current assets xxx
k. Redeemable preference share shall be classified as Noncurrent assets
current or noncurrent liability depending on the date of Property, plant & equipmt xxx
redemption Long-term investments xxx
Intangible assets xxx
Other noncurrent assets xxx
4. Owners’ Equity Total noncurrent assets xxx
a. Measures the owners’ interests. TOTAL ASSETS xxx
b. Measured indirectly as a residual of assets minus
liabilities. LIABILITIES AND SHAREHOLDERS’ EQUITY
c. Three forms of business organization: sole Current liabilities
Trade and other payables xxx
proprietorship, partnership and corporation.
Current provisions xxx
1) Sole proprietorship and partnership generally have Short-term borrowing xxx
one capital account for each owner. Current portion of long-term debt xxx
2) Corporations generally break down owners’ equity Current tax liability xxx
(shareholders’ equity) into paid-in capital versus Total current liabilities xxx
retained earnings. Noncurrent liabilities
a) Paid-in capital – the amounts paid in by the Noncurrent portion of long-term debt xxx
Finance lease liability xxx
owners in exchange for shares of stock. Deferred tax liability xxx
(i) Share Capital– the par value or stated Long-term obligations to company officers xxx
value per share. Long-term deferred revenue xxx
(ii) Share Premium (Paid-in capital in excess Total noncurrent liabilities xxx
of par) (additional paid-in capital) –
amounts received for the share in excess Shareholders’ equity
Share capital xxx
of its par value. Reserves xxx
b) Retained Earnings – the company’s Retained earnings xxx
accumulated earnings less any dividends. Total shareholders’ equity xxx
(i) Deficit – a negative value. Total liabilities and shareholders’ equity xxx
(ii) Appropriations - amounts designated for
special purpose and not available for
dividends. Must be shown separately 7. STATEMENT OF CHANGES IN EQUITY
from unappropriated amount.
(iii) Treasury Shares – issued shares of the a. It shows the movements in the elements or components
company’s stock which have been of the shareholders’ equity
repurchased and are being held for some b. Components
future purpose such as employee stock 1. CI for the period
options. 2. For each component of equity, the effects of
(i) Reduces shareholders’ equity changes in accounting policies and corrections of
(ii) Accounted for at cost method errors
3. For each component of equity, a reconciliation
5. Line items in statement of financial position between the carrying amount at the beginning and
a. Cash and cash equivalents end of the period, separately disclosing changes
b. Financial assets (other than 1, 3 and 6) from:
c. Trade and other receivables a) P/L
d. Inventories b) Each item of the OCI
e. Property, plant and equipment

FINANCIAL STATEMENTS page 2

 c) Transactions with owners in their capacity as
owners showing separately contributions by b. Three major categories in the statement:
and distributions to owners 1) Investing activities:
2) Financing activities:
4. Sample of SCE 3) Operating activities:
ABC COMPANY
STATEMENT OF CHANGES IN EQUITY c. The two methods:
FOR THE Year Ended December 31, 2012 1) Direct method – shows in detail or itemizes the
Share Reserves Retained
Capital Earnings cash receipts and cash payments.
Balances, beg. xxx xxx xxx 2) Indirect Method – presenting the cash flow from
Correction of error +- xxx
Change in accounting +-xxx
operations begins with the accrual basis net
policy income and applies a series of adjustments to
Issuance of ordinary xxx xxx
share convert the income to a cash basis.
Issuance of xxx xxx
preference share
Comp. Income 9. STATEMENT OF RETAINED EARNINGS
P/L +- xxx
OCI +- xxx
Dividends paid during (xxx) a. It shows the changes affecting directly the retained
the year earnings of an entity and relates the income statement
Current
appropriations for Xxx (xxx) to the statement of financial position.
contingencies
Balances, End xxx xxx xxx
b. Components
1. P/L for a period
8. STATEMENT OF CASH FLOWS 2. Prior period errors
a. Uses: To report a company’s cash receipts and 3. Dividends declared and paid to shareholders
payments during a period, to assess future cash flows, 4. Effect of change in accounting policy
to assess debt-paying ability, to assess dividend-paying 5. Appropriation of retained earnings
ability, to evaluate external financial needs, to identify c. The statement of retained earnings is no longer a
causes for differences between net income and cash required basic statement but it is a part of the statement
flows, to evaluate investing and financing activities, to of changes in equity.
assess liquidity, financial flexibility, profitability and
risk.

PROBLEMS

PROBLEM 1. ABC Corp., reported total assets of P4,375,000 Problem 4: Current Assets The following data are available
at year-end. The total assets included the following: for purposes of stating the financial position of Today
Idle machinery 150,000 Corporation on December 31, 2012:
Treasury shares of the company at cost P120,000 Cash, including sinking fund of P50,000 with
Unamortized patent 56,000 trustee P200,000
Cash surrender value of life insurance 68,500 Notes receivable (P20,000pledge) 120,000
Cumulative translation loss 42,000 Accounts receivable 80,000
Inventory, including P60,000 cost of goods in
What amount should be reported as total assets at year-end? transit purchased FOB destination point.
a. P4,208,500 c. P4,213,000 The goods were received on January 3,
b. P4,250,500 d. P4,063,000 2013 280,000
Allowance for doubtful accounts 1,000
Problem 2: Current Assets and Noncurrent Assets
ABC Corporation’s trial balance reflected the following account How much current assets should be shown in the statement of
balances at December 31, 2012 financial position as of December 31, 2012?
Accounts receivable (net) P16,000 P____________________
Financial asset fair value through OCI 5,000
Accumulated depreciation-equipment 15,000 Problem 7: Current Liabilities
Cash 11,000 ABC Company provided the following information on
Inventory of merchandise 30,000 December 31, 2012:
Equipment 25,000
Patent 4,000 Notes payable:
Prepaid expenses 1,000 Trade ………………………………. P600,000
Land held for future business site 18,000 Bank loans…………………………. 150,000
Advances from officers…………… 180,000
1. In December 31, 2012 statement of financial position, the Accounts payable – trade……………………… 700,000
current assets total is P____________________ Bank overdraft…………………….………….. 120,000
2. In December 31, 2012 statement of financial position, the Stock Dividends payable……………………… 300,000
noncurrent assets total is P____________________ Withholding tax payable……………………… 50,000
Mortgage payable…………………………… 1,500,000
Problem 3: Current Assets The following are data of DEF Income tax payable……………………………. 80,000
Corporation: Estimated warranties payable……………… 60,000
Cash in bank P95,000 Provisions …………………………………… 70,000
Notes receivable (P20,000 pledge) 100,000 Accrued liabilities…………………………… 95,000
Notes receivable discounted 40,000 Gift certificates payable………………………… 100,000
Accounts receivable – unassigned 200,000 Notes receivable discounted…………………… 200,000
Accounts receivable – assigned 70,000 Deferred tax liability 25,000
Allowance for doubtful accounts 1,000
Required: Compute the total current liabilities on December 31,
Considering the above data, what is the amount of current 2012? P_________________
assets of DEF Corporation? P__________________
FINANCIAL STATEMENTS page 3
Problem 5: Statement of Financial Position. Prepare a Problem 9: Net Income/Retained Earnings
properly classified statement of financial position for ABC Changes is account balance for the Flanigan Sales Co. during
Corporation from the following account balances as of 2012 were as follows:
December 31, 2012. Increase (Decrease)
Share Capital 5,000,000 Cash P135,000
Share Premium 500,000 Accounts Receivable 15,000
Retained Earnings 880,000 Inventory 120,000
Bonds payable 2,500,000 Building and Equipment (net) 360,000
Employees income tax payable 20,000 Accounts Payable (105,000)
Notes payable 100,000 Bonds Payable 300,000
Accrued expenses 30,000 Ordinary Shares 225,000
Accrued interest on notes payable 10,000 Share Premium 45,000
Income tax payable 60,000
Allowance for doubtful accounts 50,000 Dividends declared during 2012 were P75,000.
Calculate the net income for the year assuming there were no
Advances from customers 100,000
transactions affecting retained earnings other than the dividends.
Accounts receivable 500,000 P________________
Accumulated depreciation – building 1,600,000
Land 3,400,000 Problem 10: Statement of Financial Position ABC
Factory supplies 50,000 Multinational Corporation provided the following balances on
Notes receivable 150,000 December 31, 2012
Building 4,000,000
Cash 420,000 Accounts payable 125,000
Claim receivable 20,000 Deferred tax liability 57,000
Finished goods 400,000 Accrued taxes 47,000
Franchise 200,000 Cash surrender value 29,000
Goods in process 600,000 Ordinary shares 1,000,000
Prepaid insurance 20,000 Dividends – ordinary shares 100,000
Raw materials 200,000 Dividends – preference shares 150,000
Financial asset at fair value through P/L 250,000 Mortgage payable (200,000 due in six months) 1,200,000
Financial asset at fair value through OCI 200,000 Note payable – due January 1, 2013 1,500,000
Financial asset at amortized cost 150,000 Share premium 250,000
Property held for sale 40,000 Preference share 450,000
Customers account with credit balance 50,000 Redeemable Preference shares, to be
Goodwill 100,000 redeemed June 30, 2013 450,000
Plant expansion fund 500,000 Premium on notes payable 40,000
Accounts payable 300,000 Income summary – credit balance 500,000
Retained earnings – January 1 550,000
a. What is the total current assets? P_________ Unamortized issue cost on notes payable- 25,000
b. What is the total noncurrent assets? P_________ Unearned rent income 30,000
c. What is the total current liabilities? P_________
d. What is the total noncurrent liabilities? P_________ Required:
a. What is the total current liabilities? P_________
e. What is the total shareholders’ equity on
b. What is the total noncurrent liabilities? P_________
December 31, 2012? P_________
c. What is the retained earnings balance on
December 31, 2012? P_________
Problem 6: Shareholders’ equity
The adjusted trial balance of ABC Corporation at December 31, d. What is the total shareholders’ equity on
2012, includes the following account balances: December 31, 2012? P_________
Share Capital, P10 par 600,000
Share premium 800,000 PROBLEM 11: ABC Corp. provided the following information
Treasury share, at cost 50,000 on December 31, 2012:
Retained earnings appropriated 150,000
Retained earnings unappropriated 120,000 Share premium 1,000,000
Revaluation surplus 100,000 Accounts payable 1,100,000
What amount should ABC CORP. report as total shareholders’ Preference share, at par 2,000,000
equity on December 31, 2012? P_______________ Ordinary share, at par 3,000,000
Sales 10,000,000
Problem 8: Current Assets On December 31, 2012, the Total expenses 7,800,000
following are the current assets appearing in the unaudited Treasury shares-ordinary 500,000
statement of financial position of ABC Company: Dividends 700,000
Cash P43,000 Retained earnings – January 1 1,000,000
Accounts receivable 147,000
Merchandise inventory 80,000 1. What is the balance Retained Earnings as of December 31,
An examination of the accounts shows that the accounts 2012?
receivable are composed of the following: a. P1,000,000 c. P 300,000
Trade accounts P110,000 b. P2,500,000 d. P3,200,000
Claims against a salesman for goods lost 15,000
Selling price of goods sent on consignment at 2. What is the total of shareholders’ equity as of December
125% of cost and not included in inventory 25,000 31, 2012?
Allowance for uncollectible accounts 3,000 a. P8,000,000 c. P8,500,000
What is the correct amount of current assets as of December 31, b. P5,800,000 d. P8,700,000
2012? P__________________

FINANCIAL STATEMENTS page 4