MMCO Continuing Professional Development in 1494, included a 27-page, 36 short chapters on

Training Center (CPDTC) bookkeeping.

2F MMCO Building, 8000 Lakeview Ph3 Angela • Books of accounts used by Luca Pacioli
Street, Halang Calamba City Laguna, Philippines o The memorandum (a daybook) – for chronological
Tel No. (02) 330-8617, (049) 523-6031; (02) 330- recording of business transactions as they occurred
6057 o The journal – the merchant's private account book
CPA REVIEW (May 2019 Batch) o The ledger – the money and date columns were
FAR Theory Cedrick Zapanta, CPA almost identical to those in modern ledgers, with
Module 1 entries consisting of brief paragraphs
• The trial balance is the end of Pacioli's accounting
1. Overview of Accounting
cycle. Debits from the old ledger are listed on the left
2. Accounting Standard-setting Process and
side of the balance sheet and credits on the right. If
Institutions
the two totals are equal, the old ledger is considered
3. Conceptual Framework
balanced. If not (in balance), says Pacioli, "that
OVERVIEW OF ACCOUNTING
would indicate a mistake in your ledger, which
1. History of Accounting
mistake you will have to look for diligently with the
Historical records show that the beginnings of record
industry and intelligence God gave you."
keeping or storing information dates back some
• The objective of Luca Pacioli’s keeping records is to
76,000 years ago in the Blombos caves of Africa.
give traders prompt information as to his assets and
Accounting In Ancient Egypt, China, Greece and
liabilities.
Rome
• The Summa is the first known printed treatise on
• Government accounting records in Egypt show “in
bookkeeping and was translated into different
kind” tax payments.
languages. It is widely believed to be the forerunner
• China used Accounting as a means of evaluating
of modern bookkeeping practice.
the efficiency of governmental programs
• Thus, it can be said that Luca Pacioli systematized
• Legislation on financial matters in Greece (5th
record keeping through the double-entry
century BC) included control of receipts and
bookkeeping system.
expenditures of public monies through the oversight
Professional Accountancy Travels across the Globe
of “public accountants” chosen by lot
• 1880: Institute of Chartered Accountants in
• In its thousand years of existence, these records
England and Wales (ICAEW) brought together all the
showed simple list-making only, similar to single-
accountancy organizations in those countries
entry bookkeeping
• 1887: the first national accounting society of the
• Early financial records in the Roman Empire
United States was formed, the American Association
include the Account, (listed public revenues); the
of Public Accountants (predecessor of the AICPA)
Treasury, (which listed amounts of cash in the
Accounting in the Internet Era
provincial tax officials and in the hands of the public
• The act of accounting is usually defined as the act
contractors). The records included not only cash and
of collecting information on resource usage for the
commodities but also the names of freed men and
purpose of trend analysis, auditing, billing, or cost
slaves, especially the records Roman army.
allocation.
• Medieval Europe (13th century) –introduction of
o For example when a user uses a connectivity
double-entry bookkeeping. The chief objective was
service paid with a pay-per-view approach the
to keep track of amounts owed by customers
accounting process is based on a metering of the
(debtors) and amounts owed to creditors. Debit is
resource usage by the user (usually time spent with
Latin for 'he owes' and credit is Latin for 'he trusts'.
an active connection or the amount of data
• The Messari (Italian for Treasurer’s accounts, of
transferred using that connection). The accounting is
the city of Genoa 1340) is the oldest discovered
hence the recording of this connectivity service
record of a complete double-entry system. These
consumption for subsequent charging of the service
accounts contain debits and credits journalized in a
itself.
bilateral form.
Recent Trends and Developments in Accounting
Luca Pacioli and Double-entry System of
• Cloud Accounting
Bookkeeping
• Automation (Artificial Intelligence)
• Luca Pacioli's "Summa de Arithmetica, Geometria,
• Data Analytics
Proportioni et Proportionalità," published in Venice
• Environmental Accounting
• Standardization and Harmonization
2. Definition, Nature, and Purpose of Accounting
Definition: Accounting is a service activity. Its
function is to provide quantitative information,
primarily financial in nature, about economic entities
that is intended to be useful in making economic
decisions.
Accounting is the art of recording, classifying,
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at
least, of a financial character and interpreting the
results thereof.
Nature:
• Accounting as Science and Art – Accounting is a
social science with a body of knowledge which has
been systematically gathered, classified, and
organized. It is influenced by, and interacts with,
economic, social and political environments.
Accounting is a practical art which requires the use
of creative skill and judgment.
• Accounting as an Information System – Accounting
identifies and measures economic activities,
processes information into financial reports and
communicates these reports to decision makers.
Purpose: To provide quantitative information 1 about
economic entities2 intended to be useful in making
economic decisions.
1 – Types of information provided by accounting
• Quantitative information – expressed in numbers,
quantities or units
• Qualitative information – expressed in words or
descriptive form
• Financial information – expressed in terms of
money
2 – Economic entity vs business entity
• Economic entity – is a separately identifiable
combination of persons and property that uses or
controls economic or scarce resources to achieve
certain goals or objectives. Scarce resources have
one significant characteristic: because of their
limited nature, they command a price.
o Business entity is an economic entity that produces
and distributes goods or services primarily for profit.
o Not-for-profit or non-profit entity is one that
carries out some socially desirable needs of the
community or its members whose activities are not
directed towards making profit.
3. Functions of Accounting
a. Identification – the accounting process of
recognition or non-recognition of business activities
as “accountable events” or whether they have
accounting relevance.
b. Measurement – the accounting process of
assigning of peso amounts or numbers to the
economic transactions and events. The unit of
measure of accounting is money, expressed in
prices.
c. Communication – the accounting process of
preparing and distributing accounting reports to
potential users of accounting information and
interpreting the significance of this processed
information. The three aspects of communicating
are:
i. Recording – the process of systematically
committing to writing business transactions and
events in books of account in a systematic and
chronological manner according to accounting rules
and regulation.
ii. Classifying – the grouping of similar and
interrelated items into their respective classes.
iii. Summarizing – expressing in condensed or brief
form the recorded and classified information in
financial statements.
4. Branches of Accounting
a. Financial Accounting – the recording of
transactions, preparation of financial statements and
communication of financial information to external
user groups. (Focus: general purpose reports)
b. Auditing – the examination of financial statements
by independent certified public accountant for the
purpose of expressing an opinion on the fairness of
presentation of financial statements. (Focus: audit
report)
c. Management Accounting (or Management
Services) – the accumulation and communication of
information for use by internal parties or
management. This includes services to clients on
matters of accounting, finance, business policies,
organization procedures, product costs, distribution,
and many other phases of business conduct and
operations. (Focus: advisory services; consultancy)
d. Government Accounting – accounting for the
national government and its instrumentalities,
focusing attention on the custody of public funds
and the purpose or purposes to which such funds
are committed.
e. Tax Accounting – involves the preparation of tax
returns and rendering of tax advice, such as
determination of tax consequences of certain
proposed business endeavors. (Focus: Tax advisory
services)
f. Fiduciary Accounting – handling of accounts
managed by a person entrusted with the custody
and management of property for the benefit of
another.
g. Social Responsibility Accounting – reporting of
programs and projects that have to do with the
upliftment of the welfare of the people of a
community or of the nation.
h. Environmental Accounting – the area of
accounting that focuses on programs, activities and
projects that are focused on care for Mother Earth.
One example is carbon accounting which is a process
of encouraging reductions in greenhouse gas
emissions.
i. Price-level Accounting (Accounting for
Hyperinflationary Economies) – is accounting that
recognizes in the financial statements changes in the
purchasing power of money. This is in contrast to
traditional accounting which assumes a stable
monetary unit when it reports financial information.
5. Financial Accounting vs. Management Accounting
Financial Accounting
Management Accounting
o Basically concerned with income determination
and asset valuation
o Prepares statements in accordance with GAAP
o Prepares general purpose statements
o Basically concerned with decision-making
o Prepares statements in accordance with
management needs
o Prepares special purpose reports for internal users
that can be used by external and internal users
o Historical in nature
o Emphasizes objective data
o Future-oriented
o Makes use of subjective data as long as it is
relevant
6. Areas of Professional Accounting Practice
a. Public Accounting – composed of individual
practitioners, accounting firms and large
multinational organizations that render independent
expert financial services to the public on a
professional fee basis. Public accountants usually
offer three kinds of services: assurance and audit,
taxation, and management advisory services.
b. Private Accounting – composed of individuals
employed in business enterprises on salary basis.
The major objective of private accounting is to assist
management in planning and controlling the
enterprise’s operations.
c. Government Accounting – composed of
accountants employed in the different branches of
government, such us the BIR, COA, SEC, and GBEs.
The focus of government accounting is custody and
administration of public funds.
d. Accounting Education – composed of CPAs who
are professors of accounting in various colleges and
universities. Their task is to prepare entrants into the
accountancy profession.
7. Environment of Accounting
Financial accounting is shaped to a significant extent,
by the environment, and in particular, all of the
following:
• The economic activities in society
• The means of measurement of economic activity
• The financial statement users and their
information needs
Economic Activities and their Classification
a. Production – the process of converting economic
resources into outputs of goods and services that are
intended to have greater utility than the required
inputs
b. Exchange – the process of trading resources or
obligations for other resources or obligation
c. Income distribution – the process of allocating
rights to the use of output among individuals and
groups in society
d. Consumption – the process of using the final
output of the production process
e. Investment – the process of using current inputs
to increase the stock of resources available for
output as opposed to immediately consumable
output
f. Savings – the process by which individuals and
groups set aside rights to present consumption in
exchange for rights to future consumption
Accountable Events – are events that are
quantifiable and has an effect on assets, liabilities
and equity. Also known as economic activities, these
are the subject matter of accounting.
• Only economic activities are emphasized and
recognized in accounting. Sociological and
psychological matters are not recognized.
• Criteria for an accountable event
o It must affect a financial element of accounting
(increasing or decreasing asset, liability or equity
(probability criterion)
o It is a result of a past activity
o Its cost can be measured reliably (measurability
criterion)
Types of Accountable Events
1. External Events – events wherein another party
participates
a. Transfers – there is flow of economic resources
i. Exchanges – two-way
ii. Non-reciprocal Transfers – one-way
b. External Events other than Transfers – no flow of
economic resources
2. Internal Events – those wherein only the entity
participates
a. Production
b. Casualties
Measurement of Accountable Events (to be
discussed in Conceptual Framework)
1. Historical Cost
2. Current Cost
3. Realizable (Settlement) Value
4. Present Value
QUIZZER 1 – OVERVIEW OF ACCOUNTING
History of Accounting
1. Are the following statements about the history of
Accounting true or false?
I. According to the history of accounting, debit
means “he owes” and “credit” means “he trusts”.
II. Frater Luca Bartolomes Pacioli did not invent
accounting but his treatise, “De Computis et
Scripturis is said to have laid the foundation for
double-entry bookkeeping as it is practiced today.
III. The earliest accounting records date back to the
14th Century and were found in the Roman Empire.
Statement I Statement II Statement III
a. True False True
b. False True False
c. True True False
d. False False True
2. Which of the following statements pertaining to
Luca Pacioli’s bookkeeping system is (are) true?
I. The books of accounts included a Memorandum, a
Journal and a Ledger
II. The objective of Luca Pacioli’s keeping records is
to give traders prompt information as to his assets
and liabilities.
III. Luca Pacioli’s accounting cycle is basically the
same as the accounting cycle as practiced today.
a. Statements I and II are true
b. Statements I and III are true
c. Statements II and III are true
d. All statements are true
3. Which of the following statements is (are) true?
I. Accountancy is a communication service
profession.
II. Financial accounting is the process of identifying,
measuring, analyzing, and communicating financial
information needed by management to plan,
evaluate, and control an organization's operations.
III. Financial statements are the principal means
through which financial information is
communicated to those outside an enterprise.
a. Statements I and II only
b. Statements I and III only
c. Statements II and III only
d. Statements I, II and III
4. Which of the following statements is not a proper
description of accounting as a communication
profession?
a. Financial statements can be expressed in any
national language.
b. Financial statements can be expressed in any
dialect of a country.
c. Financial statements should use terminology
within the level of understanding of the statement
user.
d. Financial statements, as far as possible, should
show information that can be verified from
documentary evidence in order to gain the
confidence of statement users
5. Which of the following statements about
accounting information is (are) true?
I. Accounting provides quantitative and financial
information only.
II.Accounting provides quantitative, qualitative and
financial information
III. Information in the financial statements are
sourced only from the books of account.
a. I and II only b. II and III only c. II and III only d. I, II
and III
6. Which of the following statements is not an
objective of financial reporting?
a. Provide information that is useful in investment
and credit decisions.
b. Provide information about enterprise resources,
claims to those resources, and changes to them.
c. Provide information on the liquidation value of an
enterprise.
d. Provide information that is useful in assessing
cash flow prospects.
7. How does accounting help the capital allocation
process attract investment capital?
a. Provides timely, relevant information
b. Encourages innovation
c. Promotes productivity
d. (a) and (b)
8. The information provided by financial reporting
pertains to
a. Individual business enterprises, rather than to
industries or an economy as a whole or to members
of society as consumers.
b. Business industries, rather than to individual
enterprises or an economy as a whole or to
members of society as consumers.
c. Individual business enterprises, industries, and an
economy as a whole, rather than to members of
society as consumers.
d. An economy as a whole and to members of c. I and III only
society as consumers, rather than to individual d. I, II and III
enterprises or industries. 14. Which of the following features of an asset
9. Which of the following represents a form of closely links its definition to the science of
communication through financial reporting but not Economics?
through financial statements? a. An asset is controlled by an entity
a. Statement of financial position b. An asset can provide future benefits to an entity
b. President's letter c. An asset can command a price
c. Income statement d. An asset is exclusively owned by an entity
d. Notes to financial statements 15. Which of the following is not an economic
10. Qualitative information is found entity?
abcd a. Aldo, Baldo, Calvo & Associates, a law office
Only in the face of the financial statements yes no b. Luna Sangre Group of Companies
yes no c. Polytechnic University of the Philippines
In the face of the financial statements and d. Janet, a filipino citizen who owns JLN Piggery
the accompanying notes yes yes no no 16. Which of the following is an economic entity but
11. In which of the following situations is the science not a business entity?
aspect of accounting demonstrated? a. Golden Acres, a charitable institution
I. The accountant makes use of the rules of debit and b. Consolidated Foods Corporation
credit in recording transactions of the business c. Rustan’s supermarket
II.Transactions and events are processed using the d. ABC Co., a stock corporation
steps of the accounting cycle. 17. It is the process of recognition and non-
III. A provision for doubtful accounts was estimated recognition of business activities as “accountable
by the accountant on the basis of recorded data and events” or whether they have accounting relevance
the collection experience of the company a. Identification
a. I only b. I and II only c. II and III only d. I, II and III b. Measurement
12. The art aspect of accounting is applied in which c. Communication
of the following circumstances? d. Summarization
I. The accountant records a purchased equipment at 18. The accounting process of assigning peso
cost plus expenses in acquisition and putting it amounts or numbers to relevant objects and events
available for use. is known as
II.The external auditor gives an unqualified opinion a. Identification
that the financial statements are fairly presented in b. Measurement
conformity with generally accepted accounting c. Communication
principles. d. Summarization
III. The accountant selects the reliable fair value at Branches of Accounting / Areas of Professional
which a consumable biological asset will be Practice
recognized and measured in the books of account. 19. Which of the following branches of accounting
a. Statement I only focuses on general purpose reports on financial
b. Statements I and II position and results of operations, known as
c. Statements II and III financial statements?
d. Statements I, II and III a. Financial accounting
13. Which of the following statements is (are) true? c. Management advisory services
I. Not all quantitative information is also financial in b. Auditing
nature. d. Bookkeeping
II.Measurement is the process of assigning numbers 20. The process of analyzing, recording, classifying,
to objects such as inventories or plant assets and to summarizing and communicating all transactions
events such as purchases or sales. involving state funds and property is known as
III. Management decisions are oriented to the future a. government accounting
whereas the decisions of external users are oriented c. fiduciary accounting
to the past. b. estate accounting
a. I and II only d. receivership accounting
b. II and III only
21. An independent appraisal function established d. Fiduciary accounting
within an organization to examine and evaluate its 29. Which of the following applies to financial
activities as a service to the organization. accounting?
a. external auditing abcd
c. fiduciary accounting Information meets specific needs of particular
b. internal auditing statement users yes no yes no
d. management accounting Emphasizes objective data yes yes no no
22. The process of identifying, measuring and Basically concerned with income determination and
communicating financial information used for asset valuation no yes no yes
planning , evaluation, and control within the Primarily historical in nature no yes yes yes
organization 30. Accounting that recognizes changes in the
a. financial accounting purchasing power of money is known as
c. social responsibility accounting a. Price-level accounting
b. estate accounting b. Historical accounting
d. management accounting c. Current value accounting
23. Handling of accounts for fiduciaries who wind up d. Traditional accounting
the affairs of a deceased person. QUIZZER 2 – ENVIRONMENT OF ACCOUNTING
a. estate accounting The Environment of Accounting / Economics
c. receivership accounting Concepts
b. fiduciary accounting 1. Financial accounting is shaped to a significant
d. macro accounting. extent, by the environment, and in particular, all of
24. The process of measuring and disclosing the the following, except:
performance of a firm in terms of community a. The economic activities in society
involvement and related criteria. b. The financial statement users and their
a. macro accounting information needs
c. social responsibility accounting c. The means of measurement of economic activity
b. enterprise accounting d. The characteristics and limitations of financial
d. community accounting accounting and financial statements
25. Accounting for not-for-profit entities other than 2. Which of the following is not a fundamental
the government economic activity in society?
a. Estate accounting a. Consumption
c. Receivership accounting c. Income recognition
b. Institutional accounting b. Income distribution
d. Enterprise accounting d. Investment
26. The practice of accounting by one whose 3. This is an economic activity which involves trading
principal employment is confined to a single resources and obligations for other resources or
enterprise obligations.
a. single-proprietorship accounting a. Production
c. estate accounting c. Non-reciprocal transfer
b. enterprise accounting b. Exchange
d. private accounting d. Distribution
27. Branch of accounting which deals with rendering 4. This is the process of converting economic
of services to the public for compensation. resources into outputs of goods and services that are
a. Private Accounting intended to have greater utility than the required
c. Public Accounting inputs.
b. Government Accounting a. Production
d. Enterprise Accounting c. Investment
28. It is an independent examination intended to b. Exchange
support the expression of an impartial, professional d. Distribution
opinion on the reliability of the financial statements 5. The process of using the final output of the
a. External Auditing production process is
c. Internal auditing a. Investment
b. Management accounting c. Distribution
b. Savings Liabilities
d. Consumption Owner’s Equity
6. It is the process of using current inputs to increase a.
the stock of resources available for future output as Yes
opposed to immediately consumable output No
a. Exchange Yes
c. Consumption b.
b. Investment Yes
d. Savings Yes
Economic Resources/Economic Obligations/Residual Yes
Equity c.
7. These are the scarce means (limited in supply Yes
relative to desired uses) available for carrying on No
economic activities of a business enterprise: No
a. Economic resources d.
c. Production resources No
b. Economic obligations No
d. Property No
8. Economic resources include Events and Transactions / Accountable Events
a. Money 14.These are events and transactions that affect the
c. Products enterprise and in which other entities participate.
b. Claims to receive money a. External events
d. All of these c. Exchange transactions
9. Productive resources include all of the following b. Internal events
except d. Production
a. tangible productive resources of the enterprise 15.These are events in which only the entity
b. intangible productive resources of the enterprise participates
c. contractual rights to the use of resources of other a. External event
entities c. Non-reciprocal event
d. ownership interests in other enterprises b. Internal events
10.Which of the following is not among the d. Accountable event
economic resources of a business enterprise? 16.These are reciprocal transfers of resources or
a. Money obligations between the enterprise and other
c. Obligations to pay money entities in which the enterprise either sacrifices
b. Products or output of the entity resources or incurs obligations in order to obtain
d. Ownership interest in other enterprises other resources or satisfy other obligations
11.These represent an enterprise’s present a. Exchanges
responsibilities to transfer economic resources or c. Manufacturing
provide service to other entities in the future: b. Production
a. Economic resources d. Investment
c. Residual interest in resources 17.These are changes in economic resources by
b. Economic obligations actions of other entities that do not involve transfers
d. None of these of enterprise resources and obligations
12.The interest in the economic resources of an a. Transfers
enterprise that remains after deducting economic c. Internal events
obligations is called b. External events other than transfers
a. Residue d. Production
c. Residual Interest 18.Some events involve the transfer of resources in
b. Stockholders’ Equity only one direction, either from the enterprise to
d. Owners’ Equity other entities, or from other entities to the
13.The economic activities of a business enterprise enterprise. These are called
increase or decrease its (the) a. Nonmonetary transactions
Assets c. Nonreciprocal transfers
b. Arms-length exchanges d. I, II and III
d. Executory contracts 26.Which of the following is (are) classified as
19.External events are those that affect the external events other than transfers
enterprise and in which other entities participate. I. Exchange of assets with no commercial substance
One example is when II. Transfer of materials from one stage of production
a. A manufacturing company transfers goods from to another
one production department to another III. Technological changes caused by other entities
b. The expired portion of prepaid insurance is taken IV. General price level changes
up as expense a. I and II only
c. Loss of inventory due to fire c. II, III and IV only
d. Issuance of promissory note in settlement of an b. III and IV only
account d. I, III and IV only
e. Manufacture of a product out of raw materials 27.In the classification of accountable events,
20.The following are classified as external events vandalism is an event that
except a. is classified as an external event other than
a. Payment of money borrowed transfer
c. Government grant b. cannot be recorded
b. Purchase of supplies c. is classified as a nonreciprocal transfer
d. Casualty loss d. is classified as a casualty
21.Safe Corp. discovered a material amount of loss 28.Which of the following criteria should be met
from theft. The value of the loss should be classified before a particular action, condition, or set of
as circumstances qualifies as an accountable event?
a. A non-reciprocal transfer a. It has already happened.
c. An exchange b. It affects the financial position of individual
b. A reciprocal transfer business entities.
d. A casualty c. It can be measured in monetary terms with a
22. Purchases or sale of merchandise on account is reasonable degree of precision.
classified as d. All of the above.
a. Exchanges 29.Which of the following will not qualify as an
c. Production accountable event in financial statements according
b. External events other than transfers to current generally accepted accounting principles
d. Nonreciprocal transfer (assume all amounts are material)?
23. These are sudden, substantial, unanticipated a. Receipt of a stock split
reductions in enterprise resources not caused by b. Decline in market value of trading securities held
other entities c. Increase in market value of investment property
a. Internal events d. Revaluation of property
c. Casualties 30. Which of the following is not a transaction in a
b. Production strict sense?
d. Exchanges a. Enterprise’s charitable contributions to flood
24. Fire, tornado, and volcanic eruption are victims
examples of accountable events classified as b. Loss of assets due to theft
a. Production c. Additional investment by owner
b. Exchange d. Depreciation of property and equipment
c. Events other than transfers QUIZZER 3 – ENVIRONMENT OF ACCOUNTING
d. Casualties Measuring Economic Activity
25.Which of the following is (are) classified as 1. Which accounting process is the assigning of peso
nonreciprocal transfer? amounts to the accountable economic transactions
I. Imposition of fines and events?
II. Loss from theft a. Identifying
III. Declaration of dividends c. Summarizing
a. I only b. Measuring
c. II and III only d. Communicating
b. I and II only
2. This is usually the primary basis of measurement compared with other types of money prices used for
of assets upon initial recognition measuring resources in financial accounting,
a. Historical cost statements using this type are more
c. Realizable or settlement value a. Indicative of the entity’s purchasing power
b. Current cost b. Relevant
d. Present value c. Conservative
3. Applied to assets, this is usually are measured by d. Objective
the cash or cash equivalent paid, or the fair value of 10. Which of the following types of acquisition of
the consideration given to acquire them at the time asset and measurement base is (are) properly and
of acquisition. value logically matched?
a. Historical Cost Mode of acquisition Measurement base
c. Realizable (settlement) value 1. Acquisition asset by purchase 1. Historical cost
b. Current cost 2. Acquisition of machinery by long-term credit 2.
d. Present value Net realizable value
4. Under this measurement base, assets are carried 3. Acquisition of land invested by the owner 3. Fair
at the amount of cash or cash equivalents that value
would have to be paid if the same or an equivalent a. 1 only b. 1 and 2 only c. 1 and 3 only d. 1, 2 and 3
asset was acquired currently Users of Accounting Information
a. Historical cost 11. The investors or providers of risk capital and
c. Realizable or settlement value their advisers are concerned with the following
b. Current cost information except
d. Present value a. The need to determine whether they should buy,
5. This represents the present discounted value of hold, or sell their investment
future net cash inflows that the item is expected to b. The need to assess the ability of the enterprise to
generate in the normal course of business. pay dividends
a. Historical cost c. The need to assess the ability of the enterprise to
c. Realizable or settlement value provide retirement benefits and employment
b. Current cost opportunities
d. Present value d. The need to assess the risk inherent in, and return
6. “Historical cost” is another name for provided by their investments
Past Input Price Past Output Price Past Input price 12. Customers are interested in information
Past Output Price a. That enables them to determine whether amounts
a. Yes No c. No No owing to them will be paid when due
b. Yes Yes d. No Yes b. About the continuance of an enterprise, especially
7. Which of the following is price based on a future when they have long-term involvement with or are
exchange? dependent on the enterprise
a. Discounted cash flow c. About the stability and profitability of the
b. Net realizable value enterprise
c. Present value of future net cash receipts d. In order to regulate the activities of the enterprise
d. All of these 13. Lenders are interested in information that
8. Historical cost is a measurement base currently enables them to determine
used in financial accounting. Which of the following a. Whether the entity has the capacity to pay its
measurement bases is (are) also currently used in short-term obligation
financial accounting? b. Whether their loans and the interest attaching to
Fair value or current value Discounted Cash Flow Net them will be paid when due
Realizable Value c. Whether the enterprise is making a substantial
a. Yes Yes Yes contribution to the local economy
b. No Yes Yes d. Whether the enterprise will continue to operate
c. Yes No Yes as a going concern
d. Yes No No 14. Which of the following is an internal user of a
9. Proponents of the use of historical cost (or price in company’s financial information?
past purchase exchange) as a measurement of a. A member of the board of directors
resources in financial accounting advance that
b. A creditor with long-term contracts with the
company
c. A holder of the company’s bonds
d. A stockholder of the company
15. Which of the following groups use financial
accounting information to assess the nature and
extent of financing needs, evaluate results of past
economic decisions, set dividend policy and project
future potential position and income?
a. management
c. financial analysts
b. owners
d. potential owners
16. These financial statement user group is
interested in information that enables them to
determine if amounts owing to them, generally over
a shorter period of time, will be paid when due
a. Suppliers & trade creditors c. Investors
b. Lenders d. Stockholders
17. Which of these statements about users of
financial information is (are) true?
I. The public need information about the trends and
recent developments in the prosperity of the
enterprise
II. Employees and their representative groups are
interested in information about the stability and
profitability of the enterprise
III. The providers of risk capital and their advisers are
concerned with the risk inherent in and return
provided by their investments
IV. Government and their agencies have an interest
in information about the continuance of an
enterprise, especially when they have long-term
involvement or are dependent on the enterprise
a. Only I is true
c. I, II and III are true
b. I and II are true
d. All statements are true
Ethics and Challenges of the Accounting Profession
18. Financial statements in the early 2000s provided
information related to
a. nonfinancial measurements
b. hard assets (inventory & PPE)
c. forward-looking data
d. none of these
19. Which of the following is not a major challenge
facing the accounting profession?
a. Nonfinancial measurements
b. Timeliness
c. Accounting for hard assets
d. Forward-looking information
20. Which of the following is an ethical concern of
accountants?
a. Earnings manipulation
b. Conservative accounting
c. Industry practices
d. None of the above
Numbers 21 to 25 pertain to ethical issues, some
procedures and practices by Sara Corp. For each of
the situations described in these numbers, identify
what assumption, principle, qualitative objective or
constraint is violated
21. Sara Corporation switched from accelerated
depreciation method to straight line method
because the company's income is low this year
a. Comparability
b. Neutrality
c. Understandability
d. Relevance
22. The president of Sara Corp. believes it is foolish
to report financial information on a yearly basis.
Instead, the president believes that financial
information should be disclosed only when
significant new information is available related to
the company's operations.
a. Going Concern
b. Economic Entity
c. Periodicity
d. Money measurement
23. Sara Corp. decides to establish a large loss and
related liability this year because of the possibility
that it may lose a pending patent infringement
lawsuit. The possibility of loss is considered remote
by its attorneys
a. Measurement Principle
b. Matching Principle
c. Revenue recognition Principle
d. Disclosure Principle
24. An officer of Sara Corp. purchased a new home
computer for personal use with company money,
charging this to miscellaneous expense.
a. Materiality
b. Economic or separate entity
c. Relevance
d. Verifiability
25. A bookkeeper discovered an omitted sales
invoice of P500 while she was preparing the draft
financial statements the year. Since the total sales
for the year amount to P5,080,000, she did not
correct the error anymore as she reasoned that the
amount anyway is not material. This is
a. An application of the materiality concept
b. A violation of the materiality concept
c. An application of the initial recognition principle
d. A violation of the initial recognition principle
CONCEPTUAL FRAMEWORK OF FINANCIAL
ACCOUNTING
Definition: A conceptual framework is a coherent
system of interrelated basic concepts and
propositions that prescribe objectives, limits, and
other fundamentals of financial accounting and
serves as a basis for developing and evaluating
accounting principles and resolving accounting and
reporting controversies (FASB).
Preface to the Philippine Financial Reporting
Standards
1. Institutions, Professional Bodies and Standard-
Setting Due Process
The FRSC
The Financial Reporting Standards Council (FRSC)
was established by the Board of Accountancy (BOA
or the Board) in 2006 under the implementing Rules
and Regulations of the Philippine Accountancy Act of
2004 to assist the Board in carrying out its power
and function to promulgate accounting standards in
the Philippines.
Composition: Appointed by BOA
A Chairman and members that include sectoral
representatives from the Philippine Institute of
Certified Public Accountants (PICPA), the Board of
Accountancy, the Securities and Exchange
Commission, (SEC), Bangko Sentral ng Pilipinas (BSP),
Financial Executives Institute of the Philippines
(FINEX) and Philippine Institute of Certified Public
Accountants (PICPA), Commission on Audit (COA)
and Bureau of Internal Revenue (BIR)
The FRSC is the successor of the Accounting
Standards Council (ASC), which was created on
November 18, 1981 by the Philippine Institute of
Certified Public Accountants to establish generally
accepted accounting principles in the Philippines.
Responsibility of FRSC: The approval of Philippine
Financial Reporting Standards (PFRSs), Philippine
Interpretations and related documents such as the
Framework for the Preparation and Presentation of
Financial Statements, exposure drafts, and other
discussion documents.
• Once it was established, the FRSC resolved that all
Standards and Interpretations issued by the ASC
continue to be applicable unless and until they are
amended or withdrawn by the FRSC.
• The Philippine Interpretations Committee (PIC) was
formed by FRSC in November 2006 to assist the FRSC
in establishing and improving financial reporting
standards in the Philippines. The role of the PIC is
principally to issue implementation guidance on
PFRSs. The PIC replaced the former Interpretations
Committee created by the ASC in 2000.
Objectives of the FRSC:
(1) The main function of the FRSC is to establish
generally accepted accounting principles in the
Philippines. In achieving the objective the FRSC
considers Standards issued by the IASB.
(2) The FRSC carries on the decision made by the ASC
to converge Philippine accounting standards and
international accounting standards issued by the
IASB. The objectives of FRSC in this respect are:
a) To develop, in the public interest a single set of
high quality, understandable and enforceable
accounting standard that require, high quality,
transparent and comparable information in financial
statements and other financial reporting to help
participants in the various capital markets and other
users of the information to make economic decisions
b) To promote the use and rigorous application of
those standards; and
c) To work for the convergence of Philippine
accounting standards with international Financial
Reporting Standards (PFRSs) issued by the IASB.
Scope and Authority of PFRSs
1) The FRSC issues its Standards in a series of
pronouncements called Philippine Financial
Reporting Standards (PFRSs). These consist of:
(a) Philippine Financial Reporting Standards (PFRSs)
(these correspond to the International Financial
Reporting Standards (IFRSs)
(b)Philippine Accounting Standards (PASs) (these
correspond to International Accounting Standards
(IASs); and
(c) Philippine Interpretations (these correspond to
Interpretations of the IFRIC and the Standing
Interpretations Committee (SIC) of the IASC. (These
also include Interpretations developed by the PIC)
2) The FRSC achieves its objectives primarily by
developing and issuing Philippine Financial Reporting
Standards (PFRSs) and promoting the use of these
standards in general purpose financial statements
and other financial reporting.
3) PFRSs sets out the recognition, measurement,
presentation and disclosure requirements dealing
with transactions and events that are important in
general purpose financial statements. They may also
set out such requirements for the transactions and
events that arise mainly in specific industries. The
Framework also provides a basis for the use of
judgment in resolving accounting issues.
4) PFRSs are designed to apply the general purpose
financial statements and other financial reporting of
all profit-oriented entities. Profit-oriented entities
include those engaged in commercial, industrial,
financial and similar activities, whether organized in
corporate or any other forms. They include
organizations such as mutual insurance companies
and other mutual cooperative entities that provide
dividends or other economic benefits directly and
proportionately to their owners, members or
participants. Although PFRSs are not designed to
apply to not-for profit activities in private sector,
public sector or government, entities with such
activities may find them appropriate
5) PFRSs apply to all general purpose financial
statements. These financial statements are directed
towards the common information needs of a wide
range of users, for example, shareholders, creditors,
employees and the public at large.
The objective of financial statements is to provide
information about the financial position,
performance and cash flows of an entity that is
useful to those users in making economic decisions.
6) A complete set of financial statements include a
statement of financial position (or balance sheet), a
statement of comprehensive income , a statement
showing either all changes in equity or changes in
equity other than those arising from capital
transactions with owners and distribution to owners,
a cash flow statement, and accounting policies and
explanatory notes.
7) Interpretations of PFRSs are intended to give
authoritative guidance on issues that are likely to
receive divergent or unacceptable treatment in the
absence of such guidance.
Philippine Due Process in Accounting Standard-
Setting
PFRSs are developed through a due process that
includes members of PICPA, financial executives,
regulatory authorities, academics, and other
interested individuals and organizations. Due
process for projects normally, but not necessarily
includes the following steps:
a) Consideration of pronouncements of the IASB;
b) Formation of a task force, when deemed
necessary, to give advice to the FRSC;
c) Issuing for comment an exposure draft approved
by a majority of the FRSC members, comment period
will be at least 60 days unless a shorter period (not
less than 30 days) is considered appropriate by FRSC.
d) Consideration of all comments received within the
comment period and, when appropriate, preparing a
comment letter to the IASB; and
e) Approval of the standard or an interpretation by a
majority of the FRSC members.
f) Approval of the Standard by majority of the
members of the Board of Accountancy.
g) Final approval of the Accounting standard or
Interpretation by the Professional Regulation
Commission
h) Publication in the PRC Official Gazette
FRAMEWORK FOR THE PREPARATION AND
PRESENTATION OF FINANCIAL STATEMENTS
CONCEPTUAL FRAMEWORK LEVEL 1
1. Purpose and Status
The FRSC Framework for the Preparation and
Presentation of Financial Statements identifies the
following purposes:
a) Assists the FRSC in the development of future
Philippine Financial Reporting Standards and its
review of existing Philippine accounting standards.
b) Assists preparers of financial statements in
applying the Statements of Financial Accounting
Standards and in dealing with topics that have yet to
form the subject of a Philippine Financial Reporting
Standard
c) Assists auditors in forming an opinion as whether
financial statements conform with Philippine
Financial Reporting Standards.
d) Assists users of financial statements in
interpreting the information contained in financial
statements prepared in conformity with Philippine
Financial Reporting Standards, and
e) Provides those who are interested in the work of
FRSC with information about its approach to the
formulation of Statements of Philippine Financial
Accounting Standards.
This framework is not a PFRS. However, when
developing an accounting policy in the absence of a
standard or an Interpretation that specifically applies
to an item, an entity’s management is required to
refer to, and consider the applicability of the
concepts of the Framework. (see PAS 8, Accounting
Policies, Changes in Accounting Estimates and
Errors).
In a limited number of cases where there may be a
conflict between the Framework and the
requirements within the Standard or Interpretation,
the Standard or Interpretation should prevail over
those of framework.
. Scope
1) The framework deals with:
(a) The objective of financial statements:
(b) The qualitative characteristics that determine the
usefulness of information in financial statements.
(c) The definition, recognition and measurement of
the elements from which financial statements are
constructed; and
(d) Concepts of capital and capital maintenance
A complete set of financial statements normally
include:
• A statement of financial position
• A statement of comprehensive income
• A statement of changes in financial position (which
could be presented in many ways, like a statement
of cash flows), and
• Those notes and other statements and explanatory
material that are an integral part of the financial
statements. They may also include supplementary
schedules and information based on, or derived from
and expected to be read with such (ex: financial
information about industrial and geographical
segment, and disclosures about the effects of
changing prices.
3. Special purpose financial statements are outside
of the scope of this Framework.
4. Applicability: Financial statements of all
commercial, industrial, and business reporting
enterprises whether public or private sector. A
reporting enterprise is an enterprise for which there
are users who rely on the financial statements as
their major source of financial information about the
enterprise.
5. Users and their Information Needs
Users of the financial statements have different
needs for the information which are as follows:
a. Investors – The provider of risk capital and their
advisers are concerned with the risk inherent in, and
return provided by their investments. They need
information:
• to help them determine whether they should buy,
hold or sell
• to assess the ability of the enterprise to pay
dividends
b. Employees – Employees and their representative
groups need information about the stability and
profitability of their employers. They need
information that will enable them:
• to assess the ability of the enterprise to provide
remuneration, retirement benefits and employment
opportunities.
c. Lenders – Lenders are interested in the
information that enables them:
• to determine whether their loans, and the interest
attaching to them will be paid when due.
d. Suppliers and other trade creditors – They are
interested in information that enable them:
• to determine whether the amounts owing to them
will be paid when due.
• Trade creditors are likely to be interested in an
enterprise over a shorter period of time than lenders
unless they are dependent upon the continuation of
the enterprise as a major customer.
e. Customers – They need information that enable
them to:
• to know about the continuance of the enterprise,
especially when they have a long term involvement
with, or are dependent on, the enterprise.
f. Government and their agencies – They are
interested in the allocation of resources and
activities of the enterprise. They require
information:
• to regulate the activities of the enterprises,
• to determine taxation policies and as the basis for
national income and similar statistics.
g. Public – Enterprises affect the members of the
public in a variety ways. For example the enterprises
may make a substantial contribution to the local
economy in many ways, including the number of
people they employ and their patronage of the local
suppliers. The public need financial statements in
order to assists them
• to determine trends and recent developments in
the prosperity of the enterprise and the rank of its
activities.
The basic financial statements are designed to meet
the common needs of all users. As investors are
providers of risk capital to the enterprise, the
provision of financial statements that meet their
needs will also meet most of the needs of other
users.
6. Responsibility for the Financial Statements
The management of an enterprise has the primary
responsibility for the preparation and presentation
of the financial statements of the enterprise.
7. Objective of Financial Statements
The objective of financial statements is to provide
information about the financial position,
performance and changes in financial position of an
enterprise that is useful to a wide range of users in
making economic decisions.
Financial statements prepared for this purpose:
• Meet the common needs of most users.
• Also show the results of the stewardship of
management, or accountability of management for
the resources entrusted to it.
• Do not, however provide all the information that
users may need to make decisions since they largely
portray the financial effects of past events and do
not necessarily provide non-financial information.
A. Financial position – The financial position of an
enterprise is affected by the economic resources it
controls, its financial structure, it liquidity and
solvency, and its capacity to adapt to changes in the
environment in which it operates. This is primarily
provided in the Statement of Financial Position (or
Balance Sheet). It answers the following questions:
• What assets does the entity own?
• What does it owe?
• What are the residual equity interests in the
entity’s net assets?
Other important information provided by the
statement of financial position are as follows:
• Financial structure – is the source of financing for
the assets of the enterprise. It indicates what
amount of assets has been financed by creditors,
which is borrowed capital, and what amount of
assets has been financed by owners, which is
invested capital.
Significance: (1) Useful in predicting future
borrowing needs and how future profits and cash
flows will be distributed among those with an
interest in the enterprise
(2) Useful in predicting how successful the enterprise
is likely to be raising further finance.
• Liquidity – refers to the availability of cash in the
near future after taking account of financial
commitments over this period.
Significance: Useful in predicting the ability of the
enterprise to meet its short-term financial
commitments as they fall due
• Solvency – refers to the availability of cash over
the longer term to meet financial commitments as
they fall due
Significance: Useful in predicting the ability of the
enterprise to meet its long-term financial
commitments as they fall due
• Capacity for adaptation – the ability of the
enterprise to use its available cash for unexpected
requirements and investment opportunities. This is
also known as financial flexibility. It can be
accomplished by raising cash at a short notice either
through borrowing or issuance of securities or by
disposal of assets without disrupting normal
operations.
Significance: Information about the economic
resources controlled by the enterprise and its
capacity for adaptation is useful in predicting the
ability of the enterprise to generate cash and cash
equivalents in the future
B. Financial performance reflected by accrual
accounting
Performance of an enterprise – comprises its
revenue, expenses, net income or loss for a period of
time. It is the level of income earned by the
enterprise through efficient and effective use of its
resources. Information about the performance of an
enterprise, in particular its profitability, is important
in assessing potential changes in the economic
resources that it is likely to control in the future.
Information about performance is primarily provided
in a statement of comprehensive income.
Accrual accounting recognizes transactions and
other events of a reporting entity in the periods in
which those effects occur, even if the resulting cash
receipts and payments occur in a different period.
Current financial reporting standards provide that all
increases and decreases in equity other than from
owner – related transactions, that is, income,
expense, realized and unrealized gains and losses
should be reported in the overall performance
report.
Changes in financial position – refers to the changes
in the economic resources and obligation of an
enterprise. In constructing a statement of changes in
financial position, funds can be defined in various
ways, such as all financial resources, working capital,
liquid assets or cash. .
Information about changes in financial position is
provided in the financial statement by means of a
separate statement.
Significance: (1) Useful in assessing investing,
financing and operating activities during the
reporting period.
(2) Useful in providing the user with a basis to assess
the ability of the enterprise to generate cash and
cash equivalents and the needs of the enterprise to
utilize those cash flows.
Fundamentally related financial statements – The
component parts of the financial statements
interrelate because they reflect different aspects of
the same transactions or other events. Although
each statement provides information that is
different from the others, none is likely to serve only
a single purpose or provide all the information
necessary for particular needs of users.
Notes and Supplementary Schedules
The financial statements also contain notes and
supplementary schedules and other information. For
example, they may contain additional information
that is relevant to the needs of users about the items
in the balance sheet and income statement. They
may include:
• Disclosures about risks and uncertainties affecting
the enterprise and
• Any resources and obligations not recognized in
the balance sheet (mineral reserves)
• Information about geographical and industry
segments and the effect on the enterprise of
changing prices
CONCEPTUAL FRAMEWORK LEVEL 2
Qualitative Characteristics of Financial Statements
If financial information is to be useful, it must be
relevant and faithfully represent what it purports to
represent. The usefulness of financial information is
enhanced if it is comparable, verifiable, timely and
understandable.
A. Fundamental Qualitative Characteristics
The fundamental qualitative characteristics are
1. relevance and
2. faithful representation
(1) Relevance
Relevant financial information is capable of making a
difference in the decisions made by users.
Information has the quality of relevance when it
influences the economic decisions of users by
helping them to evaluate, past, present, or future
events or confirming, or correcting, their past
evaluations.
Financial information is capable of making a
difference in decisions if it has predictive value or
confirmatory value, or both.
(a) Predictive value - Financial information has
predictive value if it can be used as an input to
processes employed by users to predict future
outcomes. Thus, the information can help users
increase the likelihood of correctly predicting or
forecasting outcome of events. For instance,
information about financial position and past
performance is frequently used in predicting
dividend and wage payments, and the ability of the
enterprise to meet maturing commitments
(b) Confirmatory value (or feedback) - Financial
information has confirmatory value if it provides
feedback about (confirms or changes) previous
evaluations. Information with feedback value
enables users to confirm or correct expectations.
The predictive value and confirmatory value of
financial information are interrelated.
Materiality
Materiality is an entity-specific aspect of relevance
based on the nature or magnitude, or both, of the
items to which the information relates in the context
of an individual entity’s financial report. Materiality
provides a threshold or cut-off point rather than
being a primary qualitative characteristic which
information must have to be useful. The relevance of
information is affected by its nature and materiality.
Information is material if its omission or
misstatement could influence the economic
decisions.
(2) Faithful Representation
Financial reports represent economic phenomena in
words and numbers. To be useful, financial
information must not only represent relevant
phenomena, but it must also faithfully represent the
phenomena that it purports to represent.
Characteristics of faithful representation:
a) Completeness - A complete depiction includes all
information necessary for a user to understand the
event or information being presented, including all
necessary descriptions and explanations.
b) Neutrality - A neutral presentation of information
is one without bias. A neutral information is one that
is not manipulated to increase the probability that
financial information will be received favorably or
unfavorably by users.
c) Freedom from error - means there are no errors
or omissions in the description of the phenomenon,
and the process used to produce the reported
information has been selected and applied with no
errors in the process.
Faithful representation does not mean accurate in all
respects. In this context, free from error does not
also mean perfectly accurate in all respects. For
example, an estimate of an unobservable price or
value cannot be determined to be accurate or
inaccurate. However, a representation of that
estimate can be faithful if the amount is described
clearly and accurately as being an estimate, the
nature and limitations of the estimating process are
explained, and no errors have been made in
selecting and applying an appropriate process for
developing the estimate.
B. Enhancing Qualitative Characteristics
The usefulness of information that is relevant and
faithfully represented is enhanced by the qualitative
characteristics of comparability, verifiability,
timeliness and understandability
(1) Comparability - is the qualitative characteristic
that enables users to identify and understand
similarities in, and differences among, items. Unlike
the other qualitative characteristics, comparability
does not relate to a single item. A comparison
requires at least two items.
Users’ decisions involve choosing between
alternatives, for example, selling or holding an
investment, or investing in one reporting entity or
another. Consequently, information about a
reporting entity is more useful if it can be compared
with similar information about other entities and
with similar information about the same entity for
another period or another date.
Consistency, is not the same as comparability.
Consistency refers to the use of the same methods
for the same items, either from period to period
within a reporting entity or in a single period across
entities.
Comparability is the goal; consistency helps to
achieve that goal.
(2) Verifiability – means that different
knowledgeable and independent observers could
reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful
representation. Verifiability helps assure users that
information faithfully represents the economic
phenomena it purports to represent.
Verification can be direct or indirect. Direct
verification means verifying an amount or other
representation through direct observation, for
example, by counting cash. Indirect verification
means checking the inputs to a model, formula or
other technique and recalculating the outputs using
the same methodology.
(3) Timeliness – means having information available
to decision-makers in time to be capable of
influencing their decisions. Generally, the older the
information is the less useful it is. However, some
information may continue to be timely long after the
end of a reporting period because, for example,
some users may need to identify and assess trends.
(4) Understandability – means classifying,
characterizing, and presenting information clearly
and concisely. Some phenomena are inherently
complex and cannot be made easy to understand.
However, excluding this information from the
financial reports may render these reports be
incomplete and therefore potentially misleading.
Financial reports are prepared for users who have a
reasonable knowledge of business and economic
activities and who review and analyze the
information diligently. At times, even well-informed
and diligent users may need to seek the aid of an
adviser to understand information about complex
economic phenomena.
C. Cost Constraint
Cost is a pervasive constraint on the information that
can be provided by financial reporting. Reporting
financial information imposes costs, and it is
important that those costs are justified by the
benefits of reporting that information.
Providers of financial information expend most of
the effort involved in collecting, processing, verifying
and disseminating financial information, but users
ultimately bear those costs in the form of reduced
returns. Users of financial information also incur
costs of analyzing and interpreting the information
provided. If needed information is not provided,
users incur additional costs to obtain that
information elsewhere or to estimate it.
In applying the cost constraint, there is a need to
assess whether the benefits of reporting particular
information are likely to justify the costs incurred to
provide and use that information.
VI. The Elements of Financial Statements
Financial statements portray the financial effects of
transactions and other events by grouping them into
broad classes according to their economic
characteristics. These are termed the elements of
financial statements. Elements directly related to
measurement of financial position are Assets,
Liabilities and Equity while elements directly related
to measurement of performance are Income and
Expenses.
The statement of changes in financial position
usually reflects income statement elements and
changes in balance sheet elements; accordingly, this
Conceptual Framework identifies no elements that
are unique to this statement. The presentation of
these elements in the balance sheet and the income
statement involves a process of sub-classification.
For example, assets and liabilities may be classified
by their nature or function in the business of the
entity in order to display information in the manner
most useful to users for purposes of making
economic decisions.
QUIZZER 4 CONCEPTUAL FRAMEWORK LEVELS 1 and
2
The IASB, FASB, FRSC AND “DUE PROCESS”
1. The IASB conceptual framework is intended to
establish
a. Generally accepted accounting principles in
financial reporting by business enterprises
b. The meaning of “present fairly in accordance with
generally accepted accounting principles”
c. The objectives and concepts for use in developing
standards of financial accounting and reporting
d. The hierarchy of sources of generally accepted
accounting principles.
2. The purpose of the International Accounting
Standards Board is to
a. Issue enforceable standards which regulate the
financial accounting and reporting of multinational
companies
b. Develop a uniform currency in which the financial
transactions of companies throughout the world
would be measured
c. Develop a single set of high quality IFRS.
d. Arbitrate accounting disputes between auditors
and international companies
3. Which of these statements regarding the IFRS and
US GAAP is correct?
a. US GAAP is considered to be “principles-based”
and more detailed than IFRS
b. US GAAP is considered to be “rules-based” and
less detailed than IFRS
c. IFRS is considered to be “principles-based” and
less detailed than US GAAP
d. Both US GAAP and IFRS are considered “rules-
based”, but US GAAP tends to be more complex
4. Which of the following is not included in the scope
of the IASB’s conceptual framework?
a. Qualitative characteristics of useful financial
accounting information
b. Definition, recognition & measurement of the
elements
c. Concepts of capital and capital maintenance
d. Generally accepted accounting principles
5. What is due process in the context of standard
setting at the IASB?
a. IASB and FASB operates in full view of the public
b. Public hearings are held on proposed accounting
standards
c. Interested parties can make their views known
d. All of these
6. The following published documents are part of the
“due process” system used by the IASB in the
evolution of a typical IASB Standard
1. Exposure Draft
2. IASB Standard
3. Discussion Paper
The chronological order in which these items are
released is as follows:
a. 1, 2, 3 b. 1, 3, 2 c. 2, 3, 1 d. 3, 1, 2
7. Which one of the following bodies is responsible
for reviewing accounting issues that are likely to
receive divergent or unacceptable treatment in the
absence of authoritative guidance with a view to
reaching a consensus as to the appropriate
accounting treatment?
a. International Financial Reporting Interpretations
Committee (IFRIC)
b. Standards Advisory Council (SAC)
c. International Accounting Standards Board (IASB)
d. International Accounting Standards Committee
Foundation (IASCF)
8. Which of the following are parts of the “due
process” of the IASB in issuing a new International
Financial Reporting Standard?
(1) Establishing an advisory committee to give advice
(2) Reviewing compliance and enforcement
procedures
(3) Issuing an interpretation as authoritative interim
guidance
(4) Developing and publishing a discussion document
for public comment
a. (1) and (4) b. (2) and (3) c. (2) and (4) d. ( 1) and (3)
The Financial Reporting Standards Council
9. The main function of this body is to establish and
improve accounting standards that will be generally
accepted in the Philippines
a. Board of Accountancy c. Professional Regulation
Commission
b. Philippine Institute of CPAS d. Financial Reporting
Standards Council
10. You are given the following statements relating
to the FRSC and standard setting process in the
Philippines. Which of these is (are) true?
I. All members of the FRSC should be CPAs.
II. The Financial Reporting Standards Council (FRSC)
Board of Accountancy (BOA) and Professional
Regulation Commission (PRC) are all involved in the
standard setting process, with PRC as the final
approving authority.
a. Only I is true
b. Only II is true
c. I and II are true
d. I and II are false
11. Which of the following is a characteristic of the
Financial Reporting Standards Council (FRSC)?
a. FRSC members must come from CPA firms
b. FRSC members are required to render service on
full-time basis
c. All four sectors of the Accountancy profession are
represented in the FRSC
d. All members should be CPAs
12. Which of the following are parts of the “due
process” of the IASB in issuing a new International
Financial Reporting Standard?
(1) Establishing an advisory committee to give advice
(2) Reviewing compliance and enforcement
procedures
(3) Issuing an interpretation as authoritative interim
guidance
(4) Developing and publishing a discussion document
for public comment
a. (1) and (4) b. (2) and (3) c. (2) and (4) ( 1) and (3)
13. Which of the following is (are) part of the
financial reporting standard setting process in the
Philippines?
I. Consideration of pronouncements of the IASB;
II. Creation of a task force by the standard setting
body to study the proposed accounting standard
III. Distribution of the exposure draft for comment to
CPA professionals and other interested parties.
IV. Approval by the Financial Reporting Standards
Council and eventually by the Professional
Regulation Commission
V. Publication in the Official Gazette and in a
newspaper of general circulation
a. I and IV only
b. II, III and V only
c. I, II, III and IV only
d. I, II, III, IV and V
14. Once the FRSC has established an accounting
standard
a. The standards are continually reviewed to see if
modifications or amendments are necessary
b. The standards are not reviewed unless the SEC
makes a complaint
c. The task of reviewing the standard to see if
modification is necessary is given to PICPA
d. The standard should never be modified to
conform with the principle of consistency
15. As an assistance to the FRSC, Philippine
Accountancy profession and the public it serves,
which of the following should the Philippine
Interpretations Committee (PIC) consider issuing an
interpretation?
I. Newly identified financial reporting issues in the
Philippines not specifically Addressed in PFRSs
II. Narrow industry-specific issues arising in the
international business scene
III. Philippine accounting and reporting issues when
unsatisfactory or conflicting interpretations have
developed or seem likely to develop
a. I and II only
b. I and III only
c. II and III only
d. I, II and III
Nature/Purpose/Scope
16. A conceptual framework is
a. An International Financial Reporting Standard
b. An underlying accounting assumption
c. A theoretical foundation which guides the
accounting standard-setters, the prepares and users
of financial accounting information in the
preparation and presentation of financial statements
d. A financial statement
17. Which is not a basic purpose of a conceptual
framework?
a. Assist preparers of financial statements in
applying FRSC accounting standards
b. Assist accounting standard-setting body in
reviewing and adopting International Accounting
Standards
c. Assist accounting standard setting body in
developing accounting standards
d. A assist the Board of Accountancy in promulgating
rules and regulations affecting the practice of
accountancy in the Philippines
18. A soundly developed conceptual framework of
concepts and objectives should
a. Increase financial statement users’ understanding
of and confidence in financial reporting
b. Enhance comparability among companies’
c. Allow new and emerging practical problems to be
more quickly solved
d. All of these
19. In the conceptual framework for financial
reporting, what provides the “why” – the goals and
purposes of accounting?
a. Measurement and recognition concepts such as
assumptions principles and constraints
b. Qualitative characteristics of accounting
information
c. Elements of financial accounting
d. Objective of financial reporting
20. The underlying theme of the conceptual
framework is
a. Decision usefulness
b. Understandability
c. Reliability
d. Comparability
21. The accounting standard setting body in the
Philippines is currently known as
a. The Accounting Standards Council
b. The Financial Reporting Standards Council
c. The Auditing Standards and Practices Council of
the Philippines
d. The Auditing and Assurance Standards Council
22. The conceptual framework applies to all financial
statements of reporting enterprises described as
a. Industrial enterprise
b. Commercial enterprise
c. Business enterprise
d. All of these
23. Which of the following statements regarding the
Conceptual Framework of accounting is (are)
correct?
I. The Framework deals with the qualitative
characteristics of financial statements
II. The Framework normally prevails over
International Accounting Standards where there is a
conflict between the two
III. The Framework deals with the objectives of
financial statements and the users of financial
information
a. Only I is true
b. I and II are true
c. I and III are true
d. All statements are true c. Customers
Users of Financial Information d. Investors
24. Which users need financial information to enable Basic Features/Assumptions of Accounting
them to assess the ability of the enterprise to pay 31. According to FRSC Conceptual Framework, the
dividends? following may be considered among the basic
a. Employees features of accounting that have a direct relationship
b. Lenders with preparation and presentation of financial
c. Suppliers statements.
d. Investors a. Accounting Entity and Time Period
25. Which users need financial information to assess b. Accrual and Going Concern
trends and recent developments in the prosperity of c. Going Concern and Exchange Price
an enterprise? d. Timeliness and Neutrality
a. Customers 32. The following statements, are applications of the
b. Public in general basic features of financial accounting except
c. Government & their agencies a. A parent corporation and its subsidiaries are
d. Employees treated as a single enterprise.
26. Which of the following financial statement users b. Estimates used in accounting are based on
need to determine whether obligations due them, informed judgment.
usually over a short period of time, will be paid when c. Economic activities that can be quantified are
due? emphasized in financial accounting.
a. Employees d. Financial information should be presented in a
b. Lenders way that facilitates understanding and avoids
c. Suppliers and other trade creditors erroneous implications.
d. Customers 33. Clarence, Inc. is a company whose securities are
27. Which of the following users will need financial traded on over-the-counter market. It controls
information to regulate activities of an enterprise Sherwin Corp. Consolidated financial statements are
and determine taxation policies? prepared in recognition of the accounting concept of
a. Lenders a. Economic entity
b. Government and their agencies b. Materiality
c. Management c. Legal entity
d. Public d. Flexibility
28. Which of the following statement users will use 34. The following statements relate to basic
financial information to anticipate price changes, assumptions of financial accounting. Which is false?
seek alternative sources of supply, and assess ability a. An enterprise is not viewed as a going concern if
of enterprise to operate as a going-concern? liquidation appears imminent.
a. Public in general b. The life of an enterprise is divided into equal time
b. Customers segments at the end of which financial statements
c. Lenders are prepared.
d. Employees c. The basic financial statements contain the same
29. Which of the following statement users need to underlying data and made use of the same
determine whether the obligations due them for measurement rules, and are therefore
loans granted and the related interest will be paid fundamentally related.
when due? d. Financial accounting measurements are primarily
a. Lenders based on current values.
b. Customers 35. This assumption states that the determination of
c. Suppliers and other trade creditors periodic income and financial position depends on
d. Investors the measurement of economic resources and
30. Which users need financial information to enable obligations and changes in them as the changes
them to assess the ability of the enterprise to occur rather than simply on receipt or and payments
provide remuneration and retirement benefits and of cash.
employment opportunities? a. Accrual
a. Employees b. Going concern
b. Government and its agencies c. Monetary Unit
d. Time period (2) A statement of retained earnings (4) An income
36. When a parent company and subsidiary statement
relationship exists, consolidated financial statements a. (1) and (2)
are prepared in recognition of b. (3) and (4)
a. Legal entity c. (1) and (3)
b. Economic entity d. (2) and (4)
c. Stable monetary unit 43. It is generally referred to as the financial
d. Time period flexibility of an enterprise
37. Which underlying concept serves as the basis for a. Liquidity
preparing financial statements at regular intervals of b. Solvency
time? c. Financial structure
a. Accounting entity d. Capacity for adaptation
b. Going concern 44. It is the level of income earned by an enterprise
c. Accounting period through efficient and effective utilization of
d. Stable monetary unit resources.
38. Past experience indicates that continuation of a. Financial position
operations is highly probable for most enterprises b. Performance
although continuation cannot be known with c. Positive cash flows
certainty. d. Negative cash flows
a. Going concern 45. This statement shows information about the
b. Accounting entity operating, investing and financing activities of the
c. Periodicity enterprise during a period of time.
d. Monetary unit a. Statement of Receipts and Disbursements
39. The accounting function is to account for b. Statement of Financial Position
nominal pesos only and not for changes in c. Statement of Cash Flows
purchasing power d. Statement of Changes in Owner’s Equity
a. Accrual 46. This refers to the availability of cash over a long
b. Monetary unit term to meet financial commitments when they fall
c. Separate entity due.
d. Time period a. Liquidity
40. The concept that justifies the classification of b. Solvency
assets and liabilities in the balance sheet as to c. Financial flexibility
current and non-current is d. Financial structure
a. Going concern 47. This indicates what amount of assets has been
b. Accounting entity financed by creditors (borrowed capital) and how
c. Monetary postulate much has been financed by owners (equity/invested
d. Periodicity capital)
Basic Financial Statements a. Solvency
41. The general objective of financial statements is b. Financial structure
a. To provide financial information to assist users c. Financial position
make economic decisions d. Financial flexibility
b. To disclose the market value of the firm’s assets 48. Which of the following statements about the
and liabilities financial statements is true?
c. To determine compliance with tax laws a. A prediction of events and transactions that will
d. To make forecasts about the economy give rise to cash inflows and cash outflows is best
42. Financial statements include a statement of seen in the Statement of Cash Flows.
financial position, a statement of cash flows and a b. A statement of Comprehensive Income shows
statement of changes in equity. Which TWO of the only realized gains and losses for the period.
following are also included in basic financial c. The Statement of Changes in Equity shows
statements? information about owner-related transactions and
(1) A statement of comprehensive income (3) events as well as results of profit – directed activities
Accounting policies including realized and unrealized gains and losses for
a time-period.
d. Notes to financial statements are necessary c. Comparability
because there are significant transactions and events d. Reliability
that are non-quantifiable but are important in 55. Which of the following is (are) the quality of
making economic decisions. information that assures readers that the
Qualitative Objectives/Constraints information is representationally faithful?
49. Which of the following is not considered a a b. c. d.
qualitative objective of financial accounting or Freedom from error Yes No Yes No
aspect of these objectives? Freedom from bias Yes Yes No No
a. Objectivity Completeness Yes No No Yes
b. Freedom from bias 56. It is the ability to bring together for the purpose
c. Consistency of noting similarities and dissimilarities.
d. Conservatism a. Relevance c. Reliability
50. Which one of the following is not a fundamental b. Understandability d. Comparability
qualitative objective of financial accounting? 57. Some accounting measures are more easily
a. b. c. d. verified than others. Which of the following is the
Relevance yes yes no no least verifiable measure?
Comparability yes no no yes a. Cost of machinery
Faithful representation no yes yes no b. Amount of cash
51. Which of these are not enhancing qualitative c. Salaries paid for the period
characteristics? d. Net realizable value of accounts receivable
a. Relevance and prudence 58. Objectivity is assumed to be achieved when an
b. Understandability and comparability accounting transaction
c. Timeliness and verifiability a. Is recorded in a fixed amount of pesos
d. Comparability and timeliness b. Involves the payment or receipt of cash
52. Which of the following is (are) an attribute of the c. Involves an arm’s length transaction
fundamental qualitative characteristic of relevance? d. Allocate revenues or expenses in a rational
a b. c. d. manner
Timeliness Yes No No Yes 59. If accounting information is neutral, complete,
Predictive value Yes No Yes No and free from error, then such information is
Confirmatory value Yes No Yes No a. Relevant
53. Comparability of financial information depends b. Representationally faithful
on c. Comparable
a. d. Understandable
b. 60. The consistency standard of reporting requires
c. that
d. a. Expenses are charged against the period in which
Consistency they are incurred.
Yes b. Whenever there is a change in an accounting
Yes method from one that was previously used by an
No enterprise, such change must be justifiable and must
No be disclosed in the financial statements.
Regular reporting periods c. Extraordinary gains and losses should not appear
No in the income statement
Yes d. Accounting procedures be adopted which give a
No consistent rate of net income
Yes 61. Which of the following terms are least properly
54. It is the capacity of information to make a matched?
difference in decision by helping users form a. Comparability and consistency
predictions about outcome of past, present and b. Verifiability and objectivity
future events or conform and correct prior c. Neutrality and freedom of bias
expectations. d. Neutrality and prudence
a. Relevance 62. Which of the following is the threshold of
b. Understandability recognition as to what information is relevant to be
displayed in the balance sheet or the income
statement
a. Materiality
b. Timeliness
c. Prudence
d. Understandability
63. This accounting concept means that in case there
is a conflict between economic substance and legal
form, the economic substance should prevail
a. Substance and form
b. Substance over form
c. Form over substance
d. Faithful representation
64. What is meant by comparability when discussing
financial information?
a. Information has predictive or feedback value
b. Information is reasonably free from error
c. Information that is measured and reported in
similar fashion across companies
d. Information is timely
65. What is meant by consistency when discussing
financial accounting information?
a. Information that is measured and reported in a
similar fashion across points in time.
b. Information is timely
c. Information is measured similarly across the
industry
d. Information is verifiable
66. Which of the following is not a proper condition
for comparability within a single enterprise?
a. The contents of the statements are identical
b. Accounting principles should not be changed, or if
they are changed, the financial effects need not be
disclosed.
c. The presentation of the financial statements are in
the same form
d. Changes in the circumstances or in the nature of
underlying transactions are disclosed.
67. Under the revised Conceptual Framework of
2010, which of the following is a constraint when
implementing accounting procedures to achieve the
qualitative objectives of relevance and reliability as
set forth in the FRSC conceptual framework?
a. Cost
b. Timeliness
c. Materiality
d. Balance between qualitative characteristics
68. Financial reporting is concerned only with
information that is significant enough to affect
evaluation or decision.
a. Timeliness
b. Cost and benefit
c. Materiality
d. Comparability
69. Which of the following is not an element of
faithful representation?
a. Influence on the economic decisions of users
b. Neutral presentation of financial information
c. Freedom from material error
d. Completeness of information
70. Which of the following situations violates the
concept of reliability?
a. Financial statements were issued nine months late
b. Report on segments having the same expected
risks and growth rates to analysts estimating future
periods
c. Financial statements included property with a
carrying amount increased to management’s
estimate of market value
d. Management reports to stockholders regularly
refer to new projects undertaken, but the financial
statements never report project results.
END OF MODULE 1
MMCO Continuing Professional Development
Training Center (CPDTC)
2F MMCO Building, 8000 Lakeview Ph3 Angela
Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-
6057
CPA REVIEW (May 2019 Batch)
FAR Theory Cedrick Zapanta, CPA
Module 2
1. Bookkeeping Systems
2. Review of the Accounting Process
3. Income Recognition Bases
BOOKEEPING SYSTEMS
Definition: Bookkeeping is the systematic and
chronological recording of transactions and events in
books of account. It is also known as the recording
phase of accounting.
Systems of Bookkeeping
1. Single Entry Bookkeeping – a system of
bookkeeping whereby, as a general rule only cash
and personal accounts are recognized.
2. Double Entry Bookkeeping – a system of
bookkeeping which views a transaction as having
two-fold effect on accounting values, (i.e., a value
received and a value parted with and which reflects
these two-fold effects in the accounting record).
Single Entry Bookkeeping System
Single entry bookkeeping is usually adopted by
organizations with relatively few and simple
transactions such that they do not employ the
services of a bookkeeper.
Books of account used in single-entry system
include:
• Day Book or General Journal – records transactions
in chronological order and in narrative form
• Cash Book and Subsidiary Ledgers (debtors and
creditors)
o The cash book records all transactions affecting
cash (no account titles are maintained)
o The subsidiary ledgers record transactions with
debtors and creditors
Single-entry formula in arriving at profit or loss for
the period:
Equity, end of the year P xx
Equity, beginning of the year xx
Total increase (decrease in equity) xx
Add: Amounts withdrawn by owners xx
Less: Additional investments by owners (xx)
Profit (loss) for the year P xx
Distinctions between Double Entry and Single Entry
A. Principles involved
1. Duality (VR / VPW)
2. Equilibrium (or equality)
Recognizes only one phase of a transaction
B. Transactions and events recorded
Records every type of accountable event
(transactions approach)
Records only transactions involving cash and
personal accounts
C. Accounts recognized
Assets, Liabilities, Equity, Income, and Expenses
Cash, Accounts Receivable, Accounts Payable, and
Equity
D. Books used
Journals and Ledgers
Cash Book, Subsidiary Ledgers
E. Financial statement preparation
Financial statements are prepared using a systematic
processing of data known as the accounting process.
Income (Loss) is computed using the direct matching
approach.
Income (Loss) is determined using the Net Assets
Method, sometimes known as Analysis Approach /
Residual or Indirect Approach.
F. Financial statements
Statement of Financial Position
Statement of Comprehensive Income
Statement of Cash Flows
Statement of Changes in Equity
Notes to Financial Statements
Statement of Assets, Liabilities and Net Worth
(SALN)
Summary of Changes in Equity
REVIEW OF THE ACCOUNTING PROCESS
Broad Steps of Operation in the Financial Accounting
Process under Double-Entry System of Bookkeeping
These are the series of steps undertaken in one
accounting period to identify, record, store and
report accounting information contained in
accountable events.
1. Selecting the event (or Identification of
accountable events) – an event or transaction is
selected for recording if it complies with the criteria
for accountable events set under double–entry
principles
2. Analyzing the events – events are analyzed to
determine their effects on the financial position of
the enterprise
3. Measuring the effects – effects of the events on
the financial position of the enterprise are measured
and represented by money amounts.
4. Classifying the measured effects – the effects are
classified according to the individual assets and
liabilities, owners’ equity items , revenue and
expenses affected
5. Recording the measured effects – the effects are
recorded according to the asset, liability, equity,
revenue and expense items affected (journalizing
and posting)
6. Summarizing the recorded effects – the amount of
changes for each asset, liability, equity item, revenue
and expenses are summed and related data are
grouped (trial balance preparation)
7. Adjusting the records – re-measurements, new
data, corrections or other adjustments are often
required after the events have been initially
recorded, classified, and summarized of financial
statements (preparation of adjusting entries
including worksheet preparation)
8. Communicating the processed information – the
information is communicated to users in the form
(Preparation of Financial Statements)
The accounting cycle is a series of well-defined steps
leading to the communication of the effects of a
business transaction.
The accounting cycle implements the accounting
process from period to period.
Steps in the Accounting Cycle
1. Identifying and analyzing transactions and events
to be recorded – gathering of information from
source documents and determining the impact of
the transaction or event on the financial position
using the equation “Assets equals Liabilities +
Owners’ Equity”.
2. Journalizing the transactions and events – act of
recording transactions in the business forms to
appropriate journals.
3. Posting – act of transferring peso amounts and
other information from the journal to the ledger.
4. Preparing the unadjusted trial balance – balances
of the general ledger accounts are proved as to the
equality of debits and credits and to serve as a basis
for adjusting entries.
5. Journalizing and posting the adjusting entries –
made to take up accruals, expiration of deferrals,
estimations and other events often not signaled by
new source documents.
6. Preparing the adjusted trial balance (or preparing
the worksheet) – checking the equality of debits and
credits after adjustments and to facilitate the
preparation of financial statements.
7. Preparing the financial statements – the means by
which the processed information is communicated
to external decision-makers.
8. Closing the books – involves journalizing and
posting closing entries and ruling and balancing real
accounts in the ledger. Temporary capital accounts
(or nominal accounts) are closed and the resulting
net income or loss is transferred to the capital
account or retained earnings account.
9. Taking a post-closing trial balance – this is done to
prove equality of debits and credits in the ledger
after the closing process.
10. Preparing, entering and posting of reversing
entries – this is done to facilitate the recording of
certain transactions in the succeeding accounting
period.
Accounting Records of a Business Enterprise
1. Business or source documents – these are the
original source materials evidencing a transaction.
Examples are purchase invoice, official receipts,
vouchers, debit or credit memoranda, miscellaneous
bills for expenses.
2. Books of original entry – these refer to the
journals such as the General Journal and the special
journals (sales journal, purchase journal, cash
receipts journal, cash disbursement journal, or
voucher register and check register.
3. Books of final entry – these refer to the Ledgers:
General Ledger and subsidiary ledgers.
Step 1: Identifying and Analyzing Transactions and
Events – the process of selecting a transaction or
event and analyzing its impact on the financial
position.
1.1 The “dual effects principle” of the double-entry
system of bookkeeping is used. Each recorded event
affects at least two items in the financial accounting
records.
1.2 The account is used as the storage unit of
information in double-entry system. It is composed
of three parts, the name of the account, (or account
title), the left side (or debit) the right side (or credit).
Step 2: Journalizing – the process of recording
transactions by means of a journal entry in the
journal.
2.1 Types of journal entries as to the time prepared:
• Opening entry – entry beginning a new system of
accounting for enterprises
• Current entries – entries to record transactions
completed by the business during a given period
• Adjusting entries – entries made at the end of the
accounting period to update certain amounts so that
they reflect correct balances at a designated time
• Closing entries – entries made at the end of the
accounting period after adjustments, by means of
closing nominal accounts to a summary account
transferring the balances to capital
• Reversing entries – entries made at the start of the
subsequent accounting period to reverse certain
adjusting entries made in the immediately preceding
accounting period
• Correcting entries – entries made to correct entries
made in error
• Reclassification entries – entries that transfer an
item from one account to another that may clearly
describe the nature of the item transferred
2.2 Journal – a formal record or book of original
entry where transactions are recorded for the first
time. The following are the types of Journals:
• simple journal – a book of original entry used to
record all transactions
 general journal – simple journal with two money
columns
 combination journal – simple journal with several
money columns
• special journal – multi-column book to record
transactions of a similar nature
2.3 Types of Special Journals:
• Cash Receipts Journal
• Cash Disbursement Journal
• Sales Journal
• Purchase Journal .
• Voucher Register
• Check Register
• Requisition Journal
2.4 Voucher System – a special method of
accounting for business transactions which involves
the payment of cash immediately or in the future. It
is one of the means of establishing internal control
over the expenditures of the business. A voucher is a
document that carries the authorization to pay cash
either immediately or in a future date, and to
journalize the transaction. Thus, one of the most
important parts of a voucher is the signature(s) of
the authorizing officials of the economic entity.
Two basic principles in voucher system:
1. All cash payments, immediately or in the future,
must be properly authorized through a voucher.
2. No voucher can be presented for payment twice.
Books of Accounts used in a Voucher System
1. voucher register – records vouchers issued
2. check register – records all purchases of
merchandise
3. sales register – records all sales of merchandise
4. cash receipts journal – records all receipts of cash
5. general journal – records transactions not
accommodated in special journal
Advantages of the Voucher System
1. Better control over disbursements
2. Facility in taking cash discount
3. Elimination of accounts payable subsidiary ledger
Disadvantages of the Voucher system
1. Lacks flexibility
2. May result in duplication of work and increased
bookkeeping expenses
Step 3: Posting – it is the process of transferring data
from the journal to the appropriate accounts in the
ledger.
Purpose: it serves to classify the effects of
transactions on specific asset, liability,
proprietorship, revenue and expense accounts.
3.1 Ledger – a systematic compilation of a group of
accounts
3.2 Kinds of Ledger
1. General ledger – contains all accounts appearing
in the financial statements
2. Private ledger – contains confidential information
of accounts
3. Subsidiary ledger – a supporting ledger consisting
of a group of accounts of similar nature, the total of
which is in agreement with a controlling account in
the general ledger
3.3 Accounts – are accounting devices used to
summarize change in asset, liability or
proprietorship.
3.4 Kinds of Accounts
1. Real account
2. Nominal account
3. Mixed account
4. Clearing account
5. Controlling account
6. Suspense account
7. Reciprocal account
8. Auxiliary account
9. Summary account
Step 4: Preparing the Trial Balance – this is the next
step of the bookkeeping cycle which is the listing
down of accounts with open balances in order to
prove the mathematical accuracy of the debits and
credits in the ledger.
4.1 Types of Trial Balance
4.1.1 As to Form
1. Trial Balance of Balances – contains accounts with
open balances only
2. Trial Balance of Totals – contains all accounts in
the ledger, both open and closed
4.1.2 As to time of preparation
1. Periodic or Unadjusted Trial Balance – this is
prepared before the preparation of adjusting entries.
Contents: Real, Nominal, and Mixed Accounts
2. Adjusted Trial Balance – one prepared after
adjusting entries.
Contents: Real and Nominal Accounts
3. Post-closing Trial Balance – one prepared after the
closing process.
Contents: Real Accounts only
4.2 Examples of errors revealed by a Trial Balance:
1. Error of Transplacement (sliding error; decimal
point)
2. Error of Transposition
3. Error in posting one side of an entry
4. Omission in posting one side of an entry
4.3 Examples of errors not revealed by a Trial
Balance:
1. Wrong computation
2. Wrong classification of account (wrong account
used)
3. Double-posting both sides of an entry
4. Omission in posting both sides of an entry
5. Omission in journalizing a transaction
Step 5: Preparation of Adjusting Entries – These are
entries made at the accounting period to update or
bring to their correct balances certain asset, liability,
revenue or expense accounts.
5.1 Concepts Involved
• Accrual – revenue must be recognized when
earned, even if cash is not yet received. Expenses
must be recorded when benefits are received, even
if cash is not yet paid.
• Matching of Costs Against Revenue – to have a fair
measurement of revenue in a given period of time,
all costs and expenses incurred in generating that
revenue must be deducted therefrom.
• Accounting period – a transaction is recorded on
the basis of business papers. Certain transactions,
however, remain “unfinished” at the time of
reporting financial information. Estimates and
updating entries therefore become necessary in
order to reflect more fairly the status of certain
accounts.
5.2 Purpose of Adjusting Entries (7 adjusting entries)
1. To take up unrecorded income and expenses of
the period
a. Accrued expense
b. Accrued income
2. To split mixed accounts into their real and nominal
elements:
a. Deferred or prepaid expenses
b. Deferred, unearned, or pre-collected income
c. Bad debts
d. Inventory
e. Depreciation
Step 6: Preparing Adjusted Trial Balance or a
Worksheet
6.1 Definition: A worksheet is an analytical device
used in accounting to facilitate the gathering of data
for adjustment, the preparation of financial
statements, and closing entries.
Step 7: Preparing Financial Statements
7.1 Definition: Financial statements are the means
by which the information accumulated and
processed in financial accounting is periodically
communicated to the users.
7.2 Components of the Basic Financial Statements
(details to be discussed in PAS 1 – Presentation of
Financial Statements):
1. Statement of Financial Position (Balance Sheet) – a
formal statement showing assets, liabilities, capital
or the financial position of an enterprise as of a given
date.
2. Statement of Comprehensive Income – presents
the revenue, expenses, gains, losses, both realized
and unrealized, that are the result of the enterprise’s
profit-directed activities during a given period of
time.
3. Statement of Changes in Equity – shows the
movements in the elements of the components of
stockholders’ equity which includes the net income
and items such as dividends, appropriations and
adjustments of net income of prior periods.
4. Statement of Cash Flows – is a statement that
summarizes the cash inflows and outflows arising
from operating, financing and investing activities of
the enterprise for a given period of time.
5. Notes – contain explanatory material, and
disaggregation of certain items in the face of the
financial statements, as well as other significant
quantifiable and non-quantifiable information that
are necessary in making economic decisions.
Step 8: Closing the Books
8.1 Definition: Closing the books is the process of
preparing closing entries and ruling and balancing
real accounts.
8.2 Closing entries – are entries prepared at the end
of the accounting period to “empty” or bring to zero
all nominal accounts in the ledger.
8.3 Steps in preparing closing entries:
1. Close all nominal accounts to Income and Expense
Summary account
2. Close Income and Expense Summary account to
Drawing (if single proprietorship or partnership), or
to Retained Earnings (if corporation)
3. Close Drawing to Capital
Step 9: Preparing the Post-Closing Trial Balance
9.1 Definition: A post-closing trial balance is a trial
balance prepared after closing the books.
9.2 Purpose: To prove the equality of the debits and
credits in the ledger after the closing process.
9.3 Contents : Real accounts only
Step 10: Reversing Entries
10.1 Definition: Reversing entries are entries made
on the first day of the succeeding accounting period
to reverse certain adjusting entries done in an
immediately preceding period.
10.2 Purpose:
1. For convenience in recording accruals
2. For consistency in recording deferrals
10.3 Adjustments requiring reversal:
1. Accrued expense
2. Accrued income
3. Prepaid expense, if expense method is used
4. Unearned income, if income method is used
QUIZZER 1 BOOKKEEPING SYSTEMS
Bookkeeping Concepts/Accounting Equation/Rules
of Debit and Credit
1. This is the means by which a reporting entity
records and stores the financial and managerial
information from its transactions or economic
events so that it can retrieve and report the
information in an accounting statement
a. Accounting system
b. Bookkeeping system
c. Internal control system
d. Ledger system
2. The systematic and chronological recording of
transactions and events in books of account is
known as
a. Accounting
b. Bookkeeping
c. Recordkeeping
d. Auditing
3. Accounting records of an enterprise include which
of the following?
abcd
Source documents of accountable events yes no yes
no
Journals and ledgers yes yes no no
4. Which of the following phrases are descriptive of
bookkeeping?
abcd
Routine, mechanical and repetitive yes yes no no
Creative, analytical, judgmental no yes yes no
Follows method prescribed by accounting yes yes no
yes
5. Which one of the following is among the
conditions that will qualify a situation, particular
action or set of circumstances as an accountable
event?
a. It has happened or will happen within a short
period of time
b. It affects an accounting element (s) either
increasing and decreasing it
c. It involves an exchange of values between the
business enterprise and a third party
d. It can be measured accurately in monetary terms
6. The system of bookkeeping that recognizes the
two-fold effect of an accountable event is known as
a. Double-entry
b. Single-entry
c. Cash basis
d. Accrual basis
7. The system of bookkeeping whereby, as a general
rule, only cash and personal accounts are recognized
and is deemed to be incomplete bookkeeping
a. Double-entry
b. Single-entry
c. Cash basis
d. Hybrid accounting
8. Which of the following statements about
bookkeeping systems is (are) true?
I. Single-entry bookkeeping is the same as cash basis
of accounting
II. In both single-entry bookkeeping and cash basis of
accounting, receipt and payment of cash is used as
the basis for recording transactions.
III. Single-entry bookkeeping offers a better internal
control than double-entry bookkeeping
a. Only I is true
b. Only II is true
c. Both II and III are true
d. All statements are true
9. Which of the following statements about single-
entry bookkeeping is (are) true?
I. Single-entry bookkeeping uses the net assets
approach or indirect approach in determining net
income for a period.
II. The single-entry or net assets formula in
determining net income or loss cannot be used in a
corporate form of organization
III. There are certain instances when a trial balance
can be prepared from a single-entry set of books
a. Only I is true
b. I and II are true
c. II and II are true
d. All statements are true
10. The following books of account are used in
single-entry bookkeeping
a. Cashbook and subsidiary ledger
b. Cash receipts book and general ledger
c. Cash receipts book , cash disbursements book,
general ledger and subsidiary ledger
d. Cashbook and general ledger
11.Which of the following transactions are
recognized in single-entry bookkeeping?
abcd
Purchase of office supplies for cash yes yes no no
Collection on accounts receivable no yes no yes
Unsold merchandise at the end of the year yes no
yes no
12.Which one of the following bases of income and
expense recognition is used in accounting for
revenue and expenses under single-entry
bookkeeping?
a. Cash basis
b. Accrual
c. Modified cash basis
d. None of these is used
13. The two basic concepts or theories underlying
double-entry bookkeeping are
a. Value received and value parted with
b. Duality and equilibrium
c. Debit and credit
d. Check and balance
14.Which of the following should be recognized as
an accountable event in financial accounting
according to GAAP?
a. LMN Corporation declares an issuance of stock
rights to its stockholders
b. OP Inc. increases its recorded goodwill due to
good customer relations and high employee morale.
c. The estimated recoverable value of an intangible
asset becomes lower than its carrying value
d. RST’s building, which is carried in the books using
the cost model, has increased in fair value at year-
end
15. The primary characteristic that distinguishes
double-entry bookkeeping from single-entry is
a. It recognizes the two-fold effect of each event
affecting the enterprise
b. A complete set of journals and ledgers is
maintained
c. A trial balance is periodically prepared
d. Accrual basis accounting is used
16. Double entry bookkeeping requires that
a. Every transaction affects both an asset account
and either a liability or owner’s equity account
b. The number of ledger accounts with debit balance
is equal to the number with credit balances
c. The total peso amount of debit entries posted to
the ledger is equal to the total peso amount of the
credit entries
d. The number of debit entries posted to the ledger
equals the number of credit entries
17. The basic classification category and storage unit
for information in a double-entry system is the
a. Business document
b. Journal
c. Ledger
d. Account
18.Which of the following statement is false
concerning double-entry bookkeeping?
I. The duality and equilibrium principles in double –
entry are expressed through an accounting equation,
“ Assets = Liabilities + Equity”
II. If an economic entity has no liabilities, the assets
will be equal to equity unless some assets are
impaired.
III. In double entry bookkeeping, an accountable
event always has an effect on assets and / or
liabilities or capital account
a. Only I is false
b. Only II is false
c. I and II are false
d. All statements are false
19. Given the dual effects of accountable events, an
increase in an asset cannot possibly be accompanied
by a (an)
a. Decrease in another asset
b. Decrease in owner’s equity
c. Increase in a liability
d. Increase in revenue
20. A transaction caused a P60,000 increase in both
assets and total liabilities. This transaction could
have been
a. Purchase of office supplies for P60,000 cash
b. Exchange of assets with no commercial
substance , at carrying amount, P60,000
c. Purchase of a piece of ornate office furniture for
P100,000 paying P40,000 cash and issuing a note
payable for the balance
d. Repayment of a P30,000 bank loan
21.Owner’s equity was understated and liabilities
were overstated. Which of the following errors could
have been the cause?
a. Making the adjustment entry for depreciation
expense twice
b. Failure to record interest accrued on a note
payable
c. Failure to make the adjusting entry to record
revenue which had been earned but not yet billed to
customers
d. Failure to record the earned portion of rent
received in advance
22.Which is false concerning the rules of debit and
credit?
a. The left side of an account is always the debit side
and the right side is always the credit side.
b. The normal balance of any account appears on the
side used for recording increases.
c. The rules of debit and credit cannot be amended
over time.
d. The word “debit” means to increase and the word
“credit” means to decrease.
23.Which of the following explains the debit and
credit rules relating to the recording of revenue and
expenses
a. Expenses appear on the left side of the balance
sheet and are recorded by debits; revenue appears
on the right side of the balance sheet and is
recorded by credits
b. Expenses appear on the left side of the income
statement and are recorded by debits; revenue
appears on the right side of the income statement
and is recorded by credits
c. The effects of revenue and expenses upon owner’s
equity
d. The realization principle and the matching
principle
24. All of the following are disadvantages of the
single-entry bookkeeping system except
a. Accounting records are incomplete.
b. Accrual basis financial statements cannot be
prepared.
c. Internal control is inadequate.
d. Financial statements are not likely to be fairly
presented in accordance with GAAP.
25.Which of the following is a book of account
utilized in both a single-entry bookkeeping system
and a double-entry bookkeeping system?
a. cash receipts book
b. subsidiary ledger
c. general journal
d. sales journal
26. Which of the following statements about
bookkeeping systems is (are) true?
I. Net income or loss under single entry bookkeeping
is computed using an approach that directly matches
cost with revenue.
II. Double-entry bookkeeping is sometimes known as
transactions approach of accounting for Assets,
liabilities, equity, revenue and expenses.
III. Double-entry bookkeeping is the generally
acceptable method of bookkeeping because it offers
an accurate and more complete income
measurement than single-entry.
a. Only III is true
b. Only II is true
c. I and II are true
d. I, II, and III are true
27. In double-entry bookkeeping system which of
the following may be used as basis for recognizing
income and expenses?
a. b. c. d.
Cash basis yes no yes no
Modified cash basis yes yes no no
Accrual basis yes no no yes
QUIZZER 2 ACCOUNTING PROCESS
Accounting Process/Accounting Cycle
1. Which of the following statements is true?
a. “Accounting process” and “accounting cycle” may
be used interchangeably as they have exactly the
same meaning.
b. The accounting cycle represents the steps taken to
accomplish the accounting process.
c. The accounting process implements the steps of
the accounting cycle.
d. The steps of the accounting process culminates in
the preparation of reversing entries.
2. The series of well-defined steps followed and
completed within an accounting period to record
transactions and prepare financial statements under
the double-entry bookkeeping system is
a. Operating cycle
b. Business cycle
c. Accounting cycle
d. Accounting process
3. Which of the following operations in the financial
accounting process determine how events affect the
assets, liabilities, owners’ equity, revenue, and
expenses of the enterprise?
a. Selecting the events
b. Analyzing the events
c. Measuring the effects
d. Classifying the measured effects
4. Which of the following operations involves the
assignment of peso amounts to accountable events?
a. Analyzing the events
b. Measuring the effects
c. Recording the measured effects
d. Classifying the measured effects
5. Which of the following operations can be
performed by a computer without requiring an
accountant’s judgment?
a. Selecting the events
b. Measuring the effects
c. Summarizing the recorded effects
d. Adjusting the records
6. Identify the following as pertaining to the
recording phase (RP) and summarizing phase (SP) of
an accounting cycle
(1) Analyzing each event (3) Posting to ledger
accounts
(2) Preparing a trial balance (4) Preparing the
financial statements
a. RP, RP, RP, SP
b. SP, RP, RP, RP
c. RP, SP, RP, SP
d. SP, RP, SP, SP
Journalizing
7. The first step in the accounting cycle is
a. Record transactions in the journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger accounts
d. Adjust the general ledger accounts
8. At what step in the accounting cycle is GAAP
typically applied?
a. Journalizing
b. Posting
c. Trial balance preparation
d. All of these
9. Transactions and events are analyzed according to
the rules of debit and credit
a. After selecting the event and before an entry is
recorded in the journal.
b. After the entry is recorded in the journal and
before it is posted in the ledger
c. When adjusting entries are prepared.
d. After adjusting entries and before preparation of
the financial statements and closing entries
10.Which of the following documents does not
initiate an entry to be made in the books of
accounts?
a. Sales invoice
b. Purchase invoice
c. Purchase order
d. Credit memorandum
11. A firm’s chart of accounts is
a. A flowchart of all transactions
b. A list of names of all account titles used by an
economic entity
c. An accounting procedures manual
d. A journal
12.Which of the following statements the primary
purpose of a general journal?
a. The general journal provides a continuing balance
of the amount to date in each of the temporary
accounts
b. The general journal provides an organized
summary, in chronological order, of the transactions
of the entity.
c. The general journal directly provides the data for a
trial balance.
d. The general journal eliminates the need for
control accounts in the ledger
13.Which is false concerning use of special journals?
a. Sale of merchandise is recorded in the sales
journal and sale of any item for cash is recorded in
the cash receipts journal.
b. Only cash sales are recorded in the cash receipts
journal
c. Investment of non-cash asset by the owner of the
entity is recorded in the general journal
d. Purchase of property and equipment on account is
recorded in the general journal.
14.One of these is not an advantage of using special
journals:
a. Division of labor is possible
b. Possibility of error is minimized
c. Number of postings is reduced
d. Space and effort in recording transactions is
reduced
15. A company uses the periodic inventory system
and records purchases net of discounts. On April 1,
the company purchased merchandise worth P20,000
under terms 2/10, n/30. The journal entry to be
made to record the purchase on April 1 will include a
a. credit to accounts payable of P 20,000
b. credit to accounts payable of P 19,600
c. debit to purchases of P 20,000
d. debit to allowance for purchase discounts of P 400
16.Which of the following pertaining to the use of
special journals is (are) true?
Statement 1 – Transactions that cannot be
appropriately recorded in a special journal are
recorded in the general journal.
Statement 2 – If entity is using a one-column Sales
Journal, sale of merchandise on account are
recorded in the sales journal while cash sales are
recorded in the cash receipts journal.
Statement 3 – Voucher register and check register
are also classified as special journals.
a. Only statement 1 is true
b. Only statement 2 is true
c. Statements 1 and 2 are true
d. All of the statements are true
17. Which of the following statements pertaining to
the voucher system is incorrect?
a. A voucher system is used in connection with
transactions involving payment of cash.
b. When installments or other payments are made
on an invoice, a separate voucher is prepared for the
amount of each check issued
c. A file of unpaid vouchers shows only the total
amount of outstanding liabilities for merchandise
purchased.
d. Payments of purchases with discounts is recorded
in the check register by a debit to vouchers payable
at gross and appropriate credits to cash and
purchase discounts.
18. The voucher system strengthens internal
accounting control by requiring that a voucher be
prepared to authorize payment of the liability at the
time the liability is
a. Paid
b. Incurred
c. Planned
d. Audited
19.Which of the following best describes a voucher?
a. A supporting document prepared for each cash
receipt or disbursement
b. A promise to pay an amount owed within a
discount period
c. A written authorization prepared for each check
written
d. A written record sent to a payee along with the
signed check
20. Which of the following statements about the
voucher system is (are) true?
I. A voucher need not be prepared for a purchase on
account since it will not require an immediate cash
payment.
II. Since the voucher system is costly to apply,
repetitive and time-consuming, it is not
recommended for use in accounting for cash
disbursements.
III. The voucher system offers a more effective
internal control than the non- voucher system.
a. I only
b. III only
c. I and III only
d. I, II and III
Posting
21. A systematic compilation of account titles of
asset, liability, equity, revenue and expense accounts
which is also called a “book of secondary entry” is
known as
a. Journal
b. Ledger
c. Worksheet
d. Trial balance
22.Which of the following statements is incorrect?
a. Accounts are arranged in the general ledger
following the “financial statement order”.
b. The ledger is more important than the journal.
c. Posting is the process of transferring debit and
credit changes in account balances from the ledger
to the journal.
d. A ledger account shows in one place all the
information about changes in a specific asset or
liability, or owners’ equity.
23. A listing of the components of account balances
which relieves the general ledger of detail thereby
facilitating the preparation of a trial balance is
known as
a. Subsidiary ledger
b. Private ledger
c. Worksheet
d. Register
24.Which of the following types of accounts measure
economic flows over a period of time?
a. Real accounts
b. Nominal accounts
c. Mixed accounts
d. Summary accounts
25. An auxiliary account that has the same balance
as the principal account is a
a. Contra account
b. Adjunct account
c. Offset account
d. Controlling account
26.Which of the following best defines a controlling
account?
a. A summary account in the general ledger that is
supported by detailed accounts in a subsidiary ledger
b. A listing of the balances in all accounts
c. An account which increases due to sale of goods
or services during the normal operations of a
business
d. A chronological listing of all transactions for a
specific time period.
27. You are given the following statements. Which
one is true?
I. A mixed account involves a mixture of asset and
income elements
II. Transactions are posted only at the end of the
month when special journals and controlling
accounts are used.
III. The “Share Premium” account is both an auxiliary
and adjunct account
a. Only I is true
b. II and III are true
c. I and II are true
d. Only III is true
28.Which of the following statements is false?
a. Before year-end adjustments are prepared, a
building account is a mixed account
b. Offset accounts are neither assets nor liabilities
c. Contra accounts appear only in the balance sheet
d. A principal account is an account that can stand
alone
29. A notation entered in a journal or ledger, not
intended to be formally incorporated in the
accounts, which describes a situation or event, with
or without money values is known as
a. a footnote
b. a negative entry
c. a memorandum entry
d. a reciprocal entry
Trial Balance
30.Which of the following statements regarding a
trial balance is incorrect?
a. A trial balance should always balance.
b. A trial balance is a test of the equality of the
debits and credits in the ledger.
c. A trial balance that is in balance proves that no
error of any kind has been made in the accounts
during the accounting period.
d. A trial balance is useful in the preparation of the
income statement and the balance sheet.
31. The primary purpose of preparing a trial balance
is to determine that
a. The ledger contains an equal peso amount of
debit and credit entries
b. The ledger contains an equal number of debit and
credit entries
c. The number of ledger accounts with debit
balances is equal to the number of accounts with
credit balances
d. Each transaction was recorded with equal
amounts of debits and credits.
32. A trial balance will disclose that an error has
been made in
a. a. Entering an amount on the wrong side of an
account
b. b. Computing the interest expense on a note
payable
c. c. Posting an amount to the wrong ledger account
d. d. Double-posting two both sides of an entry
33. A trial balance that contains real accounts only is
a. an interim trial balance
b. an unadjusted trial balance
c. an adjusted trial balance
d. a post-closing trial balance
Adjusting Entries
34. Adjusting entries are needed
a. Whenever revenue is not received in cash
b. Whenever expenses are not paid in cash
c. Primarily to correct errors in the initial recording
of business transactions
d. Whenever transactions affect the revenue or
expenses of more than one accounting period
35.Which one of the following concepts is least
related to adjusting entries.
a. Accrual
b. Approximation
c. Materiality
d. Matching of cost against revenue
36. Adjusting entries involve
a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. At least one real and one nominal account
37.Which one of the following is a purpose of
adjusting entries?
I. To apportion the proper amounts of revenue and
expense to the current accounting period.
II. To establish the proper amounts of assets and
liabilities in the balance sheet.
III. To accomplish the objective of offsetting the
revenue of the period with all the expenses incurred
in generating that revenue.
IV. To prepare the revenue and expense accounts for
recording transactions of the following period.
a. I and II only
b. II and III only
c. I, II and III only
d. All of these
38. The entry to record depreciation is an example of
an adjusting entry
a. To apportion a recorded cost
b. To apportion unearned revenue
c. To record unrecorded expense
d. To record unrecorded revenue
39. Assume that a company’s fiscal year ends on
December 31. Which of the following events involves
an adjusting entry that would be affected by how the
event was originally recorded?
a. Sale of merchandise on account
b. Signing a one-year lease for a building
c. Salaries earned by employees this year will be paid
next year.
d. Payment of rent for 6 months coverage starting
October 1 of current year
40. If the advance payment of an expense was
initially recorded in an expense account, the
adjusting entry will involve
a. A debit to the asset account and a credit to the
expense account in the amount of the unexpired
portion.
b. A debit to the asset account and a credit to
expense in the amount of the expired portion.
c. A debit to expense and a credit to the asset
account in the amount of the unexpired portion.
d. A debit to expense and a credit to the asset
account in the amount of the expired portion.
41. The entry to record merchandise inventory for
goods unsold at the end of the accounting period is
a. An adjusting entry
b. A closing entry
c. Both an adjusting and closing entry
d. A regular entry
42. Rent revenue collected one month in advance
should be accounted for as
a. Revenue in the month collected
b. An accrued liability
c. A separate item in equity
d. A current liability
Worksheet
43. An analytical device used by accountants to
facilitate the gathering of data for adjustments, and
the preparation of adjusting and closing entries.
a. trial balance
b. worksheet
c. account
d. ledger
44.Which of the following is not a factor to consider
in determining the money columns of a periodic
worksheet?
a. the nature of the business
b. the concept or basis used in accounting for
revenue and expenses
c. the amount of capital of the business
d. the type of ownership of the business
Closing Entries/ Post-closing Trial Balance/ Reversing
Entries
45. The purpose of making closing entries is to
a. Prepare revenue and expense accounts for the
recording of the next period’s revenue and expenses
b. Enable the accountant to prepare financial
statements at the end of the accounting period
c. Establish new balances in the balance sheet
accounts
d. Reduce the number of revenue and expense
accounts
46. The effect of closing entries is to
a. Change assets
b. Change liabilities
c. Change retained earnings
d. Change debit balances of all accounts into credits
and vice-versa
47. The purpose of the post-closing trial balance is to
a. Provide the account balances for preparation of
the balance sheet.
b. Ensure that the ledger is in balance for the start of
the next period
c. Aid the journalizing and posting of the closing
entries.
d. Ensure that the ledger is in balance for completion
of the worksheet
48. Reversing entries are used
a. primarily to simplify the bookkeeping during the
next accounting period
b. to adjust the inventory account under a periodic
inventory system
c. to close the income summary account
d. to establish appropriate contra accounts
49. The following six adjusting entries were recorded
by RNQ Corp. at the end of the fiscal year:
(1) Bank service charge expense xx (4) Wages
expense xx
Cash xx Wages payable xx
(2) Unearned rent xx (5) Insurance expense xx
Rent revenue xx Prepaid insurance xx
(3) Bad debts expense xx (6) Prepaid rent xx
Allowance for bad debts xx Rent expense xx
If the firm reverses all adjusting journal entries that
should be appropriately reversed, which of the six
adjusting journal entries would be reversed?
a. (3), (4), and (6)
b. (1), (2), and (5)
c. (4) and (6)
d. All six adjustments should be reversed
50.Which of the following steps in the accounting
cycle are optional?
Adjusting entries Worksheet Closing Entries
Reversing entries
a. NO NO NO NO
b. NO YES YES YES
c. NO YES NO YES
d. YES YES YES YES
INCOME RECOGNITION BASES
Principle: Determination of periodic net income
depends on recognizing changes in assets and
liabilities in the period in which the changes occur,
rather than simply on recording receipts and
payments of money. (Accrual Concept)
1. Alternative Income-Recognition Bases (for
recording of day-to-day transactions)
a. Accrual basis
b. Cash basis
c. Modified cash basis
2. Accrual basis
a. Underlying concept – Revenues are recognized
when realized, i.e. when goods are sold are services
provided. Expenses are recognized when incurred,
i.e. when assets are consumed to generate revenue.
Net income (loss) for the period is the difference
between realized revenues and related expenses.
b. Advantages – Accomplishments (revenues) are
related to efforts or sacrifices (expenses) so that
reported net income measures an enterprise’s
performance during a period.
It is also more useful in predicting future earnings
and cash flows of the enterprise. These are the
primary reasons why accrual accounting is preferred
over cash-basis accounting.
3. Cash Basis
a. Underlying concept – Revenue is recognized when
collected in cash, expenses when paid or settled in
cash. Net income (loss) for the period is the
difference between cash received from, and cash
disbursed for the firm’s profit-directed activities.
b. Advantages – The claimed advantages of cash
basis accounting are:
1. Simplicity and economy because transactions are
recorded only when cash is received or paid.
2. Reliability because estimates and judgments are
not required.
c. Disadvantage – Cash basis is not useful in
evaluating enterprise performance because it does
not reflect the results of all profit-directed activities
which took place during the period. Cash receipts
and payments and the accomplishments and efforts
often occur in different periods.
d. Acceptability – Cash basis accounting is not a
generally accepted basis of recognizing net income.
It is used only by relatively small business firms and
practicing professionals whose needs are satisfied by
simple accounting records. Moreover, strict cash
basis accounting is often modified in practice.
4. Modified Cash Basis
a. Underlying concept – Modified cash basis is a
hybrid system of recognizing net income. Items
materially affecting net income such as purchases
and sales on account, inventories, long-lived assets
and depreciation are accounted for on an accrual
basis; all other items are recognized on a cash basis.
b. Modified accrual basis - This term is sometimes
used in place of “modified cash basis”, particularly in
describing the basis of accounting for governmental
funds.
SAMPLE TRANSACTIONS AND ENTRIES USING Accrual view
DIFFERENT INCOME AND EXPENSE RECOGNITION Purchases 120,000
BASES UNDER THE DOUBLE ENTRY SYSTEM OF Accts Pay 120,000
BOOKKEEPING 7. Payment on acct purchase, P60,000
CASH BASIS Purchases 60,000
MODIFIED CASH BASIS Cash 60,000
ACCRUAL BASIS Accrual view
TRANSACTION Accts Pay 60,000
INCOME  when cash is received Cash 60,000
EXPENSE  when paid 8. Purchased supplies, C.O.D P 10,000
INCOME  when cash is received Supplies Exp. 10,000
EXPENSE  when paid Cash 10,000
 AR, AP, Mdse Invty, PPE Cash view
INCOME  when earned Unused Supplies or
EXPENSE  when benefits are received Supplies Exp. 10,000
1. Cash sales, P100,000 Cash 10,000
Cash 100,000 9. Bought eqpt C.O.D P50,000
Sales 100,000 Eqpt Exp. 50,000
Same Cash 50,000
Cash 100,000 Accrual view
Sales 100,000 Equipment 50,000
2. Account sales Cash 50,000
P 300,000 10. Interest income received, P15,000
No entry Cash 15,000
Accrual view Int. Inc. 15,000
Accts Rec 200,000 Same
Sales 200,000 Cash 15,000
3. Cash purchases, P 90,000 Int. Inc. 15,000
Purchases 90,000 11.. Rent collected in advance, P60,000
Cash 90,000 Cash 60,000
Same Rent Inc. 60,000
Purchases 90,000 Cash view
Cash 90,000 Cash 60,000
4. Collection on acct, P 150,000 Rent Income/or
Cash 150,000 Unearned Rent 60,000
Sales 150,000 12. Unpaid advertising
Accrual view P 18,000
Cash 150,000 No entry
Accts Rec 150,000 Cash view
5. Paid salaries, Advert. Exp. 18,000
P 75,000 Advert. Pay. 18,000
Salaries Exp.75,000 13. Uncollected service income P 30,000
Cash 75,000 No entry
Same Cash view
Salaries Exp. 75,000 Com. Rec. 30,000
Cash 75,000 Com. Income 30,000
6. Account purchases, P120,000 14.. Unused supplies, P2,000
No entry No entry
Cash view 4. Under the cash basis, expenses are recognized
Supplies Exp. 8,000 when
Unused Sup. 8,000 a. they are paid by the entity
Unused Sup. 2,000 b. the costs expire or as assets are used
c. the revenues are recognized that the expenses
Supplies Exp. 2,000
helped to produce
15. One-third of advance collection of rent is d. cash is received from revenues that the expenses
earned helped to produce
No entry 5. Which of the following transactions will not be
Cash view recognized in cash basis accounting?
Rent Income 40,000 a. Unsold inventory at the end of the period
Unearned Rent 40,000 b. Collection of account sales
Unearned Rent 20,000 c. Payment of utilities
Rent Income 20,000 d. Purchase of equity shares in ABS Corporation
6. The recognition of expenses under accrual
16. 10% of accounts receivable outstanding is
accounting is based on three principles: direct
uncollectible
matching, systematic and rational allocation and
No entry immediate recognition. The direct matching principle
Accrual view requires that expenses be recognized
Bad Debts Exp. 5,000 a. when they are paid by the enterprise
Allow for BD 5,000 b. in the same period that costs expire or assets are
17.Unsold merchandise by physical count P used
35,000 c. in the same period in which the revenues are
No entry recognized that the expenses help to
Accrual view d. produce in the same period that the revenue is
received that the expenses helped to produce
Mdse. Invty. 35,000
7. Which of the following books of accounts are used
Inc. & Exp. Sum. 5,000
under cash basis of accounting?
18. Equipment life, 5 years a. Cash book only
No entry b. Journals and ledgers
Accrual view c. Cash receipts and disbursement books only
Dep. Exp. 10,000 d. Day book and subsidiary ledgers only
Accum. Dep. 10,000 8. Which of the following is (are) recognized in both
QUIZZER 3 INCOME RECOGNITION BASES modified cash basis and accrual basis of accounting?
1. In double-entry bookkeeping system which of the a. Prepaid rent expense
following may be used as basis for recognizing b. Bad debts expense
income and expenses? c. Accrued commission income
a. b. c. d. d. Unearned rent revenue
Cash basis yes no yes no 9. Modified cash basis or hybrid basis differs from
Modified cash basis yes yes no no accrual basis in the computation of
Accrual basis yes no no yes a. Gross profit
2. Under the cash basis revenue are recognized b. Expenses
when they are c. Depreciation
a. Collected d. Bad debts expense
b. Earned 10.Which of the following statements is (are) false?
c. Earned and collected I. Purchase of equipment is recognized as outright
d. Earned and become measurable expense under cash basis Accounting.
3. Under the accrual basis, revenue are recognized II. In both modified basis and accrual basis of
when they are accounting, the cost of long-lived assets is spread
a. Collected over the period of benefits in a systematic and
b. Earned rational manner
c. Earned and collected III. There are no adjusting entries under modified
d. Earned and become measurable cash basis of accounting
a. I only b. accrual
b. III only c. modified cash basis
c. II and III only d. All of these
d. I and III only END OF MODULE 2
11. Which of the following statements about income MMCO Continuing Professional Development
and expense recognition is (are) true? Training Center (CPDTC)
I. The gross profit on sales computed under modified 2F MMCO Building, 8000 Lakeview Ph3 Angela
cash basis is the same as that computed under Street, Halang Calamba City Laguna, Philippines
accrual basis. Tel No. (02) 330-8617, (049) 523-6031; (02) 330-
II. Both cash basis and modified cash basis will yield 6057
the same amount of operating expenses in the CPA REVIEW (May 2019 Batch)
income statement. FAR Theory Cedrick Zapanta, CPA
III. In recording day-to-day transactions and events, Module 3
all entities must follow accrual basis of accounting.
1. Principles of Recognition and Measurement
a. Only I is true
b. I and II are true a) Assets
c. II and III are true b) Liabilities
d. All statements are true c) Equity
12.Which of the following is (are) recognized in both PRINCIPLES OF RECOGNITION AND MEASUREMENT
modified cash basis and accrual basis of accounting? OF THE ELEMENTS OF FINANCIAL POSITION
a. Prepaid rent expense 1. Recognition
b. Bad debts expense Definition – Recognition is the process of formally
c. Accrued commission income incorporating in the balance sheet or income
d. Unearned rent revenue statement an item that meets the definition of an
13.Which of the following items of income and element and satisfies the criteria for recognition.
expenses are given the same treatment in the books Criteria – An item that meets the definition of an
under both pure cash and modified cash basis of element should be recognized if:
accounting? • It is probable that any future economic benefit
I. Income collected in advance associated with the item will flow to or from the
II. Doubtful accounts expense enterprise (probability criterion); and
III. Prepaid expenses • The item has a cost or value that can be measured
a. I only with reliability (measurability criterion)
b. II and III only In assessing whether an item meets these criteria
c. I and III only and therefore qualifies for recognition in the
d. I, II and III financial statement regard needs to be given to the
14.Which of the following bases of accounting for materiality considerations.
income and expenses are currently in use by Recognition vs. Realization
economic entities? Realization (assets) is the process of converting
a. Cash basis noncash resources and rights into money and is most
b. Modified cash basis precisely used in accounting and financial reporting
c. Accrual basis to refer to sales of assets for cash or claims to cash.
d. All of these 2. Measurement
15.Which of the following types of business is Definition – Measurement is the process of
allowed to use cash basis in financial reporting in the determining the monetary amounts at which the
Philippines? elements of financial statements are to be
a. Publicly accountable entities recognized and reported. It is also known as
b. Medium-sized entities valuation.
c. Small entities Measurement Bases used in Accounting
d. Micro entities A. Historical Cost
16.Which one of the following bases of income and Assets – are recorded at the amount of cash or cash
expense recognition is acceptable for financial equivalents paid or the fair value of the
reporting under current GAAP? consideration given to acquire them at the time of
a. cash basis their acquisition.
Liabilities – are recorded at the amount of the
proceeds received in exchange for the obligation, or
in some circumstances, at the amounts of cash or
cash equivalents expected to be paid to satisfy the
liability in the normal course of business.
B. Current Cost
Assets – are carried at the amount of cash or cash
equivalents that would have to be paid, if the same
or an equivalent asset was acquired currently.
Liabilities – are carried at the undiscounted amount
of cash or cash equivalents that would be required
to settle the obligation currently.
C. Realizable (Settlement) Value
Assets – carried at the amount of cash or cash
equivalents that could currently be obtained by
selling the asset in an orderly disposal.
Liabilities – are carried at their settlement values;
that is, the undiscounted amounts of cash or cash
equivalents expected to be paid to satisfy the
liabilities in the normal course of business.
D. Present Value
Assets – are carried at the present discounted value
of the future net cash inflows that the item is
expected to generate in the normal course of
business.
Liabilities – are carried at the present discounted
value of the future net cash outflows that are
expected to be required to settle the liabilities in the
normal course of business.
The initial measurement basis usually adopted by
enterprises in recording transactions is historical
cost. Subsequent measurement in the financial
statements may be at historical cost or fair market
value depending on the nature of the asset.
Historical cost is usually combined with other
measurement bases, such as lower of cost and net
realizable values (for inventories), market value (for
marketable securities), present value (for pension
liabilities) and current cost to recognize effects of
changing prices of nonmonetary assets.
ACCOUNTING FOR ASSETS
Definition – An asset:
• is a resource controlled by the enterprise
• as a result of past events and
• from which future economic benefits are expected
to flow to the enterprise
Characteristics – Assets have the following
characteristics or attributes:
A. Future economic benefits – the potential to
contribute, directly or indirectly, to the flow of cash
and cash equivalents to the enterprise. Future
economic benefits embodied in an asset may flow to
the enterprise as in several ways. It may be
• used singly or in combination with other assets in
the production of goods or services to be sold by the
enterprise
• exchanged for other assets
• used to settle a liability
• distributed to the owners of the enterprise
Physical form is not an essential to the existence of
an asset. Most assets, however, have physical form.
B. Controlled by a particular enterprise – the
enterprise has the right to obtain and control the
asset benefits expected. In determining the
existence of an asset, the right of ownership is not
essential.
The capacity of an enterprise to control benefits is
usually the result of legal rights. However, an item
may satisfy the definition of an asset even when
there is no legal control.
C. Past transactions – arise from transactions and
events which have occurred in the past.
D. Money measurement – the asset has a relevant
attribute that can be measured in monetary units
with sufficient reliability.
Valuation accounts – are reductions or increases in
assets to reflect adjustments beyond historical cost
or carrying amount. They are part of the related
asset and are neither assets nor liabilities in their
own right.
1. Initial Recognition of Assets
An asset is recognized on the balance sheet when it
is probable that the future economic benefits will
flow to the enterprise and the asset has a cost or
value that can be measured reliably.
Broad Operating Principles
A. Financial assets – recognize when, and only when,
the entity becomes a party to the contractual
provisions of the instrument.
B. Assets acquired through Exchanges – Recognize
assets when transfer of resources takes place or
services provided.
C. Asset received through nonreciprocal transfers –
Recognize the asset when acquired or when transfer
occurs.
D. Executory contracts – The effects of executory
contracts are generally not recognized until one of
the parties, at least, partially fulfills his commitment.
a. Executory contracts – is an agreement which
neither party has fulfilled
b. Rationale for accounting treatment – this is a
mere exchange of promises which are offsetting
c. Exception – some executory contracts (e.g., long-
term leases) are recorded if their economic
substance indicates that substantially all the benefits
and risks of ownership have been transferred to the
enterprise.
Terms Associated with Asset Acquisition
• Expenditure (cost outlay) – payment of cash or
property, or the incurrence of a liability to obtain an
asset or service.
o Capital expenditure – a cost outlay whose benefits
extend beyond the current accounting period, and
which therefore, is capitalized by charging an asset
or a contra-asset account.
o Revenue expenditure – a cost outlay whose
benefits do not extend beyond the current
accounting period and which, therefore is charged to
expense.
2. Initial Measurement of Assets
Pervasive Principle: Assets are initially measured at
the exchange price at which transfers take place.
This measurement base is called historical cost.
• Accounting measures the economic value of an
asset.
• However, the true economic value cannot be
determined, as it is a very subjective concept. It
pertains to the preference or “desirability” people
have for one item as opposed to others.
• Accountants rely on exchange price to
approximate the economic value. In an arms-length
transaction, exchange price approximates economic
value at the time an asset is acquired. It has the
advantage of objective and easy verifiability.
2.1 Exchanges – Assets acquired in exchanges are
measured at the exchange price, i.e., at acquisition
cost. Money or money claims acquired are measured
at face amount or sometimes at discounted
amounts. This principle classifies assets into:
• Nonmonetary assets – measure at acquisition cost
• Monetary assets – measure at face amount or
sometimes discounted amounts
2.2 Nonreciprocal transfers – Cost is generally
measured by the face amount or discounted value or
fair value of assets acquired. This is because there is
no exchange price since assets are acquired without
giving up something of value in exchange. Thus:
• Monetary assets received are measured at their
face value (fair value) or discounted amount
• Nonmonetary assets received are measured at
their fair value on the date received
Monetary vs. Nonmonetary Assets
Assets may be classified according to ease or
difficulty of measurement, into monetary and
nonmonetary.
A. Monetary assets – are assets whose peso
amounts are fixed by contract or law, regardless of
changes in prices. They include (a) Cash, and (b)
claims to a fixed amount of money in the future such
as accounts and notes receivable.
B. Nonmonetary assets – are assets whose price in
terms of money may change over time. They include
inventories, prepayments, property, plant and
equipment. In general, items that are not monetary
assets are nonmonetary.
In the classification of assets as to monetary and
nonmonetary, the rule “auxiliary follows principal” is
observed.
3. Measurement of Monetary Assets
Monetary assets are measured at their fair value or
sometimes at discounted amount.
A. Cash – should be measured at fair value (or face
value)
B. Accounts receivable and other short-term money
claims – are valued at the original exchange price
between the firm and the outside party, less
adjustment for cash discounts, returns and
allowances, yielding an approximation to fair value.
C. Short-term notes – are initially recorded at the
present value of the future cash receipts on the date
of issue. The present value of a short-term interest-
bearing note is equal to the face value of the note.
D. Long term receivables are measured at the face
amount or they may be stated at present value (or
discounted amount) when notes bear no interest or
stated rate is unreasonable.
E. Imputing interest – When face differs from
discounted amount, discounted amount may be
determined by imputing interest on the note using
an imputed interest rate, the rate that would be
incurred in a similar arms-length transaction.
Assume a P10,000 one-year non-interest bearing
note, if imputed rate is 10%, discounted amount is
P9,091 (P10,000 divided by 1.10).
4. Measurement of Nonmonetary Assets
Assets (other than financial instruments) acquired in
exchanges are measured at the exchange price, that
is, at acquisition cost.
Cost is often used as synonym for exchange price
when nonmonetary assets are involved. The basic
idea of cost is economic sacrifice, something given
up for economic benefits acquired or to be acquired.
A. Cash transactions – Acquisition cost is the net
price of the asset acquired. It excludes any
discounts, returns, allowances, and other
adjustments or partial cancellation of the list or
billed price.
B. Credit transactions – Acquisition cost is the
equivalent net cash price of the asset, i.e. the
amount of cash required to immediately settle the
liability. The difference between cash and higher
credit price represents interest and financing
charges which are costs of using or borrowing
money rather than part of the cost of acquiring the
asset.
C. Nonmonetary transactions - Acquisition cost is
generally measured by the fair value of the asset
given up. However, if the fair value of the asset
acquired is more clearly evident, cost is measured by
that amount. If fair value of both asset given and
received is not reasonably determinable, carrying
value of asset given up is used.
i. Exchange of assets with commercial value (or
substance) – record at the fair value of the asset
given or the asset received whichever is more clearly
determinable. If the fair value of both the asset
received and the asset given up are determinable,
the asset received should be recorded at the fair
value of the asset given up.
ii. Exchange of assets with no commercial value (or
substance) – should be recorded at the carrying
amount of the asset given up.
Carrying value (CV) – the recorded amount of assets
given up. Carrying (book) value is not used to
measure cost unless:
• No other fair value amount is available, or
• Nonmonetary assets with no commercial
substance are exchanged.
D. Nonreciprocal transfer – Cost is measured by
monetary or fair value of asset received. In a strict
sense, no cost is involved since assets were acquired
without sacrificing other assets or incurring
liabilities. However, term “cost” is commonly used to
refer to amounts at which assets are initially
recorded, regardless of how the amount is
determined.
E. Auxiliary costs – Acquisition cost included
expenditures necessary to prepare the asset for its
intended use.
Special Cases
• Biological assets – should be valued at fair value
less point of sale costs
• Financial assets at fair value through profit or loss
– measured at fair value
• Financial assets not at fair value through profit or
loss – measured at fair value plus transaction costs
that are directly attributable to the acquisition or
issue pf the financial asset
• Lump-sum acquisition – Total exchange price is
allocated to individual assets based on their relative
fair values (relative sales value method)
• Imputed costs – are hypothetical costs not
involving actual expenditures, should not be
recognized in accounting records
5. Accounting for Assets after Acquisition
The amounts at which assets are initially recorded
may be carried without change, may be changed, for
example, by amortization, write-off, or may be
shifted to other categories.
Changes in utility – The initial utility of an asset
measured by exchange price when recognized may
be changed by the following subsequent events.
• External events other than transfers
• Production
• Casualties
Alternative Measurement Bases
When the initially recorded amount no longer
measures expected asset benefits (utility), some
other measurement basis must be used. The
following basis are used in current practice:
A. Acquisition cost adjusted for depreciation,
depletion or impairment – Property, plant and
equipment, and intangible assets are reported at
their acquisition cost, commonly adjusted after
acquisition for amortization, depreciation, depletion
or other allocations.
B. Cost or net realizable value whichever is lower -
Generally, inventories are reported at their cost or
net realizable value (or replacement cost). Net
realizable value is computed as selling price less
selling costs or expenses
C. Fair value – Some financial assets are valued at
fair value (either through profit or loss or through
equity)
D. Fair value less point of sale costs adjusted for
changes in values – This specifically pertains to the
valuation of biological assets.
E. Net realizable value – Short-term receivables and
some inventories are reported at their net realizable
value, which is the non-discounted amount of cash,
or its equivalent, into which an asset is expected to
be converted in due course of business less direct
costs, if any, necessary to make that conversion.
F. Amortized cost – Loans and receivables as well as
held to maturity instruments are reported at their
amortized cost, using the effective interest method.
G. Revalued amount less accumulated depreciation
and accumulated impairment loss – Property, plant
and equipment may be written up to their appraised
value, which is the current or fair value of an asset as
established by an independent expert using
systematic procedures that include physical
examination, pricing and often engineering
estimates.
6. Asset Disposition
Once acquired, an asset continues as an asset of the
enterprise until the enterprise collects it, transfers it
to another entity, uses it, or some other event or
circumstance destroys the future benefit or removes
the enterprise’s ability to obtain it.
Recognition – Decreases in assets are recorded when
assets are disposed in exchanges.
Measurement – The decrease in assets is measured
by the recorded amounts that relate to the assets. In
partial dispositions, measurement of the amount
removed is governed by detailed principles (ex: FIFO,
Average Cost, or Specific Identification for
inventories) that are based on the presumed flow of
goods or the presumed flow of costs.
When the service potential of an asset is no longer
available to the enterprise whether transferred by
sale dissipated by obsolescence or damage, the
acquisition cost of the asset, as modified by events
subsequent to acquisition should be eliminated from
the accounts and a final gain or loss on disposition is
recognized.
QUIZZER 1 ACCOUNTING FOR ASSETS
Recognition of Assets
1. According to the conceptual framework, the
definition of asset includes which of the following
descriptions?
a. b. c. d.
Resource exclusively owned by entity yes yes no no
Accounts with debit balances carried forward upon
closing of the books no yes yes no
Resource controlled by the entity from which
probable benefits will flow to entity yes no yes yes
2. One of the following is not an essential
characteristic of an asset. Which one?
a. It is acquired at a cost and is exchangeable.
b. It provides the entity with probable future
benefits.
c. The event giving rise to the enterprise’s right to
the benefit has already happened.
d. A particular enterprise can obtain the benefit and
control others’ access to it.
3. Which of the following statements is (are) true?
I. No asset can simultaneously be an asset of more
than one entity.
II. An asset must produce future economic benefits
and must have physical form.
III. At times, two or more entities, may share the
benefits that an asset provides.
a. I and II are true
b. II and III are true
c. I and III are true
d. I, II, and III are true
4. Which of the following is an asset?
a. Corporation’s own shares reacquired for re-issue
b. Preference shares of another corporation
acquired by the entity
c. Possible gain on lawsuit according to company
lawyer’s opinion
d. Goodwill developed by the entity through
extensive advertising and personnel development
5. Which of the following is considered an asset but
not an economic resource?
a. Mango orchard
b. Deferred tax asset
c. Ownership interest in other enterprises
d. Productive resources
6. Which of the following is not an asset?
a. Delivery truck purchased by installment; legal title
retained by seller until full payment of the purchase
price.
b. Waiting shed in front of sales office built by the
entity for its customers
c. Public highways used by company to transport its
goods to customers
d. Advance payment for six months advertising of
company products
7. According to conceptual framework, asset
valuation accounts are
a. Assets
b. Neither assets nor liabilities
c. Part of stockholders’ equity
d. Liabilities
8. The appropriate basis for recognizing an asset is
when a particular enterprise
a. Acquires the right to utilize and control access to
the asset’s benefits
b. Acquires legal title to the asset
c. Obtains physical possession of the asset
d. Makes a cash disbursement for the asset
9. Which of the following is an appropriate basis for
recognizing an asset?
a. The president of CDE Corporation signed a one-
year, lease contract for office space in a new
building. The lease contract is renewable after one
year.
b. A company issued a purchase order to a supplier
for merchandise to be delivered next month under
terms, FOB supplier’s warehouse.
c. ABC, Inc. signed a non – cancellable, 40-year lease
contract for the use of a building with a useful life of
50 years. The lease contract does not transfer
ownership to ABC, Inc. at the end of the lease term
and there is no provision for a bargain purchase
option.
d. The Board of Directors of ELB Corporation
approved a resolution authorizing the purchase of
new machinery next year.
10. Which of the following statements about
“executory contracts” is not true?
a. Executory contracts are viewed in accounting as a
mere exchange of promises which are offsetting
b. Executory contracts should be recorded only
when both parties have fully complied with the
terms of the agreement.
c. Executory contracts are legally binding
d. Executory contracts are not recorded until one or
both parties at least partially performs under the
contract
11. Generally accepted accounting principles require
that certain lease contracts be accounted for as
credit purchases of plant assets. The theoretical
basis for this treatment is that a lease of this type
a. Effectively conveys all of the benefits and risks
incident to the ownership of property.
b. Is an example of form over substance
c. Provides the use of the leased asset to the lessee
for a limited period of time
d. Must be recorded in accordance with the concept
of cause and effect
12. Which of the following is a monetary asset?
a. Inventories
b. Cash in bank
c. Furniture and equipment
d. Financial assets
13. All of the following are a non-monetary assets
except
a. Patents
b. Land
c. Machinery
d. Accounts receivable, net
14. The initial recording principle for assets states
that assets are initially recorded on the basis of
events in which the enterprise acquires resources
from other entities. This principle does not apply to
the acquisition of
a. Claims to receive money
b. Contractual rights to the use of resources of other
entities
c. Produced or self-constructed assets
d. Ownership interests in other enterprises
Measurement/Valuation of Assets
15. Financial assets such as held for trading securities
and available for sale securities are initially valued
a. Historical cost
b. Present value of future cash flows
c. Net realizable value
d. Fair market value
16. The ideal measure of short-term receivables in
the balance sheet is the discounted value of cash to
be received in the future. Failure to follow this
practice usually does not make the balance sheet
misleading because
a. Cash can be raised through receivable financing
b. The allowance for uncollectible accounts include a
discount element
c. Short-term receivables are normally non-interest
bearing
d. The amount of the discount is not material.
17. Nonmonetary assets should initially be recorded
at their acquisition cost which is best described as
a. The price paid to acquire the asset
b. All costs incurred to finance the acquisition of the
asset and place it in a location and condition ready
for use.
c. The invoice price of the asset plus all expenditures
related to its acquisition
d. The cash or cash-equivalent outlay required to
obtain the asset and place it in a condition and
location ready for its intended use
18. ABS Company purchased certain plant assets
under a deferred payment contract on December 31,
Year 1. The agreement was to pay P20,000 at the
time of purchase and P20,000 at the end of the next
five years. The plant assets should be valued at
a. The present value of a P20,000 ordinary annuity
for five years
b. P120,000
c. P120,000 plus imputed interest
d. P120,000 less imputed interest
19. Assets acquired in a long-term credit transaction
are measured at
a. Invoice price
b. Equivalent net cash price
c. Installment price
d. Exchange price
20. In non-monetary exchanges with commercial
substance, the asset acquired is generally measured
at the
a. Fair value of the asset given up or fair market
value of the asset received whichever is clearly
evident
b. Market value of the asset acquired even if the fair
market value of the asset given is likewise clearly
evident
c. Fair value of the asset given
d. Appraised value of the asset given up
21. In nonmonetary exchange with no commercial
substance, the asset acquired is measured at
a. Fair market value of the asset given up
b. Fair market value of the asset received
c. Carrying value of the asset received
d. Carrying value of the asset given
22. Nonmonetary assets acquired in nonreciprocal
transfers are measured at the
a. Fair value of the asset acquired
b. Carrying value of the asset acquired
c. Fair value of the asset given up or of the asset
received, whichever is more clearly determinable
d. Assessed value of the asset acquired
23. In which two of the following asset acquisitions
may a gain be recognized?
A. Acquisition by exchange of non-monetary assets
with no commercial substance
B. Acquisition by exchange of non-monetary assets
with commercial substance
C. Acquisition by donation
D. Acquisition by investment
a. A and B
b. A and C
c. B and C
d. B and D
24. Which of the following statements is (are) true?
I. When an asset is acquired through an exchange
transaction, a gain or loss is recognized
II. When an asset is acquired through a non-
monetary exchange with no commercial value, a
gain or loss is recognized
III. When an asset is acquired through a non-
monetary exchange with commercial value, a gain or
loss may be recognized
IV. There may be instances when a gain may be
recognized when an asset is received in a non-
reciprocal transfer
a. I and II only
b. III and IV only
c. I, II, and III
d. I, II, III, and IV
25. Which of the following expenditures may be
properly capitalized?
a. Extensive costs incurred in the inauguration and
blessing of the building which is the primary place of
business of Assert Enterprise
b. Cost of repairing damage on glass top of a table
which was accidentally dropped upon delivery to the
administrative office.
c. Cost of extraordinary repairs on building which did
not prolong its life nor increase its operating capacity
d. Insurance on plant during construction
26. Which of the following is not an auxiliary cost
that should be added to the purchase price of a new
machine?
a. Freight to bring machine to the place of business
b. Installation cost of machine
c. Cost of test runs on the machine
d. Cost of dismantling old machine replaced by new
machine
27. When a group of assets is acquired in an
exchange, the fair values of the assets acquired is
used
a. To determine total cost to the enterprise
b. As a device for allocating total cost
c. As the measurement basis of the basis
d. Both (b) and (c)
28. Theoretically, cash discounts permitted on
purchased equipment should be
a. Excluded from asset cost if taken
b. Excluded from asset cost if not taken
c. Excluded from asset cost whether taken or not
d. Included in asset cost
29. Which of the following assets should be recorded
initially at historical cost
a. Held for trading securities
b. Available-for-sale securities
c. Newly hatched chicks
d. Investment Property
30. The local government of Global City donated a
factory site suitable for Expensaver Corporation. This
donation may be reflected in the company books at
a. Nominal value or market value at management’s
option
b. At current market value
c. Cost of titling the property
d. Actual cost of relocating the factory
31. Which of the following is not a generally
accepted basis for valuing an asset after acquisition?
a. Acquisition cost
b. Net realizable value
c. Nominal value
d. Current replacement cost
32. Which of the following events or circumstances
would justify reporting an asset above its acquisition
cost under present GAAP?
a. An investment in common stock is accounted for
under the equity method and the investee reports a
net income for the year.
b. The market value of an investment in common
stock accounted for under the equity method is
higher than the acquisition cost
c. The market value of an investment in debt
securities is higher than acquisition cost and the
investment is classified as a non-current asset
d. The market value of inventories is higher than its
cost
33. All of the following may be used to determine
the “fair value” of an asset except
a. Quoted market prices
b. Independent appraisals
c. Firm cash offers for the asset
d. Book values
34. In an arms-length transaction, Company A and
Company B exchanged nonmonetary assets with no
monetary consideration involved. The exchange can
be classified as “with commercial value” and the fair
value of the assets exchanged are both clearly
evident. The accounting for the exchange should be
based on the
a. Fair value of the asset surrendered
b. Fair value of the asset received
c. Carrying amount of the asset surrendered
d. Carrying amount of the asset received
35. Company X and Company Y exchanged
nonmonetary assets with no monetary consideration
involved and no commercial value. The accounting
for the exchange should be based on
a. Carrying amount of the asset received
b. Carrying amount of the asset relinquished
c. Fair value of the asset received
d. Fair value of the asset relinquished
36. If the cost of a depreciable asset is incorrectly
recorded as a revenue expenditure
a. Assets and owners’ equity for the first year will be
understand
b. Assets and owners’ equity for the succeeding year
will be overstated
c. Net income for the first year will be overstated
d. Net income in the succeeding year will be
understated
37. For a manufacturing company, which of the
following is an example of a period rather than a
product cost?
a. Depreciation on factory equipment
b. Wages of salespersons
c. Wages of machine operators
d. Insurance on factory equipment
38. Present GAAP require recognition of all of the
following unfavorable events except
a. Decline in market value of inventory below cost
b. Decline in market value of plant assets below cost
c. Reductions in the utility of productive facilities due
to obsolescence
d. Future operating losses
39. Under present GAAP, which of the following
items may not be initially measured at cost?
a. A constructed building
b. A machinery acquired by purchase
c. A one year old piglet acquired by purchase
d. A patent developed by the company and
registered with the Philippine Patents Office
ACCOUNTING FOR LIABILITIES
Definition – A liability:
• is a present obligation of the enterprise
• arising from past events
• the settlement of which is expected to result in an
outflow from the enterprise of resources embodying
economic benefits
Characteristics – Liabilities have the following
characteristics:
A. Present obligation of a specific enterprise – an
obligation is a duty or responsibility to act or
perform in a certain way. The enterprise has little or
no discretion to avoid the future sacrifice.
• An obligation may be legally enforceable as a
consequence of a binding contract or statutory
requirement. However, obligations also arise from
normal business practice, custom and a desire to
maintain good business relations or act in an
equitable manner.
• Present obligation vs. future commitment – An
obligation normally arises only when the asset is
delivered or the enterprise enters into an irrevocable
agreement to acquire the asset.
• The irrevocable nature of the agreement means
that the economic consequences of failing to honor
the obligation leave the enterprise with little, if any
discretion to avoid the outflow of resources to
another party.
• A commitment is a decision by management of an
enterprise to acquire assets in the future. It does
not, of itself give rise to a present obligation.
B. Requires sacrifice or transfer of assets – embodies
obligation that requires payment or settlement by a
probable future sacrifice of assets.
Modes of settlement of a present obligation
• Payment of cash
• Transfer of other assets
• Provision of services
• Replacement of that obligation with another
obligation; or
• Conversion of the obligation to equity
C. Past transactions or events – the obligation results
from transactions or events that have already
happened.
D. Monetary measurement – the amount can be
measured in money with reasonable accuracy.
• Some liabilities can be measured only by using a
substantial degree of estimation. These liabilities are
usually described as provisions. When the provision
involves a present obligation and satisfies the rest of
the definition of a liability, it is a liability even if the
amount has to be estimated.
E. Other matters
i. Identity of the payee – a liability may exist even if
the identity of the payee is not immediately known
provided it can be determined before the settlement
date of the obligation.
ii. Settlement date – liabilities may be payable at a
specific or determinable future date, upon
occurrence of a specified event, or on demand.
iii. Valuation accounts – these may increase or
decrease the carrying amount of a liability, and are
therefore part of the related liability. Examples are
Premium on Bonds and Discount on Bonds.
iv. Gross profit on installment sales – is not a liability.
The enterprise is not obligated to pay cash or
provide goods or services to the customer. It is
conceptually an asset valuation account.
v. Legal enforceability – not all liabilities are legally
enforceable claims. Legal enforceability is not a
prerequisite for an obligation to qualify as a liability
if the future sacrifice of assets is otherwise probable.
Thus liabilities may arise from “equitable” or
“constructive” obligations. (Ex. Estimated Warranty
Payable; Estimated Premiums Payable)
1. Classification of Liabilities
A. As to nature of obligation
i. Legal obligation – arises from contracts and other
agreements that are legally enforceable of from
governmental actions that have the force of law.
ii. Equitable obligation – arises from ethical and
moral constraints, rather than legal requirements.
Examples: (1) A company obligates itself to pay for
damages sustained when there is no legal
requirement for it do so, or (2) refunds damaged
merchandise when there is no legal obligation for
such refunds.
iii. Constructive obligation – Obligation created,
inferred or construed from the facts in a particular
situation rather than contracted by agreement with
another entity or imposed by the government
Example: An enterprise may create a constructive
obligation to employees for vacation pay or year –
end bonuses by paying them every year even if it is
not contractually bound to do so and has not
announced a policy to do so.
B. As to amount of obligation
i. Determinable liability – a liability whose amount is
specified or can be determined from the conditions
of a contract.
ii. Estimated liability – A liability whose amount is
dependent upon future events and must be
measured by estimates of a definitive character.
These are sometimes known as provisions
C. As to existence of obligation
i. Actual liability – A liability whose existence is
certain
ii. Contingent liability – A potential obligation that is
dependent upon the occurrence or nonoccurrence
of one or more future events to confirm its
existence.
2. Recognition of Liabilities
Recognition Principle – A liability is 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 the settlement will take place can be
measured reliably.
• Liabilities from exchanges are recognized when the
corresponding money, goods or services are
received.
• Some liabilities are the result of non-reciprocal
transfers which obligate the enterprise to make a
future sacrifice of assets without receiving in
exchange. Examples: imposition of fines, damages
and penalties, tax obligations and declaration of cash
or property dividends. These types of liabilities are
recognized when the obligation is established.
Liabilities should be given accounting recognition in
the period in which money, goods or services are
received, or when a legally enforceable claim exists
against the company is established. In general,
liabilities are recorded when the corresponding
assets, expenses or losses are recognized.
Special Problems
• Commitment – A commitment to acquire goods
and services in the future does not give rise to a
liability because the mere signing of a contract or the
issuance of a purchase order does not result in a
completed transaction.
• Contingent liabilities – The accounting treatment
of a contingent liability and the corresponding loss
contingency depends on the likelihood that the
related future event will occur and confirm the
incurrence of the loss and the liability.
3. Measurement of Liabilities
Recognition Principle – A liability is 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
Pervasive Principle: Liabilities are measured at
exchange prices at which transfers take place.
• Liabilities are measured at amounts established in
exchanges, usually the amounts to be paid,
sometimes discounted.
• Liabilities imposed in nonreciprocal transfers are
measured at the amount to be paid, sometimes
discounted.
Monetary vs. Nonmonetary Liabilities
Like assets, liabilities may be classified as monetary
and nonmonetary for the purpose of applying the
measurement principle.
A. Monetary assets – obligations payable in a fixed
amount of pesos at a definite future date.
Conceptually, monetary liabilities should be
measured at discounted value. Most short-term
liabilities are simply measured at the amount to be
paid. Discounted present values are often used if the
obligation require payments at dates that are
relatively far in the future.
B. Nonmonetary assets – obligations that will be
settled by delivering goods or services.
• Estimated accrued liabilities - Reasonably probable
obligations to deliver goods or services upon the
occurrence of a related future event or events.
These are stated at net settlement value measured
by estimated cost of goods to be delivered or
services to be provided in the future. Example:
Estimated Liability for product warranties
• Deferred revenues - Obligations created by
advance payment from customers for goods or
services to be delivered in the future. These are
reported at historical proceeds, which is the amount
of cash or its equivalent, advanced by customers,
adjusted after acquisition for amortization or other
allocations.
4. Discharge of Liabilities
Broad Operating Principle: Decreases in liabilities are
recorded when they are discharged through
payments, through substitution of other liabilities, or
otherwise, the decreases are measured by the
recorded amounts that relate to the liabilities. A
partial discharge of liabilities is measured at a
proportionate part of the recorded amount of the
liabilities.
Most liabilities are discharged by cash payments.
Others are settled by the enterprise’s transferring of
assets or providing services to other entities, and
some involve performance to earn revenues (ex:
liabilities to provide magazines under a prepaid
subscription agreement. Liabilities are also
sometimes eliminated by:
• Forgiveness
• Compromise
• Incurring another liabilities
• Changed circumstances
Accounting: A discharge of liabilities is accounted for
by removing the recorded amount of the liability
from the accounts. In some cases, the amount of net
assets required to settle a liability may be more or
less than its recorded amount. Any difference is
recognized as a gain or loss.
ACCOUNTING FOR EQUITY
Definition – Equity is the residual interest of owners
in the assets of the enterprise, after deducting all its
liabilities.
Characteristics:
A. Owners’ rights – represents the rights of owners
in the assets of a business enterprise.
B. Residual interest – residual interest ranks after
liabilities as a claim to enterprise assets and
significantly.
C. Indefinite repayment date – it has no definite
repayment date except upon liabilities
D. Measurability – it is not independently
measurable, its amount depends on the value
assigned to assets and liabilities.
Owners’ Rights – “Equity” in the broad sense, refers
to any recognized rights to, or interest in the assets
of a business enterprise. Equity interests are of two
principal groups: liabilities and owner’s equity.
Liabilities are the rights of creditors; owners’ equity
represents the rights of owners.
Residual Interest – Equity is a residual interest
because the claims of creditors must first be
satisfied, or not jeopardized, before assets can be
distributed to owners.
Indefinite Repayment Date – The claim of owners on
assets of the enterprise has no specific maturity date
except upon liquidation. Generally, an enterprise is
not obligated to transfer assets to owners, except
upon liquidation and when the enterprise itself
formally acts to effect such transfer, for example, by
declaring a cash dividend.
In contrast, the maturity date of creditors’ claims is
generally fixed or determinable from written
agreements or provisions of law, and the enterprise
has little or no discretion to avoid payment of these
claims.
Measurability of Equity – Equity cannot be measured
separately from other elements of financial position
because it is the excess of assets over liabilities. As
such, its amount depends on the measurement of
assets and liabilities.
1. Events Increasing/Decreasing Owners’ Equity
Increases in owners’ equity arise from
• Investments in an enterprise by its owners
• The net result of all revenue and expenses
recognized during a period (net income)
• External events other than transfers (revaluation of
property and equipment)
• Owners’ equity may also be increased by prior
period adjustments
Decreases in owners’ equity arise from
• Transfers from an enterprise to its owners (ex:
dividends, treasury stock acquisitions)
• Net losses for the period
• Owners’ equity may also be decreased by prior
period adjustments and by adjustment arising from
quasi-reorganization
2. Recognition and Measurement of Owners’ Equity
Classification of transactions – Owners’ equity
transactions are of two types:
• Capital transactions – represent the direct
contributions or withdrawals of assets by owners.
• Income-related transactions – represent income
statement transactions and prior period adjustments
that pertain to income of previous periods.
This section deals only with capital transactions.
Income-related transactions are discussed in other
sections.
Recognition of Changes in Owners’ Equity
a. Principle – Transfers of assets or liabilities
between an enterprise and its owners are recorded
when they occur.
b. Fundamental relationships – Assets, liabilities and
owners’ equity are fundamentally related as
expressed in the equation: A = L + C. Because of this
relationship, recognition of changes in owners’
equity depends upon recognizing changes in assets
and liabilities that affect owners’ equity.
c. Events Affecting Owners’ Equity - Not all changes
in assets and liabilities affect owners’ equity.
Furthermore, changes may take place within owners’
equity that do not affect asset or liabilities.
Measurement of Changes in Owners’ Equity
Changes in owners’ equity are measured by the
values of related assets acquired or transferred, or
related liabilities incurred or discharged.
QUIZZER 2 ACCOUNTING FOR LIABILITIES
1. Which of the following is an essential
characteristic of a liability?
a. The obligation should be paid in cash or non-cash
asset
b. The obligation should arise from a past
transaction of the enterprise
c. The obligation must have a definite amount.
d. The specific party to whom payable should be
clearly identifiable at the balance sheet date.
2. Which of the following is not an essential
characteristic of a liability?
a. Legal enforceability
b. Present obligations to third parties
c. Involves future sacrifice of economic benefits
d. Past activity
3. An example of an item which is not a liability is
a. The portion of a long-term debt due within one
year
b. Estimated warranty costs
c. Dividends payable common shares of the issuing
corporation
d. Customers’ deposits
4. Which of the following situations creates a liability
for Bro Company?
a. The Bro Company signs a letter of intent to
purchase goods worth P 5,200 from Santino
Corporation. The goods will be delivered in six
months
b. Mara Trading pays Bro Company in advance for
goods to be delivered throughout the year
c. Clara invests P 5,000,000 in Bro, expecting to earn
a profit on her investments as stockholder
d. Bro’s company lawyers estimate that it is probable
that Bro will have to pay damages on account of a
patent infringement suit although the amount
cannot yet be ascertained.
5. When accountants record a liability for income
taxes, they are
a. Measuring the current and future outcomes of
accounting decisions
b. Measuring the present effect of a future cash
outflow to the government
c. Reflecting a past exchange as a basis of accounting
measurement
d. Using a present exchange price as the basis for
their accounting measurement
6. Conceptually, “Deferred Gross Profit on
Installment Sales is a (an)
a. Liability
b. Asset valuation account
c. Element of owners’ equity
d. Deferred credit
7. Which of the following statements relating to the
recognition of liabilities is false?
I. Liabilities are recognized when obligations to
transfer assets or provide services in the future are
incurred in exchanges.
II. Liabilities arising from non-reciprocal transfers are
recognized when the corresponding money, goods,
or services are received.
III. Mutually unexecuted contracts are generally not
recognized as accounting liabilities.
a. I only
b. II only
c. I and II only
d. I, II and III
8. All of the following are appropriate bases for
recognizing a liability except
a. When money goods or services are acquired
b. When GMA promotes Pure Foods products on TV
programs this month, but payment is not due until
next month
c. When a check for P 60,000 is received by Time
Magazine for a two year subscription.
d. When stock dividends are declared by Ayala land
9. A legal obligation that is not reported in the
balance sheet but is disclosed in notes to financial
statements is a
a. Fixed amount – estimated payment date
obligation
b. Estimated amount – estimated payment date
obligation
c. Partially executed contract
d. Mutually unexecuted contract
10. Goods were ordered by Maranao Company from
Malinao Company on December 20, 2017. The terms
of sale were FOB destination. Malinao Company
shipped the goods on December 29, 2017 and
Maranao received them on January 4, 2018. When
should Maranao record the accounts payable?
a. December 20, 2017
b. December 29, 2017
c. December 31, 2017
d. January 4, 2018
11. From the viewpoint of the declaring corporation,
liability for cash dividend is established
a. Date of payment
b. Date of declaration
c. Date the dividend checks are released
d. Date of record
12. Which of the following would be an example of
an executory contract?
a. A customer places an order for merchandise to be
picked up and paid for in one week
b. A company sold a one year subscription to its
publication and received the subscription price in
cash
c. A company sold an appliance and gave a warranty
to replace defective parts within one year after sale.
d. A company borrowed money from a bank to
purchase a delivery truck.
13. The following statements relate to the
measurement of liabilities. Which is true?
a. Liabilities are measured at amounts established in
exchanges, usually the amounts to be paid,
sometimes discounted.
b. A long-term noninterest bearing note payable
should be recorded at its face amount
c. All monetary liabilities should be stated at their
present discounted value
d. Liabilities created by advance payments from
customers are measured in terms of the cost of
goods be delivered or services to be provided on the
future
14. The following statements relate to liabilities.
Which statement is true?
I. Liabilities may also be measured by estimates of a
definitive character when the amount of the liability
cannot be measured precisely.
II. A long term, non-interest bearing note payable
should be recorded at present discounted value.
III. All monetary liabilities should be stated at their
present (discounted) value.
a. I & II
b. I & III
c. II & III
d. I, II, & III
15. Most short-term liabilities are measured at the
a. Amount to be paid
b. Amount incurred
c. Discounted amount
d. Exchange price
16. Which of the liabilities below would be
accounted for at the present value of future cash
payments?
a. Accounts payable
b. Bonds Payable
c. Income taxes payable
d. Unearned revenue
17. Obligations arising from advances from
customers on unexecuted contracts (e.g., magazine
subscriptions) should be valued at
a. Present value of goods or services to be delivered
b. Estimated cost of goods or services to be
delivered
c. Amount of cash received
d. None of the above
18. The difference between the recorded amount of
a liability and the amount to be paid is
a. Recognized as a financing expense when the
liability is incurred
b. Amortized to interest expense over the periods to
maturity
c. Added to the recorded amount of the liability to
show its present discounted value
d. Reported as deferred charge
19. Potential obligations involving uncertainty as to
possible losses are known as
Estimated liabilities Contingent liabilities Estimated
liabilities Contingent liabilities
a. YES YES
b. YES NO
c. NO YES
d. NO NO
20. An estimated liability is an obligation which is
uncertain as to
Amount Existence Amount Existence
a. YES YES
b. YES NO
c. NO YES
d. NO NO
21. Which of the following is an “estimated liability”?
a. Product warranties payable
b. Accommodation endorsement
c. Liability for unclaimed checks
d. Unearned rental income
22. Estimated liabilities are presented in the financial
statements by
a. Footnote to the balance sheet
b. Showing the amount among the liabilities but not
extending it to the liability total
c. An appropriation of retained earnings
d. Appropriately classifying them as regular liabilities
in the balance sheet
23. Which of the following should not be classified as
a contingent liability?
a. Accommodation endorsement of liability
b. Premium offers to customers for labels or box
tops
c. Pending lawsuits
d. Taxes that are in dispute
24. Which of the following statements is (are) true?
I. Liabilities where the amount is an estimate and the
parties to whom payment will be made is uncertain
are considered actual liabilities and should be shown
in the balance sheet as such
II. Estimated liabilities are not different from
contingent liabilities and are disclosed in financial
statements by footnote to the statements
a. Only I is true
b. Only II is true
c. I & II are true
d. I & II are false
QUIZZER 2 ACCOUNTING FOR OWNER’S EQUITY
25. Which of the following statements pertaining to
equity is false?
a. The term “net assets” is synonymous with
“capital” or “owners” equity
b. Equity of a reporting entity represents the excess
of total assets over total liabilities
c. Measurement of equity is affected by the
measurement of assets and liabilities
d. Claims on or interest in assets are referred to as
“equities” and is referred to as owner’s equity in the
statement of financial position
26. Which of the following statements is (are) true?
I. Owner’s equity represent the interest of owners in
specific assets of a business enterprise
II. All increases in assets also increase owners’ equity
III. Changes in owners’ equity cannot be measured
separately from changes in assets and liabilities
a. I only
b. III only
c. I and II only
d. I, II, and III
27. Which of the following can be best described as
“residual equity”?
a. Unsecured loans payable
b. Debenture bonds
c. Common or ordinary shares issued
d. Preference shares issued
28. Increases in owners’ equity can arise from
a. Treasury stock acquisition
b. Transfers from a business to its owners
c. Government grants
d. Net losses for a period
29. Decreases in owners’ equity arises from
a. Investments in an enterprise by its owners
b. Nonreciprocal transfers to an enterprise from
other than owners
c. Transfers from an enterprise to its owners
d. Net income
30. Which of the following events has no effect on
total owners’ equity?
a. Increase in fair value of asset due to revaluation
b. Rent revenue collected in advance
c. Sale of goods on account
d. Prior period adjustment
31. A nonmonetary asset is invested in a
corporation. Assuming all of the following values are
equally reliable, the best measure of the increase in
owners’ equity is
a. Fair value of the stock issued
b. Fair value of the nonmonetary asset invested
c. Book value of the stock issued
d. Assessed value of nonmonetary asset invested
32. In which of the following cases may
nonmonetary assets transferred to a corporation be
measured at their costs to the transferor, rather
than at their face value on the date of transfer?
a. When the transfer is made by principal
stockholders or founders of the corporation
b. When a nonmonetary asset is donated to the
corporation
c. When the shares issued in exchange have no
readily determinable market value
d. When the shares issued in exchange have no par
value
33. Under of the rules of debit and credit which of
the following situations cannot justify an increase in
equity?
a. Decrease in bonds payable
b. Increase in cash
c. Increase in depreciation
d. Increase in value of land through revaluation
END OF MODULE 3
MMCO Continuing Professional Development
Training Center (CPDTC)
2F MMCO Building, 8000 Lakeview Ph3 Angela
Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-
6057
CPA REVIEW (May 2019 Batch)
FAR Theory Cedrick Zapanta, CPA
Module 4
1. Principles of Recognition and Measurement
a) Net Income
b) Revenue
c) Expenses
2. Revenue Recognition Standards
a) PAS 18
b) PFRS 15
PRINCIPLES OF RECOGNITION AND MEASUREMENT
OF THE ELEMENTS OF FINANCIAL PERFORMANCE
ACCOUNTING FOR NET INCOME
Definition – Net income (or net loss) is the excess (or
deficit) of revenue over expenses for an accounting
period, which is the net increase (net decrease) in
owners’ equity (assets minus liabilities) of an
enterprise for an accounting period from profit-
directed activities that is recognized and measured
in conformity with generally accepted accounting
principles.
Characteristics
1. Net concept – Income is a net concept determined
by deducting expenses from revenues.
2. Change in net assets – Net income (net loss) is the
increase (decrease) in net assets of a business
enterprise resulting from its profit-directed activities.
3. Change in owners’ equity – Net income (net loss)
increases (decrease) owners’ equity.
4. Periodicity and tentativeness – Net income is
measured for stated periods of time and the
resulting measurements are tentative before the life
of the business is terminated.
Related Terms
A. Profit – profit is frequently used as a measure of
performance or as the basis for other measures,
such as return on investment or earnings per share.
The elements directly related to the measurement of
profit are income and expenses. The recognition and
measurement of profit (income and expenses)
depends in part on the concepts of capital and
capital maintenance used by the enterprise in
preparing financial statements.
B. Income – is increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.
C. Gains – represent other items that meet the
definition of income and may, or may not, arise in
the course of the ordinary activities of the
enterprise. Gains represent economic benefits. It
includes those arising on the disposal of noncurrent
assets.
The definition of income also includes unrealized
gains, for example, those arising on the revaluation
of marketable securities and those resulting from
increases in the carrying amount of long-term assets.
When gains are recognized in the income
statements, they are usually displayed separately
because knowledge of them is useful for the purpose
of making economic decisions. Gains are often
reported net of related expenses.
D. Earnings – earnings is a general term embracing
revenue, profit and income. The term is commonly
used as a synonym for net income, particularly over
a period of years.
1. Net Concept
Income has positive and negative elements
consisting of revenues and expenses. Net income is
the excess of total revenues over total expenses
during a period. An excess of total expenses over
total revenues is a net loss.
Revenues and expenses can be combined in various
ways to obtain several intermediate measures or
sub-totals of income with varying degrees of
inclusiveness. Thus” income” may mean “operating
income”, “income from continuing operations”,
income before extraordinary items” etc. To avoid
confusion, an appropriate qualifying word or phrase
should accompany the term “income” to explain
what is presented.
2. Changes in Net Assets
The elements of income describe changes in assets
and liabilities resulting from the profit-directed
activities of an enterprise during a period. Revenues
are gross increases in assets or gross decreases in
liabilities. Expenses are gross decreases in assets or
gross increases in liabilities. Net income is the
increase in net assets of an enterprise, measured by
the excess of revenues over expenses.
Since net income measures the change (or part of
the change) in net assets during a period, its
determination is inseparably linked to the
recognition and measurement of assets and
liabilities. The point in time at which revenues and
expenses are recognized is also the point at which
changes in the amounts of net assets are recognized.
3. Changes in Owner’s Equity
Net income (net loss) is the change in net assets of
an enterprise resulting from its profit-directed
activities during a period. Since net assets is equal to
assets less liabilities, it is synonymous with owners’
equity. From the fundamental accounting equation
(Assets – Liabilities = Owners’ Equity), we know that
an increase (decrease) in net assets is always
accompanied by a corresponding increase (decrease)
in owners’ equity.
Although net income changes owners’ equity, not all
changes in owners’ equity are caused by net income.
Owners’ equity can also change as a result of (a)
transfers between the business enterprise and its
owners and (b) events that are accounted for as
directed changes in owners’ equity rather than as
elements of net income such as appraisal write-ups
of property and quasi-organizations.
4. Periodicity and Tentativeness
Unlike the elements of financial position which
related to a point of time, net income and its
elements relate to a period of time. Net income
cannot be conclusively measured until the end of the
life of the enterprise. However, users cannot wait
indefinitely for information about an entity’s
operating results. Accordingly, relatively short time
periods of equal length, usually one year, are used to
measure and report net income.
To determine net income, revenues and expenses
must be assigned to appropriate time periods during
the life of the enterprise. This requires the use of
estimates and judgments because business activities
do not come to a complete stop at the end of each
accounting period and because assumptions must be
made as to future events which may be invalidated
by experience. For example, periodic depreciation
expense is necessarily an estimate based on
assumptions and judgments about the useful life and
salvage value of the asset and the amount to be
recognized as expense in each period. Thus,
attempts to measure net income for short time
periods are necessarily tentative. The shorter the
time period, the more difficult it is to determine net
income.
5. Recognition of Net Income
Principle – Determination of periodic net income
depends on recognizing changes in assets and
liabilities in the period in which the changes occur,
rather than simply on recording receipts and
payments of money.
Alternative Income Recognition Bases
• Accrual Basis
• Cash Basis
• Modified Cash Basis
Accrual Basis
Revenues are recognized when realized, i.e. when
goods are sold are services provided. Expenses are
recognized when incurred, i.e. when assets are
consumed to generate revenue. Net income (loss)
for the period is the difference between realized
revenues and related expenses.
• Advantages – Accomplishments (revenues) are
related to efforts or sacrifices (expenses) so that
reported net income measures an enterprise’s
performance during a period. It is also more useful in
predicting future earnings and cash flows of the
enterprise. These are the primary reasons why
accrual accounting is preferred over cash-basis
accounting.
Cash Basis
Revenue is recognized when collected in cash,
expenses when paid or settled in cash. Net income
(loss) for the period is the difference between cash
received from, and cash disbursed for the firm’s
profit-directed activities.
• Advantages – Simplicity and economy because
transactions are recorded only when cash is received
or paid and reliability because estimates and
judgments are not required.
• Disadvantages – Cash basis is not useful in
evaluating enterprise performance because it does
not reflect the results of all profit-directed activities
which took place during the period. Cash receipts
and payments and the accomplishments and efforts
often occur in different periods.
• Acceptability – Cash basis accounting is not a
generally accepted basis of recognizing net income.
It is used only by relatively small business firms and
practicing professionals whose needs are satisfied by
simple accounting records. Moreover, strict cash
basis accounting is often modified in practice.
Modified Cash Basis
Modified cash basis is a hybrid system of recognizing
net income. Items materially affecting net income
such as purchases and sales on account, inventories,
long-lived assets and depreciation are accounted for
on an accrual basis; all other items are recognized on
a cash basis.
6. Measurement of Net Income
Principle – Net income (loss) for a period is
measured by the excess (deficiency) of revenues
over expenses recognized in accordance with accrual
accounting during the period. Net income should
include all items of revenues and expenses given
accounting recognition during the period, with the
sole exception of prior period adjustments.
Transaction Approach – Net income (net loss) is the
excess (deficiency) of revenues over expenses
recognized on an accrual accounting basis during the
period. This is the preferred approach because it
shows not only the amount of net income or loss but
also the nature and amounts of revenues and
expenses included in net income. The amount of net
income or loss will be the same under either
approach because financial statements articulate.
Steps in Income Measurement
Under the transactions approach, the income
measurement process involves three basis steps:
a. Revenue – Identify and measure revenues realized
during the reporting period
b. Expenses – Measure the expenses incurred to
directly or indirectly generate the realized revenues
c. Net income (loss) – Deduct expenses from
revenues to arrive at the net income/loss for the
period.
Comprehensive Income – Comprehensive income
comprises all recognized changes in equity (net
assets) of an entity during a period from transactions
and other events and circumstances except those
resulting from investments by and distributions to
owners. Total comprehensive income and profit and
loss are usually used as a measure of the total
performance of the firm. Performance is the
relationship of the income and expenses (both
realized and recognized) of an entity during a
reporting period.
7. Contemporary Income Issues
A. Capital vs. Income
 Capital distinguished from income – Capital in its
most general sense may be thought of as a “store of
wealth” from the use of which the owner hopes to
obtain additional wealth. Income is the increment in
wealth arising from the use of capital. It is a return
on capital as distinguished from a return of a capital.
 Importance of distinction – Capital should be
distinguished from income so that charges and
credits which should be made directly to capital are
not included in net income, and vice versa.
B. Capital Maintenance Concepts – Capital
maintenance holds that a firm’s beginning capital
should be maintained intact before any income can
be recognized. There are three concepts about the
nature of capital that should be maintained.
• Nominal financial capital
• Physical capital
• Constant-peso capital
Nominal financial capital - Nominal financial capital
is the money amount of net financial resources
invested by owners in the business, measured in
terms of nominal pesos. Nominal pesos are actual
pesos without adjustments for changes in the
general purchasing power of money. This concept
underlies present generally accepted accounting
principles.
Physical capital – Physical capital is the amount of
capital need to replace existing assets of the
enterprise and preserve its capacity to produce a
constant supply of goods and services at previous
levels of output. Advocates of this concept believe
that net income should be measured on the basis of
current values instead of historical costs.
Constant-peso capital – Constant peso capital
(sometimes called “real capital” is the money
amount of capital measured in constant pesos.
Constant pesos are units of money with the same
(constant) general purchasing power. This concept is
advocated by those who believe that changes in the
general purchasing power of money should be
recognized in measuring net income.
C. Holding Gains and Losses – Holding gains and
losses are changes in the value of assets and
liabilities held by a firm during a period as a result of
technological advances, movements in price levels,
and other events and circumstances not directly
influenced by managerial decisions.
 Present practice – Holding gains and losses are
recognized to the extent that they are allowed by
particular accounting standards (IFRSs), such as
available-for-sale securities, (PAS 39), property and
equipment carried at revalued amounts (PAS 16),
Biological Assets (PAS 41)
 Holding gains and losses are recognized in the
accounts and reported in the statement of
comprehensive income separately from profit and
loss for the period. This will make net income more
significant and facilitate prediction of future earnings
and cash flows.
QUIZZER - NET INCOME
1. The process of identifying, measuring, and relating
revenue and expenses of an enterprise for an
accounting period is known as
a. Revenue recognition
b. Income determination
c. Realization
d. Expense recognition
2. The excess of revenue over expenses for an
accounting period, which is the net increase in
owners’ equity of an enterprise from profit-directed
activities that is recognized and measured in
conformity with GAAP is
a. Net income
b. Net gain
c. Net loss
d. Net margin
3. Which of the following statements is true?
I. Net loss is the decrease in net assets of a business
resulting from its profit-directed activities.
II. Income is a net or partially net concept
determined by deducting expenses from revenues
III. The income or loss which is shown as the final
amount in the income statement reflects the success
or failure of the business in its profit-directed
activities.
a. Only I is true
b. I and II are true
c. II and III are true
d. I, II, and III are true
4. Which of the following best describes “net
income” of a business enterprise for an accounting
period?
a. The increase in net assets resulting from all its
activities during the period, except transfers
between the enterprise and its owner, that is
recognized and measured in conformity with GAAP
b. The excess of revenues over expenditures during
the period
c. The increase in net assets resulting from all its
activities during the period
d. The increase in owner’s equity resulting from
profit-directed activities during the period
5. “Profit-directed activities” generally refer to all
activities of an enterprise
a. That give rise to revenue and expenses
b. That affect its earning potential
c. Except transfers between the enterprise and its
owners
d. Except transfers between the enterprise and its
owners and prior period adjustments
6. Which of the following terms is commonly used as
a synonym for net income particularly over a period
of years?
a. Earnings
b. Profit
c. Revenue
d. Proceeds
7. The computed figure which represents the
difference between sales or other revenues and the
sum of costs expired and expenses incurred during
the year is considered as the
a. Economic measurement of profit
b. Accounting concept of income
c. Return on investment
d. Return on total assets
8. The term “realized income” refers to
a. The recording of revenue at the time cash is
received from the sale of a commodity of service
b. The accounting for income in the period in which
it is actually earned
c. The recognition of revenue when there is
sufficient objective evidence to determine with a fair
degree of certainty that final amount to be received
from operations
d. The recognition of gain when there is good
evidence that an asset has changed in value
9. Which of the following statements is incorrect?
a. Accrual basis financial statements may be
prepared from single entry records.
b. Single entry accounting is synonymous with cash
basis accounting.
c. No adjusting entries are necessary when
accounting records are kept on a pure cash basis.
d. Over entire life of the business, there would be no
difference between income on cash basis and
income on an accrual basis.
10. Why is accrual accounting the generally accepted
basis for recognizing and measuring net income?
a. It recognizes non-cash transactions and events
affecting net income
b. Data needed for preparing the income statement
is more readily available from accounting records
c. The information is more readily understood by
users
d. It provides a better indication of enterprise
performance than information about current cash
receipts and payments
11. Which of the following phrases is associated with
the cash basis, rather than the accrual basis of
accounting?
a. Generally accepted accounting principle
b. Flexibility in determining timing of expenses
c. Matching efforts and accomplishments
d. Minimum amount or record keeping
12. Under modified cash basis accounting, which of
the following would most likely be accounted for on
an accrual basis (rather than a cash) basis?
a. Interest income and expense
b. Salaries and wages
c. Rent expense
d. Long-lived assets and depreciation
13. Under the modified-cash basis accounting, bad
debts are
a. Recognized in the books because sales on account
are recognized as revenue even if not yet collected
b. Disregarded because sales on account are not
recognized until collected in cash
c. Disregarded because sales on account are only
allowed when total collection is ascertained
d. Answer not given
14. Compared to the accrual basis of accounting, the
cash basis of accounting overstates income by the
net increase during the accounting period of the
Accounts Receivable Accrued Expenses Payable
a. NO NO
b. NO YES
c. YES YES
d. YES NO
15. Periodic net earnings are conventionally
measured by a
a. Transactions approach
b. Transactions approach including recognition of
unrealized gains and losses
c. Capital maintenance approach
d. Market value approach including recognition of all
realized gains and some unrealized losses
16. The transactions approach to income
measurement is superior to the capital maintenance
approach because
a. It is simpler and easier to implement
b. All changes in asset values are recognized
c. It emphasizes articulation of the financial
statements
d. It provides information on the components of net
income
17. The method of income determination which
measures the results of enterprise transactions and
involves the determination of the amount of
revenue earned by an entity during a given period
and the amount of expenses applicable to that
revenue is known as the
Transactions approach Economic approach
a. YES NO
b. NO YES
c. NO NO
d. YES YES
18. An income measurement approach based on the
difference between capital values at two points in
time is the
a. Transactions approach
b. Direct approach
c. Economic approach
d. Comprehensive approach
19. Under GAAP
a. Income and expenses, assets and liabilities are
measured based on the occurrence of changes in the
economic resources and obligations
b. Assets and liabilities are measured on the basis of
their liquidation values
c. Income and expenses are recognized on the basis
of cash receipts and payments, including
depreciation of fixed assets
d. Financial position and results of operations are
measured on the basis of cash received and cash
paid.
20. The asset/liability view of earnings
a. Regards the balance sheet as a link between two
successive income statements
b. Leads to balance sheet recognition of “deferred
charges’ and “deferred credits” which are not
economic resources and obligations
c. Holds that revenues and expenses result only from
changes in assets and liabilities
d. Asserts that changes in assets and liabilities are
merely the consequences of revenues and expenses
21. Total comprehensive income includes all changes
in equity during a period except
a. Sale of assets other than inventory
b. Those resulting from investments by or
distributions to owners
c. Sales to a particular entity where ultimate
payment by the entity is doubtful
d. Those resulting from revenue generated by a
totally owned subsidiary
22. This type of losses is excluded from the
determination of current period net income
a. Material losses resulting from unusual sales of
assets not acquired for resale
b. Material losses resulting from the write-off of
intangibles
c. Material losses resulting from adjustments
specifically related to operations of prior years
d. Material losses resulting from transactions in the
company’s own bonds payable
23. The occurrence that most likely would have no
effect on 2017 net income under present GAAP is
the
a. Sale in 2017 of an office building contributed by a
stockholder in 1980
b. Collection in 2017 of a dividend from an
investment acquired in 2011
c. Correction of an error in the financial statements
of a prior period discovered subsequent to their
issuance
d. Stock purchased in 2008 was deemed worthless
2017
24. Which one of the following types of losses is
excluded from the determination of net income
under present GAAP?
a. Material losses resulting from transactions in the
company’s own capital stock
b. Material losses resulting from unusual sales of
assets not acquired for resale
c. Material losses resulting from the write-offs of
intangibles
d. Material losses of a type not usually insured
against, such as those resulting from wars, riots, and
similar calamities
25. The distinction between capital and income is
illustrated by
a. Treating gains on sale of treasury stock as
additional paid-in capital
b. Excluding corrections of prior years’ profits from
current period net income
c. Adopting the current operating performance
concept of net income
d. Recognizing income on an accrual basis
26. What concept is critical in distinguishing an
enterprise’s return on investment from return of its
investment?
a. Comprehensive income concept
b. Current operating performance concept
c. Capital maintenance concept
d. Return on investment concept
27. The capital maintenance concept followed under
present GAAP is
a. Economic capital c. Real capital
b. Financial and physical capital d. Physical capital
ACCOUNTING FOR REVENUES
Basic Concepts
• Income is defined in the Conceptual Framework as
increases in economic benefits during the accounting
period in the form of inflows or enhancements of
assets or decreases of liabilities that result in
increases in equity, other than those relating to
contributions from equity participants. Income
encompasses both revenue and gains.
• Revenue is income that arises in the course of
ordinary activities of an entity and is referred to by a
variety of different names including sales, fees,
interest, dividends and royalties.
Characteristics
1. Asset inflows – Revenue is the stream of inflowing
assets resulting from the ongoing operations of a
business enterprise (or from those types of profit-
directed activities that can change owner’s equity).
2. Increases Owners’ Equity – Revenues increase
owners’ equity because they represent rewards for
enterprise efforts and sacrifices in providing goods
and services to others.
3. Gross Concept – In contrast to income, revenue is
a gross rather than a net concept. The entire selling
price of goods and services is considered revenue,
even though part of the sales price is required to
cover the cost of producing and selling the goods
and services.
Sources of Revenue
Activities generating revenue
• Sale of goods
• Rendering services
• Permitting others to use enterprise assets which
result in interest, rent, royalties and dividends
• Disposing of resources other than products, for
example, plant and equipment or investments in
other entities
• Receipt of government grants and similar
transactions
• Forgiveness of indebtedness
Events giving rise to revenue – Revenue arises
primarily from exchanges. Occasionally, revenue
arises from production, and rarely from non-
reciprocal transfers and from external events other
than transfers.
Non-revenue events – Revenue does not include:
• Collection on behalf of third parties like:
 Sales taxes, goods and services taxes and value
added tax
 In an agency relationship: collections on behalf of
the principal
• Receipts of assets purchased
• Proceeds from borrowing
• Investment by owners
• Adjustments of revenue of prior periods
No revenue is recognized when goods and services
similar in nature (or of no commercial substance) are
exchanged.
No revenue is recognized where an enterprise is a
part of an agency relationship. In this case, the
following should apply:
• Amounts collected on behalf of and passed on to
the seller are not revenue of agent. The principal in
an agency relationship recognizes as revenue the
gross amount charged to the customer. Commission
paid is accounted for as expense.
Related Terms
A. Proceeds – is a general term used to designate the
total amount realized or received in a transaction.
Both proceeds and revenue are gross concepts but
proceeds, is a broader term.
B. Gains – are increases in owners’ equity (net
assets) from peripheral or incidental transactions of
an entity, and from all other transactions and other
events and circumstances affecting the entity during
a period except those that result from revenues or
investment by owners.
C. Cost savings – is an economy or reduction in cost
made possible because of fortunate purchases or
efficient operations. Savings reduce costs and
eventually increase net income but they are not
revenue because there is no inflow of assets into the
firm.
D. Cost offsets - are adjustments of the gross
amounts of recorded costs and are reported as
direct deductions therefrom. Cost offsets are not
revenue.
Recognition of Revenue
Recognition Principle – Revenue is recognized when
it is probable that future economic benefits will flow
to the entity and these benefits can be measured
reliably. (Conceptual Framework)
• Pervasive Principle Revenue is generally recognized
when both of following conditions are met:
o the earning process is complete or virtually
complete, and
o an exchange has taken place.
• Broad operating principle – Revenue from
exchanges is recorded when products are sold,
services provided, or enterprise resources are used
by others.
Realization principle – Revenue is conventionally
recognized as specific point in the earning process of
a business enterprise, usually when assets are sold
and services are rendered. This conventional
recognition is the basis for the “realization
principle,” i.e., the principle governing recognition of
revenue. Two conditions or requirements must be
met before revenue can be considered realized:
a. Earning requirement – the first condition of
realization is that the earning process must be
complete or virtually complete.
b. Exchange requirement – the exchange determines
both the time at which to recognize revenue and the
amount at which to recognize it. The existence of an
exchange transaction provides reasonable assurance
that revenue exists and is relatively permanent since
cash or some other asset has been received for
goods delivered or services performed. Furthermore,
the exchange price provides an objective basis for
measuring the amount of revenue to be recorded in
the accounts.
Philippine Accounting Standard No. 18: Revenue
1. Objectives
• To prescribe the accounting treatment of revenue
arising from certain types of transactions and events.
• The primary Issue is determining when to
recognize revenue. This Standard identifies the
circumstances in which these criteria will be met
and, therefore, revenue will be recognized. It also
provides practical guidance on the application of
these criteria.
2. Scope
This Standard shall be applied in accounting for
revenue arising from the following transactions and
events:
• the sale of goods
• the rendering of services
• the use by others of entity assets yielding interest,
royalties and dividends
a. “Goods” include goods produced by the entity for
the purpose of sale and goods purchased for resale,
such as merchandise purchased by a retailer or land
and other property held for resale.
b. Rendering of services involves the performance by
the entity of a contractually agreed task over an
agreed period of time. The services may be rendered
within a single period or over more than one period.
Some contracts for the rendering of services are
directly related to construction contracts, for
example, those for the services of project managers
and architects. Revenue arising from these contracts
is not dealt with in this Standard but is dealt with in
accordance with the requirements for construction
contracts PAS 11 Construction Contracts.
c. The use by others of entity assets gives rise to
revenue in the form of:
• interest – charges for the use of cash or cash
equivalents or amounts due to the entity
• royalties – charges for the use of long-term assets
of the entity, for example, patents, trademarks,
copyrights and computer software
• dividends – distributions of profits to holders of
equity investments in proportion to their holdings of
a particular class of capital
Excluded from PAS 18 are revenue arising from:
• lease agreements (see IAS 17 Leases)
• dividends arising from investments which are
accounted for under the equity method (see IAS 28
Investments in Associates)
• insurance contracts within the scope of IFRS 4
Insurance Contracts
• changes in the fair value of financial assets and
financial liabilities or their disposal (see IAS 39
Financial Instruments: Recognition and
Measurement)
• changes in the value of other current assets
• initial recognition and from changes in the fair
value of biological assets related to agricultural
activity (see IAS 41 Agriculture)
• initial recognition of agricultural produce (see IAS
41)
• the extraction of mineral ores
3. Definitions
A. Revenue is the gross inflow of economic benefits
during the period arising in the course of the
ordinary activities of an entity when those inflows
result in increases in equity, other than increases
relating to contributions from equity participants.
B. Fair value is the amount for which an asset could
be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length
transaction.
4. Measurement of Revenue
Revenue shall be measured at the fair value of the
consideration received or receivable.
Measurement of revenue takes into account the
amount of any trade discounts and volume rebates
allowed by the entity. The consideration is usually in
the form of cash or cash equivalents.
Credit transactions
When the inflow of cash or cash equivalents is
deferred, the fair value of the consideration may be
less than the nominal amount of cash received or
receivable.
• Example: An entity may provide interest free credit
to the buyer or accept a note receivable bearing a
below-market interest rate from the buyer as
consideration for the sale of goods. When the
arrangement effectively constitutes a financing
transaction, the fair value of the consideration is
determined by discounting all future receipts using
an imputed rate of interest.
• The imputed rate of interest is the more clearly
determinable of either:
o the prevailing rate for a similar instrument of an
issuer with a similar credit rating; or
o a rate of interest that discounts the nominal
amount of the instrument to the current cash sales
price of the goods or services.
The difference between the fair value and the
nominal amount of the consideration is recognized
as interest revenue in accordance with paragraphs
29 and 30 and in accordance with IAS 39 Financial
Instruments: Recognition and Measurement.
Exchange of goods or services of a similar nature and
value – the exchange is not a revenue transaction.
Goods sold or services rendered in exchange for
dissimilar goods or services – Revenue is measured
at the fair value of the goods or services received,
adjusted by the amount of any cash or cash
equivalents transferred.
• When the fair value of the goods or services
received cannot be measured reliably, the revenue is
measured at the fair value of the goods or services
given up, adjusted by the amount of any cash or cash
equivalents transferred.
5. Identification of the Transaction
The recognition criteria in this Standard are usually
applied separately to each transaction. However, in
certain circumstances, it is necessary to apply the
recognition criteria to the separately identifiable
components of a single transaction in order to
reflect the substance of the transaction. Examples:
• When the selling price of a product includes an
identifiable amount for subsequent servicing defer
the amount, and recognize revenue over the period
during which the service is performed.
• Conversely, apply recognition criteria to two or
more transactions together when they are they are
linked in such a way that the commercial effect
cannot be understood without reference to the
series of transactions as a whole
o An entity may sell goods and, at the same time,
enter into a separate agreement to repurchase the
goods at a later date, thus negating the substantive
effect of the transaction. In such a case, the two
transactions are dealt with together.
6. Revenue from Sale of Goods
Revenue from the sale of goods shall be recognized
when all the following conditions have been
satisfied:
a. the entity has transferred to the buyer the
significant risks and rewards of ownership of the
goods;
b. the entity retains neither continuing managerial
involvement to the degree usually associated with
ownership nor effective control over the goods sold;
c. the amount of revenue can be measured reliably;
d. it is probable that the economic benefits
associated with the transaction will flow to the
entity; and
e. the costs incurred or to be incurred in respect of
the transaction can be measured reliably.
In most cases, the transfer of the risks and rewards
of ownership coincides with the transfer of the legal
title or the passing of possession to the buyer as in
the case for most retail sales. In other cases, the
transfer of risks and rewards of ownership occurs at
a different time from the transfer of legal title or the
passing of possession.
Entity retains significant risks of ownership – the
transaction is not a sale and revenue is not
recognized.
a. when the entity retains an obligation for
unsatisfactory performance not covered by normal
warranty provisions
b. when the receipt of the revenue from a particular
sale is contingent on the derivation of revenue by
the buyer from its sale of the goods
c. when the goods are shipped subject to installation
and the installation is a significant part of the
contract which has not yet been completed by the
entity
d. when the buyer has the right to rescind the
purchase for a reason specified in the sales contract
and the entity is uncertain about the probability of
return
Entity retains only an insignificant risk of ownership
– the transaction is a sale and revenue is recognized.
a. Seller retains legal title to the goods solely to
protect the collectability of the amount due. If the
entity has transferred the significant risks and
rewards of ownership, the transaction is a sale and
revenue is recognized.
b. A retail sale when a refund is offered if the
customer is not satisfied – Revenue is recognized at
the time of sale provided the seller can reliably
estimate future returns and recognizes a liability for
returns based on previous experience and other
relevant factors.
Revenue is recognized only when it is probable that
the economic benefits associated with the
transaction will flow to the entity. In some cases, this
may not be probable until the consideration is
received or until an uncertainty is removed.
• Example: It may be uncertain that a foreign
governmental authority will grant permission to
remit the consideration from a sale in a foreign
country. When the permission is granted, the
uncertainty is removed and revenue is recognized.
However, when an uncertainty arises about the
collectability of an amount already included in
revenue, the uncollectible amount or the amount in
respect of which recovery has ceased to be probable
is recognized as an expense, rather than as an
adjustment of the amount of revenue originally
recognized.
Revenue and expenses that relate to the same
transaction or other event are recognized
simultaneously – This process is commonly referred
to as the matching of revenues and expenses.
Expenses, including warranties and other costs to be
incurred after the shipment of the goods can
normally be measured reliably when the other
conditions for the recognition of revenue have been
satisfied. However, revenue cannot be recognized
when the expenses cannot be measured reliably; in
such circumstances, any consideration already
received for the sale of the goods is recognized as a
liability.
7. Revenue from Rendering of Services
When the outcome of a transaction involving the
rendering of services can be estimated reliably,
revenue associated with the transaction shall be
recognized by reference to the stage of completion
of the transaction at the balance sheet date. The
outcome of a transaction can be estimated reliably
when all the following conditions are satisfied:
a. the amount of revenue can be measured reliably;
b. it is probable that the economic benefits
associated with the transaction will flow to the
entity;
c. the stage of completion of the transaction at the
balance sheet date can be measured reliably; and
d. the costs incurred for the transaction and the
costs to complete the transaction can be measured
reliably
The recognition of revenue by reference to the stage
of completion of a transaction is often referred to as
the percentage of completion method. Under this
method, revenue is recognized in the accounting
periods in which the services are rendered. The
recognition of revenue on this basis provides useful
information on the extent of service activity and
performance during a period.
Revenue is recognized only when it is probable that
the economic benefits associated with the
transaction will flow to the entity. However, when an
uncertainty arises about the collectability of an
amount already included in revenue, the
uncollectible amount, or the amount in respect of
which recovery has ceased to be probable, is
recognized as an expense, rather than as an
adjustment of the amount of revenue originally
recognized.
An entity is generally able to make reliable estimates
after it has agreed to the following with the other
parties to the transaction:
• each party's enforceable rights regarding the
service to be provided and received by the parties;
• the consideration to be exchanged; and
• the manner and terms of settlement.
It is also usually necessary for the entity to have an
effective internal financial budgeting and reporting
system. The entity reviews and, when necessary,
revises the estimates of revenue as the service is
performed. The need for such revisions does not
necessarily indicate that the outcome of the
transaction cannot be estimated reliably.
The stage of completion of a transaction may be
determined by a variety of methods. An entity uses
the method that measures reliably the services
performed. Depending on the nature of the
transaction, the methods may include:
a. surveys of work performed;
b. services performed to date as a percentage of
total services to be performed; or
c. the proportion that costs incurred to date bear to
the estimated total costs of the transaction. Only
costs that reflect services performed to date are
included in costs incurred to date. Only costs that
reflect services performed or to be performed are
included in the estimated total costs of the
transaction.
Services performed by an indeterminate number of
acts over a specified period of time – revenue is
recognized on a straight-line basis over the specified
period unless there is evidence that some other
method better represents the stage of completion.
When a specific act is much more significant than
any other acts, the recognition of revenue is
postponed until the significant act is executed.
When the outcome of the transaction involving the
rendering of services cannot be estimated reliably,
revenue shall be recognized only to the extent of the
expenses recognized that are recoverable.
Outcome of the transaction cannot be estimated
reliably (as in the early stages of production:
• If it is probable that the entity will recover the
transaction costs incurred. Therefore, revenue is
recognized only to the extent of costs incurred that
are expected to be recoverable.
• As the outcome of the transaction cannot be
estimated reliably, no profit is recognized.
Outcome of a transaction cannot be estimated
reliably and it is not probable that the costs incurred
will be recovered:
• Do not recognize revenue.
• Costs incurred are recognized as an expense. When
the uncertainties that prevented the outcome of the
contract being estimated reliably no longer exist,
revenue is recognized in accordance with paragraph
20 rather than in accordance with paragraph 26.
8. Interest, Royalties and Dividends
Revenue arising from the use by others of entity
assets yielding interest, royalties, and dividends,
shall be recognized on the basis set out in par. 30
when
a. it is probable that the economic benefits
associated with the transaction will flow to the
entity, and
b. the amount of revenue can be measured reliably
Revenue shall be recognized on the following bases:
a. interest shall be recognized using the effective
interest method as set out in IAS 39, paragraphs 9
and AG5–AG8;
b. royalties shall be recognized on an accrual basis in
accordance with the substance of the relevant
agreement; and
c. dividends shall be recognized when the
shareholder's right to receive payment is
established.
Unpaid interest that has accrued before the
acquisition of an interest-bearing investment, the
subsequent receipt of interest is allocated between
pre-acquisition and post-acquisition periods.
Only the post-acquisition portion is recognized as
revenue.
Dividends on equity securities are declared from pre-
acquisition profits –these dividends are deducted
from the cost of the securities. If it is difficult to
make such an allocation except on an arbitrary basis,
dividends are recognized as revenue unless they
clearly represent a recovery of part of the cost of the
equity securities.
Royalties accrue in accordance with the terms of the
relevant agreement and are usually recognized on
that basis unless, having regard to the substance of
the agreement, it is more appropriate to recognize
revenue on some other systematic and rational
basis.
9. Disclosure
An entity shall disclose:
a. the accounting policies adopted for the
recognition of revenue, including the methods
adopted to determine the stage of completion of
transactions involving the rendering of services;
b. the amount of each significant category of
revenue recognized during the period, including
revenue arising from:
i. the sale of goods;
ii. the rendering of services;
iii. interest;
iv. royalties;
v. dividends; and
c. the amount of revenue arising from exchanges of
goods or services included in each significant
category of revenue.
10. Special Issues in Measuring Revenue
A. Non-cash transactions: Barter arrangements
Barter of advertising space on the web pages, in
magazines and TV programs. Many internet
companies recognize revenue from barter
transactions.
SIC 31: Revenue: Barter Transactions involving
Advertising Services
• Revenue from a barter transaction involving
advertising services cannot be measured reliably at
fair value of the advertising services received:
• A seller can reliably measure revenue at the fair
value of the advertising services it provides in a
barter transaction by reference only to non-barter
transactions that:
o involve advertising similar to the advertising in a
barter transaction;
o occur frequently
o represent a predominant number of transactions
and amount to provide advertising that is similar to
the advertising in the barter transaction.
o involve cash and/or another form of consideration
(e.g. : marketable securities, non-monetary assets,
and other services) that has a reliably measurable
fair value; and
o do not involve the same counterparty as in the
barter transaction
B. Bill and Hold Sales (in which delivery is delayed at
the buyer's request but the buyer takes title and
accepts billing)
Revenue is recognized when the buyer takes title,
provided:
a. it is probable that delivery will be made;
b. the item is on hand, identified and ready for
delivery to the buyer at the time the sale is
recognized;
c. the buyer specifically acknowledges the deferred
delivery instructions; and
d. the usual payment terms apply.
Revenue is not recognized when there is simply an
intention to acquire or manufacture the goods in
time for delivery.
C. Goods Shipped Subject to Conditions
i. Installation and inspection – recognize revenue
when buyer accepts delivery and installation and
completion are complete. However, revenue is
recognized immediately upon the buyer's
acceptance of delivery when:
• the installation process is simple in nature (ex:
installation of a factory tested television receiver
• the inspection is performed only for purposes of
final determination of contract prices (ex: shipments
of iron ore, sugar or soya beans)
ii. On approval when the buyer has negotiated a
limited right of return – if there is uncertainty about
the possibility of return, revenue is recognized when
the shipment has been formally accepted by the
buyer or the goods have been delivered and the time
period for rejection has elapsed.
iii. Consignment sales under which the recipient
(buyer) undertakes to sell the goods on behalf of the
shipper (seller) – revenue is recognized by the
shipper when the goods are sold by the recipient to
a third party.
iv. Cash on delivery sales – revenue is recognized
when delivery is made and cash is received by the
seller or its agent.
D. Lay Away Sales (the goods are delivered only
when the buyer makes the final payment in a series
of installments)
Revenue is recognized when the goods are
delivered. However, when experience indicates that
most such sales are consummated, revenue may be
recognized when a significant deposit is received
provided the goods are on hand, identified and
ready for delivery to the buyer.
E. Orders when payment (or partial payment) is
received in advance of delivery for goods not
presently held in inventory, for example, the goods
are still to be manufactured or will be delivered
directly to the customer from a third party –
Revenue is recognized when the goods are delivered
to the buyer.
F. Sale and Repurchase Agreements (other than
swap transactions) under which the seller
concurrently agrees to repurchase the same goods
at a later date, or when the seller has a call option to
repurchase, or the buyer has a put option to require
the repurchase, by the seller, of the goods.
For a sale and repurchase agreement on an asset
other than a financial asset, the terms of the
agreement need to be analyzed to ascertain
whether, in substance, the seller has transferred the
risks and rewards of ownership to the buyer and
hence revenue is recognized. When the seller has
retained the risks and rewards of ownership, even
though legal title has been transferred, the
transaction is a financing arrangement and does not
give rise to revenue. For a sale and repurchase
agreement on a financial asset, IAS 39 Financial
Instruments: Recognition and Measurement applies.
G. Installment Sales – Revenue attributable to the
sales price, exclusive of interest, is recognized at the
date of sale. The sale price is the present value of
the consideration, determined by discounting the
instalments receivable at the imputed rate of
interest. The interest element is recognized as
revenue as it is earned, using the effective interest
method.
H. Real Estate Sales – Revenue is recognized when
legal title passes to the buyer. However, in some
jurisdictions the equitable interest in a property may
vest in the buyer before legal title passes, in which
case, provided that the seller has no further
substantial acts to complete under the contract, it
may be appropriate to recognize revenue.
In either case, if the seller is obliged to perform any
significant acts after the transfer of the equitable
and/or legal title, revenue is recognized as the acts
are performed. An example is a building or other
facility on which construction has not been
completed.
In some cases, real estate may be sold with a degree
of continuing involvement by the seller such that the
risks and rewards of ownership have not been
transferred. Examples are sale and repurchase
agreements which include put and call options, and
agreements whereby the seller guarantees
occupancy of the property for a specified period, or
guarantees a return on the
buyer's investment for a specified period. In such
cases, the nature and extent of the seller's
continuing involvement determines how the
transaction is accounted for. It may be accounted for
as a sale, or as a financing, leasing or some other
profit sharing arrangement. If it is accounted for as a
sale, the continuing involvement of the seller may
delay the recognition of revenue.
A seller also considers the means of payment and
evidence of the buyer's commitment to complete
payment. For example, when the aggregate of the
payments received, including the buyer's initial
down payment, or continuing payments by the
buyer, provide insufficient evidence of the buyer's
commitment to complete payment, revenue is
recognized only to the extent cash is received.
QUIZZER - REVENUE and PAS 18
1. These are gross increases in assets or gross
decreases in liabilities recognized and measured in
conformity with generally accepted accounting
principles that result from those types of profit-
directed activities that can change owners’ equity
a. Income
b. Expense
c. Revenue
d. Profit
2. One of these activities does not generate revenue.
Which one is it?
a. Permitting others to use enterprise resources
b. Sale of merchandise
c. Adjustment of revenue of prior periods
d. Disposing of investment in other entities.
3. Which of the following statements is false?
I. Revenue is the difference between the selling price
of a service and the cost of providing such service.
II. Revenue is synonymous with proceeds.
III. Revenue is the change in net assets of an entity
during a period that is attributable to profit-directed
activities.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
4. Which of the following is not a characteristic of
revenue?
a. Revenue always increases owner’s equity
b. Revenue represents an inflow of assets into the
enterprise
c. Revenue is a gross rather than a net concept
d. Revenue is always accompanied by an increase in
cash.
5. According to the conceptual framework, an
entity’s revenue may result from
a. A decrease in an asset from primary operations
b. An increase in an asset from incidental
transactions
c. An increase in a liability from incidental
transactions
d. A decrease in a liability from primary operations
6. An example of revenue derived from a non-
reciprocal transfer is
a. Sale of products subject to warranty
b. Appreciation of property
c. Land acquired by donation
d. Settlement of a liability at less than its book value
7. Rent collected one month in advance should be
accounted for as
a. Revenue in the month collected
b. A current liability
c. A separate item in stockholders’ equity
d. An accrued liability
8. The term “revenue recognition” conventionally
refers to
a. The process of identifying transactions to be
recorded a revenue in an accounting period.
b. The process of measuring and relating revenue
and expenses of an enterprise for an accounting
period.
c. The earning process which gives rise to revenue
realization
d. The process of identifying those transactions that
result in an inflow of assets from customers
9. Generally, revenue should be recognized at a
point when
a. Management decides it is appropriate to do so
b. The product is available for sale to the ultimate
consumer
c. An exchange has taken place and the earning
process is complete or virtually complete
d. An order for a definite amount of merchandise
has been received for shipment FOB destination.
10. Revenue is generally recognized when the
earning process is virtually complete and an
exchange has taken place. What principle is
described by this statement?
a. Consistency
b. Matching
c. Realization
d. Conservatism
11. Which of the following, in the most precise
sense, means the process of converting noncash
resources and rights into cash or claims to cash?
a. Allocation
b. Recording
c. Recognition
d. Realization
12. Gains on assets unsold are identified, in a precise
sense, by the term
a. Unrecorded
b. Unrealized
c. Unrecognized
d. Unallocated
13. Revenues are considered to have been earned
when
a. Goods are shipped, not yet received by buyer,
under terms “ sale on trial”
b. Goods are sold under “lay-away” terms, where
goods are delivered only when buyer makes the final
payment in a series of installments.
c. Goods are shipped, not yet received by buyer,
where the buyer has the right to rescind the
purchase if the goods are not within the
specifications in the contract
d. The entity ships goods subject to installation
which is a significant part of the contract and the
entity has completed such installation
Revenue Recognition Bases
14. Given the proper circumstances, each of the
following is an acceptable basis for recognizing
revenue except
a. After all costs have been recovered in cash
collections
b. As cash is collected from a customer
c. After cash is collected but before goods are
delivered to a customer
d. Upon completion of the production process but
before a sale has taken place
15. Revenue, under proper circumstances, may be
recognized at all of the following moments in time
except
a. After the earning process has been completed and
an exchange has taken place
b. Upon the receipt of cash from the customer
c. As certain stages of completion of production are
attained
d. When goods are shipped under terms “sale on
approval”
16. Arguments supporting revenue recognition at
the point of sale include all of the following except
a. The significant risks and rewards of ownership
have been transferred
b. For most concerns, the sale is usually the most
critical event in the earning process
c. Most of the costs related to the manufacture or
acquisition of the product and the costs of disposal
are now readily determinable
d. Uncertainties regarding the final measurement of
revenue have been eliminated
17. Which of the following approaches to revenue
recognition does not depend on the receipt of cash?
a. Installment sales
b. Cost recovery
c. Cash sale
d. Accrual basis
18. The following statements relate to the two
methods of accounting for long-term construction
contracts. Which statement is true?
I. The completed contract method recognized
revenues at the point of sale
II. When work to be done and costs to be incurred
on a long-term construction contract can be
estimated dependably, the percentage of
completion method of revenue recognition should
be used
a. Only I is true
b. Only II is true
c. I and II are true
d. I and II are false
19. The justification for recognizing revenue on a
long-term construction contract as construction
contract progresses is
a. To conform with established industry practices
b. To comply with the realization principle
c. To provide better measure of periodic results
d. To associate cause and effect
20. Under what condition is it proper to recognize
revenues prior to the sale of the merchandise?
a. When the ultimate sale of the goods is at an
assured sales price
b. When the concept of internal consistency (of
amounts of revenue) must be complied with
c. When the revenue is to be reported as an
installment sale
d. When management has a long established policy
to do so
21. According to the installment method of
accounting, the gross profit on an installment sale is
recognized in income
a. On the date of sale
b. On the date the final cash collection is received
c. After cash collections equal to the cost of sales
have been received
d. In proportion to the cash collections received
22. Income recognized using the installment method
of accounting generally equals cash collected
multiplied by the
a. Net operating profit percentage
b. Net operating profit percentage adjusted for
expected uncollectible accounts
c. Gross profit percentage
d. Gross profit percentage adjusted for expected
uncollectible accounts
23. One method employed to defer revenue
recognition is the cost recovery method. Under the
cost recovery method, profit is not recognized until
a. The entire sales price is collected
b. The seller is convinced that collection is assured
beyond a reasonable doubt
c. The buyer formally accepts delivery of the
merchandise involved in the sale
d. Cash payments by the buyer exceed the seller’s
cost of the merchandise sold
24. Laguna Lands, Inc. is engaged in extensive
exploration for water in Mt. Makiling. If upon
discovery of water the corporation does not
recognized any revenue from water sales until the
sales exceed the costs of exploration, the basis of
revenue recognition being employed is the
a. Production basis
b. Cash (or collection) basis
c. Sales (or accrual) basis
d. Sunk cost (or cost recovery) basis
25. Wilson Co. produces expensive equipment for
sale on installment contract. When there is doubt
about eventual collectability, the income recognition
method least likely to overstate income is
a. At the time the equipment is completed
b. The installment method
c. Cost recovery method
d. At the time of recovery
26. A real estate broker engaged in the sale of real
estate on commission basis should recognize
revenue on the basis of
a. Cash collections
b. Completed performance
c. Specific performance
d. Proportional performance
27. According to the cost recovery method of
accounting, gross profit on an installment sale is
recognized
a. After cash collections equal to the cost of sales
have been received
b. In proportion to the cash collections
c. On the date the final cash collection is received
d. On the date of sale
28. Which of the following methods of service
revenue recognition usually would be most
appropriate for a business engaged in packing,
loading, transporting, and delivering freight?
a. Specific performance method
b. Collection method
c. Proportional performance method
d. Completed performance method
29. Which of the following methods of service
revenue recognition is appropriate for use by a real
estate broker engaged in the sale of real estate on a
commission basis?
a. Specific performance method
b. Proportional performance method
c. Completed performance method
d. Collection method
30. One of the conditions that must be satisfied in
order to recognize revenue in a transaction involving
the rendering of services is that the stage of
completion of the transaction at the end of the
reporting period can be measured reliably. Which of
the following methods for determining the stage of
completion of a contract involving the rendering of
services are specifically referred to in PAS18
Revenue, as acceptable?
I - Costs incurred to date as a percentage of the
estimated total costs of the transaction
II - Advances received to date as a percentage of the
total amount receivable
III - Surveys of work performed
IV - Revenue to date divided by total contract
revenue
a. I and II
b. I and III
c. II and III
d. III and IV
31. According to PAS18 Revenue, which of the
following conditions apply to the recognition of
revenue for transactions involving the rendering of
services?
A – The significant risks and rewards of ownership
have been transferred to the buyer
B – The amount of revenue can be measured reliably
C – The entity retains neither continuing managerial
involvement nor effective control over the
transaction
D – The costs incurred for the transaction and the
costs to complete the transaction can be measured
reliably
a. A and B
b. B and D
c. C and D
d. B, C, and D
32. According to PAS 18 Revenue, which two of the
following criteria must be satisfied before revenue
from the sale of goods should be recognized in profit
or loss?
A – Ownership has been transferred to the buyer
B – The outcome of the transaction is certain
C – Revenue can be reliably measured
D – Managerial control over the goods sold has been
relinquished
a. A and B
b. B and C
c. C and D
d. A and D
33. The Odessa Corp. sells goods to a third party via
an agent. During 2017, Odessa supplies the agent
with goods with a sales value of P 200,000. The
agent charges a commission of 15%. Under PAS18
Revenue, how much revenue should each of Odessa
and the agent recognize in profit or loss for 2017?
Odessa Corp. Agent
a. P 170,000 P 25,500
b. P 200,000 P 25,500
c. P 170,000 P 30,000
d. P 200,000 P 30,000
34. The Karlo Company sells merchandise for P8,000
to Kim Corp. on December 31, 2016. The terms of
the sale agreement state that payment is due in one
year's time. Karlo has an imputed rate of interest of
9%. Under PAS18, how much revenue should Karlo
recognize in profit or loss for the year ended 31
December 2016?
a. P 7,339
b. P 8,000
c. P 8,720
d. Nil
35. Heavy Company placed an order with Light
Company for new specialist machinery. The order
was non-cancellable once signed and Heavy agreed
to pay for the machinery at the time the order was
signed on January 31, 2016. Light held the machinery
to Heavy's order from June 1, 2016, the date on
which it was completed. Heavy commenced using
the machinery on July 31, 2016 when Light complete
the installation process. Light had staff on standby to
deal with any operating problems until the warranty
period ended on December 1, 2016. Under PAS 18
Revenue, Light should recognize the revenue from
the sale of this specialist machinery on
a. January 31, 2016
b. June 1, 2016
c. July 31, 2016
d. December 1, 2016
36. The Marjo Company provides service contracts
to customers for maintenance of their electrical
systems. On October 1, 2016, it agrees to a four year
contract with a major customer for P 154,000. Costs
over the period of the contract are reliably
estimated at P 51,333. Under PAS 18 Revenue, how
much revenue should the company recognize in
profit or loss in the year ended December 31, 2016?
a. P 3,208
b. P 9,625
c. P 12,833
d. P 38,500
37. On January 1, 2016 Viola Company signs a four-
year fixed-price contract to provide services for a
customer. The contract value is P 550,000. On
December 31, 2016, the contract is thought to be
30% complete. Costs to complete the contract
cannot be reliably estimated and costs incurred to
date of P 152,000 are recoverable from the
customer. What is the revenue to be recognized in
profit or loss for the year ended December 31, 2016,
according to PAS 18 Revenue?
a. P 13,000
b. P 137,500
c. P 152,000
d. P 165,000
38. On July 1, 2016, Pyrex Company, a manufacturer
of office furniture, supplied goods to Nacho
Company for P 120,000 on condition that this
amount was paid in full on July 1, 2017. Nacho had
earlier rejected an alternative offer from Pyrex
whereby they could have bought the same goods by
paying cash of P108,000 on July 1, 2016. Under PAS
18 Revenue, how much relating to this transaction
should Pyrex recognize in profit or loss in respect of
revenue and interest income for the year ended June
30, 2017?
Revenue Interest income
a. P 108,000 P 12,000
b. P 120,000 Nil
c. P 108,000 Nil
d. P 120,000 P 12,000
39. On July 1, 2017, The Osamis Company handed
over to a client a new computer system. The
contract price for the supply of the system and
aftersales support for 12 months was P 800,000.
Osamis estimates the cost of the after-sales support
at P 120,000 and it normally marks up such costs by
50% when tendering for support contracts. Under
PAS 18 Revenue, the revenue Osamis should
recognize in its financial year ended December 31,
2017 is
a. Nil
b. P 620,000
c. P 710,000
d. P 800,000
Philippine Financial Reporting Standard No. 15
Revenue from Contracts with Customers
Effective Date: mandatory for annual reporting
periods starting from 1 January 2018 onwards, with
earlier application permitted.
Supersedes the following: PAS 11, PAS 18, IFRIC 13,
IFRIC 15, IFRIC 18, SIC 31
The Need for a Change in the Revenue Standards
• Significant diversity in revenue recognition
practices
• Limited guidance on many important topics, such
as accounting for arrangements with multiple
elements
• Difficult for investors and analysts (‘investors’) to
understand and compare a company’s revenue
• Difficult to apply to complex transactions due to
lack of basis for conclusions
• Numerous industry and transaction specific
requirements, which often resulted in economically
similar transactions being accounted for differently.
• New types of transactions emerges
Overview
IFRS 15 establishes a comprehensive framework for
recognition of revenue from contracts with
customers based on a core principle that an entity
should recognize revenue representing the transfer
of promised goods or services (PERFORMANCE
OBLIGATION) to customers in an amount that
reflects the consideration to which the entity
expects to be entitled in exchange for those goods or
services.
IAS 18 / IAS 11
IFRS 15
Separate models for:
• Construction contracts
• Sale of goods
• Rendering of services
Single model for performance obligations:
• Satisfied over time
• Satisfied at a point in time
Focus on risks and rewards
Focus on control
Limited guidance on:
• Multiple element arrangements
• Variable consideration
More guidance on separating elements, allocating
the transaction price, variable consideration,
repurchase arrangements…
Scope
IFRS 15 applies to all entities and all contracts with
customers to provide goods or services in the
ordinary course of business, except for the following
contracts, which are specifically excluded:
 Lease contracts ( IAS 17 or IFRS 16)
 Insurance contracts (IFRS 4 or IFRS 17)
 Financial instruments and other contractual rights
or obligations (IAS 27, IAS 28, IAS 39, IFRS 9, IFRS 10,
IFRS 11)
 Non-monetary exchanges between entities in the
same line of business to facilitate sales to customers
or potential customers
Definitions
 Contract – An agreement between two or more
parties that creates enforceable rights and
obligations
 Customer – A party that has contracted with an
entity to obtain goods or services that are an output
of the entity’s ordinary activities in exchange for
consideration.
 Performance obligation – A promise in a contract
with a customer to transfer to the customer either:
o a good or service (or a bundle of goods or services)
that is distinct; or
o a series of distinct goods or services that are
substantially the same and that have the same
pattern of transfer to the customer.
 Transaction price – The amount of consideration to
which an entity expects to be entitled in exchange
for transferring promised goods or services to a
customer, excluding amounts collected on behalf of
third parties.
The New Revenue Model under PFRS 15
The standard describes the principles an entity must
apply to measure and recognize revenue and the
related cash flows. The core principle is that an
entity will recognize revenue at an amount that
reflects the consideration to which the entity
expects to be entitled in exchange for transferring
goods or services to a customer.
1. Identify the contract(s) with a customer
An entity must first identify the contract, or
contracts, to provide goods and services to
customers. A contract with a customer (which may
be written, oral, or implied) will be within the scope
of IFRS 15 if all the following conditions are met
(PRACC):
 the contract has been Approved by the parties to
the contract;
 each party’s Rights in relation to the goods or
services to be transferred can be identified;
 the Payment terms for the goods or services to be
transferred can be identified;
 the contract has Commercial substance; and
 it is probable that the consideration to which the
entity is entitled to in exchange for the goods or
services will be Collected.
These criteria are assessed at the inception of the
arrangement. If the criteria are met at that time, an
entity does not reassess these criteria unless there is
an indication of a significant change in facts and
circumstances.
The model is to be applied on an individual contract
basis, with a practical expedient available.
As a practical expedient, an entity may apply this
Standard to a portfolio of contracts (or performance
obligations) with similar characteristics if the entity
reasonably expects that the effects on the financial
statements of applying this Standard to the portfolio
would not differ materially from applying this
Standard to the individual contracts (or performance
obligations) within that portfolio.
Contracts should be accounted for separately.
However, contracts should be combined if:
 they are negotiated as a package with a single
commercial objective;
 the amount of consideration to be paid in one
contract depends on the goods or services to be
delivered in another contract; or
 the goods or services promised in the contracts are
considered to be a single performance obligation
Contract Modification
Parties to an arrangement frequently agree to
modify the scope or price (or both) of their contract.
If that happens, an entity must determine whether
the modification is accounted for as a new contract
or as part of the existing contract.
Is the contract modification for additional goods
and services that are distinct and at their stand-
alone selling price?*
Are the remaining goods and services distinct
from those already provided?
Account for the new goods and services as a
separate contract.
YES
NO
In accordance with IFRS 15.20, an entity may make
appropriate adjustments to the stand-alone selling
price to reflect the circumstances of the contract and
still meet the criteria to account for the modification
as a separate contract.
2. Identify the performance obligations in the
contract
At contract inception, an entity shall assess the
goods or services promised in a contract with a
customer and shall identify as a performance
obligation each promise to transfer to the customer
either:
 a good or service (or a bundle of goods or services)
that is distinct; or
 a series of distinct goods or services that are
substantially the same and that have the same
pattern of transfer to the customer
A series of distinct goods or services has the same
pattern of transfer to the customer if both of the
following criteria are met:
 each distinct good or service in the series that the
entity promises to transfer to the customer would
meet the criteria to be a performance obligation
satisfied over time; and
 the same method would be used to measure the
entity’s progress towards complete satisfaction of
the performance obligation to transfer each distinct
good or service in the series to the customer
Unbundling Performance Obligations
Principal / Agent Considerations
When more than one party is involved in providing
goods or services to a customer, the standard
requires an entity to determine whether it is a
principal or an agent in these transactions by
evaluating the nature of its promise to the customer.
An entity is a principal (and, therefore, records
revenue on a gross basis) if it controls a promised
good or service before transferring that good or
service to the customer.
An entity is an agent (and, therefore, records as
revenue the net amount that it retains for its agency
services) if its role is to arrange for another entity to
provide the goods or services.
Indicators that an entity is an agent:
 another party is primarily responsible for fulfilling
the contract;
 the entity does not have inventory risk at any point
during the contract;
 the entity does not have discretion in establishing
prices for the other party’s goods or services and,
therefore, the benefit that the entity can receive
from those goods or services is limited;
 the entity’s consideration is in the form of a
commission; and
 the entity is not exposed to credit risk for the
amount receivable from a customer in exchange for
the other party’s goods or services.
Treat the modification as a termination of the
existing contract and the creation of a new
contract. Allocate the total remaining
transaction price (unrecognized transaction
price from the existing contract plus additional
transaction price from the modification) to the
remaining goods and services (both from the
existing contract and the modification).
Update the transaction price and measure of
progress for the single performance obligation
(recognize change as a cumulative catch-up to
revenue).
Update the transaction price and allocate it to
the remaining performance obligations (both
from the existing contract and the
modification). Adjust revenue previously
recognized based on an updated measure of
progress for the partially satisfied performance
obligations. Do not adjust the accounting for
completed performance obligations that are
distinct from the modified goods or services.
YES
NO
YES and NO
3. Determine the transaction price
An entity shall consider the terms of the contract
and its customary business practices to determine
the transaction price. The transaction price is the
amount of consideration to which an entity expects
to be entitled in exchange for transferring promised
goods or services to a customer, excluding amounts
collected on behalf of third parties (for example,
some sales taxes). The consideration promised in a
contract with a customer may include fixed
amounts, variable amounts, or both.
The nature, timing and amount of consideration
promised by a customer affect the estimate of the
transaction price. When determining the transaction
price, an entity shall consider the effects of all of the
following:
 variable consideration
 constraining estimates of variable consideration
 the existence of a significant financing component
in the contract
 non-cash consideration
 consideration payable to customer
Variable Consideration
If the consideration promised in a contract includes a
variable amount, an entity shall estimate the amount
of consideration to which the entity will be entitled
in exchange for transferring the promised goods or
services to a customer.
Example: discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses,
penalties or if an entity’s entitlement to the
consideration is contingent on the occurrence or
non-occurrence of a future event (sale with a right to
return)
An entity shall estimate an amount of variable
consideration by using either of the following
methods, depending on which method the entity
expects to better predict the amount of
consideration to which it will be entitled:
 The expected value (large number of contracts
with similar characteristics)
 The most likely amount (only two possible
outcomes)
Constraining Estimates of Variable Consideration
An entity shall include in the transaction price some
or all of an amount of variable consideration
estimated to the extent that it is highly probable
(i.e., significantly more likely than probable) that a
significant reversal in the amount of cumulative
revenue recognized will not occur when the
uncertainty associated with the variable
consideration is subsequently resolved. In assessing
this, an entity shall consider both the likelihood and
the magnitude of the revenue reversal. Factors that
could increase the likelihood or the magnitude of a
revenue reversal include, but are not limited to, any
of the following:
 the amount of consideration is highly susceptible
to factors outside the entity’s influence (volatility in
a market, the judgement or actions of third parties,
weather conditions and a high risk of obsolescence
of the promised good or service)
 the uncertainty about the amount of consideration
is not expected to be resolved for a long period of
time
 the entity’s experience (or other evidence) with
similar types of contracts is limited, or that
experience (or other evidence) has limited predictive
value
 the entity has a practice of either offering a broad
range of price concessions or changing the payment
terms and conditions of similar contracts in similar
circumstances
 the contract has a large number and broad range
of possible consideration amounts
Significant Financing Component
In determining the transaction price, an entity shall
adjust the promised amount of consideration for the
effects of the time value of money if the timing of
payments agreed to by the parties to the contract
(either explicitly or implicitly) provides the customer
or the entity with a significant benefit of financing
the transfer of goods or services to the customer. In
those circumstances, the contract contains a
significant financing component. A significant
financing component may exist regardless of
whether the promise of financing is explicitly stated
in the contract or implied by the payment terms
agreed to by the parties to the contract.
Objective: to recognize revenue at an amount that
reflects the cash selling price of those goods or
services
A contract with a customer would not have a
significant financing component if any of the
following factors exist:
 the customer paid for the goods or services in
advance and the timing of the transfer of those
goods or services is at the discretion of the customer
 a substantial amount of the consideration
promised by the customer is variable and the
amount or timing of that consideration varies on the
basis of the occurrence or non-occurrence of a
future event that is not substantially within the
control of the customer or the entity
 the difference between the promised
consideration and the cash selling price of the good
or service arises for reasons other than the provision
of finance to either the customer or the entity, and
the difference between those amounts is
proportional to the reason for the difference
Non-cash Consideration
Customer consideration may be in the form of
goods, services or other non-cash consideration
(e.g., property, plant and equipment, a financial
instrument). When an entity (i.e., the seller or
vendor) receives, or expects to receive, non-cash
consideration, the fair value of the non-cash
consideration is included in the transaction price. An
entity will likely apply the requirements of IFRS 13
Fair Value Measurement or IFRS 2 Share-based
Payment when measuring the fair value of any non-
cash consideration.
Consideration Payable to Customer
Consideration payable to a customer includes cash
amounts that an entity pays, or expects to pay, to
the customer (or to other parties that purchase the
entity’s goods or services from the customer).
Consideration payable to a customer also includes
credit or other items (for example, a coupon or
voucher) that can be applied against amounts owed
to the entity (or to other parties that purchase the
entity’s goods or services from the customer). An
entity shall account for consideration payable to a
customer as a
reduction of the transaction price and, therefore, of
revenue unless the payment to the customer is in
exchange for a distinct good or service that the
customer transfers to the entity.
Classification of the different types of consideration
paid or payable to a customer
 payment for a distinct good or service
 reduction of the transaction price
 combination of both
Forms of consideration paid or payable to a
customer
 slotting fees
 co-operative advertising arrangements
 price protection
 coupons and rebates
 ‘pay-to-play’ arrangements
 purchase of goods or services
4. Allocate the transaction price to the performance
obligations in the contract
The objective when allocating the transaction price is
for an entity to allocate the transaction price to each
performance obligation (or distinct good or service)
in an amount that depicts the amount of
consideration to which the entity expects to be
entitled in exchange for transferring the promised
goods or services to the customer.
Once the separate performance obligations are
identified and the transaction price has been
determined, the standard generally requires an
entity to allocate the transaction price to the
performance obligations in proportion to their
stand-alone selling prices (relative stand-alone
selling price basis).
IFRS 15 indicates the observable price of a good or
service sold separately provides the best evidence of
stand-alone selling price. However, if a standalone
selling price is not directly observable, the entity will
need to estimate it. The standard suggests various
methods that might be used, including:
 adjusted market assessment approach –
benchmarking with adjustment of costs and margins
 expected cost plus a margin approach – forecasting
expected costs of satisfying a performance
obligation and adding an appropriate margin
 residual approach – total transaction price less the
sum of the observable stand-alone selling prices of
other goods or services promised in the contract
(only permissible when selling price is highly variable
or uncertain)
Where consideration is paid in advance or in arrears,
the entity will need to consider whether the contract
includes a significant financing arrangement and, if
so, adjust for the time value of money. A practical
expedient is available where the interval between
transfer of the promised goods or services and
payment by the customer is expected to be less than
12 months.
5. Recognize revenue when (or as) the entity satisfies
a performance obligation
Under IFRS 15, an entity only recognizes revenue
when it satisfies an identified performance
obligation by transferring a promised good or service
to a customer. A good or service is considered to be
transferred when the customer obtains control.
IFRS 15 states that “control of an asset refers to the
ability to direct the use of and obtain substantially all
of the remaining benefits from the asset”. The key
terms in this definition are explained as follows:
 ability – a customer must have the present right to
direct the use of, and obtain substantially all of the
remaining benefits from, an asset for an entity to
recognize revenue
 direct the use of – refers to the customer’s right to
deploy or to allow another entity to deploy that
asset in its activities or to restrict another entity
from deploying that asset
 obtain the benefits from – the ability to obtain
substantially all of the remaining benefits from an
asset for the customer to obtain control of it, directly
or indirectly in many ways, such as:
o using the asset to produce goods or services
(including public services);
o using the asset to enhance the value of other
assets;
o using the asset to settle a liability or reduce an
expense;
o selling or exchanging the asset;
o pledging the asset to secure a loan; or holding the
asset
Revenue is recognized as control is passed, either
over time or at a point in time.
Control Transferred Over Time
An entity recognizes revenue over time if one of the
following criteria is met:
 the customer simultaneously receives and
consumes all of the benefits provided by the entity
as the entity performs;
 the entity’s performance creates or enhances an
asset that the customer controls as the asset is
created; or
 the entity’s performance does not create an asset
with an alternative use to the entity and the entity
has an enforceable right to payment for
performance completed to date
Measuring Progress
Appropriate methods of measuring progress include
output methods and input methods. In determining
the appropriate method for measuring progress, an
entity shall consider the nature of the good or
service that the entity promised to transfer to the
customer.
Output Methods
Output methods recognize revenue on the basis of
direct measurements of the value to the customer of
the goods or services transferred to date relative to
the remaining goods or services promised under the
contract and include:
 surveys of performance completed to date
 appraisals of results achieved
 milestones reached
 time elapsed
 units produced
 units delivered
The disadvantages of output methods are that the
outputs used to measure progress may not be
directly observable and the information required to
apply them may not be available to an entity without
undue cost. Therefore, an input method may be
necessary.
Input Methods
Input methods recognize revenue on the basis of the
entity’s efforts or inputs to the satisfaction of a
performance obligation, such as:
 resources consumed
 labor hours expended
 costs incurred
 time elapsed
 machine hours used
If the entity’s efforts or inputs are expended evenly
throughout the performance period, it may be
appropriate for the entity to recognize revenue on a
straight-line basis.
Control Transferred at a Point in Time
If an entity does not satisfy its performance
obligation over time, it satisfies it at a point in time.
Revenue will therefore be recognized when control
is passed at a certain point in time. Factors that may
indicate the point in time at which control passes
include, but are not limited to:
 the entity has a present right to payment for the
asset;
 the customer has legal title to the asset;
 the entity has transferred physical possession of
the asset;
 the customer has the significant risks and rewards
related to the ownership of the asset; or
 the customer has accepted the asset
Other Topics
Warranties
The standard identifies two types of warranties:
 warranties that promise the customer that the
delivered product is as specified in the contract
(assurance-type)
 warranties that provide a service to the customer
in addition to assurance that the delivered product is
as specified in the contract (service-type) –
considered a performance obligation
Onerous Contracts
If an entity has a contract that is onerous, the
present obligation under the contract shall be
recognized and measured as a provision in
accordance with IAS 37. An onerous contract as a
contract in which the unavoidable costs of meeting
the obligations under the contract exceed the
economic benefits expected to be received under it.
The unavoidable costs under a contract reflect the
least net cost of exiting from the contract, which is
the lower of the cost of fulfilling it and any
compensation or penalties arising from failure to
fulfil it.
Customer Options for Additional Goods or Services
Many sales contracts give customers the option to
acquire additional goods or services. These
additional goods and services may be priced at a
discount or may even be free of charge. Options to
acquire additional goods or services at a discount
can come in many forms, including sales incentives,
volume-tiered pricing structures, customer award
credits (e.g., frequent flyer points) or contract
renewal options (e.g., waiver of certain fees,
reduced future rates).
When an entity grants a customer the option to
acquire additional goods or services, that option is
only a separate performance obligation if it provides
a material right to the customer that the customer
would not receive without entering into the contract
(e.g., a discount that exceeds the range of discounts
typically given for those goods or services to that
class of customer in that geographical area or
market). If the option provides a material right to the
customer, the customer has, in effect, paid in
advance for future goods or services. As such, the
entity recognizes revenue when those future goods
or services are transferred or when the option
expires.
Breakage and Prepayments for Future Goods or
Services
Entities may collect non-refundable payments from
customers for goods or services that the customer
has a right to receive in the future. However, a
customer may ultimately leave that right
unexercised (breakage). Retailers, for example,
frequently sell gift cards that are not completely
redeemed and airlines sometimes sell tickets to
passengers who allow the tickets to expire unused.
When an entity receives consideration that is
attributable to a customer’s unexercised rights, the
entity recognizes a contract liability equal to the
amount prepaid by the customer for the
performance obligation to transfer, or to stand ready
to transfer, goods or services in the future. Revenue
would normally be recognized when the entity
satisfies its performance obligation.
Non-refundable Upfront Fees
In certain circumstances, entities may receive
payments from customers before they provide the
contracted service or deliver a good. Upfront fees
generally relate to the initiation, activation or set-up
of a good to be used or a service to be provided in
the future. Upfront fees may also be paid to grant
access or to provide a right to use a facility, product
or service. In many cases, the
upfront amounts paid by the customer are non-
refundable. Examples include fees paid for
membership to a health club or buying club and
activation fees for phone, cable or internet services.
Entities must evaluate whether a non-refundable
upfront fee relates to the transfer of a good or
service. If it does, the entity is required to determine
whether to account for the promised good or service
as a separate performance obligation.
Repurchase Agreements
Some agreements include repurchase provisions,
either as part of a sales contract or as a separate
contract that relates to the goods in the original
agreement or similar goods. These provisions affect
how an entity applies the requirements on control to
affected transactions.
A repurchase agreement is a contract in which an
entity sells an asset and also promises or has the
option (either in the same contract or in another
contract) to repurchase the asset. The repurchased
asset may be the asset that was originally sold to the
customer, an asset that is substantially the same as
that asset, or another asset of which the asset that
was originally sold is a component. Repurchase
agreements generally come in three forms:
 an entity’s obligation to repurchase the asset (a
forward);
 an entity’s right to repurchase the asset (a call
option); and
 an entity’s obligation to repurchase the asset at
the customer’s request (a put option)
Consignment Arrangements
Entities frequently deliver inventory on a
consignment basis to other parties (e.g., distributor,
dealer). By shipping on a consignment basis,
consignors are better able to market products by
moving them closer to the end-customer. However,
they do so without selling the goods to the
intermediary (consignee).
Indicators that an arrangement is a consignment
arrangement include, but are not limited to, the
following:
 the product is controlled by the entity until a
specified event occurs, such as the sale of the
product to a customer of the dealer or until a
specified period expires;
 the entity is able to require the return of the
product or transfer the product to a third party (such
as another dealer); and
 the dealer does not have an unconditional
obligation to pay for the product (although it might
be required to pay a deposit)
Bill-and-hold Arrangements
In some sales transactions, the selling entity fulfils its
obligations and bills the customer for the work
performed, but does not ship the goods until a later
date. These transactions, often called bill-and-hold
transactions, are usually designed this way at the
request of the purchaser for a number of reasons,
including its lack of storage capacity or its inability to
use the goods until a later date.
For a customer to have obtained control of a product
in a bill-and-hold arrangement, all of the following
criteria must be met:
 the reason for the bill-and-hold arrangement must
be substantive (for example, the customer has
requested the arrangement)
 the product must be identified separately as
belonging to the customer;
 the product currently must be ready for physical
transfer to the customer;
 the entity cannot have the ability to use the
product or to direct it to another customer
Contract costs
Two types of contract costs (costs of obtaining or
fulfilling a contract)
 Costs of obtaining a contract – costs to be
capitalized are those costs that entities would not
have incurred had the contract not been obtained
(e.g., selling and marketing costs, bid and proposal
costs, sales commissions, and legal fees)
• To be recognized as an asset, the entity must
expect to recover such
• Practical expedient available
 Costs of fulfilling a contract – follow a two-step
process:
Forward or Call Option
Repurchase price < Original selling price = Lease
Repurchase price ≥ Original selling price =
Financing
Put Option
Repurchase price < Original selling price = Lease
(with significant economic incentive)
Repurchase price < Original selling price = Sale
with a
right to return
(without significant economic incentive)
Repurchase price ≥ Original selling price and
Repurchase price > Expected market value of
asset = Financing
Repurchase price ≥ Original selling price and
Repurchase price ≤ Expected market value of
asset = Sale with a
right to return
• Determine whether the accounting for such costs
is addressed by other standards (e.g., IAS 2
Inventories) and, if so, apply that guidance.
• Fulfillment costs not addressed by other standards
should be capitalized if all the following criteria are
met:
• costs relate directly to a contract or to an
anticipated contract the entity can specifically
identify (e.g., costs relating to services to be
provided under renewal of an existing contract or
costs of designing an asset to be transferred under a
specific contract not yet approved)
• costs generate or enhance resources of the entity
that will be used in satisfying (or in continuing to
satisfy) performance obligations in the future
• costs are expected to be recovered
These include costs such as direct labor, direct
materials, and the allocation of overheads that
relate directly to the contract. The asset recognized
in respect of the costs to obtain or fulfil a contract is
amortized on a systematic basis that is consistent
with the pattern of transfer of the goods or services
to which the asset relates.
Financial Statement Presentation
When either party to a contract has performed, an
entity shall present the contract in the statement of
financial position as a contract asset or a contract
liability, depending on the relationship between the
entity's performance and the customer's payment.
An entity shall present any unconditional rights to
consideration separately as a receivable.
If a customer pays consideration, or an entity has a
right to an amount of consideration that is
unconditional (i.e., a receivable) before the entity
transfers a good or service to the customer, the
entity shall present the contract as a contract liability
when the payment is made or the payment is due
(whichever is earlier). A contract liability is an
entity's obligation to transfer goods or services to a
customer for which the entity has received
consideration (or an amount of consideration is due)
from the customer.
If an entity performs by transferring goods or
services to a customer before the customer pays
consideration or before payment is due, the entity
shall present the contract as a contract asset,
excluding any amounts presented as a receivable. A
contract asset is an entity's right to consideration in
exchange for goods or services that the entity has
transferred to a customer. An entity shall assess a
contract asset for impairment in accordance with
IFRS 9. An impairment of a contract asset shall be
measured, presented and disclosed on the same
basis as a financial asset that is within the scope of
IFRS 9.
A receivable is an entity's right to consideration that
is unconditional. A right to consideration is
unconditional if only the passage of time is required
before payment of that consideration is due. For
example, an entity would recognize a receivable if it
has a present right to payment even though that
amount may be subject to refund in the future. An
entity shall account for a receivable in accordance
with IFRS 9. Upon initial recognition of a receivable
from a contract with a customer, any difference
between the measurement of the receivable in
accordance with IFRS 9 and the corresponding
amount of revenue recognized shall be presented as
an expense (for example, as an impairment loss).
Case A – Cancellable contract
On 1 January 20X9, an entity enters into a
cancellable contract to transfer a product to a
customer on 31 March 20X9. The contract requires
the customer to pay consideration of CU1,000 in
advance on 31 January 20X9. The customer pays the
consideration on 1 March 20X9. The entity transfers
the product on 31 March 20X9. The following journal
entries illustrate how the entity accounts for the
contract:
a. The entity receives cash of CU1,000 on 1 March
20X9 (cash is received in advance of performance)
Cash CU1,000
Contract liability CU1,000
b. The entity satisfies the performance obligation on
31 March 20X9
Contract liability CU1,000
Revenue CU1,000
Case B – Non-cancellable contract
The same facts as in Case A apply to Case B except
that the contract is non-cancellable. The following
journal entries illustrate how the entity accounts for
the contract:
a. The amount of consideration is due on 31 January
20X9 (which is when the entity recognizes a
receivable because it has an unconditional right to
consideration)
Receivable CU1,000
Contract liability CU1,000
b. The entity receives the cash on 1 March 20X9
Cash CU1,000
Receivable CU1,000
c. The entity satisfies the performance obligation on
31 March 20X9
Contract liability CU1,000
Revenue CU1,000
If the entity issued the invoice before 31 January
20X9 (the due date of the consideration), the entity
would not present the receivable and the contract
liability on a gross basis in the statement of financial
position because the entity does not yet have a right
to consideration that is unconditional.
Case C – Contract asset recognized for the entity's
performance
On 1 January 20X8, an entity enters into a contract
to transfer Products A and B to a customer in
exchange for CU1,000. The contract requires Product
A to be delivered first and states that payment for
the delivery of Product A is conditional on the
delivery of
Product B. In other words, the consideration of
CU1,000 is due only after the entity has transferred
both Products A and B to the customer.
Consequently, the entity does not have a right to
consideration that is unconditional (a receivable)
until both Products A and B are transferred to the
customer.
The entity identifies the promises to transfer
Products A and B as performance obligations and
allocates CU400 to the performance obligation to
transfer Product A and CU600 to the performance
obligation to transfer Product B on the basis of their
relative stand-alone selling prices. The entity
recognizes revenue for each respective performance
obligation when control of the product transfers to
the customer.
a. The entity satisfies the performance obligation to
transfer Product A
Contract asset CU400
Revenue CU400
b. The entity satisfies the performance obligation to
transfer Product B and to recognize the
unconditional right to consideration:
Receivable CU1,000
Contract asset CU400
Revenue CU600
QUIZZER - PFRS 15
1. To address inconsistencies and weaknesses, a
comprehensive revenue recognition model was
developed entitled the
a. Revenue Recognition Principle
b. Principle-based Revenue Accounting
c. Rules-based Revenue Accounting
d. Revenue from Contracts with Customers
2. The converged standard on revenue recognition
a. reduces the number of disclosures required for
revenue reporting
b. increases the complexity of financial statement
preparation
c. recognizes and measures revenue based on
changes in assets and liabilities
d. simplifies revenue recognition practices across
entities and industries
3. The first step in the process for revenue
recognition is to
a. determine the transaction price
b. identify the contract with the customer
c. allocate the transaction price to the separate
performance obligations
d. identify the separate performance obligations in
the contract
4. A contract
a. must be in writing to be an enforceable contract
b. is an agreement that creates enforceable rights
and obligations
c. is enforceable if each party can unilaterally
terminate the contract
d. does not need to have commercial substance
5. Revenue from a contract with a customer
a. is recognized when the customer receive the
rights to receive consideration
b. is recognized even if the contract is still wholly
unperformed
c. can be recognized even when a contract is still
pending
d. cannot be recognized until a contract exists
6. Signing of the contract by the two parties is
a. not recorded until one or both parties perform
under the contract
b. recorded at the time the contract is approved by
both parties
c. not recorded until both parties perform under the
contract
d. recorded immediately after the contract is signed
7. On January 15, 2014, Bella Vista Company enters
into a contract to build custom equipment for ABC
Carpet Company. The contract specified a delivery
date of March 1. The equipment was not delivered
until March 31. The contract required full payment
of P75,000 30 days after delivery. This contract
should be
a. recorded on January 15, 2014
b. recorded on March 1, 2014
c. recorded on March 31, 2014
d. recorded on April 30, 2014
8. A performance obligation exists when
a. a company receives the right to receive
consideration
b. a contract is approved and signed
c. a company provides a distinct product or service
d. a company provides interdependent product or
service
9. New Age Computers manufactures and sells
pagers and radio paging systems which include a 180
day warranty on product defects. It also sells an
extended warranty which provides an additional two
years of protection. On May 10, it sold a paging
system for P3,850 and an extended warranty for
another P1,200. The journal entry to record this
transaction would include
a. a credit to Service Revenue of P5,050
b. a credit to Service Revenue of P1,200
c. a credit to Sales of P3,850 and a credit to Service
Revenue of P1,200
d. a credit to Unearned Service Revenue of P1,200
10. Consideration paid or payable to customers
a. includes volume rebates which increases the cost
to the customer
b. includes discounts which reduces the cost of
purchases to the company
c. reduces the consideration received and the
revenue to be recognized
d. includes prompt settlement discount which
increases revenues
11. The transaction price for multiple performance
obligations should be allocated
a. based on selling price from the company’s
competitors
b. based on what the company could sell the goods
for on a standalone basis
c. based on forecasted cost of satisfying
performance obligation
d. based on total transaction price less residual value
12. A company has satisfied its performance
obligation when the
a. company has received payment for goods or
services
b. company has significant risks and rewards of
ownership
c. company has legal title to the asset
d. company has transferred physical possession of
the asset
13. When a customer purchases a product but is not
yet ready to accept delivery, this is referred to as
a. a repurchase agreement
b. a consignment
c. a principal-agent relationship
d. a bill-and-hold arrangement
14. The role of the agent in a Principal-Agent
relationship is to
a. arrange for the principal to provide goods or
services to a customer
b. provide the goods or services for a customer
c. market the principal goods and services to
prospective customers
d. develop and maintain goodwill of the principal’s
customers
15. Marle Construction enters into a contract with a
customer to build a warehouse for P850,000 on
March 30, 2016 with a performance bonus of
P50,000 if the building is completed by July 31, 2016.
The bonus is reduced by P10,000 each week that
completion is delayed. Marle commonly includes
these completion bonuses in its contracts and, based
on prior experience, estimates the following
outcomes:
Completed by
Probability
July 31, 2016
65%
August 7, 2016
25%
August 14, 2016
5%
August 21, 2016
5%
The transaction price for this transaction is
a. P895,000
b. P850,000
c. P552,500
d. P585,000
16. On June 1, 2017, Johnson & Sons sold equipment
to James Landscaping Services. In exchange for a
zero-interest bearing note with a face value of
P55,000, with payment due in 12 months. The fair
value of the equipment on the date of sale was
P50,000. The total revenue to be recognized on this
transaction in 2017 is
a. P55,000
b. P5,000
c. P50,000
d. P52,917
17. Meyer & Smith is a full-service technology
company. They provide equipment, and installation
services as well as training. Customers can purchase
any product or service separately or as a bundled
package. Container Corporation purchased
computer equipment, installation and training for a
total cost of P120,000 on March 15, 2016. Estimated
standalone fair values of the equipment, installation,
and training are P75,000, P50,000, and P25,000
respectively. The transaction price allocated to
equipment, installation and training is
a. P75,000, P50,000, P25,000 respectively
b. P40,000, P40,000, P40,000 respectively
c. P120,000 for the entire bundle
d. P60,000, P40,000 and P20,000 respectively
18. On August 5, 2016, Famous Furniture shipped 20
dining sets on consignment to Furniture Outlet, Inc.
The cost of each dining set was P350 each. The cost
of shipping the dining sets amounted to P1,800 and
was paid for by Famous Furniture. On December 30,
2016, the consignee reported the sale of 15 dining
sets at P850 each. The consignee remitted payment
for the amount due after deducting a 6%
commission, advertising expense of P300, and
installation and setup costs of P390. The total profit
on units sold for the consignor is
a. P11,295
b. P4,695
c. P6,045
d. P9,945
Seasons Construction is constructing an office
building under contract for Cannon Company. The
contract calls for progress billings and payments of
P1,240,000 each quarter. The total contract price is
P14,880,000 and Seasons estimates total costs of
P14,200,000. Seasons estimates that the building will
take 3 years to complete, and commences
construction on January 2, 2015.
19. At December 31, 2015, Seasons estimates that it
is 30% complete with the construction, based on
costs incurred. What is the total amount of Revenue
from Long-Term Contracts recognized for 2015 and
what is the balance in the Accounts Receivable
account assuming Cannon Company has not yet
made its last quarterly payment?
Revenue Accounts Receivable Revenue Accounts
Receivable
a. P 4,960,000 P 4,960,000
b. P 4,260,000 P 1,240,000
c. P 4,464,000 P 1,240,000
d. P 4,260,000 P 4,960,000
20. At December 31, 2016, Seasons Construction
estimates that it is 75% complete with the building;
however, the estimate of total costs to be incurred
has risen to P14,400,000 due to unanticipated price
increases. At December 31, 2016, Seasons estimated
it was 30% complete. What is the total amount of
Construction Expenses that Seasons will recognize
for the year ended December 31, 2016?
a. P 10,800,000
b. P 6,300,000
c. P 6,390,000
d. P 6,540,000
21. At December 31, 2016, Seasons Construction
estimates that it is 75% complete with the building;
however, the estimate of total costs to be incurred
has risen to P14,400,000 due to unanticipated price
increases. What is reported in the balance sheet at
December 31, 2016 for Seasons as the difference
between the Construction in Process and the Billings
on Construction in Process accounts, and is it a debit
or a credit?
Difference between the accounts Debit/Credit
Difference between the accounts Debit/Credit
a. P 3,380,000 Credit
b. P 1,240,000 Debit
c. P 880,000 Debit
d. P 1,240,000 Credit
22. Seasons Construction completes the remaining
25% of the building construction on December 31,
2017, as scheduled. At that time the total costs of
construction are P15,000,000. At December 31,
2016, the estimates were 75% complete and total
costs of P14,400,400. What is the total amount of
Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize
for the year ended December 31, 2017?
Revenue Expenses Revenue Expenses
a. P 14,880,000 P 15,000,000
b. P 3,720,000 P 3,750,000
c. P 3,720,000 P 4,200,000
d. P 3,750,000 P 3,750,000
ACCOUNTING FOR EXPENSES
Basic Concepts
• Expenses – are decreases in economic benefits
during the accounting period in the form of outflows
or depletions of assets or incidences of liabilities that
result in decreases in equity, other than those
relating to distributions to equity participants.
(Conceptual Framework)
• Expenses are outflows or other using up of assets
of an entity or incurrences of liabilities (or a
combination of both) during a period from delivering
or producing goods, rendering services, or other
activities that constitute the entity’s ongoing major
or central operations. (FASB SFAC 3).
Discussion: The definition of expenses encompasses
losses as well as those expenses that arise in the
ordinary activities of the enterprises. Expenses that
arise in the ordinary activities of the enterprise
include, for example, cost of sales, wages and
depreciation. They usually take the form of an
outflow of assets such as cash and cash and cash
equivalents, inventory, property, plant and
equipment.
Losses represent other items that meet the
definition of expenses and may, or may not, arise in
the course of the ordinary activities of the
enterprise. Losses represent decreases in economic
benefits and as such, they are different in nature
from other expenses. They include, for example,
those resulting from disasters such as fire and flood,
as well as those arising on the disposal of non-
current assets.
The definition of expenses also includes unrealized
losses, such as those arising from the effects of
increases in the rate of exchange for a foreign
currency in respect of the borrowings of an
enterprise in that currency.
When losses are recognized in the income
statement, they are usually displayed separately
because knowledge of them is useful for the purpose
of making economic decisions. Losses are often
reported net of related income. (Conceptual
Framework)
Characteristics
1. Relation to assets – A business entity never
acquires expenses as such. It always acquires assets,
although, for convenience, an expenditure may be
immediately recorded as an expense if acquisition
and consumption of benefits take place in the same
accounting period.
2. Assets Outflows – Expenses are asset outflows
(decreases in assets) that result from carrying out
activities constituting the entity’s ongoing major or
central operations. In the earning process, asset
outflows (expenses) are made to generate asset
inflows (revenue).
3. Decreases in Owners’ Equity – Expenses decrease
owners’ equity because they represent sacrifices or
efforts made to generate revenue.
4. Gross Concept – Like revenue, expense is a gross
rather than a net concept. It is measured by the
gross decreases in assets or gross increases in
liabilities.
Related Terms
A. Loss – Losses are decreases in equity (net assets)
from peripheral or incidental transactions of an
entity and from all other transactions and other
events and circumstances affecting the entity during
a period except those that result from expenses or
distribution to owners (FASB).
B. Revenue offsets – Revenue offsets are
adjustments of the recorded amount of revenue
representing amounts that will not be collected or
realized. They are shown as direct deductions from
gross revenue. Examples are sales discounts, returns
and allowances.
Expenses vs. Costs
Accountants customarily use the term “cost” to
describe assets and expenses. Expenses are the costs
that are associated with the revenue of the period.
Costs to be associated with future revenue or
otherwise to be associated with future accounting
periods are deferred to future periods as assets.
Costs associated with past revenue or otherwise
associated with prior periods are adjustments of the
expenses of those prior periods.
Expenses vs. Losses
The term “expense’ has both broad and narrow
meaning. Broadly defined, it refers to all expired
costs which are deducted from revenue to
determine net income. Under this concept, losses
are part of expenses. In a narrow sense, expense is
distinguished from loss. Accountants use the term
“loss” in two ways:
• to describe the excess of expenses over revenue
for a period, such as “net loss:” if expenses exceed
revenue, and
• to describe unfavorable events not related to
normal operations of the entity, such as “loss on sale
of plant assets” or “loss on inventory market
decline.”
Both expenses and loss (in the second sense) are
expired costs. They differ as follows:
Expenses
Losses
1. Result from ongoing major operations
Result from incidental activities or unfavorable
effects of the environment
2. Contribute to the production of revenue
Do not provide any economic benefits and are not
directly or indirectly associated with revenue.
3. Normal and recurring
Irregular, nonrecurring and unplanned.
4. Voluntary incurred
Involuntary
Other Matters
A. Events giving rise to expenses
• Exchanges
• Reciprocal transfers with others owners
• External events other than transfers
• Production
• Casualties
B. Important classes of expenses
• Costs of assets used to produce revenue (for
example, cost of goods sold, selling and
administrative expenses and interest expense).
• Expenses from nonreciprocal transfers and
casualties, for example, taxes, fires and thefts).
• Costs of assets other than products (for example,
plant and equipment or investments in other
companies) disposed of,
• Costs incurred in unsuccessful efforts, and
• Certain declines in market prices (such as in
inventories held for sale).
C. Expenses do not include
• Repayments of borrowings
• Expenditures to acquire assets
• Distributions to owners (including acquisition of
treasury stock)
• Adjustments of expenses of prior periods
1. Recognition of Expenses
Expenses are recognized in the income statement
when a decrease in future economic benefits related
to a decrease in an asset or an increase of a liability
has arisen and can be measured reliably.
Discussion: Recognizing expenses is essentially a
problem of directly or indirectly relating expired
economic benefits with revenues recognized during
an accounting period. We call this the “matching
process”.
Matching involves finding a satisfactory basis of
associating efforts or sacrifices (expenses) with
rewards or accomplishments (revenues). In the
matching process, accountants first recognize the
revenue realized in a given period and then relate to
these the expenses representing efforts or sacrifices
made to earn the recognized revenues. The result of
this process is the net income or loss for the period.
2. Pervasive Expense Recognition Principles
The pervasive expense recognition principles specify
the bases for recognizing the expenses that are
deducted from revenue to determine the net income
or loss of a period. They are as follows:
A. Associating Cause and Effect
Expenses are recognized in the income statement on
the basis of a direct association between the costs
incurred and the earning of specific items of income.
Discussion: Associating cause and effect is the ideal
way of matching revenues and expenses. This
involves the simultaneous or combined recognition
of revenues and expenses that result directly and
jointly from the same transactions or other events.
Examples
• The various components of expense making up the
cost of goods sold are recognized at the same time
as the income derived from the sale of goods.
• Commissions paid to personnel can be traced to
specific sales revenue.
B. Systematic and Rational Allocation
When economic benefits are expected to arise over
several accounting periods, and the association with
income can only be broadly or indirectly determined,
expenses are recognized in the income statement on
the basis of systematic and national allocation
procedures.
Discussion: When costs cannot be associated with
revenue on the basis of cause and effect, systematic
and rational allocation should be attempted. This
form of expense recognition matches revenues and
expenses indirectly. Many assets yield their benefits
to an enterprise over several accounting periods.
Expenses and revenues are presumed to be
indirectly associated because economic benefits
were consumed in the same period in which
revenues were realized.
Example
• The using up of assets such as property, plant and
equipment, patents and trademarks. The expense
referred to as depreciation or amortization.
C. Immediate Recognition
An expense is recognized immediately in the income
statement when an expenditure produces no future
economic benefits or when, and to the extent that,
future economic benefits do not qualify or, cease to
qualify for recognition in the balance sheet as an
asset.
Discussion: When costs cannot be associated with
revenue on the basis of cause and effect, systematic
and rational allocation should be attempted. This
form of expense recognition matches revenues and
expenses indirectly. Many assets yield their benefits
to an enterprise over several accounting periods.
Expenses and revenues are presumed to be
indirectly associated because economic benefits
were consumed in the same period in which
revenues were realized.
An expense is also recognized in the income
statement in those cases when a liability is incurred,
without the recognition of an asset, as when a
liability under a product warranty arises.
Example: Some costs are associated with the current
accounting period as expenses because
• Costs incurred during the period provide no
discernible future benefits
o When incurred in nonreciprocal transfers to
outside parties – example, amounts paid to settle
lawsuits
o When benefits fail to materialize at the time costs
are incurred – example, cost of resources used in
unsuccessful efforts
• Costs recorded as assets in prior periods no longer
provide discernible benefits
o When costs carried as assets in prior periods expire
without any benefits, a loss should be recognized in
the period in which the cost expiration too place or
is discovered – examples are patents determined to
be worthless and long-lived assets destroyed by fire,
flood or other casualty.
• Allocating costs either on the basis of association
with revenue or among several accounting periods is
considered to serve no useful purpose
o Even if future periods are benefited, it may not be
worthwhile to match costs with future revenues on
the basis of cause and effect association or rational
and systematic allocation. In such cases, the costs
are immediately charged to expense as a practical
expedient.
o Officers’ salaries are charged to expense when
incurred even though part of the officers’ time and
efforts are devoted to production activities or
planning for future periods.
o Advertising expenditures are accorded a similar
treatment because the expected future benefits are
difficult to ascertain, measure, and allocate.
3. Measurement of Expenses
Expense is measured by the proportionate cost or
other recorded amount of expired asset benefits
given accounting recognition during the period.
Discussion: Since expenses are the expired service
potential of assets, the basis for measuring expenses
is the amount at which assets are valued. Assets are
stated primarily at acquisition costs, therefore
expenses are measured primarily in terms of the
acquisition cost of assets whose service potential has
expired.
When assets are written up to appraised values, the
basis for measuring expenses should be the
appraised value of the asset, rather than its
acquisition cost.
QUIZZER - EXPENSES
Nature and Characteristics
1. These are decreases in economic benefits during
the accounting period in the form of outflows or
depletion of assets or incidences of liabilities that
result in decreases in equity, other those relating to
distributions to equity participants
a. Cost
b. Expense
c. Loss
d. Expenditure
2. Expenses may be best described as
a. Costs which have no discernible benefit to future
operations
b. The consideration given to acquire goods or
services
c. Costs that are associated with revenues of a given
period
d. Gross decreases in owner’s equity
3. Which of the following statements is (are) true?
I. Expenses are synonymous with expenditures
II. All expenses are expired costs
III. All expired costs are expenses
IV. Expense in the broadest sense, includes expired
costs and losses that are deducted from revenue, in
a narrow sense, expense is distinguished from loss
a. I and III are true
b. II and IV are true
c. III and IV are true
d. All statements are true
4. Which of the following is not a characteristic of
expenses?
a. Expense is a gross rather than a net concept
b. Expenses decrease owners’ equity
c. They are gross increases in assets or gross
decreases in liabilities resulting from the firm’s
profit-directed activities
d. They involve acquiring assets and using goods and
services to obtain revenue
5. The term “expired costs” means
a. Excess of all expenses over revenue for one
accounting period
b. Cost which is deductible from revenue
c. Cost having no discernible benefit to future
operations
d. The amount of the consideration measured in
money given in order to acquire goods or services
6. An expired cost arising from using or consuming
goods or services in the process of obtaining revenue
is identified as
a. Expense
b. Expenditure
c. Disbursement
d. Obligation
7. Costs which are not applicable to production of
future revenue and for that reason are treated as
deductions from current revenue or are charged
against retained earnings are
a. Expired costs
b. Expenses
c. Revenue expenditure
d. Cost outlay
8. An expiration of cost which is incurred without
compensation or return and is not absorbed as costs
of revenue is called
a. Deferred charge
b. Deferred credit
c. Indirect costs
d. Loss
9. The expense of a period include all the following
except
a. Costs directly associated with the revenue of the
current period
b. Costs directly associated with past revenues
c. Costs associated with the current period on some
basis other than a direct relationship with revenue
d. Costs that cannot, as a practical matter, be
associated with any other period.
10. Which of the following involves recognizing an
expense?
a. Factory supplies are consumed in production
b. Office supplies are consumed in operations
c. A sales discount is granted to customer who pays
within the discount period
d. Previously unrecorded wages are paid to laborers
engaged in constructing a building for company’s
own use
11. Which of the following transactions would
require the recording of an expense?
a. Cash paid to a supplier in settlement of a
previously recorded promise to pay when some
advertising supplies were purchased
b. Cash paid to office employees for services
rendered during the month
c. Cash paid to acquire a new truck to be used in the
business
d. Cash paid to settle an unrecorded liability for
factory supplies received and already consumed.
12. Which of the following is not a loss or an
expense?
a. Shrinkage in the net realizable value of accounts
receivable as measured by an estimate for
uncollectible accounts
b. The cost of radio/TV time announcing a new
product
c. Depreciation on trucks used to construct a
building for the company’s own use
d. A drop in the net realizable value of inventory
below cost
13. The following statements relate to expenses.
Which statement is true?
a. The fact that an expense is recognized on the
income statement indicates that an equivalent
outlay of cash has been made in the same period
b. Losses are asset expirations that are incurred
voluntarily to produce revenue
c. Expense accounts usually have debit balances and
show the cost associated with producing revenue
during an accounting period
d. The price paid for a plant asset is actually a
prepayment of an expense
14. Management reported P 30,000 as imputed costs
for last month. These should be taken up as
a. A capital expenditure
b. A revenue expenditure
c. Offset against stockholders’ equity
d. None of these
15. In expense recognition principle, which of the
following is not an important class of expense?
a. Expenditures to acquire assets
b. Expenses from non-reciprocal transfers and
casualties
c. Cost of assets other than products disposed of
d. Declines in market prices of inventories held for
sale
16. In accordance with Pervasive Measurement
Principles, which of the following items accurately
belong to the important classes of expenses?
A. Expenditures to acquire assets
B. Distribution to owners
C. Costs of assets other than products disposed of
D. Costs incurred in unsuccessful efforts
a. A, B, and C only
b. C and D only
c. B and D only
d. All of these
17. An example of expense that arises from
production is
a. Abnormal spoilage
b. Salary of plant superintendent
c. Taxes on factory building
d. All of the above
18. Expenses cannot arise from
a. External events other than transfers
b. Nonreciprocal transfers to owners
c. Production
d. Casualties
19. Losses on writing down inventory from cost to
market are usually considered to be
Operating Losses Non-operating losses
a. Yes No
b. No Yes
c. Yes Yes
d. No No
20. Which of the following describes the distinction
between expenses and losses?
a. Losses are reported net-of-related-tax-effect
whereas expenses are not reported net-of-tax
b. Losses are extraordinary changes whereas
expenses are ordinary charges
c. Losses are material items whereas expenses are
immaterial items
d. Losses result from peripheral or incidental
transactions whereas expenses result from ongoing
major or central operations of the entity.
Capital vs. Revenue Expenditures
21. The primary factor that distinguishes a capital
from a revenue expenditure is
a. The period in which the expenditure was made
b. Whether or not the expected benefit will extend
beyond the current accounting period
c. The account to be charged
d. The materiality of the expenditure
22. Which of the following is not a capital
expenditure?
a. Purchased typewriter for office use
b. Repaired roof damaged by typhoon
c. Replaced major part of a machine which increased
its production capacity
d. Paid for the services of engineers to test a new
high-speed lather recently acquired.
23. The best general criterion for deciding whether a
cost should be included in the value of a new asset is
to determine
a. If the cost was necessarily incurred in the process
of getting the asset to a usable state.
b. If the cost was optional or a part of the base
model price
c. If the cost was incurred before or after the asset
arrived at the ultimate place for use
d. All of the above
24. Which of the following expenditures may be
properly capitalized?
a. Expenditure for massive advertising campaign
b. Insurance on plant during construction
c. Research and development related to a long-term
asset which is giving the company a competitive
advantage
d. Title search and other legal costs related to a
piece of property which was not acquired
Matching Concept
25. After the revenues for an accounting period have
been determined, the costs directly or indirectly
associated with these revenues must be deducted to
measure net income. This is called
a. Income statement preparation
b. Profit and loss preparation
c. Matching process
d. Bookkeeping process
26. The following statements relate to the income
determination process. Which statement(s) is (are)
true?
I. Revenue for a period is generally determined
independently by applying the realization principles
II. Expenses are determined by applying the expense
recognition principles on the basis of the
relationships between acquisition costs and either
the independently determined revenue of
accounting periods
III. The term matching is used in accounting to
describe the entire process of income
determination, or in a more limited sense, to the
process of expense recognition.
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
27. The accounting concept of matching is best
demonstrated by
a. Not recognizing any expense unless some revenue
is realized
b. Associating effort (cost) with accomplishment
(revenue)
c. Recognizing prepaid rent received as revenue
d. Establishing a Reserve for Possible Future Market
Decline in Inventory Account
28. The term “matching costs and revenues” means
a. That all expenses should be allocated to
accounting periods on the basis of the effect on net
income
b. That costs should be carried forward to future
accounting periods if they have not resulted in
revenue during the current accounting period
c. That if costs are charged off as expenses in the
accounting period when they are actually incurred,
they will be matched properly with the revenues
actually earned during that accounting period
d. That costs which can be associated directly with
specific revenue should be carried forward in the
balance sheet until the associated revenue is
recognized
29. Why are certain costs of doing business
capitalized when incurred and then depreciated or
amortized over subsequent accounting periods?
a. To reduce the income tax liability
b. To aid management in the decision-making
process
c. To match the costs of production with revenues as
earned
d. To adhere to the accounting concept of
conservatism
30. Current accounting practice does not strictly
apply the matching principle to
a. Wasting assets
b. Research and development
c. Trademarks
d. Equipment
31. Costs should be charged against revenue in the
period the costs are incurred except
a. For manufacturing overhead costs for a product
manufactured and sold in the same accounting
period
b. When the costs will not benefit any future
c. For costs from idle manufacturing capacity
resulting from an unexpected plant shutdown
d. For costs of normal shrinkage and scrap incurred
for the manufacture of a product in inventory
32. If losses and prior period adjustments are
ignored, an exception to the general rule that costs
should be charged to expense in the period incurred
is
a. Depreciation charges on equipment used in the 3) Cost of sales
construction of a new building for the company’s 4) Insurance premiums
own use 5) Utilities expense
b. Factory overhead costs on a product 6) Loss on inventory write-down
manufactured and sold during the accounting period 7) Doubtful accounts expense
c. Idle manufacturing capacity costs when a plant is 8) Research and Development expense
closed unexpectedly due to a strike 9) Depreciation of building – leased asset
d. The cost of abnormal shrinkage and scrap incurred 10) Impairment loss
in the manufacture of a product included in ending Required: Indicate how many items were recognized
inventory as expense under each of the following principles:
33. The matching concept is least relevant to Associating Cause & Effect
accounting for a Systematic & Rational Allocation
a. Manufacturing corporation with a three-month Immediate Recognition
production cycle a.
b. Manufacturing corporation with a fifteen-month 3 items
production cycle 4 items
c. Joint venture organized to subdivide and market 3 items
lots in a large realty development b.
d. Joint venture organized to market this year’s 3 items
mango crop from 20 hectares of trees 3 items
34. Which of the following items is NOT important in 4 items
the matching of expenses revenues under the c.
accrual basis of accounting? 5 items
a. Amortization of patent costs 2 items
b. Estimated allowance for uncollectible accounts 3 items
c. Beginning and ending inventory accounts d.
d. Cash receipts 4 items
35. The determination of expenses of an accounting 3 items
period is based largely on the application of the 3 items
a. Cost principle 39. Which of the following is not an example of the
b. Matching principle expense recognition principle of associating cause
c. Realization principle and effect?
d. Consistency principle a. Freight out
Expense Recognition Principles b. Salesmen’s commission
36. The following are theoretical basis for c. Product guaranty expense
recognition of expenses except d. Repairs and maintenance
a. Associating effort with accomplishment 40. Which of the following is a deferred cost that
b. Recognizing expense at the earliest possible time should be amortized over the periods estimated to
c. Ensuring maximum profits be benefited?
d. Allocating cost to all periods benefited a. Three years’ prepayment on an operating lease
37. Which of the following is the rationale for contract for the use of a building.
deducting unsold inventory at the end of the period b. Security deposit representing two-months’ rent
from goods available for sale in order to determine on leased office space
the cost of sales to be matched against revenue from c. Advance from customer to be returned when sale
sales? is completed
a. Associating cause and effect d. Property tax for this year payable next year
b. Systematic and rationale allocation 41. Which of the following is expensed under the
c. Immediate recognition principle of systematic and rational allocation?
d. Partial recognition a. Salesmen’s monthly salaries
38. The following costs were charged to expense in b. Transportation to customers
the current period c. Insurance premiums
1) Loyalty rewards expense d. Electricity to light the office building
2) Patent amortization
42. Whenever costs or expenses cannot be
reasonably associated with specific products but can
be associated with specific revenues, the cost should
be
a. Expensed in the period in which the related
revenue is recognized
b. Charged to expense in the period incurred
c. Allocated to specific products based on the best
estimate of the production processing time
d. Capitalized and amortized over a period not to
exceed 24 months
43. Some costs cannot be directly related to
particular revenues but are incurred to obtain
benefits in the period in which the costs are
incurred. An example of such cost is
a. Electricity used to light offices
b. Transportation to customers
c. Cost of merchandise sold
d. Sales commission
44. What is the underlying concept that supports the
immediate recognition of a loss?
a. Consistency
b. Matching
c. Judgement
d. Conservatism
45. Sean Company purchased in patent at the
beginning of 2008 and amortizes it over a life of ten
years. At the end of year 2010, the patent was
determined to be worthless and was thus written off
from the books. Which of the following expense
recognition principle was applied by Sean Company
in 2010 on the derecognition of patents from the
books?
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
d. Materiality
46. Which of the following cost items would be
matched with current revenues on a basis other than
association of cause and effect?
a. Goodwill
b. Sales Commission
c. Cost of goods sold
d. Purchase on account
47. The current method of accounting for research
expense is best described by
a. Associating cause and effect
b. Income minimization
c. Immediate recognition
d. Systematic and rational allocation
48. What method allocates costs to expense in
proportion to elapsed time?
a. Unit output method
b. Straight line method
c. Appraisal or inventory method
d. Replacement method
49. This is a method of allocating costs whereby the
earliest current costs are charged out first to
expense of the period and the units remaining on
hand are reported at the current costs.
a. First-in, first-out
b. Moving weighted average
c. Last-in, first-out
d. Last invoice price
50. An investment in shares of stock a company that
has dissolved due to bankruptcy has to be written off
as expense (loss) according to which of the following
principles?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Conservatism
51. Simultaneous recognition of both revenue and
an expense may result from certain transactions or
events. An example of an expense so recognized
may be
a. Expired portion of prepaid insurance
b. Salesperson’s monthly salaries
c. Transportation to customers
d. Electricity used to light offices
52. When should an indicated loss on a long-term
construction contract be recognized under the
completed contract method and the percentage of
completion method, respectively?
Completed-contract Percentage-of-completion
a. Immediately Immediately
b. Immediately Over the life of the project
c. Completion of contract Over the life of the project
d. Completion of contract Immediately
53. If losses and prior period adjustments are
ignored, an exception to the general rule that costs
should be charged to expense in the period incurred
is
a. Depreciation charged on equipment used in the
construction of a new building for the company’s
own use.
b. Salaries paid to corporate officers
c. Idle manufacturing capacity costs when a plant is
closed unexpectedly due to strike
d. Unabsorbed factory overhead incurred in the
manufacture of a product included in ending
inventory
54. Advertising costs are typically treated as
expenses of the period in which incurred under the
expense recognition principle of
a. Matching
b. Cause and Effect Association
c. Immediate Recognition
d. Systematic allocation
55. Depreciation of a long-lived asset is a process of
a. Providing for its eventual replacement
b. Recognizing the effect of wear and tear
c. Allocating its cost over its estimated useful life
d. Partial recognition
END OF MODULE 4