Mark Jayson M.

Mortel

Chapter 2
1. What is the meaning of Conceptual Framework?
A complete, comprehensive and single document promulgated by the international
accounting stantards board.

2. What are the basic purposes of the Conceptual Framework?

a. To assist the FRSC in developing accouting standards and reviewing existing standards.
b. To assist preparers of financial statement in applying accounting stantards and in
dealing with issues not yet covered by GAAP.
c. To assist the FRSC in the review and adoption of International Financial
Reporting Stantards. d. To assist users of financial statements in interpreting the information
contained in the financial statements.
e. To assist auditors in forming an opinion as to whether financial
statements conform with Philippine GAAP.
f. To provide information to those interested in the work of the
FRSC in the formulation of PFRS.

3. Explain the authoritative status of the Conceptual Framework.

In the absence of a standard or an interpretation that specifically applies to a transaction,
management shall consider the applicability of the Conceptial Framework in developing
and applying an accouting policy that results in information that is relevant and reliable.

4. Explain the “primary users” and their information needs.

The parties to whom general purpose financial reports are primarily directed. Such users
cannot require reporting entities to provide information directly to them and therefore must rely on
general purpose financial reports for much of the financial information they need.

5. Explain the “other users” and their information needs.

Users of financial information other than the existing and potential investors, lenders
and other creditors.

6. What is the scope of the Conceptual Framework?

a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. Defination, regognition and measurement of the elements from which
financial statements are constructed.
d. Concepts of capital and capital maintenance

7. Explain financial reporting.

The privision of financial information about an entity to external user that is useful to
them in making economic decisions and for assessing the effectiveness of the entity’s
management.

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8. Distinguish financial reports and financial statements.
The principal way of providing financial information to external users is through the
annual financial statements.

9. What is the overall objective of financial reporting?

To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing resources to
the entity.

10. What are the specific objectives of financial reporting?

a. To provide information useful in making decisions about providing resources to the
entity. b. To provide information useful in assessing the prospects of future net cash flows to the
entity. c. To provide information about entity resources, claims and changes in resources and
claims.

11. Explain financial position.

Information about the enitity’s economic resources and the claims against the reporting
enitity.

12. Explain liquidity and solvency.

Liquidity is the availability of cash in the near future to cover currently maturing
obligations, while solvency is the availability of cash over a long term to meet financial commitments
when they fall due.

13. Explain financial performance.

The level of income earned by the entity throught the efficent and effective use of its
resources.

14. Explain accrual accouting.

The effects of transactions and other events are recognized when they occur and not as
cash is is received or paid.

15. What are the limitations of financial reporting?

a. General purpose financial reports do not and cannot provide all of the information
that existing and potential investors, lenders and other creditors need.
b. General purpose financial reports are not designed to show the value of an entity but
the reports provide information to help the primary users estimate the value of the entity.
c. General purpose financial reports are not designed to show the value of an
entity but the reports provide common information to users and cannot accommodate every request
for information.
d. To a large extent, general purpose financial reports are based on estimate and
judgment rather than exact depiction.

16. Explain accounting assumptions.

The basic notions fundamental premesis on which the accounting process is based.
Accounting assumptions are also known as postulates.

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17. Explain going concern assumption.
Means that in the absence of evidence to the contraru. The accounting entity is viewd as
continuing in operation indefinitely.

18. Explain accouting entity assumpation.

The entity is separate from the owners, managers, and employees who constitute the
entity.

19. Explain time period assumption.

A completely accurate report on the financial position and performance of an entity
cannot be obtained until the entity is finally dissolved and liquidated.

20. Explain monetary unit assumption.

There are two aspects of monetary unit assumption. The quantifiability aspect means
that the assets, liabilities, equity, income and expenses should be stated in terms of a unit of
measure which is the peso in the philippines. The other one is the stability of the peso assumption,
means that the purchasing power of the peso is stable or constant and that its instability is insignificant
and therefore may be ignored.

Chapter 3
1. What is the meaning of qualitative characteristics of financial information?
The qualities or attributes that make financial accounting information useful to the
users.

2. What are fundamental qualitative characteristics?

Information must be both relevant and faithfully represented if it is to be useful.

3. What are the two fundamental qualitative characteristics?

Releveance and faithful representation.

4. Explain the most efficient and effective process of applying the fundamental qualitative
characteristics.
First, identify an economic phenomenon that has the potential to be useful.
Second, identify the type of information about the phenomenon that would be
most relevant and can be faithfully represented.

5. Explain relevance.
The financial information must be capable of making a difference in the decisions made
by users.

6. What are the two ingredients of relevance?

Predictive value and confirmatory value.

7. Explain predictive value.

Financial information has predictive value if it can be used as an input to processes
employed by users to predict future outcome.

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8. Explain confirmatory value.
Financial information has confirmatory value if it provides feedback about previous
evaluations.

9. Explain materiality.
A practical rule in accounting which dictates that strict adherence to GAAP is not
required when the items are not significat enough to affect the evaluation, decision and fairness of the
financial statements.

10. When is an item material?

An item is material if knowledge of it would affect or influence the decision of the
informed users of the financial statements.

11. What are the factors that may be considered in determining materiality?
The relative size and nature of an item are considered.

12. Explain the fundamental qualitative characteristic of faithful representation.

Means that financial reports represent economic phenomena or transactions in words
and numbers.

13. What are the three ingredients of faithful representation?

Completeness, neutrality and free from error.

14. Explain completeness of financial information.

The result of adequate disclosure standard or the principle of full disclosure.

15. What is the stantard of adequate disclosure?

Means that all significant and relevant information leading to the preparation of financial
statements shall be clearly reported.

16. Explain notes to financial statements in relation to completeness of financial information.

Provide narratice description or disaggregation of the items presented in the financial
statements and information about items that do not qualify for recognition.

17. Explain neutrality of financial information.

A neutral depiction is not slanted, weighted, emphasized, de-emphasized or otherwise
manipulated to increase the probability that financial information will be
received favorable or unfavorably by users.

18. Explain free from error financial information.

Means there are no errors or omissions in the description of the phenomenon or
transaction, and the process used to produce the reported information has been selected and applied
with no errors in the process.

19. Explain the concept of substance over form.

If information is to represent faithfully the transactions and other events it purports to
represent, it is necessary that the transactions and events are accounted in accordance with
their substance and reality and not merely their legal form.

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20. What is conservatism?
When alternatives exist, the altermatove which has the least effect on equity should be
chosen.

21. What are some expressions of conservatism?

“Anticipate no profit and provide for probable and measureble”

22. What is prudence?

The desire to exercise care caution when dealing with the uncertainties in the
measurement process such that assets or income are not overstated and liabilities or expenses are no
understated.

23. What are enchancing qualitative characteristics?

Comparability, understandability, verifiability and timeliness.

24. Enumerate the four enchancing qualitative characteristics.

a. Comparability means the ability to bring together for the purpose of noting points of
likeness and difference.
b. Understandability requires financial information must be comprehensible or
intelligible if it is to be most useful.
c. Verifiability means that different knowledgeable and independent observers
could reach consensus.
d.Timeliness means that fiancial information must be available or communicated
early enough when a decision is to be made.

25. Explain comparability.

It enables users to identify and understand similarities and dissimilarities among items.

26. Explain comparability within a single entity.

The quality of information that allows comparisons within a single entity through time or
from one accounting period to the next.

27. Explain comparability between and across entities.

The quality of information that allows comparisons between two or more entities
engaged in the same industry.

28. What is consistency?

The use of the same method for the same items, either from period to period within an
entity orin a single period accross entities.

29. Distinguish consistency from comparability.

Consistency is the uniform application of accounting method from period to period
within an entity. On the other hand, comparability is the uniform application of accounting method
from period to period within an entity.

30. Explain understandability.

The information should be presented in a form and expressed in terminology that a user
understands.

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31. Explain verifiability.
The financial information is verifiable in the sense that it is supported by evidence so that
an accountand that would look into the same evidence would arrice at the same economic
decision or conclusion.

32. Distinguish direct verification and indirect verification.

Direct verification means verifying an amount or other representation through direct
obsevation, for example, by counting cash. Indirect verification means checking the
inputs to a model, formula or other technique and recaltculating the inputs using the same
methodology.

33. Explain timeliness.

It enchances the trusm that without knowledge of the past, the basis for prediction will
usually be lacking and without interest in the future, knowledge of th past is sterile.

34. Explain cost constraint on useful financial information.

It is a consideration of the cost incurred in generating financial information against the
benefit to be obtained from having the information.

35. What is the rule on cost constraint?

The benefit derived from the information should exceed the cost incurred in obtaining
the information.

Chapter 4
1. Define elements of financial statements.
The financial affects of transactions and other events by grouping them into broad
classes according to their economic characteristics.

2. What are the elements directly related to the measurement of financial position?
The elements are asset, liability and equity.

3. What are the elements directly related to the measurement of financial performance?
The elements are income and expense.

4. What is the meaning of “recongnition” of the elements of financial statements?

Recognition is a term which means the reporting of an asset, liability, income or expense on the
face of the financial statement of an entity.

5. Define an asset.
It is defined as “a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity”.

6. Explain the asset recognition principle.

An asset is recognized when it is probable that future economic benefits will flow to the
entity and the asset has a cost or value that can be measured reliably.

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7. Explain future economic benefit.
The future economic benefit embodied in an asset is the potential to contribute directly
or indirectly to the flow of cash and cash equivalents to the entity.

8. What is the cost principle?

Assets should always be recorded at their cost, when the asset is new and also for the
life of the asset.

9. Define a liability.
a liability is defined as the future sacrifices of economic benefits that the entity is obliged
to make to other entities as a result of past transactions or other past events.

10. Explain the liability recognition principle.

A liability is recognized when it is probable that an outflow of resources embodying
economic benefits will be required for the settlement of a present obligation and the amount of the
obligation can be measured reliably.

11. Define income.

A liability is defined as the future sacrifices of economic benefits that the entity is obliged
to make to other entities as a result of past transactions or other past events

12. Distinguish income, revenue and gain.

Income is increase in economic benefit during the accouting period, the revenue arises in
the course of the ordinary regular activities, while gains represent other items that meet the
definition of income and do not arise in the course of the ordinary regular activities.

13. Explain the income recognition principle.

Income is recognized when it is probable that an increase in future economic benefits
related to an increase in an asset or a decrease in a liability has arisen and that the increase in
economic benefits can be measure reliably.

14. Explain the revenue recognition from interest, royalties and dividends.
Interest revenue shall be recognized on a time proportion basis that takes into account
the effective yield on the asset, the royalties shall be recognized on an accrual basis in accordance
with the substance of the relevant agreement, and the dividends shall be recognized as revenue
when the shareholder’s right to receive payment is established, meaning, when the
dividends are declared.

15. Explain the revenue recognition from installation fees, subscription fees, admission fees and tuition
fees.
Installation fees are recognized as revenue over the period of installation by reference to the
stage of completion.

16. Define expense.

an expense or expenditure is an outflow of money to another person or group to pay for
an item or service, or for a category of costs.

17. Distinguish expenses and losses.

Expenses that arise in the course of ordinary regular activities include, for example, cost

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of sales, wage and depreciation. Losses do not arise in the course of the ordinary regular
activities and include lossess resulting from disasters.

18. Explain the expense recognition principle.

Expenses are recognized when it is probable that a decrease in future economic benefits
related to decrease in an asset or an increase in liability has occurred and that the decrease in economic
benefits can be measured reliably.

19. What do you understand by the “matching principle”?

It requires that “those costs and expenses incurred in earning a revenue shall be
reported in the same period”.

20. What are the three applications of the matching principle?

The three applications are cauase and effect association, systematic and rational
allocation and immediate recognition.

21. Explain cause and effect association principle.

The expense is recognized when the revenue is already recognized.

22. Explain systematic and rational allocation principle.

Some costs are expensed by simply allocating them over the periods benefited.

23. Explain immediate recognition principle.

The cost incurred is expensed outright because of uncertainty of future economic
benefits or difficulty of reliably associating certain costs with future revenue.

24. What is measurement of elements of financial statements?

The process of determining the monetary amounts at which the element of the financial
statements are to be recognized and carried in the statement of financial position and income
statement.

25. Define historical cost, current cost, realizable value and present value.
Historical cost is the amount of cash or cash equivalent paid or the fair value of the
conderation given to acquire an asset at the time of acquisition.

Chapter 5
1. What are financial statements?
Are the means by which information accumulated and processed in financial accounting
is periodically communicated to the users.

2. What are the components of financial statements?

a. Statement of financial position
b. Income statement
c. Statement of comprehensive income
d. Statement of changes in equity
e. Statement of cash flows

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 f. Notes, comprising a summary of significant
accouting, accounting polices and other explanatory notes

3. Explain the objective of financial statements.

to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions.

4. What is the frequency of reporting of financial statements?

An entity’s end of reporting period changes and financial statements are presented for a
period longer or shorter than one year.

5. Define a statement of financial position.

A formal statement showing the three elements comprising financial position, namely
assets, liabilities and equity.

6. What are the essential characteristics of an asset?

a. The asset is controlled by the entity
b. The asset is the result of a past transaction or event.
c. The asset provides future economic benefits.
d. The cost of the asset can be measured reliably.

7. What are the classification of assets?

The current assets and noncurrent assets.

8. Define current assets.

Cash and other assets that are expected to be converted to cash within a year.

9. What are the line items for current assets?

a. The asset is cash or cash equivalent unless the asset is restricted to settle a liability for
more than twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the
reporting period. d. The entity expects to realize the asset or intends to sell or consume it
within the entity’s normal operating cycle.

10. Define noncurrent assets.

What is not included in the definition of current assets is deemed excluded. All others are
classified as noncurrent assets.

11. Identify the noncurrent assets.

a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Deferred tax assets
e. Other noncurrent assets

12. What are the essential characteristics of a liability?

a. The liability is the present obligation of a particular entity.
b. The liability arises from past transaction or event.

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 c. The settlement of the liability requires an outflow of resources
embodying economic benefits.

13. What are the classifications of liabilities?

The current and noncurrent liabilities.

14. Define current liabilities.

The entity expects to settle the liability within the entity’s normal operating cycle.

15. What are the line items for current liabilities?

a. Trade and other payables
b. Current provisions
c. Short-term Borrowing
d. Current portion of long-term debt
e. Current tax liability

16. Define noncurrent liabilities.

All liabilities not classified as current are classified as noncurrent.

17. Identify noncurrent liabilities.

a.Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company officers
e. Long-term deferred revenue

18. What are the elements comprising the equity of a corporation?

a. Owner’s equity in a proprietorship
b. Partners’ equity in a partnership
c. Stockholders’ equity or shareholders’ equity in a corporation

19. What is the meaning of “notes to financial statements”?

It provide narrative description or disaggregation of items presented in the financial
statements and information about items that do not qualify for recognition.

20. Explain the two forms of statement of financial position.

a. Report form
This form sets forth the three major sections in a downwards sequence
of assets, liabilities and equity.
b. Account form
As the title suggests, the presentation follows
that of an account, meaning, the assets are shown on the left side and the liabilities and
equity on the right side of the statement of financial position.

Chapter 6

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1. Define an income statement.
Is a formal statement showing the financial performance of an etity for a given period of time.

2. Explain the usefulness of an income statement.

It is useful in predicting future performance and ability to generate future cash flows.

3. Define comprehensive income.

Is the change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners.

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

a. OCI that will be reclassified subsequently to profit or loss when specific conditions are met.
b. OCI that will not be reclassified subsequently to profit or loss.

5. Identify components of other comprehensive income.

a. Unrealized gain or loss on equity investment measured at fail valie through other
comprehensive income.
b. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income.
c. Gain or loss from translation of the financial statements of a foreign
operation. d. Revaluation surplus during the year.
e. Unrealized gain or loss from derivative contracts desgnated as cash flow
hedge. f. “Remeaurements” of defined benefit plan, including actuarial gain or loss.
g. Change in fair value attributable to credit risk of a financial liability
desgnated at fair value through profit or loss.

6. Explain the presentation of other comprehensive income.

a. OCI that will be reclassified subsequently to profit or loss when specific conditions are met.
b. OCI that will not be reclassified subsequently to profit or loss.

7. What are the components of other comprehensive income that are subsequently reclassified to profit
or loss?
a. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income.
b. Gain or loss from translating financial statement of a foreign operation.
c. Unrealized gain or loss on derivative contracts designated as cash flow hedge.

8. What are the components of other comprehensive income that are not subsequently reclassified to
profit or loss?
a. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income.
b. Revaluation surplus during the year
c. Remeasurements of defined benefit plan, including actuariial gain or loss.
d. Change in failr value attributable to credit risk of a financial liability designated at fair
value through profit or loss.

9. Explain the reclassification of the components of other comprehensive income that are not
reclassified to profit or loss.

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 a. Such unrealized gain or loss is reclassified to retained earnings upon disposal of the
investment.
b. The realiztion of the revaluation surplus is through retained earnings.
c. The remeasurements are not reclassifed subsequently but are permanently
excluded from profit or loss.
d. Such gain or loss from change in fair value attributable to credit risk
of a financial liability may be transferred within equity or retained earnings.

10. Explain the two options of presenting comprehensive income.

An entity has two options of presentg comprehensive income:

1. Two statement:
a. An income statement showing the components of profit or loss.
b. A statement of comprehensive income beginning with profit or loss as shown in the
income statement plus or minus the components of other comprehensive income.
2. Single statement of compresive income
This is combined statement showing the components of profit or loss and components of
other comprehensive income in a single statement.

11. Identify the common sources of income.

a. Sales of merchandise to customer
b. Rendering of services
c. Use of entity
d. Disposal of resources other that products

12. Identify the components of expenses.

a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
c. Administrative expense
d. Other expenses
e. Income tax expense

13. What is the formula in computing cost of goods sold of a merchandising concern?
Beginning inventory xx
Net purchases xx

Goods availabe for sale xx

Ending inventory (x x)

Cost of goods sold xx

Gross purchases xx
Freight in xx

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 Total xx
Freight in xx

Total xx
Purchase returns, Allowances and discounts (x x)

Net purchases xx

14. What is the formula computing that cost of goods sold of a manufaturing entity?
Beginning inventory xx
Net purchases xx

Raw materials available for use xx

Ending raw materials (x x)

Raw materials used xx

Direct labor xx
Factory overhead xx

Total manufacturing cost xx

Beginning goods in process xx

Total cost of good in process xx

Ending goods in process (x x)

Cost of goods manufactured xx

Beginning finished goods xx

Goods available for sale xx

Ending finished goods (x x)

Cost of goods sold xx

15. Define Distribution costs.

Costs constitute costs which are directly related to selling, advertising and delivery of
goods to customers.

16. Define administrative expenses.

Is where all operating expenses not related to selling and cost of goods sold.

17. Define other expenses.

Are those expenses which are not directly related to the selling and administrative
function.

18. As a minimum, what are the line items that are reported on the face of the income statement and
statement of comprehensive income?
a. Revenue
b. Gain and loss from the derecognition of financial asset measured at amortized

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cost. c. Finance cost
d. Share in income or loss of associate and joint venture accounted for
using the equity method. e. Income tax expense
f. A single amount comprising discontinued operations
g. Profit or loss for the period
h. Total other comprehensive income
i. Comprehensive income for
the period being the total of profit or loss and other comprehenive income.

19. Explain the two forms of income statement.

The functional and the natural presentation. Funcional classifies expense according to
their function as part of cost of goods sold, distribution costs, administrative expenses and other
expenses. Under natural presentation, expenses are aggregated according to their nature and
not allocated among the various functions within the entity.

20. Which form of income statement is required?

It states that “because each method of presentation has merit for different types of
entities, management is required to select the presentation that is reliable and more relevant”.

21. What is a single statement of comprehensive income?

This single statement is the combined income statement and statement of
comprehensive income.

22. Define a statement of retained earnings.

It shows the changes affecting directly the retained earnings of an entity and relates the
income statement to the statement of financial position.

23. What are the common items that directly affect retained earnings?
a. Profit or loss for the period
b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings

24. Define a statement of changes in equity.

Is a basic statement that shows the movements in the elements or components of the
shareholders equity.

25. Define a statement of cash flows.

Is a basic component of the financial statements which summarizes the operating,
investing and financing activities of an entity.

Chapter 7
1. Define “cash”.
Is the standard medium of exchange in business transactions. It refers to the currency and coins
which are in circulation and legal tender.

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2. Explain the meaning of “unrestricted cash”.
This means that the cash must be readily available in the payment of current obligations and not
be subject to any restrictions, contractual or otherwise.

3. Define “cash equivalents”?

Cash equivalents are investments securities that are for short-term investing, and they have high
credit quality and are highly liquid.

4. Explain the measurement of cash.

If a bank or financial institution holding the funds of an entiry is in bankruptcy or financial
difficulty, cash should be written down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.

5. Explain the financial statement presentation of “cash and cash equivalents”.

The caption “cash and cash equivalents” inclused all cash items, such as cash on hand,
cash in bank , petty cash fund and cash equivalents which are unrestricted in use for current
operations.

6. Explain the classification of investments and treasury bills.

a. If the term is three month or less, such intruments are classified as cash equivalents
and therefore included in the caption “cash and cash equivalents”.

b. If the term is more than three months but within one year, such investments are classified as
short-term financial assets or temporary investments and presented separately as current assets.

c. If the term is more than one year, such investments are classified as noncurrent or long-term
investments.

7. Explain the treatment of foreign currency.

Deposit in foreign countries which are not subjecy to any foreign exchange restriction are
included in “cash”.

8. Explain the classification of a cash fund.

For example, a sinking fund that is set aside to pay a bond payable, shall be classified as current
asset when the bond payable is already due within one year after the end of reporting
period.

9. Explain a bank overdraft.

A bank overdraft is classified as a current liability and should not be offset against other bank
accounts with debit balances.

10. Explain a compensating balance.

A compensating balance generally takes the form of minimum checking or demand
deposit account balance that must be maintained in connection with a borrowing arrangement with a
bank.

11. Explain undelivered check, postdated check delivered and stale check.
Is one that is merely drawn and recorded but not given to the payee before the end of
reporting period.

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12. Explain the accounting for cash shortage or cash overage.
Cash shortage is where the cash count shows cash which is less than the balance, while cash
overage is where the cash count show cash which is more than the balance per book.

13. Explain the imprest system of internal control.

Is a system of conteol of cash which requires that all cash receipts should be deposited intact and
all cash disbursements should be made by means of check.

14. What is a petty cash fund?

Is money set aside to pay small expenses which cannot be paid conveniently by means of
check.

15. Explain the two methods of accounting for petty cash fund.
The impreset fund system iis the on usually followerd in handling pettc cash transactions.
Fluctuating fund system is a system called where the checks drawn to replenish the fund do not
necessarily equal the petty cash disbursements.

Chapter 8
1. Explain the three kinds of bank deposits.
The demand deposit is the current account or checking account or commercial deposit where
deposits are covered by deposit slips and where funds are withdrawable on demand by
drawing checks against the bank. In a saving deposit, the depositor is given a passbook upon the
inital deposit. The time deposit is similar to saving deposit in the sense that it is interest bearing.

2. What is a bank reconciliation?

A bank reconciliation is a statement which brings into agreement the cash balance per book and
cash balance per bank.

3. What is a bank statement?

A bank statement is a monthly report of the bank to the depositor.

4. What are credit memos?

Refer to items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.

5. What are debit memos?

Refer to items not representing checks paid by bank which are charged or debited by the bank to
the account of the depositor but not yet recorded by the depositor as cash disbursements.

6. What are deposits in transit?

Are collections already recorded by the depositor as cash receipts but noy yet reflected on the
bank statement.

7. What are outstanding checks?

Are checks already recorded by the depositor as cash disbursements but not yet reflected on the
bank statement.

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8. Define a certified check.
Is one where the bank has stamped on its face the word “accepted” or “certified”
indicating sufficiency of fund.

9. What is the treatment of certified check for bank reconciliation purposes?

Certified check should be deducted from the total outstanding checks (if included therein)
because they are no longer outstanding for bank reconciliation purposes.

10. Explain the three forms of bank reconciliation.

Under adjusted balance method, the book balance and the bank balance are brought to a
correct cash balance that must appear on the balance sheet.
Under book to bank method, the book balance is reconciled with the bank balance or the
book balance is adjusted to equal the bank balance.
Under Bank to book method, the bank balance is reconciled with the book balance or the
bank balance is adjusted to equal the book balance.

Chapter 9
1. What is a two-date bank reconciliation?
The bank reconciliation is so-called “two-date” because it literally involves two dates. As it is so
called, two-date bank reconciliation involves two dates and the procedures followed in solving
for the adjusted cash balance is just the same with one-date bank reconciliation.

2. Explain book debits.

Refer to cash receipts or all items debited to the cash in bank account.

3. Explain book credits.

Refer to cash disbursements or all items credited to the cash in bank account.

4. Explain bank debits.

Refer to all items debited to the account of the depositor which include checks paid by
bank and debit memos.

5. Explain bank credits.

Refer to all items credited to the account of the depositor which include deposits acknowledged
by bank and credit memos.

6. What is the formula in the computation of balance per book?

Balance per book-beginning of month xx
Add: Book debits during the month xx

Total xx
Less: Book credits during the month xx

Balance per book-end of month xx

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7. What is the formula in the computation of balance per bank?
Balance per bank-beginning of month xx
Add: Bank credits during the month xx

Total xx
Less: Bank debits during the month xx

Balance per bank-end of month xx

8. What is the formula in the computation of deposits in transit?

Deposits in transit-beginning of month xx
Add: Cash receipts deposited during month xx

Total deposits to be acknowledged bank xx

Less: Deposits acknowledge by bank during month xx

Depositsin transit-end of month xx

9. What is the formula in the computation of outstanding checks?

Outstanding checks-beginning of month xx
Add: Checks drawn by depositor during month xx

Total checks to be paid by bank xx

Less: Checks paid by bank during month xx

Outstanding checks-end of month xx

10. What is a proof of cash?

A proof of cash is an expanded reconcialiation in that it inclueds proof of receipts and
disbursements.

Chapter 10
1. Define receivables.
Receivables are financial assets that represent a contractual right to receive cash or another
financial asset from another entity.

2. Explain the classification and presentation of receivables in the statement of financial position.
In classification an entiry shall classify an asset as current when the entity expects to realize the
asset or intends to sell or consume it in the entity’s normal operation cycle, or when the entity
expects to realize the asset within twelve months after the reporting period. While in
presentation, the details of the total trade and other receivables shall be disclosed in the notes to
financial statements.

3. Explain the treatment of customers credit balances.

Customers credit balances are credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments from customers.

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4. Explain the initial and subsequent measurement of trade accounts receivable.
Initial measurement provieds that a financial asset shall be recognized initially at fair value plus
transaction costs that are directly attributable to the acquisition. While in subsequent
measurement, after initial recognition, accounts receivable shall be measured at amortized cost.

5. Explain the two methods of recording accounts receivable and credit sales.
a. Gross method where the accounts receivable and sales are recorded at gross amount of the
invoice. This is common and widely used method beacuse it is simple to apply.

b. Net method where the accounts receivable and sales are recorded at net amount of the
invoice, meaning the invoice price minus the cash discount.

6. Explain the allowance method of accounting for bad debts.

When an account becomes uncollectible, The entity has sustained a bad debt loss. This loss is
simply one of the costs of doing business on credit.

7. Explain the direct writeoff method of accounting for bad debts.

The direct writeoff method requires recognition of a bad debt loss only when the accounts
proved to be worthless or uncollectible.

8. Give the proforma entry under the allowance method for each of the following:
a. Doubtful accounts

Doubtful accounts 30,000

Allowance for doubtful accounts 30,000

b. Accounts receivable proved to be worthless

Allowance for doubtful accounts 30,000

Accounts receivable 30,000

c. Recovery of accounts previously written off

Accounts receivable 30,000

Allowance for doubtful accounts 30,000

9. Give the proforma entry under the direct writeoff method for each of the following:

a. Doubtful accounts

No entry is necessary

b. Accounts receivable proved to be worthless

Bad debts 30,000

Accounts receivable 30,000

c. Recovery of accounts previously written off

Accounts receivable 30,000

Bad debts 30,000

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 Cash 30,000
Accounts receivable 30,000

10. Explain the presentation of doubtful accounts in the income statement.

There are two types, if the the granting of credit and collection of accounts are under the charge
of the sales manager, doubtful accounts shall be considred as distribution cost. If the granting of
credit and collection of accounts are under the charge of an officer other than sales manager,
doubtful accounts shall be considered as administrative expense.

Chapter 11
1. Explain the aging method of estimating doubtful accounts.
The againg of accounts receivable involves an analysis where the accounts are classified into not
due or past due.

2. Explain the percentage of accounts receivable method of estimating doubtful accounts.

A certain rate is multiplied by the open accounts at the end of the period in order to get
the required allowance balance.

3. Explain why the aging method and percentage of accounts receivable are known as “statement of
financial approach”.
The two has the advantage of presenting the accounts receivable at estimated ner
realizable value.

4. Explain why the percentage of sales method of estimating doubtful accounts.

The amount of sales for the year is multiplied by a certain.

5. Explain why the percentage of sales method is known as “income statement approach”.
When the “percent of sales” method is used in computing doubtful accounts, proper matching of
cost against recenue is achieved. Thus, This method is an income statement approach
because it favors the income statement.

6. When is an account past due?

The phrase “past due” refers to the period beyond the maximum credit term. In the example, the
credit term or credit period is 30 days,

7. Explain the treatment of an inadequate or excessive allowance for doubtful accounts.

When the allowance is excessive, there is a corollary problem when the discrepancy is more than
the devit balance in the doubtful accounts expense account.

8. Explain a debit balance in the allowance for doubtful accounts.

The allowance for doubtful accounts normally has a credit balance.

9. Explain impairment of accounts receivable.

Many entities record allowance for doubtful accounts using aging of accounts receivable,
percentage of accounts receivable and percentage of sales.

10. Explain the procedures in assessing impairment of accounts receivable.

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 a. Indiviadually significant accounts receivable should be considered for impairment separately
and if impaired, the impairment loss is recognized.

b. Accounts receivable not indiviually significant should be collectively assessed for impairment.

c. Accounts receivable not considered impaired should be included with other accountes
receivable with similar credit-risk characteristics and collectively assessed for impairment.

Chapter 12
1. Define notes receivable.
Notes receivable are claims supported by formal promises to pay usually in the form of notes.

2. What is a negotiable promissory note?

A negotiable promissory note is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand or at a fixed determinable future time
a sime certain in money to order or to bearer.

3. Explain the treatment of dishonored notes receivable.

When a promissoty note matures and is not paid, it is said to be dishonored.

4. Explain the initial measurement of short-term notes receivable.

Short-term notes receivable shall be measured at face value.

5. Explain the initial measurement of long-term notes receivable.

Long-term notes will depend on whether the notes are interest-bearing or noninterest-bearing.

6. What is the meaning of “noninterest bearing” note receivable?

Noninterest-bearing long-term notes are measured at present value which is the discounted
value of the future cash flows using the effective interest rate.

7. Explain the subsequent measurement of long-term notes receivable.

Subsequent to initial recognition, long-term notes receivable shall be measured at amortized
cost using the effective interest method.

8. Explain “compounding” of interest in relation to interest bearing notes receivable.

When interest is “compounded”, in the mathematical parlance this means that any accrued
interest receivable also earns interest.

9. What is the meaning of “present value” of notes receivable?

The present value is the sum of all future cash flows discounted using the prevailing market rate
of interest for similar notes.

10. Explain the computation of present value of long-term notes receivable.

The discounted value of the future cash flows using the effective interest rate.

Chapter 13

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1. Define Loan receivable

An asset account in a bank's general ledger that indicates the amounts owed by borrowers to the
bank as of a given date.

2. Explain the initial measurement of loan receivable.

Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities

should be measured at amortised cost using the effective interest method.

3. Explain the subsequent measurement of loan receivable.

Provides that if the business model in managing financial asset is to collect contractual cash
flows on specified dates and the contractual cash flows are solely payments of principal and
interest, the financial asset shall be measured at amortized cost.

4. What is the meaning of “amortized cost” in relation to loan receivable?

When loan costs are significant, they must be amortized because of the matching principle. In
other words, all of the costs of a loan must be matched to the accounting periods when the loan
is outstanding.

5. What are “origination fees” in relation to a loan?

An origination fee is an upfront fee charged by a lender for processing a new loan application,
used as compensation for putting the loan in place.

6. Explain the accounting for origination fees.

.

a fee charged by a lender on entering into a loan agreement to cover the cost of processing the
loan.

7. Explain “direct origination costs”. .

Transaction cost that are directly attributable to the loan receivable include direct origination
costs.

8. Explain the treatment of origination fees received from a borrower and direct origination costs
incurred by the lender.

The origination fees received from borrower are recognized as unearned interest income and
amortized over the term of the loan. If the origination fees are not chargeable against the
borrower, the fees are known as “direct orignation costs”.

9. Explain the treatment of indirect origination costs incurred by the lender.

Indirect origination costs should be traeted as outright expense.

10. Explain impairment of loan.

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 A loan is considered to be impaired when it is probable that not all of the related principal and
interest payments will be collected.

11. Explain impairment of loan receivable.

Provides that an entity shall recognize a loss allowance for expected credit losses on financial
asset measured at amortized costs.

12. Explain the measurement of impairment of loan.

The amount of impairment loss can be measured as the difference between the carrying amount
and the present value of estimated future cash flows discounted at the original effective rate.

13. What is the presentation of the allowance for loan impairment?

Loan receivable 3,000,000
Allowance for loan impairment ( 592,000)

Carrying amount 2,407,900

14. What is the carrying amount of loan receivable on the date of impairment?
The difference of loan receivable and allowance for loan impairment equals carrying amount.

15. What is the computation of the carrying amount of the loan receivable subsequent to impairment?

The impairment loss is the difference between the carrying amount of the loan and the present value
of the cash flows.

Chapter 14
1. 1. Explain fully receivable financing.
Accounts-receivable financing is a type of asset-financing arrangement in which a company uses
its receivables — outstanding invoices or money owed by customers — to receive financing.

2. Enumerate the four common forms of receivable financing.

a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable

3. What are the forms of financing related to accounts receivable?

a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable

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4. What is pledge of accounts receivable?
When loans are obtained from the bank or any lending institution, the accounts receivable may
be pledged as collateral security for the payment of the loan.

5. What is assignment of accounts receivable?

Means that a borrower called the assignor transfers rights in some accounts receivable to a
lender called the assignee in consideration for a loan

6. Distinguish pledge and assignment of accounts receivable.

Pledging is general because all accounts receivable serve as collateral security for the loan. On
the other hand, assignment is specific because specific accounts receivable serve as collateral
security for the loan.

7. What is the meaning of non notification and notification basis with respect to assignment of accounts
receivable?
When accounts are assigned on a nonnotification basis, as is usually the case, customers are not
informed that their accounts have been assigned.

8. What is factoring?
Is a sale of accounts receivable on a without recourse notification basis.

9. Explain casual factoring and factoring as a continuing agreement.

In a factoring arrangement, an entity sells accounts receivable to a bank or finance entity called
a factor. In Casual factoring if an entity fins itself in a critical cash position, it may be forced to
factor some or all of its accounts receivable at a substantial discount to a bank or a finance
entity to obtain the much needed cash.

10. What is credit card?

a small plastic card issued by a bank, business, etc., allowing the holder to purchase goods or
services on credit.

Chapter 15
1. Explain discounting of note receivable.
When a note is negotiable, the payee may obtain cash before maturity date by discounting the
note at a bank or other financing company.

2. Who are the original parties in a promissory note?

The original parties are the maker and payee.

3. Who are the parties involved after discounting of note receivable?

When a note is negotiable, the payee may obtain cash before maturity date by
discounting the note at a bank or other financing company.

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4. Explain endorsement of a negotiable instrument.
Endorsement is the transfer of right to a negotiable instrument by simply singing at the back of
the instrument.

5. What is the formula in computing net proceeds from discounting of note receivable?
The difference between maturity value and discount equal to net proceeds.

6. Explain maturity value.

Is the amount due on the note at the date of maturity. Principal plus interest equals the maturity
value.

7. What is the formula in computing “interest” on the note receivable.

Interest is computed as Principal x Rate x Time.

8. Explain “discount” in relation to discounting of note receivable.

The accounting for note receivable discounting depends on whether the discounting is with or
without recourse.

9. What is the formula in computing “discount”?

Discount is equal to maturity value times discount rate times discount period.

10. Explain the carrying amount of the note receivable upon discounting.
The difference between the principal and accrued interest receivable is equal to carrying amount
of note receivable.

11. What is the formula in computing gain or loss on discounting of note receivable?
The difference between the net proceeds from discounting and the carrying amount of the note
receivable is recognized as gain or loss.

12. Explain discounting without recourse.

Means that the endorser avoids future liability even if the maker refuses to pay the endorsee on
the date of maturity.

13. Explain discounting with recourse accounted for as conditional sale.

Conditional sale of note receivable recognizing a contingent liability.

14. Explain discounting with recourse accounted for as secured borrowing.

If the discounting is treated as a secured borrowing, the note receivable is not derecognized but
instead an accounting liability is recorded at amount equal to the face amount of the
note receivable discounted.

15. What are the criteria for the derecognition of a financial asses?
If the entity has transferred substantially all risks and rewards, the financial asset shall be
derecognized.

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Chapter 16
1. Define inventories.
Inventories are assets held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

2. Explain the two classes of inventory.

A trading concern is one that buys and selld goods in the same form purchased. A
manufacturing concern is one that buys goods which are altered or converted into another form before
they are made available for sale.

3. What goods are includible in inventory?

a. Goods owned and on hand
b. Goods in transit and sold FOB destination
c. Goods in transit and purchased FOB shipping point
d. Goods out on consignment
e. Goods in the hands of salesmen or agents
f. Goods held by customers on approval or on
trial

4. What is the legal test of determining inventory inclusion?

If the answer is in the affirmative, the goods shall be included in the inventory.

5. Whos is the owner of goods in transit?

It depends, it can be the buyer or the seller.

6. Explain FOB destination.

Under FOB destination, ownership of goods purchased is transferred only upon receipt of
the goods by the buyer at the point of destination.

7. Explain FOB shipping point.

Under FOB shipping point, ownership is transferred upon shipment of the goods and
therefore, the goods in transit are the property of the buyer.

8. Explain freight prepaid.

Means that the freight charge on the goods shipped is already paid by the seller.

9. Explain freight collect.

Means that the freight charge on the goods shipped is not yet paid. The common carrier
shall collect the same from the buyer.

10. What do you understand by the maritime terms FAS, CIF, CF and Ex-ship?
Under FAS a seller who ships FAS must bear all expensesand risk involved in delivering
the goods to the dock next to or alongside the vessel on which the goods are to be shipped. Under
CIF the the buyer aggress to pay in a lump sum the cost of the goods, insurance cost and freight charge.
Under Ex-ship a seller who delivers the goods ex-ship bears all expenses and risk of loss
until the goods are unloaded at which time title and risk of loss shall pass to the buyer.

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11. What is consignment?
A method of marketing goods in which the owner called the consignor transfers physical
possession of certain goods to an agent called the consignee who selld them on the owners’s
behalf.

12. Who is the owner of goods on consignment?

The consignor

13. Explain the statement presentation of inventories.

Since inventories are acquired for production, sale or consumption and acquisitions
normally approxiamte the entity’s need for the current operating cycle, these are generally
classified as current assets.

14. Explain the two systems of accounting for inventories.

The periodic system calls for the physical counting of goods of hand at the end of the
accounting period to determine quantities, while the perpetual system requires the
maintenance of records called stock cards that usually offer a running summary of the
inventory inflow and outflow.

15. Distinguish trade discounts and cash discounts.

Trade discounts are deducstions from the list or catalog price in order to arrive at the
invoice price which is the amount actually charged to the buyer. Cash discounts are deductions from the
invoice price when payment is made within the discount period.

16. Explain the two methods of accounting for purchases.

The gross method is where purchases and accounts are recorded at gross, while net
method is where purchases and accounts payable are recorded at net.

17. What are the components of the cost of inventories?

The cost of purchase, cost of conversion and other cost incurred in bringing the inventories to
their present location and condition.

18. Explain “cost of purchases”.

The cost of purchase of inventories comprises the purchase price, import duties and
irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.

19. Explain “cost of conversion”.

The cost of conversion of inventories includes cost directly related to the units of production
such as direct labor.

20. Explain the cost of inventory of a service provider.

It consist primarily of the labor and other costs of personnel directly engaged in
providing the service, including supervisory personnel and attributable overhead

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