Summary Notes

Topic: PAS 7- Statement of Cash Flows

Statement of Cash Flows - Formal statement summarizing the operating, investing and financing activities of
the entity - Provides information about cash receipts and disbursements.

A. Parts of the Statement of Cash Flows

1. Cash Flows from Operating Activities- derived from principal revenue producing
companies and other transactions and events related to the determination of net
income/loss
Note: Cash flows arising from the purchase and sale of dealing or trading securities are
classified as operating activities.
2. Cash Flows from Investing Activities- derived from acquisition and disposal of
long-term assets and other investments not included in cash equivalents
3. Cash Flows from Investing Activities- derived from cashflows from equity capital
and borrowings.
Note: Cash payments to settle such obligations as trade accounts and notes payable,
income tax payable, accrued expenses are operating activities, not financing activities.

B. Forms of Statement of Cash Flows

1. Direct Method- shows in detail the major classes of gross cash receipts and gross
cash payments
2. Indirect Method- involves the adjustment of net income with changes in balance
sheet accounts to arrive at the amount of cash generated by operating activities.
C. Other Important Note to Remember
1. Noncash Transactions – investing and financing transaction that do not require use of cash or cash
equivalents shall be excluded from Statement of cash flow. Noncash investing and financing
transaction should be disclosed anywhere in the financial statements.
A. Acquisition of assets by assuming directly related to liability.
B. Acquisition of assets by issuing share capital.
C. Acquisition of assets by issuing bonds payable.
D. Conversion of bonds payable into share capital.
E. Conversion of preference shares into ordinary shares.
2. Interests- Interest paid and received can be classified as operating cash flows. Alternatively, Interest
paid may classified as financing. Interest received may be classified as investing.
3. Dividends – Dividends received shall classified as operating. However, may classified as investing.
Dividends paid shall classified as financing. However, may classified as operating cash flow.
4. Income Tax- cash flow arising from income tax shall separately disclosed in operating unless they
are classified in investing and financing. Income tax is difficult much to identified, thus most of the time
all tax cash flows are classified as operating activities.
Summary Notes
Topic: PAS 8- Accounting Policies, Estimate and Errors

1. Categories
a. Change in Accounting Estimate - adjustments mainly in the amounts of an asset or liability
b. Change in Accounting Policy - Change of principles, rules, practices, bases or conventions of an
entity due to change in accounting standards or interpretations or changes that will result to relevant
and faithful information in the FS
2. Examples
a. Change in Accounting Estimate
1. Change in FV of financial assets and financial liabilities
2. Change in doubtful accounts
3. Change in useful life of an asset
4. Change in salvage value of an asset
b. Change in Accounting Policy
1. Change in measurement basis
2. Change from FIFO to average method
3. Change from Cost model to FV model
4. Change in policies due to a PFRS requirement
5. Change in reporting entity

3. Reporting
a. Change in Accounting Estimate - Shall be recognized currently or prospectively in the income or loss
of the period of change and or future periods that are affected - Shall not be accounted by restating
previous FS
b. Change in Accounting Policy - Changes required by standard or interpretation shall be applied in
accordance with the transitional provisions while Changes that are voluntary shall be applied
retroactively or retrospectively as if the policy has always been applied by adjusting the beginning
balance of an equity component for the earliest prior period - If retroactive application is impractical due
to impossible determination of changes in the retained earnings, it must be applied prospectively
4. Application
a. Retrospective Application or Retroactive Application - Applying a policy as if it has always been
applied
b. Prospective Application - Applying a policy after the date at which it was changed
5. Principles on Absence of Standards - When there are no standards or interpretations about a transaction
or event, the hierarchy must be followed:
a. Current standards dealing with similar shit
b. Definition, recognition criteria and measurement concepts in the conceptual framework for financial
reporting
c. Most recent declarations from standard-setting bodies
6. Cash Basis vs Accrual Basis
a. Cash Basis- income is directly recognized when received and expenses when paid
b. Accrual Basis- income is only recognized when earned and expenses only when incurred
7. Prior Period Errors - Mistakes in the FS, mathematical errors and/or other stupidities discovered after
issue of FS - Must be corrected retrospectively by adjusting the beginning balances of the line items affected or
by adjusting the beginning balance of retained earnings of the earliest period presented - Nature and amount
of corrections must be disclosed
8. Current Period Errors - Errors discovered during the current period and are corrected before the financial
statements are authorized and issued.
9. Balance Sheet Error vs Income Sheet Error vs Combined Error

a. Balance Sheet Error - Misclassification of Real Accounts - Corrected by reclassifying entry

b. Income Sheet Error - Misclassification of Nominal Accounts - If discovered before closing the books then
reclassifying entries are necessary if discovered in a subsequent year no need for correction because the
nominal accounts are correctly stated.
Summary Notes
Topic: PAS 8- Accounting Policies, Estimate and Errors

1. Meaning
a. Biological Asset- Living plants and animals, noncurrent asset (PAS40)
b. Agricultural Produce- products harvested from a biological asset (PAS40)
c. Product After Harvest- processed goods from an agricultural produce (PAS2)
2. Examples
Biological Assets
Part Not part
1. Animals 2. Bearer plants (PPE)
3. Plants 4. Agricultural Produce
5. Trees in plantation forest/ freestanding trees 6. Products after harvest
7. Bearer plants 8. Animal related recreational activities (PPE)
9. Plants with dual use 10. Agricultural Land

3. Fair Value Change (must be disclosed in the note to FS)

a. Physical Change - birth, growth and degeneration
b. Price Change
4. Measurement
a. Biological Asset - initial and subsequent: FV – Cost of Disposal
b. Agricultural Produce (only done at the point of harvest) - FV – Cost of Disposal at the point of harvest
Summary Notes
Topic: PAS 2- Inventories

INVENTORIES

• Held for sale in the ordinary course of the 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.

I. Classes of Inventories
a. Inventories of a Trading Concern - bought and sold in the same form,
generally referred to as merchandise inventory.
b. Inventories of a Manufacturing Concern - goods bought that are altered and converted
into another form before sale

1. Raw materials (direct material)

2. Goods in Process
3. Finished Goods
4. Factory or manufacturing Supplies (indirect material)
5. Cost of the product

II. Cost of Inventories

a. Cost of purchase - costs directly attributable to the acquisition of finished
goods, materials and services - purchase price, import duties and irrecoverable
taxes, freight, handling and other costs - trade discounts, rebates and other
similar items are deducted in determining the cost of purchase
b. Cost of Conversion - costs directly attributable to the units of production,
such as direct labor - fixed production overhead, these are indirect costs that are
relatively constant regardless of the volume of production (depreciation,
maintenance of factory and equipment, cost of factory management and
administration) - variable production overhead, these are indirect costs that
varies directly from the volume of production (indirect labor and indirect material)

c. Other costs - costs incurred in bringing the inventories to their present

location and condition.

III. Measurement of Inventories

a. Initial - purchase price + cost / @ cost

b. Subsequent - Lower of cost and net realizable value (LCNRV- choose the lower
amount b/n the two)

IV. Inventory Cost Flow

- Cost of inventories shall be determined only by FIFO and Weighted
Average (PAS2)
a. First in, First out Cost Formula (FIFO) - goods first purchased are
first sold
 b. Weighted Average Cost Formula (for Periodic Inventory System)
c. Moving Average Cost Formula (for Perpetual Inventory System) -
unit cost is changing when there is a new purchase or purchase return,
average cost per unit is used to determine the total cost of inventory
d. Last in, First out Cost Formula (LIFO) - goods last purchased are
first sold
e. Specific Identification - specific costs are attributed to identified
items of inventory - units X actual cost

V. Net Realizable Value

- Estimated selling price – cost of completion – cost of disposal = NRV

VI. Accounting for Inventory Write-down

• If the cost is lower that NRV, no accounting problem.

• If the NRV is lower than cost, the inventory is measured at NRV.
• The write-down of Inventory to NRV is accounted for using Allowance method.