OVERVIEW OF ACCOUNTING

1. All events and transactions of an entity are recognized the books of accounts.
 Only accountable events are recognized. Only economic activities are
emphasized and recognized in accounting.
2. The accounting process of assigning numbers, commonly in monetary terms, to the
economic transactions and events are referred to as classifying.
 Measuring involves assigning numbers, normally in monetary terms, to the
economic transactions and events.
3. The basic purpose of accounting is to provide information about economic
activities intended to be useful in making economic decisions.
4. Financial accounting is the branch of accounting that focuses on general purpose
reports of financial position and operating results known as the financial
statements.
5. General purpose financial statements are those statements that cater to the common
and specific needs of a wide range of external users.
 General purpose financial statements are those that cater to the common needs
of a wide range of external users.
6. The financial statements are only source of information when making economic
decisions.
7. All information presented in the financial statements is sourced from the
accounting records of the entity.
8. Entity’s A accounting period starts on July and ends on June 30 of the following year.
Entity A uses a fiscal year period.
9. Once promulgated, accounting standards never changed.
 Financial reporting standards continuously change primarily in response to
user’s needs.
10. The entity’s management is responsible for the selection of appropriate
accounting policies, not the accountant.
11. The concept of recognition is applied when an entity includes the effects of an
event in the financial statements through a journal entry.
12. These are the following events that are considered as an exchange or reciprocal
transfer, purchase of inventory on account, lending money to another entity,
and payment of a loan payable.
13. Donation is considered as a nonreciprocal transfer.
14. To be useful, accounting information should be presented using historical costs.
15. These are the following transactions that shows historical cost concept, recording
purchases of merchandise inventory at the purchase price, recording a building at
the total construction costs, and recording equipment acquired in an
instalment purchase at the cash price equivalent.
16. This is an example situation that applies the stable monetary unit, Entity A values
its fixed assets at their historical costs and does not restate them for changes in the
purchasing power of the Philippine pesos due to inflation.
17. Here is another example of stable monetary unit, Entity A engages in importing
and exporting activities. At the end of the period, Entity A has assets and liabilities
denominated in foreign currencies. When preparing its financial statements, Entity
A translates these assets and liabilities into pesos.
18. Preparing financial statements at least annually is an application of time period.
19. This is an example situation of matching, Entity A acquires merchandise inventory.
Entity A initially records the acquisition cost of the inventory as asset rather than an
outright expense. When the inventory is subsequently sold, Entity A recognizes the
cost of the inventory sold as expense, in the same period the sale revenue is
recognized.
20. This is an example situation of accrual basis, On Day 1; a customer buys goods from
Entity A and promises to pay the sale price on Day 30. Entity A recognizes sales
revenue on Day 1 rather than on Day 30.
21. The following transactions are considered as internal events, transfer of goods
from work-in-process to finished goods inventory; losses from flood, earthquake,
fire and other calamities; transformation of biological assets from immature to
mature.
22. Which of the following is considered an internal user of Entity A’s financial
reports? Mr. X, a member of Entity A’s board of directors, uses financial reports to
make decisions regarding the financial and operational affairs of Entity A.
23. When resolving accounting problem not specifically addressed by current
standards, an entity shall be guided by the hierarchy of financial reporting
standards. The correct sequence of the hierarchy of financial reporting standards in
the Philippines are PASs, PFRSs and Interpretations; Judgment; Conceptual
Framework and Pronouncement of other standard-setting bodies.
24. The proper application of accounting principles is most dependent upon the
accountant.
25. Accounting is considered an art because it requires the use of creative skills and
judgment.
26. The accounting process of assigning peso amounts to economic transactions and
events is measuring.
27. Under the Accrual Basis of accounting, revenues are recognized when earned and
expenses are recognized when incurred, not when cash is received and disbursed.
Under the Going concern concept, the business entity is assumed to carry on its
operations for an indefinite period of time. Under the Business entity/Separate
entity/ Entity/ Accounting entity Concept, the business is treated separately from
 its owners. Under the Time Period/ Periodicity/ Accounting Period concept, the
life of the business is divided into series of reporting periods.
28. Financial reporting standards may at times be influenced by legal, political,
business and social environments. General purpose financial statements are
prepared primarily for the use of external users. The PFRSs are issued by the
Financial Reporting Standards Council.
29. Changes to reporting standards are primarily made in response to user’s needs.
30. Entity A buys bananas and converts them into banana chips. The conversion of
bananas into banana chips is a (an) internal event.
31. Discount on share capital is considered as valued by fact rather than by opinion.
32. The following are used as measurement bases in accounting, historical cost, fair
value and present value.
33. Entity A is owned by Mr. X and Ms. Y. Which of the following transactions does not
violate the separate entity concept and therefore is appropriately recorded in the
accounting records of Entity A? Ms. Y provides capital to Entity A.
34. This is an example situation showing the concept of Articulation; Mr. A is assessing
the ability of Entity A to generate future cash and cash equivalents. In making the
assessment, Mr. A uses not only the statement of cash flows but also the other
components of a complete set of financial statements.
35. This is an example situation showing the concept of Materiality and Cost-benefit;
Entity A acquires a stapler. Instead of recognizing the cost of the stapler as an asset
to be subsequently depreciated, Entity A immediately charges it as expense.
36. User’s common need is catered by general purpose financial statements.
37. The following are included in the among the Four Sectors in the practice of
accountancy as enumerated in R.A. 9298 also known as the “Philippine Accountancy
Act of 2004”, Practice in Commerce and Industry, Practice in Government, and
Practice in Education/Academe.
38. The Philippine Financial Reporting Standards (PFRSs) comprise: Philippine
Financial Reporting Standards, Philippine Accounting Standards, and
Interpretations.
39. The PFRSs are based on IFRSs. The financial reporting standards used in the
Philippines are the same as those used globally. The PFRSs are accompanied by
guidance. The use of such guidance is sometimes mandatory and sometimes
optional.

SUMMARY

 Accounting involves the activities of identifying, measuring, and communicating

information that is useful in making economic decisions.
 Recognition refers to the process of incorporating the effects of an accountable
event in the financial statements through a journal entry.
  External events are events which involve an entity and another external party.
It includes (a) exchanges, (b) non-reciprocal transfers, and (c) external events
other than transfers.
 Internal events are events which do not involve an external party. It includes
(a) production and (b) casualties.
 Measuring is the accounting process of assigning numbers, commonly in
monetary terms, to the economic transactions and events. Several measurement
bases are used in preparing financial statements.
 Financial accounting is the branch of accounting that focuses on the general
purpose financial statements.
 General purpose financial statements are those that cater to the common needs
of a wide range of external users.
 Financial Statements: Statement of Financial Position, Statement of Profit or
Loss and Other Comprehensive Income, Statement of Changes in Equity,
Statement of Cash Flows, Notes, and Additional Statement of Financial Position.
 Financial Report: Financial Statements and Other Information
 External users are those who do not have the authority to demand financial
reports tailored to their specific needs.
 The four sectors in the practice of accountancy are: (a) public practice, (b),
commerce and industry, (c) academe, and (d) government.
 The accounting standards used in the Philippines is the PFRSs, which are based
on the IFRSs. The PFRSs comprise the following: (1) PFRSs, (2) PASs, and (3)
Interpretations.
 The Financial Reporting Standards Council (FRSC) is the official accounting
standard setting body in the Philippines.
 Financial reporting standards continuously change primarily in response to
user’s needs.

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1. All changes in an entity’s economic resources and claims to those resources result
from the entity’s financial performance.
 Economic resources and claims may also change for reasons aside from financial
performance, such as issuing debt or equity instruments.
2. The qualitative characteristics of useful information apply only to the financial
information provided in the financial statements.
 Qualitative characteristics apply to information in the financial statements as
well as to financial information provided in other ways.
3. According to IFRS Practice Statement 2 Making Materiality Judgments, cost is an
important consideration when making materiality judgments.
  Cost is not a factor when making materiality judgments.
4. When making materiality judgements, a quantitative assessment alone is not
always sufficient to conclude that an item of information is not material.
 If an item is quantitatively not material, the entity needs to reassess it on the
basis of qualitative factors.
5. Materiality judgements apply only to the items that are recognized but not to
those that are unrecognized.
6. The more significant the qualitative factors are, the lower the quantitative
thresholds will be. Thus, an item with a zero amount can be material in light of
qualitative thresholds.
7. When making materiality judgments, an entity should judge an item’s materiality
only on its own and not in combination with other information in the complete
set of financial statements.
 This is necessary because an item might not be material on its own, but it might
be material is used in conjunction with other information in the complete set of
financial statements.
8. The Conceptual Framework and the Standards specify a uniform quantitative
threshold for materiality.
 The Conceptual Framework and the Standards do not specify a uniform
quantitative threshold for materiality.
9. To meet the objectives of general purpose financial reporting, a Standard
sometimes contains requirements that depart from the Conceptual
Framework.
10. The Conceptual Framework is concerned with the provision of financial
information to both external users and internal users.
 The Conceptual Framework is concerned with general purpose financial
reporting.
11.The Conceptual Framework may be revised from time to time. Revisions in the
Conceptual Framework automatically result to changes in the Standards.
 Revisions do not automatically result to changes in the Standards – not until
after the IASB goes through its due process of amending a Standard.
12.According to the revised Conceptual Framework, the asset is right, while the
liability is the obligation, rather than ultimate inflows or outflows of economic
benefits resulting from asset or liability.
13.Legal enforceability of a right, for example ownership, is necessary for control
over an economic resource to exist.
 Ownership is not always necessary for control to exist because control can arise
from other rights.
14.According to the revised Conceptual Framework, an asset can exist even if the
probability that it will provide inflows of future economic benefits is low, and
even if the asset is subject to a high measurement uncertainty.
15.According to the revised Conceptual Framework, what the entity controls is right,
and not the ultimate inflows and outflows of future economic benefits that the
economic resource may produce.
16. The Conceptual Framework defines income and expenses in terms of changes in
assets and liabilities.
17.Not all items that meet the definition of a financial statement element are
recognized; they are recognized only if recognizing them will also result in
relevant and faithfully represented information.
18.Measuring an asset at historical cost will always result in the same carrying
amount of the asset from period to period.
19.According to the Conceptual Framework; amortized cost measurement relates to
historical cost, rather than current value.
20.Although the use of a single measurement basis improves the understandability of
the financial statements, this may not always lead to useful information. Thus, the
Standards require different measurement bases for different assets, liabilities,
income and expenses.
 Generally, the more different measurement bases are used, the more complex
the resulting information become, and hence less understandable. Using more
different measurement bases is appropriate only if it is necessary to provide
useful information.
21.According to the Conceptual Framework, these are the qualitative characteristics
that make information useful to users. Fundamental
22.Information that is capable of making a difference in the decisions made by users
has this qualitative characteristic. Relevance
23.When making materiality judgments, the overriding consideration is the ability of
the item being judged to influence users’ decisions.
24.This qualitative characteristic is unique in the sense that it necessarily requires at
least two items. Comparability
25.Which of the following enhances the comparability of information? Consistent
application of accounting policies from period to period.
26. Information has this qualitative characteristic if different, knowledgeable and
independent observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation. Verifiability
27.The Conceptual Framework uses the term “claims” against reporting entity to refer
to liabilities and equity.
28.Entity A is assessing whether an item meets the definition of a financial statement
element. Entity A considers the transaction’s substance and economic reality rather
 than merely its legal form. Entity A is applying which of the following accounting
concepts? Substance over form
29.Which of the following is not one of the aspects in the revised definition of an asset?
Probability of the expected inflows of economic benefits from the asset
30.The new definition of an asset (a liability) focuses on the asset (liability) being a
present right (obligation) that has resulted from past events and has the
potential to produce (cause a transfer of) economic benefits
31.Which of the following is not an indication of an economic resource’s potential to
produce economic benefits? The resource has no use in the entity’s operations
and has no resale value.
32.Which of the following does not meet the definition of an asset? Equipment that
the entity intends, and is very certain, to acquire in the future.
33.Entity A determined that an asset exists. However, the asset’s low probability of
inflows of economic benefits and its very high level of measurement uncertainty
affected Entity A’s recognition decisions about the asset, as these raised doubt on
whether the asset’s recognition would result in useful information. Consequently,
Entity A did not recognize the asset, but because Entity A deemed it relevant,
information about the asset was nonetheless provided in the notes. Which of the
following statements is correct? Entity A’s treatment for the asset is acceptable.
The asset is referred to as an ‘unrecognized’ asset.
34.Which of the following will most likely affect the determination of whether an asset
or liability exists? An unresolved dispute over a right or obligation.
35.An increase in the carrying amount of an asset could not possibly result in the
recognition of an expense.
36.The Conceptual Framework is least applicable in which of the following cases? To
account for a transaction that is specifically dealt with by a Standard.
37.General purpose financial statements are designed to meet most of the common
needs of most primary users.
38.These are the users of financial information who are not in a position to require a
reporting entity to prepare reports tailored to their particular information needs.
Primary users
39.Which of the following is not one of the primary users listed in the Conceptual
Framework? Debtors
40.Which of the following would least likely to need general purpose financial
statements in making economic decisions? Management
41.Which of the following is not a factor to consider when applying the qualitative
characteristics? To be useful, information need only to meet one, but not
necessarily all, of the qualitative characteristics.
42.Which of the following is an example of a qualitative factor used in making
materiality judgments? The context of an item in relation to a current crisis in
the banking and insurance industry.
43.According to the Conceptual Framework, this information provides a direct
indication of how well management has discharged its responsibilities to make
efficient and effective use of the reporting entity’s resources. The return that the
entity has produced from its economic resources.
44.Which of the following statements about the concepts in the Conceptual Framework
is least accurate? General purpose financial reports are intended to meet
equally the needs of all types of external users.
45.According to the revised Conceptual Framework, the degree of uncertainty in the
expected inflows or outflows of economic benefits from an asset or liability or the
degree of measurement uncertainty associated with that asset or liability. Does not
necessarily affect the conclusion that an asset or liability exists, although it
may affect recognition decisions about the asset or liability.
46.The following statements are correct regarding the purpose of the Conceptual
Framework: The Conceptual Framework is intended to provide a foundation
for the development of globally acceptable Standards; Globally acceptable
Standards contribute to economic efficiency by lowering the cost of capital
and reducing international reporting costs; Globally acceptable Standards
reduces the information gap between financial statement users and the
reporting entity’s management.
47.The Conceptual Framework is not PFRS; in the absence of the PFRS, shall be
considered when making its judgment in developing and applying an
accounting policy that results in useful information; is concerned with general
purpose financial reporting only.
48.Which of the following is excluded from the scope of the Conceptual Framework?
The components of a complete set of financial statements and their
presentation requirements.
49.The following are correct statements regarding the objective of general purpose
financial reporting: The objective is providing information that is useful to
primary users in making decisions about providing resources to the entity;
Decisions about providing resources to the entity depend on the users’
expected returns, which in turn, depend on assessments of the entity’s
prospects for future net cash inflows and management stewardship; forms the
foundation of the Conceptual Framework.
50.Which of the following statements best explains why the reporting entity’s
management and government regulation are not considered primary users under
the Conceptual Framework? These users have the power to demand information
they need directly from the reporting entity.
51.Information about the reporting entity’s economic resources, claims against the
reporting entity and changes in those resources and claims is referred to in the
Conceptual Framework as the economic phenomena.
52. Entity A deliberately overstated its liabilities from P1M to P1.2M. What qualitative
characteristic is violated? Faithful Representation
53.Two primary users are using the financial information of Entity A. If User #1
concludes that Entity A’s sales has increased while User #2 concludes that it has
decreased, Entity A’s financial information is not verifiable.
54.Entity A is making a materiality judgment. Entity A considers the size of the impact
of an item to be material if it exceeds 5% of the total assets. What type of materiality
assessment is this? Quantitative
55.The following statements are correct regarding the objective of general purpose
financial statements: shows information on the reporting entity’s assets,
liabilities, equity, income and expenses; provide information that is useful in
assessing the entity’s ability to generate future cash net inflows; provide
information that is useful in assessing the entity’s management stewardship
in relation to the use of the entity’s economic resources.
56.Which of the following is least likely to be considered when determining whether an
item meets the definition of an asset? Whether it is probable (more likely than
not) that the resource will produce economic benefits.
57.The revised definition of an asset and a liability emphasize that an asset is a right,
and a liability is an obligation, that has the potential to produce, or cause the
transfer of, economic benefits.
58.Which of the following is correct when determining the existence of an asset or a
liability? An asset or a liability can exist even if its potential to produce, or
cause a transfer of, economic benefits is not certain or even likely—what is
important is that the right or obligation exists in the present and that in at
least one circumstance it will produce, or cause a transfer of, economic
benefits.
59.Control is necessary element of an asset. Control means the entity has the
exclusive right over the benefits of an asset, including the ability to prevent
others from accessing those benefits.
60.An asset is an economic resource and an economic resource is a right that has the
potential to produce economic benefits. These are the following potentials of an
economic resource to produce economic benefits for an entity: Service potential,
the resource can be used to provide services in the entity’s normal business
activities; the resource can be converted into cash; the resource has the ability
to provide cost-savings to the entity.
61.Entity A enters into a purchase commitment with Entity B (a seller). Neither party
performs its obligation on the contract, Entity A did not yet pay the purchase price,
 while Entity B dis not yet deliver the goods. The following statements are correct
regarding the situation: The contract is executor. Entity A has a combined right
to receive the goods and an obligation to pay for them; Entity A recognizes
neither an asset nor a liability except when the contract becomes
burdensome, such as when the goods become obsolete before they are
delivered; If Entity B performs its obligation first, Entity A’s combined right
and obligation changes to a liability.
62.According to the revised Conceptual Framework, an item is recognized if it meets
the definition of a financial statement element and recognizing it would
provide useful information.
63.According to the Conceptual Framework, an item is recognized if it meets the
definition of an asset, liability, equity, income, expense, and recognizing it would
provide relevant and faithfully represented information. Which of the following
relates to faithful representation rather than relevance? A high level of
measurement uncertainty associated with the asset.
64.Which of the following is most likely to cause the non-recognition of an asset or a
liability? Recognizing the asset or liability would not provide relevant and
faithfully represented information.
65.The following statements result to the recognition of a liability: Receipt of the
proceeds of a bank loan; receipt of delivery of equipment purchased on credit;
a commitment for future execution becomes burdensome.
66.Entity A determined that a previously recognized asset no longer meet the definition
of an asset. Accordingly, Entity A removed the carrying amount of the asset from the
statement of financial position and recognized it as an expense. Entity A is applying
which of the following principles? Derecognition
67.Recognizing a financial statement element requires measuring it in monetary terms.
The following statements are correct regarding measurement: The Conceptual
Framework only describes the measurement bases used in financial reporting
but does not specify how a particular financial statement element should be
measured – this is addressed by the Standards; The Conceptual Framework
broadly classifies the measurement bases used in financial reporting into two
namely, historical cost and current value; Measuring a financial statement
element often requires estimation.
68.Effective communication makes information more useful. Effective communication
requires all of the following: focusing on presentation and disclosure objectives
and principles rather than focusing on rules; classifying information in a
manner that groups similar items and separates dissimilar items; aggregating
information in such a way that it is not obscured either by unnecessary detail
or by excessive aggregation.
 69.According to the revised Conceptual Framework, income and expenses are classified
as either recognized in profit or loss or in other comprehensive income.
70.Under this concept of capital maintenance, profit is earned if net assets increased
during the period after excluding the effects of transactions with the owners.
Financial capital maintenance

SUMMARY

 The decisions of primary users are based on assessments of an entity’s

prospects for future net cash inflows and management stewardship. To
make these assessments, users need information on the entity’s financial
position, financial performance and other changes in financial position, and
utilization of economic resources.
 Qualitative Characteristics: 1. Fundamental qualitative characteristics (a)
Relevance: predictive value, confirmatory value, materiality, (b) Faithful
representation: completeness, neutrality, free from errors; 2. Enhancing
qualitative characteristics: (a) comparability, (b) verifiability, (c) timeliness, (d)
understandability.
 The changes align the Conceptual Framework to the IASB’s current thinking in
formulating Standards. 1. Focusing the definition of an asset to a right, rather
than a physical object, parallels the requirement of PFRS 16 Leases on the
recognition of a ‘right-of-use asset’ by a lessee. 2. Focusing on providing useful
information when making recognition decisions, rather than on probability
threshold and reliable measurement, parallels the requirements of PFRS 3
Business Combination for goodwill, PFRS 9 Financial Instruments for certain
derivative instruments and PFRS 13 Fair Value Measurement on the
‘hierarchy of fair value measurement’. 3. Including the concept that income
and expenses are recognized either in profit or loss or other comprehensive
income parallels the requirements of PAS 1 Presentation of Financial
Statements and other relevant standards. 4. Introducing the concepts of ‘unit of
account’ and ‘executory contracts’ aligns the Conceptual Framework to the
provisions of PFRS 9 on the accounting for investment portfolios and PFRS 15
Revenue from Contracts with Customers on the recognition of ‘contract
asset’, ‘contract liability’ or ‘receivable’. The Conceptual Framework is not a
Standard, hence it does not provide requirements for specific transactions or
other events—these are addressed by the Standards. The Conceptual
Framework’s main purpose is to provide the foundation for the development of
globally acceptable Standards.
 The Conceptual Framework’s purpose is to serve as a guide in developing,
understanding, and interpreting the Standards.
 The Conceptual Framework is concerned with general purpose financial
reporting. General purpose financial reporting involves the preparation of
general purpose financial statements.
 The objective of general purpose financial reporting is to provide information
that is useful to primary users in making decisions about providing
resources to the entity. To make those decisions, primary users need
information to the entity’s: (a) financial position and financial performance;
and (b) management stewardship.
 The primary users are (a) existing and potential investors and (b) lender
and other creditors.
 Financial reports do not and cannot provide all the information needs of the
primary users. Only their common needs are catered by financial reports.
 The fundamental qualitative characteristics are (1) Relevance and (2) Faithful
Representation.
 The enhancing qualitative characteristics are (3) Comparability, (4)
Verifiability, (5) Timeliness and (6) Understandability.
 Relevant information has (a) Predictive Value and (b) Feedback Value.
 Materiality is an entity-specific aspect of relevance. It is a matter of judgment.
The overriding consideration when making materiality judgment is whether
information could reasonably be expected to influence the decisions of users.
This is in keeping with the objective of financial reporting of providing useful
information.
 The materiality process involves the following steps: (1) Identify, (2) Assess,
(3) Organize, and (4) Review.
 The elements of faithful representation include (a) Completeness, (B)
neutrality, and (c) Free from error.
 Cost is a pervasive constraint – it affects virtually all aspects of financial
reporting.
 The objective of general purpose financial statements is to provide financial
information about reporting entity’s assets, liabilities, equity, income and
expenses that is useful in assessing: (a) the entity’s ability to generate future
net cash inflows; and (b) management’s stewardship over economic
resources.
 A reporting entity is one that is required, or chooses, to prepare financial
statements.
 The elements directly related to the measurement of financial performance are
income and expenses.
 Asset is a present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce
economic benefits.
  Liability is a present obligation of the entity to transfer an economic resource as
a result of past events.
 Equity is assets less liabilities,
 Income and expenses are changes in assets and liabilities, excluding owner
contributions/distributions and capital maintenance adjustments.
 An item is recognized if it: (a) meets the definition of an element and (b)
recognizing it would provide useful information (i.e., relevant and faithfully
represented).
 An item is derecognized if it ceases to meet the definition of an asset or
liability.
 The measurement bases used in financial reporting are broadly classified into
historical cost and current value (i.e., fair value, value in use/fulfilment value,
and current cost).
 Financial information is communicated to users through presentation and
disclosure in the financial statements.
 The two concepts of capital are financial and physical.

PAS 1 PRESENTATION OF FINANCIAL STATEMENTS

1. The application of PFRSs, with an additional disclosure when necessary, is
presumed to result in financial statements that achieve a fair presentation.
2. According to PAS 1, an entity shall make an explicit and unreserved statement of
compliance with the PFRSs in the notes only if the entity complies with all the
requirements of PFRSs.
3. PAS 1 encourages, but does not require, the presentation of the preceding year’s
financial statements as comparative information to the current year’s financial
statements.
 PAS 1 requires an entity to present comparative information in respect of the
preceding period for all amounts reported in the current period’s financial
statements, unless another PFRS requires otherwise.
4. According to PAS 1, assets and liabilities or income and expenses are offset, unless
separate presentation is required or permitted by a PFRS.
 Assets and liabilities or income and expenses are presented separately and are
not offset, unless offsetting is required or permitted by a PFRS.
5. According to PAS 1, PFRSs apply to financial statements as well as to other
information presented in an annual report, a regulatory filing, or another
document.
6. According to PAS 1, the line item “Cash and cash equivalents” should always be
presented first in the statement of financial position.
7. PAS prescribes an order or format of presenting items in the financial statements.
  PAS 1 does not prescribe the order or format of presenting items in the
statement of financial position.
8. An entity may omit the notes when presenting general purpose financial
statements.
9. If profit or loss is P100 while other comprehensive income is P20, total
comprehensive income must be P130.
 P120
10.PAS 1 encourages, but does not require, the disclosure of an entity’s domicile and
legal form, its country of incorporation and the address of its registered office and a
description of the nature of its operations and its principal activities.
 PAS 1 requires an entity to present the notes in a systematic manner.
11.The objective of PAS 1 is to ensure comparability by prescribing the basis for
presentation of general purpose financial statements.
12.Entity A’s financial statements in the current period is comparable with Entity A’s
financial statements in the previous period. This type of comparability is called
Intra-comparability.
13.The scope of PAS is the preparation and presentation of general purpose
financial statements; the recognition, measurement and disclosure
requirements for specific transactions and other events; the presentation of
general purpose financial statements as well as all other information
contained in an entity’s annual report.
14.The statement of financial position is also called balance sheet.
15.When preparing financial statements, PAS 1 requires management to assess the
entity’s ability to continue as a going concern. The assessment covers a minimum
period at least one year from the end of the reporting period.
16.The following are considered as appropriate application of offsetting under PAS 1:
presenting gains or losses from sales of assets net of the related selling
expenses; presenting at net amount the unrealized gains and losses arising
from trading securities and from translation of foreign currency denominated
assets and liabilities, except if they are material; presenting a loss from a
provision net of reimbursement from a third party.
17.PAS 1requires an entity to provide an additional balance sheet dated as of the
beginning of the preceding period if certain instances occur. The following are one
of those instances (assuming that all of those have a material effect): retrospective
application of an accounting policy; retrospective restatement;
reclassification of items in the financial statements.
18.The PFRSs apply to which of the following? Explanatory material and other
information that are disclosed in the notes to the financial statements.
19.This is the most commonly used method of presenting a statement of financial
position. It facilitates the computation of liquidity and solvency ratios. Classified
presentation
20.Which of the following best reflects the definition of normal operating cycle under
PAS 1? For a manufacturing entity, this is the usual time it takes for the entity
to acquire raw materials, process those raw materials into finished goods, sell
the finished goods on account, and collect the receivables.
21.Who is responsible for the preparation and fair presentation of an entity’s financial
statements in accordance with the PFRSs? Management
22.The statement of financial position may be presented either showing current/non-
current distinction (classified) or based on liquidity (unclassified). PAS encourages
a(an) classified presentation.
23.Which of the following is a current asset? Accounts receivable
24.The following are correct statements regarding the provisions of PAS 1? An entity is
required to present separate sections of profit or loss and other
comprehensive income; presenting income statement or statement of profit or
loss in addition to a statement of other comprehensive income is permitted
when an entity elects to use the “two-statement” presentation; presenting
comprehensive income as a note disclosure only is prohibited.
25.When a separate statement of profit or loss (income statement) is presented it shall
be displayed immediately before the statement presenting comprehensive
income.
26.The following are correct when an entity opts to use the “two-statement
presentation” of income and expenses? The separate income statement forms
part of a complete set of financial statements and shall be displayed
immediately before the statement presenting comprehensive income; the
profit or loss section is not presented anymore in the statement presenting
comprehensive income; the separate statement presenting comprehensive
income begins with the amount of profit or loss.
27.Entity A reclassified a gain that was previously recognized in other comprehensive
income to the current period’s profit or loss. According to PAS 1, how should Entity
A present the reclassification adjustment in the other comprehensive income
section of the statement of comprehensive income? As a deduction
28.Which of the following is a current liability? An obligation for which the entity has
a conditional right to defer.
29.According to PAS 1, items of other comprehensive income are presented according
to the following groupings by nature and by function.
30.When an entity changes the end of its reporting period and presents financial
statements for a period longer or shorter than one year, an entity shall disclose all of
 the following: a quantification of the possible adjustments that would eliminate
the effects of the longer or shorter reporting period.
31.PAS 1 applies to which of the following? The preparation and presentation of
general purpose financial statements; the recognition and measurement of
specific assets, liabilities, income and expenses; the disclosure requirements
for specific transactions and other events.
32.In 20x3, Entity A makes a retrospective application of an accounting policy that has
a material effect on the information in the statement of financial position as at the
beginning of the preceding period. Entity A wishes to provide comparative
information in addition to the minimum requirement of PAS 1, i.e., Entity A will be
presenting its 20x3 financial statements together with the 20x2 and 20x1 financial
statements. In this case, additional statement of financial position required by PAS
will be dated as at January 1,20x2.
33.Entity A wants to change the presentation of, and the classification of some items in,
its financial statements. The following statements are correct Entity A can make
the change if it is required by a PFRS; Entity A can make the change if the
change is expected to result in reliable and more relevant information to the
users of its financial statements; Entity A may be required to provide an
additional balance sheet dated as at the beginning of the preceding period.
34.The financial statements of Entity A shows line items described as “Other current
assets,” “Other noncurrent liabilities,” and “Miscellaneous expenses.” Which of the
following is correct? Entity A considers the items included in these line items as
dissimilar and cannot be included in material classes of similar items and are
also individually immaterial to warrant separate presentation.
35.According to PAS 1, a complete set of financial statements include which of the
following? Notes
36.PAS 1 requires an entity to present an additional statement of financial position as
at the beginning of the preceding period when an entity makes any of the following:
the retrospective application of an accounting policy; the retrospective
restatement of items in the financial statements; the reclassification of items
in the financial statements.
37.The statement of financial position of which of the following entities does not show
current and noncurrent distinctions among assets and liabilities? Banks and other
financial institutions
38.The principles of PAS 1 in relation to the classification of liabilities as current or
noncurrent favor the current classification. PAS 1 provides stricter conditions for
classifying liabilities as noncurrent. Which of the following statements best reflects a
valid reason for this? The stricter conditions for noncurrent classification
address the potential misuse of classification in order to present favourably
the entity’s liquidity.
 39.Which of the following is not an acceptable method of presenting income and
expenses? Presenting an income statement alone without a statement that
presents comprehensive income.
40.This method of presenting expenses is more difficult to apply but has the potential
of providing more relevant information to users. Its downside, however, is that it
involves considerable judgment and may require arbitrary allocations. Function of
Expense
41.The following are the purpose of the notes: to present information about the
basis of preparation of the financial statements and the specific accounting
policies; to disclose the information required by PFRSs that is not presented
elsewhere in the financial statements; to provide information that is not
presented elsewhere in the financial statements but is relevant to
understanding of any of the financial statements.

SUMMARY

 General Features: 1) Fair presentation & Compliance with PFRSs; 2) Going

Concern; 3) Accrual Basis; 4) Materiality & Aggregation; 5) Offsetting; 6)
Frequency of reporting period; 7) Comparative Information; 8) Consistency of
presentation.
 The objective of PAS 1 is to prescribe the basis for presentation of general
purpose financial statements to ensure comparability.
 General purpose financial statements are those statements that cater to the
common needs of a wide range of primary (external) users.
 The purpose of general purpose financial statements is to provide information
about the financial position, financial performance, and cash flows of an entity
that is useful to a wide range of users in making economic decisions.
 A complete set of financial statements consists of the following: 1) statement
of financial position; 2) statement of profit or loss and other
comprehensive income, 3) statement of changes in equity; 4) statement of
cash flows; 5) notes; 5a) comparative information, and 6) additional
statement of financial position when an entity makes a retrospective
application, retrospective restatement, or reclassifies items – with material
effect.
 The statement of financial position may be presented either showing
current/non-current distinction (classified) or based on liquidity
(unclassified). PAS 1 encourages the classified presentation.
 Deferred tax assets and deferred tax liabilities are presented as noncurrent
items in a classified statement of financial position.
 PAS 1 does not prescribe the order or format in which an entity presents items.
  Income and expenses may be presented: (a) in a single statement of profit or
loss and other comprehensive income, (b) in two statements – an income
statement and a statement presenting comprehensive income.
 Other comprehensive income (OCI) comprises items of income and expense
(including reclassification adjustments) that are not recognized in profit or loss
as required or permitted by other PFRSs. OCI include: (a) changes in
revaluation surplus, (b) remeasurements of the net defined benefit liability
(asset), (c)unrealized gains and losses on FVOCI investments, (d)
translation gains and losses on foreign operation, and (e) effective portion
of gains and losses on hedging instruments in a cash flow hedge.
 Reclassification adjustments are amounts reclassified from OCI to profit or
loss.
 OCI may be presented net or gross of related taxes.
 Total comprehensive income includes all non-owner changes in equity. It
comprises profit or loss and other comprehensive income.
 Presenting extraordinary items in the financial statements, including the notes,
is prohibited.
 Expenses may be presented using either the Nature of expense or the Function
of expense method. Additional disclosure is required when the function of
expense method is used.
 Dividends are disclosed either in the statement of changes in equity or in the
notes.
 Owner changes in equity are presented in the statement of changes in equity.
Non-owner changes in equity are presented in the statement of comprehensive
income.
 The notes is an integral part of the financial statements. It presents (a)
information regarding the basis of preparation of financial statements, (b)
information required by the PFRSs and (c) other information not required
by PFRSs but is relevant to users of financial statements.

ILLUSTRATIONS

 Excerpt from a note to financial statement:

Statement of Compliance with Philippine Financial Reporting
Standards
The financial statements of the Bank have been prepared in accordance
with Philippine Financial Reporting Standards (PFRSs), which are adopted
by the Financial Reporting Standards Council (FRSC) from the
pronouncements issued by the International Accounting Standards Board
(IASB).
 A heading for a financial statement
ABC Group
Statement of financial position
As of December 31, 2022
(in thousands of Philippine Pesos)

 Classified Statement of financial position

Entity A
Statement of financial position
As of December 31, 2022
(amounts in Philippine Pesos)
Notes 2022 2021
ASSETS
Current assets
Cash and cash equivalents P698,020 P280,000
Trade and other inventories 500,000 100,000
Inventories 400,000 180,000
Total current assets 1,598,020 560,000
Non-current assets
Property, plant and equipment 2,750,000 2,800,000
Intangible assets 600,000 640,000
Total non-current assets 3,350,000 3,440,000
Total Assets P4,948,020 P4,000,000
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables P287,500 P200,000
Current tax payable 69,960 15,480
Current portion of long-term 40,000 40,000
borrowings
Provisions 6,000 4,000
Total current liabilities 403,460 259,480
Non-current liabilities
Long-term borrowings 120,000 160,000
Deferred tax liability 70,000 50,000
Total non-current liabilities 190,000 210,000
Total Liabilities 593,460 469,480
Equity
Share capital 2,000,000 1,000,000
Retained earnings 2,354,560 2,530,520
Total Equity 4,354,560 3,530,520

Total Liabilities and Equity P4,948,020 P4,000,000

 Statement of Profit and Loss or Other Comprehensive Income

 Single Statement Presentation

Statement of Profit or Loss and Other Comprehensive Income

Revenues P100
Expenses (80)
Profit or Loss 20
Other comprehensive income 10
Comprehensive income P30
Two-Statement Presentation

Statement of Profit or Loss/ Income Statement

Revenues P100
Expenses (80)
Profit or Loss P20

Statement of Other Comprehensive Income

Profit or loss P20
Other Comprehensive Income 10
Comprehensive Income P3
0

 Presentation of Expenses
Nature of Expense Method

Revenue xx
Other Income xx
Changes in inventories of finished goods and xx
work in process
Raw materials and consumables used xx
Employee benefits expense xx
Depreciation and amortization expense xx
Other expenses xx
Total expenses (xx)
Profit before tax xx
Income tax (xx)
expense
Profit after tax xx
Function of Expense Method

Revenue xx
Cost of sales (xx)
Gross profit xx
Other income xx
 Distribution costs (xx)
Administrative expenses (xx)
Finance costs (xx)
Other expenses (xx)
Profit before tax xx
Income tax expense (xx)
Profit after tax xx

 Statement of comprehensive income

Entity A
Statement of profit or loss and other comprehensive income
For the year ended December 31, 2022
(amounts in Philippine Pesos)
Notes 2022 2021
Revenue 700,000 500,000
Cost of sales (200,000) (120,000)
Gross profit 500,000 380,000
Other income 22,000 12,000
Distribution costs (48,000) (39,000)
Administrative expenses (92,000) (71,000)
Impairment of property, plant & equipment (10,000) -
Other expenses (6,000) (5,000)
Finance costs (15,000) (18,000)
Share in the profit of associates 35,000 30,000
Profit before tax 386,000 289,000
Income tax expense (86,000) (79,000)
Profit for the year from continuing 300,000 210,000
operations
Loss for the year from discontinued - (10,000)
operations
PROFIT FOR THE YEAR 300,000 200,000

Other Comprehensive Income, after tax:

Items that will not be reclassified
subsequently to profit or loss:
Gain on property revaluation - 23,000
Remeasurements of defined benefit plan (1,000) 2,000
(1,000) 25,000
Items that may be reclassified subsequently
to profit and loss:
Gain on translation of foreign operations 53,000 20,000
Cash flow hedges (2,000) (5,000)
51,000 15,000
OTHER COMPREHENSIVE INCOME FOR 50,000 40,000
 THE YR.

TOTAL COMPREHENSIVE INCOME FOR 350,000 240,000

THE YR.

 Statement of Changes in Equity

Entity A
Statement of Changes in equity
For the year ended December 31, 2022
(amounts in Philippine Pesos)
Share Retained Revaluation Total
capital Earnings surplus equity
Balance, Jan. 1, 2021 1,000,000 200,000 300,000 2,000,000
Changes in equity for
2021:
Profit for the year 200,000 200,000
Other comprehensive 20,000 20,000
income
Total comprehensive 220,000
income
Bal., Dec. 31, 2021 1,000,000 900,000 320,000 2,220,000
Changes in equity for
2022:
Profit of the year 300,000 300,000
Other comprehensive 50,000 50,000
income
Total comprehensive 350,000
income
Issue of share capital 500,000
Dividends (100,000) (100,000)
Bal., Dec. 31, 2022 1,500,000 1,100,000 370,000 2,970,000

PAS 2 INVENTORIES
1. According to PAS 2, Inventories are measured at net realizable value.
 Inventories are measured at the lower of cost and net realizable value (NRV).
2. According to PAS 2, net realizable value and fair value less costs to sell are the same.
 Net realizable value for inventories may not equal fair value less costs to sell.
3. Storage costs of part-finished goods may be included in the cost of inventory, but
not storage costs of finished goods.
4. Trade discounts are added to the cost of inventories.
  Deducted
5. Import duties, freight-in and non-refundable purchase taxes form part of the
cost of inventories.
6. Raw materials inventory is not written down below cost if the finished goods to
which they will be incorporated are expected to be sold at or above cost.\
7. Reversals of inventory write-downs may exceed the amount of the original write-
down previously recognized.
 Reversals of inventory write-downs shall not exceed the amount of the original
write-down.
8. The cost of factory management is included in the cost of inventory.
9. The maintenance costs of a machine used in the manufacturing process are not
included in the cost of inventories.
 Conversion costs – these refer to the costs necessary in converting raw
materials into finished goods. Conversion costs include the costs of direct labor
and production overhead.
10.If the cost of an inventory is Php 8.00 while its net realizable value is Php 6.00, the
amount of write-down is Php 2.00.
11.The following are included in the cost of inventory: Purchase cost, net of trade
discount; direct labor cost; freight in.
12.Conversion costs include the following: direct labor and production.
13.These deal with the computation of cost of sales and cost of ending inventory. Cost
formulas
14.Entity A’s inventories consist of items that are ordinarily interchangeable. According
to PAS 2, which of the following cost formulas shall entity A use? FIFO and
weighted average
15.The following statements are correct regarding the use of cost formulas: PAS 2
requires the use of specific identification of costs for inventories that are not
ordinarily interchangeable; entities may choose between the FIFO and the
Weighted Average cost formulas for inventories that are ordinarily
interchangeable; different cost formulas may be used for each class of
inventory with dissimilar nature and use.
16.Entity A’s buys and sells two types of products – Product A and Product B. Items of
Product A are not ordinarily interchangeable while items of Product B are ordinarily
interchangeable. According to PAS 2, what cost formula shall Entity A use? Product
A – SI, Product B – FIFO or WA
17.Entity A is a distributor of oil. Entity A’s inventories are ordinarily interchangeable.
Entity A maintains a specific level of inventory such that the latest purchases are the
ones dispatched first to the sales outlets. Consequently, the latest purchases are sold
first. Which of the following cost formulas shall be used by Entity A? FIFO and
Weighted Average
 18.The following instances are the write-down of inventories to net realizable value
that may be required: the inventories are damaged; the inventories have
become wholly or partially obsolete; the estimated costs to complete or costs
to sell have increased.
19.Write-downs of inventories to their net realizable value are recognized in profit or
loss.
20.Inventories are usually written-down to net realizable value on an item by item
basis.
21.The following is incorrect regarding the determination of the cost of an inventory:
import duties and non-refundable taxes are included; insurance costs while
the inventory is in are included; purchase price, net of trade discounts, is
included.
22.

Units Unit Cost Total Cost

Balance at Jan. 1 3,000 Php 19.55 Php 58,650
Purchases:
Jan. 6 10,200 21.50 219,300
Jan. 26 2,250 20.60 46,350
Sales:
Jan. 7 2,700
Jan. 31 7,200

How much are the ending inventory and the cost of sales under the FIFO cost
formula? Ending inventory: 117,300; Cost of sales: 207,000
23.How much are the ending inventory and cost of sales under the Weighted Average
cost formula? (The average is calculated on a periodic basis.) Ending inventory:
116,495; Cost of sales: 207,805
24.How much are the ending inventory and cost of sales under the Weighted Average
cost formula? (The average is calculated as each additional purchase is made, moving
average.) Ending inventory: 116,382; Cost of sales: 207,918
25.

Product A Product B Product C

Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
Selling price 210,000 300,000 570,000
Freight-out 10,500 75,000 11,400
General Overhead costs 6,300 9,000 17,100

How much is the valuation of ABC’s total inventory on December 31, 2021? 673,000

SUMMARY
  Inventories include goods that are held for sale in the ordinary course of
business, in the process of production for such sale, and in the form of materials
and supplies to be consumed in the production.
 Inventories are measured at the lower of cost and net realizable value (NRV).
 The cost of inventories comprises all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and
condition.
 Trade discounts, rebates and other similar items are deducted in determining
the costs of purchase.
 The following are excluded from the cost of inventory: Abnormal costs, Storage
costs, unless necessary, Administrative costs and Selling costs.
 The cost formulas permitted under PAS 2 are (a) specific identification, (b) FIFO,
and (c) weighted average.
 Specific identification shall be used for inventories which are not ordinarily
interchangeable.
 Net realizable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
 Inventories are usually written down to NRV on the item to item basis.
 Raw materials inventory is not written down below cost if the finished goods in
which they will be incorporated are expected to be sold at or above cost.
 Reversals of inventory write-downs shall not exceed the amount of the original
write-down.

PAS 7 STATEMENT OF CASH FLOWS

1. Cash flows are presented in the statement of cash flows into four activities.
 Cash flows are classified into three activities: (a) operating activities, (b)
investing activities, and (c) financing activities.
2. Non-financial institutions have the option of classifying interest income received
as either investing activities or operating activities.
3. Cash flows relating to income and expenses are normally classified as investing
activities in the statement of cash flows.
 Operating activities include transactions that enter into the determination of
profit and loss, income and expenses.
4. Only transactions that have affected cash and cash equivalents are included in
the statement of cash flows. Non-cash transactions are excluded and disclosed only.
5. According to PAS 7, the indirect method of presenting cash flows relating to
operating activities shows each major class of gross cash receipts and gross cash
payments.
  The direct method shows each major class of gross cash receipts and gross cash
payments.
6. Entity A had the following balances at December 31, 2021:

Cash in bank Php 35,000

Cash in 90-day money market account 75,000
Treasury bill, purchased 11/1/21, maturing 1/31/22 350,000
Treasury bill purchased 12/1/21, maturing 3/31/22 400,000

How much is the cash and cash equivalents to be reported in Entity A’s December
31, 2021 statement of financial position? 110,000
7. Which of the following cash flows is presented in the operating activities section of a
statement of cash flows? Cash receipts from the sale of goods, rendering of
services, or other forms of income.
8. In the statement of cash flows of a non-financial institution, interest expense paid is
presented under operating activities or financing activities.
9. Which of the following is presented in the activities section of the statement of cash
flows? Purchase of a treasury bill three months before its maturity date.
10.Entity A acquires equipment by paying a 10% down payment and issuing a note
payable for the balance. How should Entity A report the transaction in the statement
of cash flows? Down payment: investing activities; Note payable: financing
activities
11.Entity A had the following balances at December 33, 2022:

Cash on hand Php 300,000

Cash in bank 700,000
Cash in 90-day money-market account 500,000
Treasury bill, purchased 12/1/22, maturing 2/28/23 1,600,000
Treasury bond, purchased 3/1/22, maturing 2/28/23 1,000,000

How much cash and cash equivalents is reported in Entity A’s December 31, 2022
statement of financial position? 1,500,000
12.Which of the following is included in the investing activities section of the statement
of cash flow? Acquisition and sale of items property, plant and equipment that
are routinely manufactured in the entity’s ordinary course of business and are
to be held for rentals and reclassified to inventories when the assets cease to
be rented and become held for sale.
13.Which of the following is included in the financing activities section of the statement
of cash flows? Cash receipts from issuing shares or other equity instruments
and cash payments to redeem them.
 14.This method of presenting cash flows from (used in) operating activities involves
adjusting accrual basis profit or loss for the effects of changes in operating assets
and liabilities and effects of non-cash items. Indirect method
15.Entity A declares cash dividends in 2021 and pays the dividends in 2022. How
should Entity A report the dividends paid in the statement of cash flows for 2021:
none; 2022: operating or financing

SUMMARY

 The statement of cash flows shows the historical changes (sources and
utilization) in cash and cash equivalents during the period. It is an integral part
of a complete set of financial statements and is used in conjunction with the
other financial statements in assessing the ability of an entity to generate cash
and cash equivalents, the timing and certainty of their generation, and the needs
of the entity to utilize those cash flows.
 Cash comprises cash on hand and cash in bank.
 Cash equivalents are “short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.” Only debt instruments acquired within 3 months or
less before the maturity date can qualify as cash equivalents.
 Cash flows include inflows (sources) and outflows (uses) of cash and cash
equivalents.
 Cash flows are classified into (a) operating activities, (b) investing activities, and
(c) financing activities.
 Operating activities include transactions that enter into the determination of
profit and loss, income and expenses. (affect profit or loss)
 Investing activities include transactions that affect non-current assets and
other non-operating assets. (affect non-current assets and other investments)
 Financing activities include transactions that affect equity and non-operating
liabilities. (affect borrowings and equity)
 Only transactions that have affected cash and cash equivalents (purchase of
assets by paying cash) are included in the statement of cash flows. Non-cash
transactions (purchase of assets by issuing note payable or shares of stocks and
conversion of debt to equity) are excluded and disclosed only.
 Entities other than financial institutions have options in presenting cash flows
relating to interests and dividends.
 Interest income received: option 1 (operating activity), option 2 (investing
activity); interest expense paid: option 1(operating activity), option 2
(financing activity); dividend income received: option 1 (operating activity),
option 2 (investing activity); dividend paid to owners: option 1 (financing
activity), option 2 (operating activity).
 Option 1: interest income, interest expense and dividend income are classified
as operating activities because they enter into the determination of profit or loss.
Dividend paid is classified as financing activity because it is a transaction with
the owners and alters the equity structure.
 Option 2: interest income and dividend income are classified as investing
activities because they result from investments. Interest expense is classified as
financing activity because it results from borrowing. Dividend paid is classified
as operating activity in order to assist users in assessing the entity’s ability to
pay dividends out of operating cash flows.
 Cash flows from operating activities may be reported using either (a) direct
method or (b) indirect method.
 The direct method shows each major class of gross cash receipts and gross cash
payments. Under the indirect method, profit or loss is adjusted for the effects of
non-cash items and changes in operating assets and liabilities.
 Direct Method

Cash flows from operating activities

Cash receipts from customers 500
Cash paid to suppliers (200)
Cash paid to employees (100)
Cash paid for operating expenses (120)
Cash generated from operations 80
Interest paid (10)
Income taxes paid (20)
Net cash from operating activities 50

 Indirect Method

Cash flows from operating activities:

Profit before tax 250
Adjustments for:
Depreciation 30
Gain on sale of equipment (10)
Impairment loss 5
Interest expense 12
287
Increase in trade and other receivables (150)
Decrease in inventories 3
Decrease in trade payables (60)
Cash generated from operations 80
Interest paid (10)
Income taxes paid (20)
 Net cash from operating activities 50

 Cash flows relating to investing and financing activities are presented

separately at gross amounts, unless they qualify for net presentation.

PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

AND ERRORS
1. A change in measurement basis is most likely a change in accounting policy.
2. A correction of prior period error is accounted for by retrospective restatement.
3. Which of the following is a change in accounting estimate? Change in the
depreciation method, useful life or residual value of an item of property, plant
and equipment.
4. These result from new information or new developments: changes in accounting
estimates, changes in accounting policies, and correction of errors.
5. The effect of which of the following is presented in profit or loss in the current
period (or current and future periods, if both are affected) rather than as an
adjustment to the opening balance of retained earnings. Change in accounting
estimate
6. According to PAS 8, in the absence of a PFRS that specifically deals with a
transaction, management shall use its judgment in developing and applying an
accounting policy that results in information that is relevant and reliable.
7. According to PAS 8, a change in accounting policy is accounted for using a
transitional provision, if any; retrospectively; prospectively, if retrospective
application is impracticable.
8. This refers to applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied. Retrospective application
9. According to PAS 8, a change in accounting estimate is accounted for prospectively.
10.Entity A changes its inventory cost formula from FIFO to weighted average. How
should Entity A account for this change? By retrospective application, as a change
in accounting policy.

SUMMARY

 The two types of accounting changes are (a) change in accounting policy and (b)
change in accounting estimate.
 Accounting policies are those adopted by an entity in preparing and presenting
its financial statements.
 Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
 Hierarchy of reporting standards: PFRSs; Judgment; When making judgment:
management shall consider the following: a. requirements in other PFRSs dealing
with similar transactions; b. conceptual framework; management may consider
the following: a. pronouncements issued by other standard-setting bodies; b. other
accounting literature and industry practices.
 PAS 8 requires the consistent selection and application of accounting policies. An
accounting policy shall be changed only when it (a) is required by a PFRS; or (b)
results in relevant and more reliable information.

Accounting Effect of
Scope of PAS 8 Description
treatment adjustment
1. Change in  Change in a. Transitional  On the
accounting measurement provision beginning
policy basis. b. Retrospective balance of
application retained
c. If (b) is earnings, if
impracticable, accounted
prospective for
application retrospectiv
ely.
2. Change in  Changes in the  Prospective  In profit or
accounting realization (or application loss of
estimate incurrence) of current
expected period or
inflow (or current and
outflow) of future
economic periods, if
benefits from the change
assets (or affects both.
liabilities)
3. Correction  Misapplication a. Retrospective  On the
of prior of principles, restatement beginning
period oversight or b. If (b) is balance of
error misinterpretat impracticable, retained
ion of facts, prospective earnings, if
and application accounted
mathematical for
mistakes. retrospectiv
ely.
 Retrospective application means adjusting the opening balance “of each
affected component of equity (retained earnings ) for the earliest period
presented and the other comparative amounts disclosed for each prior period
presented as if the new accounting policy had always been applied.
  Impracticable means it cannot be done after making every reasonable effort to
do so.
 A change in accounting estimate is an adjustment of the carrying amount of an
asset or a liability, or the amount of the periodic consumption of an asset, that
results from the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities.
 Prospective application means recognizing the effects of the change in profit or
loss, either in: the period of change; or the period of change and future periods, if
both are affected.
 When it is difficult to distinguish a change in accounting policy from a change in
accounting estimate, the change is treated as a change in an accounting
estimate.
 Current period errors are an error in the current period that were discovered
either during the current period or after the current period but before the
financial statements was authorized for issue.
 Prior period errors are errors in one or more prior periods that were only
discovered either during the current period or after the current period but
before the financial statements was authorized the issue.
 Retrospective restatement means correcting a prior period error as if the error
had never occurred.
 A voluntary change in accounting policy is accounted for by retrospective
application. Early application of PFRS is not a voluntary change in accounting
policy.

PAS 10 EVENTS AFTER THE REPORTING PERIOD

1. ABC Co. completes the draft of its December 31, 2021 year-end financial statements
on January 31, 2022. On March 1, 2022, the management of ABC Co. authorizes the
financial statements for issue to its supervisory board. The supervisory board is
made up solely of non-executives and includes representatives of employees and
other outside interests. The supervisory board approves the financial statements on
March 10, 2022. The financial statements are made available to shareholders and
others on March 4, 2022. The shareholders approve the financial statements at their
annual meeting on March 23, 2022 and the financial statements are then filed with a
regulatory body on April 1, 2022. For purposes of PAS 10, what is the date of
authorization of the financial statements? March 1, 2022
2. According to PAS 10, these are events that provide evidence of conditions that
existed at the end of the reporting period. Adjusting events
3. Which of the following events after the reporting period are treated as adjusting
events? Discovery of prior-period fraud of errors.
 4. Entity A’s inventories on December 31, 2021 have a cost of Php100,000 and a net
realizable value of Php80,000. Shortly after December 31, 2021, but before the
financial statements were authorized for issue, the inventories were sold for a net
sale proceeds of Php70,000. The correct valuation of Entity A’s inventories in the
December 3, 2021 financial statements is Php70,000.
5. According to PAS 10, non-adjusting events after the reporting period do not
require adjustments of amounts in the financial statements, but are disclosed
in the notes if they are material.
6. ABC Co. completes the draft of its December 31, 2021 year-end financial statements
on January 31, 2022. On February 5, 2022, the board of directors reviews the
financial statements and authorizes them for issue. The entity announces its profit
and selected other financial information on February 23, 2022. The financial
statements are made available to shareholders and others on March 1, 2022. The
shareholders approve the financial statements at their annual meeting on March 18,
2022 and the approved financial statements are then filed with a regulatory body on
April 1, 2022. Events after the reporting period are those occurring from January 1,
2022 to March 18, 2022.
7. These are events that are indicative of conditions that arose after the reporting
period. Non-adjusting events.
8. Entity A recognized a provision for a pending litigation amounting to Php50,000 on
December 31, 2021 (end of current reporting period). This amount is reflected in
Entity A’s reported profit of Php600,000 for the year 2021. Shortly after December
31, 2021, but before the financial statements were authorized for issue, the
litigation is settled for Php40,000. The correct profit in 2021 is 590,000.
9. Which of the following is an example of an adjusting event? Sale of inventories
after the reporting period that gives evidence to their net realizable value at
the end of reporting period.
10.Which of the following is an example of a non-adjusting event? Significant decline
in foreign exchange rates after the reporting period resulting to massive
losses on recognized foreign currency denominated financial instruments.

SUMMARY

 PAS 10 prescribes the accounting for, and disclosures of, events after the
reporting period, including disclosures regarding the date when the financial
statements were authorized for issue.
 Events after the reporting period are “those events, favourable and
unfavourable, that occur between the end of the reporting period and the date
when the financial statements are authorized for issue.”
  The date of authorization of the financial statements is the date when
management authorizes the financial statements for issue regardless of such
authorization is final or subject to further approval.
 Two types of events after the reporting period: adjusting events after the
reporting period are the events that provide evidence of conditions that existed
at the end of the reporting period; non-adjusting events after the reporting
period are events that are indicative of conditions that arose after the reporting
period.
 Dividends declared after the reporting period are not recognized as liability at
the end of reporting period because no present obligation exists at the end of
reporting period.
 PAS 10 prohibits the preparation of financial statements on a going concern
basis if management determines after the reporting period either that it intends
to liquidate the entity or to cease trading, or that it has no realistic alternative
but to do so.

PAS 12 INCOME TAXES

1. In layman’s terms, to “defer” means to postpone. Thus, a deferred tax liability
increases the tax payment in the current period.
2. If the change in deferred tax asset exceeds the change in deferred tax liability during
the period, the net change is referred to as deferred tax income.
3. Entity A reports an income tax expense of Php1,000 and a current tax expense of
Php800 during the period. The difference between these amounts is best described
as deferred tax expense.
4. Entity A computes a current tax expense of Php700 using relevant tax laws. If the
change in deferred tax assets exceeds the change in deferred tax liabilities during
the period by Php100, Entity A’s income tax expense is Php600.
5. The following are correct regarding the recognition of a deferred tax asset or a
deferred tax liability: A deferred tax liability will ultimately result to a higher
tax payment in the future. A deferred tax asset is expected to cause a
reduction in the tax payment in the future period. Recognizing a deferred tax
asset reduces the tax payment in the current period, below the amount that
would have to be paid if only the tax laws are used to compute for tax due.
6. If the economic benefits from an asset will not be taxable when they are recovered,
the tax base of the asset is equal to its carrying amount.
7. PAS 12 requires the use of this method in accounting for deferred taxes. Asset-
liability method
8. Deferred tax assets and deferred tax liabilities do not alter the tax to be paid in the
current period. However, the cause tax payments to either increase or decrease
 when they reverse in a future period. The reversal of which of the following will
cause a decrease in tax payment? Deferred tax asset
9. Which of the following is correct regarding the presentation of deferred tax assets
and deferred tax liabilities in the statement of financial position? Deferred tax
assets and deferred tax liabilities are generally presented separately unless
they qualify for offsetting.
10.According to PAS 12, the tax effects of transactions or other events are recognized in
profit or loss, other comprehensive income, and directly in equity.

SUMMARY

Financial Reporting Taxation Difference

Profit before bad
1,000 1,000 -
debts
Bad debts (100) -
Accounting /
900 1,000 (100)
taxable profit
Tax rate 30% 30%
Income/Current tax
expense

 The varying treatments of economic activities between the PFRSs and tax laws
result to permanent and temporary differences.
 Permanent differences are those that do not have future tax consequences.
 Temporary differences are either taxable temporary differences or deductible
temporary differences.
 Taxable temporary differences arise, for example, when financial income is
greater than taxable income or the carrying amount of an asset is greater than
its tax base. Deductible temporary differences arise in case of the opposites of the
foregoing.
 Taxable temporary differences result to deferred tax liabilities while deductible
temporary differences result to deferred tax assets.
 If the increase in deferred tax liability exceeds the increase in deferred tax
asset, the difference is deferred tax income or benefit, income tax expense (benefit)
is computed using PFRSs. It comprises current tax expense and deferred tax
expense (income or benefit).
 Current tax expense is computed using tax laws.
 A deferred tax asset is recognized only to the extent that it is realizable.
 Deferred taxes are measured using enacted or substantially enacted tax rates
that are applicable to the periods of their expected reversals.
 Deferred tax assets and liabilities are not discounted.
 In the statement of financial position, current tax assets and liabilities are
presented separately as current items while deferred tax assets and liabilities
are presented separately as non-current items.
 Tax consequences are recognized either in profit or loss, other comprehensive
income, or directly in equity depending on the accounting treatment of the
related transaction or event.
