B S A 2 - 1 Pup Binan Campus

CFAS
BSA 2-1
PUP BINAN CAMPUS

Day 2
Chapter 1
The Accountancy
Profession
20XX 2
Definition of Accounting
Accounting is a service activity. The accounting

function is to provide quantitative information, primarily
financial in nature, about economic entities, that is
intended to be useful in making economic decisions.
(Accounting Standards Council)
The Accountancy Profession
Republic Act 9298 or the Philippine Accountancy Act of 2004
------> Law regulating the practice of accountancy in the Philippines
Board of Accountancy (BOA) - body authorized by law to promulgate rules and regulations
affecting the practice of accountancy profession in the Philippines.
The PRC upon favorable recommendation of the BOA shall issue the Certificate of Registration
(COR) to practice public accountancy which shall be valid for 3 years and renewable every 3 years
upon payment of required fees.
3 Main Areas of Practice of
Accounting Profession
Public Accounting Private Accounting Government Accounting
• Auditing • Local & overseas • Custody and administration

• Taxation employment of public funds
• Management Advisory • Budget preparation, • Process of analyzing,
Services (advice on installation of financial forecast, cash flow classifying, summarizing
computer system, quality control, budgeting, financial and communicating all
installation & modification of statements transactions involving the
accounting system, budgeting, forward receipt and disposition of
planning and forecasting) • CFO, Controller, Chief
Accountant, Finance government funds and
Manager, Accounting property and interpreting the
Supervisor, Accounting Staff results thereof
• BIR, COA, SEC and BSP
CPD – Continuing Professional Development
Republic Act No. 10912 – law mandating and strengthening the continuing professional development program
for all regulated professions, including the accountancy profession.
CPD Credit Units – 120 units is required for the CPA to renew the license and accreditation of CPA to practice the
accountancy profession.
*** CPD has become mandatory for CPAs
As recently promulgated, only 15 CPD credit units are required for the renewal of CPA license. However, 120 CPD
credit units are still required for accreditation of a CPA to practice the accountancy profession.
Note: Excess credit units earned shall not be carried over to the next 3-year period, except credit units earned for
masteral and doctoral degrees.
Exemption from CPD
➢ Upon reaching the age of 65 years
➢ This exemption is applicable only for the renewal of CPA

license and not for the purpose of accreditation to practice
the accountancy profession.
Generally Accepted Accounting Principles
(GAAP)
➢ rules, procedures, practice and standards followed in the

preparation and presentation of financial statements
➢ like laws that must be followed in financial reporting

Purpose of accounting standards
➢ To identify proper accounting practices for the preparation and presentation of financial
statements.
➢ Create a common understanding between preparers and users of financial statements

particularly the measurement of assets and liabilities.
➢Ensure comparability and uniformity in financial statements based on the same financial
information.
FRSC – Financial Reporting
Standards Council
ASC (Accounting Standards Council) – formalized the development of generally accepted
accounting principles in the Philippines
FRSC replaced the ASC.
FRSC is the accounting standard setting body created by PRC upon recommendation of the BOA
to assist the BOA in carrying out its powers and functions provided under RA 9298 (Phil.
Accountancy Act of 2004)
FRSC Main Function - establish and improve accounting standards that will be generally
accepted in the Philippines.
PAS (Philippine Accounting Standards) and PFRS (Philippine Financial Reporting Standards) –
these are the approved statements of the Financial Reporting Standards Council.
Composition of FRSC
Chairman 1
Board of Accountancy 1
Securities and Exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users of financial 1
statements-FINEX
Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
TOTAL 15
PIC – Philippine Interpretations
Committee
➢ Formed by the FRSC in August 2006 and has replaced the Interpretations Committee
(IC) formed by the ASC in May 2000.
➢ The role of the PIC is to prepare interpretations of PFRS for approval by the FSRC and to
provide timely guidance on financial reporting issues not specifically addressed in current
PFRS.
➢ Interpretations are intended to give authoritative guidance on issues that are likely to
receive divergent or unacceptable treatment because the standards do not provide
specific and clearcut rules and guidelines.
IASC – International Accounting
Standards Committee
➢ independent private sector body, with the objective of achieving the uniformity in the
accounting principles which are used by businesses and other organizations for
financial reporting around the world.
➢ Formed in June 1973 through an agreement made by professional accountancy
bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the
United Kingdom and Ireland, and USA.
➢ Headquarter is in London, United Kingdom
IASB – International Accounting
Standards Board
➢ Replaces the IASC.
➢ published standards in a series of pronouncements called International
Financial Reporting Standards (IFRS)
➢ the IASB has adopted the body of standards issued by the IASC
➢ The pronouncements issued by the IASC continued to be designated as
International Accounting Standards (IAS)
Move toward IFRS
➢ From the past years, most of the Philippine Standards are based on American accounting standards.
➢ At present, the FRSC has adapted in their entirety all International Accounting Standards (IAS) and
International Financial Reporting Standards (IFRS)
➢ The move toward IFRS is essential to achieve the goal of one uniform and globally accepted financial
reporting standards
PFRS – Philippine Financial Reporting Standards
➢ The Financial Reporting Standards Council issues standards in a series of pronouncements
called PFRS
PFRS IFRS
• The Philippine Financial Reporting Standards are numbered the same as their counterpart in IFRS
PAS IAS
• The Philippine Accounting Standards are numbered the same as their counterpart in International Accounting
Standards
Philippine Interpretations Interpretations of the IFRIC

• Interpretations developed by the Philippine Interpretations Committee
Day 2
Chapter 2
Conceptual Framework
(Objective of Financial Reporting)
20XX 17
➢ a complete, comprehensive and single document promulgated by the IASB (International Accounting Standards Board).
➢ summary of the terms and concepts that underlie the preparation and presentation of financial statements for external
users.
➢ In other words, the Conceptual Framework describes the concepts for general purpose financial reporting.
➢ an attempt to provide an overall theoretical foundation for accounting.
➢ intended to guide standard-setters, preparers and users of financial information in the preparation and presentation of
statements.
➢ underlying theory for the development of accounting standards and revision of previously issued accounting standards.
➢ The conceptual framework will be used in future standard setting decision but no changes are made to the current
IFRS.
Purposes of Revised Conceptual Framework
a.) To assist the IASB to develop IFRS based on consistent concepts.

b.) To assist preparers of financial statements to develop consistent accounting policy
when NO STANDARD applies to a particular transaction or other event or where an issue
is not yet addressed by an IFRS.
c.) To assist preparers of financial statements to develop accounting policy when a
Standard allows a choice of an accounting policy
d.) To assist all parties to understand and interpret the IFRS (standards)
Authoritative Status of Conceptual
Framework
1.) If there is a Standard or an interpretation that specifically applies to a transaction, the
Standard or Interpretation overrides the Conceptual Framework.
2.) In the absence of standard or an interpretation that specifically applies to a transaction,
management shall consider the applicability of the Conceptual Framework in developing and
applying an accounting policy that results in information that is relevant and reliable.
NOTE: Conceptual Framework is NOT an International Financial Reporting Standard.
3.) Nothing in the Conceptual Framework overrides any specific IFRS.
4.) In case of conflict, the requirements of IFRS shall prevail over the Conceptual Framework.
Users of Financial Information
Under the Conceptual Framework for Financial Reporting, the users of
financial information may be classified into two (2) namely:
(1) Primary Users – existing and potential investors, lenders and other
creditors
(2) Other Users – employees, customers, government and their agencies,
and the public.
◦ Employees – assess the ability of the entity to provide remuneration, retirement benefits & employment
opportunities
◦ Customers – continuance of an entity especially when they have a long-term involvement with or are
dependent on the entity.
◦ Governments and their agencies – to regulate the activities of the entity, determine taxation policies and as
a basis for national income and similar statistics.
Scope of Revised Conceptual Framework
1. Objective of financial reporting
2. Qualitative characteristic of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Objective of Financial Reporting
➢ The objective of financial reporting forms the foundation of the Conceptual Framework.
➢ The overall objective of financial reporting is 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.
➢ Financial reporting is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of the entity’s
management.
➢ Annual financial statements (FS)
➢ Financial highlights, summary of important financial figures, analysis of financial statements
and significant ratios
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 cash flow prospects of the entity
c.) To provide information about entity resources, claims and changes in resources and claims
Financial Financial
Position Performance
Assets – economic Changes in economic

resources resources and claims
Comprises revenue,
Liabilities & Equity – expenses and net
claims income or loss for a
period of time
Results of operations
Comprises the assets,
and is portrayed in the
liabilities and equity of
Income Statement &
an entity at a particular
Statement of
moment in time
Comprehensive Income
Liquidity vs. Solvency
LIQUIDITY SOLVENCY
Availability of cash in the near future to cover Availability of cash over a long term to meet
currently maturing obligations financial commitments when they fall due
Current Non-Current
Limitations of financial reporting
a.) General purpose financial reports do not and cannot provide all the information that existing
and potential investors, lenders and other creditors need. (e.g. economic conditions, political
events and industry outlook
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 intended to 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.
Day 2
Chapter 3
(Qualitative Characteristics)
20XX 28
6. Measurement
Qualitative Characteristics
➢ qualities or attributes that make financial accounting information useful to the users.
Fundamental Qualitative Characteristics Enhancing Qualitative Characteristics

1. Relevance
----> the relevance of information is affected by its 1. Comparability
nature and materiality.
2. Faithful representation 2. Understandability
3. Verifiability
4. Timeliness
Relevance
➢ capacity of the information to influence a decision
➢ financial information should be related or pertinent to the economic decision
Ingredients of Relevance
a.) Predictive value – can be used as an input to processes employed by users to
predict future outcome.
b.) Confirmatory value – enables users confirm or correct earlier expectations.
Materiality
➢ practical rule in accounting which dictates that strict adherence to GAAP is
not required when the items are not significant enough to affect the
evaluation, decision and fairness of the financial statements.
➢ also known as the doctrine of convenience.
➢ The relevance of information is affected by its nature and materiality.
NOTE: The conceptual framework does not specify a uniform quantitative
threshold for materiality or predetermine what could be material in a particular
situation.
New Definition of Materiality
➢ Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence the economic decisions that primary users of general purpose financial statements
make on the basis of those statements which provide financial information about a specific
reporting entity. ( IASB provided definition)
➢ 3 important aspects:
(1) Could reasonably be expected to influence
(2) Obscuring information – deliberate vagueness, ambiguity and abstruseness
(3) Primary users – existing and potential investors, lenders and other creditors
Fundamental Qualitative
Characteristics
Faithful Representation
1. Relevance
2. Faithful representation
➢ Descriptions and figures must match what really existed or happened.
➢ Actual effects of the transactions shall be properly accounted for and reported in the
financial statements.
Ingredients of Faithful Representation

a.) Completeness – relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. (e.g. Notes to FS)adequate disclosure
b.) Neutrality – without bias in the preparation or presentation of financial information
c.) Free from error
Prudence
➢ exercise of care and caution when dealing with uncertainties in the measurement process such
that assets or income are not overstated and liabilities or expenses are not understated.
Conservatism
➢ when alternatives exist, the alternative which has the least effect on equity should be chosen.
➢ In case of doubt, record any loss and do not record any gain.
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 not
merely their legal form.
➢ Example:
Lessee leased property from the lessor.
The terms of the lease provide that the lease transfers ownership of the asset to the lessee by
end of the lease term.
In FORM – the contract is a lease
In SUBSTANCE – the transfer of ownership provision is to be considered the real intent of the parties
(installment purchase of an asset by the lessee from the lessor)
The periodic rental is conceived as an installment payment representing interest and principal.
Enhancing qualitative characteristics
➢ To increase the usefulness of the financial information that is relevant and faithfully
represented.
➢ Enhancing Qualitative Characteristics

1. Comparability
2. Understandability
3. Verifiability
4. Timeliness
Intracomparability vs. Intercomparability
INTRACOMPARABILITY INTERCOMPARABILITY
a.) Within an entity a.) Across entities
b.) Through time or from one accounting period to the

b.) Two or more entities engaged in the same industry
next
Consistency vs. Comparability
CONSISTENCY COMPARABILITY
a.) Uniform application of accounting method from a.) Uniform application of accounting method
period to period within an entity between and across entities in the same industry
b.) Helps to achieve the goal b.) Goal

Understandability
➢ requires that the financial information must be comprehensible or
intelligible if it is to be most useful.
➢ very essential because a relevant a relevant and faithfully represented
information may prove useless if it is not understood by users.
Verifiability
➢ means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful
representation.
➢ Verifiability implies consensus.
➢ The financial information is verifiable in the sense that it is supported by evidence so that an
accountant that would look into the same evidence would arrive at the same economic decision or
conclusion.
➢ Verifiable financial information provides results that would be substantially duplicated by

measurers using the same measurement method.
Types of Verification
Direct Verification Indirect Verification
Checking the inputs to a model, formula or other

Direct observation
technique and recalculating the inputs
Carrying Amount of Inventory

Checking the inputs in quantities and costs, and
Cash Count
recalculating the ending inventory using the same
cost flow assumption such as FIFO.
Timeliness
➢ Financial information must be available or communicated early enough when a decision is to be
made.
➢ Relevant and faithfully represented financial information furnished after a decision is made is
useless or of no value.
➢ Cost constraint on useful information

➢ Reporting financial information imposes cost and it is important that such cost is justified by the benefit
derived from the financial information.
➢ The cost constraint is a consideration of the cost incurred in generating financial information against the
benefit to be obtained from having the information.
➢ Benefit derived from the information should exceed the cost incurred in obtaining the information.
Day 4
Chapter 4
Financial Statements and

Reporting Entity
20XX 3
6. Measurement
General Objective of FS
Financial Statements provide information about
economic resources of the reporting entity, claims against
the entity and changes in the economic resources and
claims.
Financial
Statements
Balance Sheet Income Statement

Statement of Cash Statement of Notes to Financial
(Statement of Financial Flows Changes in Equity Statements
Financial Position) Performance
Changes in
economic
resources
Changes in
claims
Assets (economic
resources)
Liabilities (claims
against the entity)
Equity (net assets)

Types of Financial Statements
1) Consolidated financial statements – both parent and its subsidiaries
2) Unconsolidated financial statements – parent alone
3) Combined financial statements – two or more entities that are not linked by a parent and
subsidiary relationship
Accounting Assumptions
➢ basic notions or fundamental premises on which the accounting process is based.
➢ serve as the foundation or bedrock of accounting in order to avoid misunderstanding but rather
enhance the understanding and usefulness of the financial statements.
GOING CONCERN assumption
➢ in the absence of evidence to the contrary, the accounting entity is viewed as continuing in
operation indefinitely.
Accounting Entity
➢ specific business organization, which may be a proprietorship, partnership or corporation.
➢ Entity is separate from the owners, managers and employees who constitute the entity.
Time Period assumption
➢ indefinite life of an entity is subdivided into accounting periods which are usually of equal length
for the purpose of preparing financial reports on financial position, performance and cash flows.
➢ Calendar year – 12 month period that ends on December 31
➢ Natural business year – 12 month period that ends on any month when the business is at the
lowest or slack season.
Monetary Unit assumption
➢ Quantifiability
➢ Assets, liabilities, equity, income and expenses should be stated in terms of
a unit of measure which is the peso in the Philippines.
➢ Stability of Peso
➢ Purchasing power of the peso is stable or constant and that its instability is
insignificant and therefore may be ignored.
Day 4
Chapter 5
Elements of Financial
Statements
20XX 11
6. Measurement
Elements of Financial Statements
➢ Quantitative information reported in the statement of financial position(balance sheet) and
income statement.
➢ Building blocks from which financial statements are constructed
Elements of Financial Position Elements of Financial Performance
Asset Income
Liability Expense
Equity
ASSET
NEW DEFINITION
OLD DEFINITION
under the Revised Conceptual Framework
A resource controlled by A present economic

the entity as a result of past resource controlled by the entity
events and from which future as a result of past events.
economic benefits are expected
to flow to the entity.
*** asset is an economic resource and that the potential

economic benefits no longer need to be expected to flow to the
entity.
Essential Characteristics of Asset
a) The asset is a present economic resource
b) The economic resource is a right that has potential to produce economic benefits
c) The economic resource is controlled by the entity as a result of past events
RIGHTs that have the potential to produce economic benefits

Obligation of another entity
▪ Right to receive cash (Accounts Receivable)
▪ Right to receive goods or services (Inventory or Supplies purchased from the vendor)
▪ Right to exchange economic resources with another party on favorable terms (Right of Use Assets) *** before outright rent expense now
capitalized over the lease term
▪ Right to benefit from an obligation of another party if a specified uncertain future event occurs (Insurance Claims, proceed from fire
insurance)
Without Obligation from another entity
▪ Right over physical objects (PPE, Equipment and Inventories)
▪ Right to intellectual property
Established by contract or legislation
▪ Debt instrument/Equity Instrument/Registered Patent
Potential to produce economic benefits
➢ The economic resource is the present right that contains the potential and not the future economic benefits that
the right may produce.
a. To receive contractual cash flows (from a lessor perspective-monthly lease payments)
b. To exchange economic resources with another party on favorable terms (trade-in of used vehicle) 2nd hand car
c. To produce cash inflows or avoid cash outflows (salvage value of used furniture and fixtures)
d. To receive cash by selling the economic resource (sale of merchandise inventory on cash basis only)
e. To extinguish a liability by transferring an economic resource (payment of trade liabilities)

Control of an economic resource
➢ ability to direct the use of asset
➢ obtain the economic benefits that flow from it
➢ Legal Rights
Liability
NEW DEFINITION
OLD DEFINITION
under the Revised Conceptual Framework
A present obligation of A present obligation of an

the entity arising from past entity to transfer an economic
events, the settlement of which resource as a result of past
is expected to result in an events.
outflow from the entity of
resources embodying economic
benefits.
*** the outflow of economic benefits no longer needs to be
expected similar to the definition of an asset.
Essential Characteristics of Liability
a) The entity has an obligation
b) The obligation is to transfer an economic resource
c) The obligation is a present obligation that exists as a result of
past event
Obligation
➢ Duty or responsibility that an entity has no practical ability to avoid.
➢ Legal Obligations – enforceable as a consequence of a binding contract or
statutory requirement
➢ Constructive Obligations – arise from normal business practice, custom and a
desire to maintain good business relations or act in an equitable manner
➢ example: warranty and out of warranty claims
Transfer of an economic resource
a.) Obligation to pay cash
b.) Obligation to deliver goods or noncash resources
c.) Obligation to provide services at some future time
d.) Obligation to exchange economic resources with another party on
unfavorable terms
e.) Obligation to transfer an economic resource if specified uncertain future
event occurs
Income
➢ Increase in assets or decreases in liabilities that result in increases in equity,
other than those relating to contributions from equity holders.
➢ Encompasses both revenue and gains.
➢ Revenue – arises in the ordinary course of business (Sales, Fees
earned, interest, dividends, royalties and rent)
➢ Gains – do not arise in the ordinary course of business (Gain from
disposal of non-current asset, unrealized gain on trading investment and
gain from expropriation of asset
Statement of
Financial
Performance
Profit or Loss Other

(Income Comprehensive
Statement) Income
Foreign currency gains or losses
Unrealized gains/losses from financial

instruments (Bonds, Derivatives)
Expense
➢ Decrease in assets or increases in liabilities that result in decreases
in equity other than those relating to distributions to equity holders.
➢ Expense encompasses both
➢ Expense – arises in the ordinary course of business (Cost of
goods sold, wages and depreciation)
➢ Losses – do not arise in the ordinary course of business (Losses
from fire, flood, storm, as well as those arising from disposal of
non-current assets
Day 4
Chapter 6
Recognition and
measurement
20XX 25
Recognition
➢ process of capturing for inclusion in the financial statements an item that meets
the definition of asset, liability, equity, income or expense.
➢ Carrying amount
➢The amount at which an asset, a liability or equity is recognized in the
statement of financial position.
OLD RECOGNITION CRITERIA NEW (REVISED) RECOGNITION CRITERIA
Probable that economic benefits will flow to the Only items that meet the definition of an asset,
entity liability, equity, income or expense.
Cost can be measure reliably Even if probability is low

Revenue Recognition
➢ Point of Sale (POS) income recognition
➢Transferred to the buyer the significant risks and
rewards of ownership of the goods
➢ Legal title to the goods passes to the buyer at the
point of sale (POS)
Expense Recognition
➢ Expenses are recognized when incurred not when paid
➢ Matching principle
➢ cost of doing business
➢ generation of revenue is not without any cost
➢ there is cost in earning a revenue
➢ No Pain, No Gain!
3 Applications of Matching Principle
(1) Cause and effect association
◦ Expense is recognized when the revenue is already recognized
◦ Examples: Cost of Goods sold, doubtful accounts, warranty expense and sales commission
(2) Systematic and rational allocation

◦ Costs are expensed by simply allocating them over the periods benefited
◦ Examples: Depreciation of PPE, Amortization of intangibles, allocation of prepaid rent, insurance and other prepayments
(3) Immediate recognition

◦ Expense outright because of uncertainty of future economic benefits
◦ No future economic benefit
◦ Does not qualify for recognition as an asset
◦ Examples: Salaries expenses, administrative expenses, advertising expense, mostly selling expenses, amount to settle
lawsuits
◦ Loss from disposal of building, loss from sale of investments, and casualty loss
Measurement
➢ quantifying in monetary terms the elements in the financial statements
2 Categories
(1) Historical Cost

➢ Cost incurred in acquiring or creating the asset comprising the consideration paid plus transaction cost (ASSET)
➢ Consideration received to incur the liability minus transaction cost (LIABILITY)
➢ Amortized cost reflects the estimate of future cash flows discounted at the rate determined at initial recognition
(2) Current Value

Current Value
a) Fair Value
a) Price that would be received to sell an asset in an orderly transaction between market participants
at measurement date (ASSET)
b) Price that would be paid to transfer a liability in an orderly transaction between market
participants at measurement date (LIABILITY)
c) In cases where fair value cannot be directly measured, an entity can use present value of cash
flows
d) Not adjusted for transaction costs
b) Value in use for asset
c) Fulfillment value for liability
d) Current Cost
Current Value
b) Value in use for asset
➢Present value of the cash flows that an entity expects to derive from the use of
an asset and from the ultimate disposal
➢Does not include transaction cost on acquiring the asset but includes
transaction cost on the disposal of the asset
c) Fulfillment value for liability
➢Present value of cash that an entity expects to transfer in paying or settling a
liability
➢Does not include transaction cost on incurring a liability but includes
transaction cost on fulfillment of a liability
Current Value
d) Current Cost
➢Current Cost of an asset
➢ Cost of an equivalent asset at the measurement date
comprising the consideration paid and transaction
cost
➢Current Cost of a liability
➢ Consideration that would be received less any
transaction cost at measurement date
Selecting a measurement basis
➢ Historical cost is the most commonly adopted
measurement basis in preparing financial statements.
➢ The IASB did not mandate a single measurement basis
because the different measurement bases could produce
useful information under different circumstances.
Day 4
Chapter 7
Presentation and
disclosure
CONCEPTS OF CAPITAL
20XX 35
Presentation and Disclosure
➢ Effective communication tool about the information in financial statements
➢ Relevance and contributes to faithful representation of assets, liabilities, income and expenses
➢ Enhances the understandability and comparability of information in the financial statements
CLASSIFICATION
➢ Sorting of assets, liabilities, equity, income and expenses on the basis of shared similar characteristics
➢ Current VS. Non-Current
AGGREGATION
➢ Adding together of assets, liabilities, equity, income and expenses that have similar or shared
characteristics and are included in the same classifications
2 Approaches in Preparing Income Statement
(1) Transaction approach

◦ Traditional preparation of income statement
(2) Capital Maintenance approach
◦ Net income occurs only after the capital used from
the beginning of the period is maintained
2 Concepts of Capital Maintenance
1) Financial Capital (net asset approach)
Net Assets, yearend > Net Assets, beginning (after deducting distributions to and
contributions by owners during the period
Ending Net Assets 1,300,000
Beginning Net Assets (500,000)

Beginning Capital XXX
Increase in Net Assets 800,000
Add: Net Income XXX
Less: Investments (400,000) Total XXX
Add: Dividends Paid 300,000 Add: Investment XXX

Less: Dividends Paid (Withdrawal) (XXX)
Net Income 700,000
Ending Capital XXX
2 Concepts of Capital Maintenance
2) Physical Capital
➢ Quantitative measure of the physical productive capacity to produce goods and services
➢ Units of output per day
➢ Current cost rather than historical cost
➢ Physical capital is equal to the net assets of the entity expressed in terms of current cost
➢ Physical productive capital of the entity at the end of the year > beginning of the year after excluding distributions to and contributions from
owners
➢ Beginning Net Assets increased due to inflation (from 500,000 to 800,000)
Ending Net Assets 1,300,000 Beginning Capital (only difference is current XXX
cost instead of historical cost)
Beginning Net Assets (800,000) Current Cost
Add: Net Income XXX
Increase in Net Assets 500,000
Total XXX
Less: Investments (400,000)
Add: Investment XXX
Add: Dividends Paid 300,000
Less: Dividends Paid (Withdrawal) (XXX)
Net Income 400,000
Ending Capital XXX
Day 4
Chapter 8
PAS 1
Statement of Financial Position
20XX 40
Financial Statements
➢ the means by which the information accumulated and processed in financial accounting is periodically
communicated to the users.
➢ Structured financial representation of the financial position and financial performance of an entity
Components of Financial Statements
1) Statement of Financial Position
2) Income Statement
3) Statement of Comprehensive Income
4) Statement of Changes in Equity
5) Statement of Cash Flows
6) Notes, comprising a summary of significant accounting policies and other explanatory notes
➢ Formal statement showing the three elements
comprising financial position, namely assets, liabilities
and equity.
➢ liquidity, solvency and the need for additional financing
Classification of Assets
1) Current Assets
1) The asset is cash or cash equivalent unless the asset is restricted to settle a liability for more than 12 months after the
reporting period
2) The entity holds the asset primarily for the purpose of trading
3) The entity expects to realize the asset within 12 months after the reporting period
4) The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle
2) Noncurrent Assets
1) An entity shall classify all other assets not classified as current as noncurrent.
EXAMPLES:
Property, plant and equipment
Long-term investments
Intangible assets
Deferred Tax assets
Other noncurrent assets
Property, plant and equipment
PAS 16, paragraph 6 defines PPE as
◦ Tangible assets which are held by an entity for use in production or supply of goods and
services, for rental to others, or for administrative purposes, and are expected to be used
during more than one period.
EXAMPLES:
◦ Land (not depreciated)
◦ Building
◦ Machinery
◦ Equipment
◦ Furniture, fixtures
◦ Patterns, molds, dies and tools
Long-term investments
➢ An asset held by an entity for the accretion of wealth through capital distribution, such as
interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the
investing activity such as those obtained through trading relationships.
➢ Examples:
➢ Stocks - an investment in a specific company. By purchasing a stock an investor is essentially buying a share – a small piece
– of the company’s earnings and assets. Stocks are offered by companies as a means of raising cash; the investors, in turn,
can buy and sell those shares among themselves.
➢ Bonds - loans you give to a company or government. When you purchase a bond, you are allowing the bond issuer to
borrow your money and pay you back with interest. Compared to most investments, bonds are generally considered less
risky than stocks, however, it is because of this that they tend to offer lower returns. The main risk the investor should
consider is the possibility that the issuer could default.
➢ Mutual Fund - investors are able to purchase large investments in a single transaction. These funds, in turn, pool money
from multiple investors and are managed by a professional fund manager to invest that pooled fund in stocks, bonds, and
other assets.
Intangible Assets
➢ Identifiable nonmonetary asset without physical substance
➢ Examples:
➢ Patent
➢ Franchise
➢ Copyright
➢ Lease right
➢ Trademark
➢ Computer software
➢Identifiable non
➢ Unidentifiable
➢ Goodwill
Other noncurrent assets
➢ Assets that do not fit into the definition of previously mentioned
noncurrent assets
➢ Examples:
➢ Long-term advances to officers/directors/shareholders and
employees
➢ Abandoned property
➢ Long-term refundable deposit
Liabilities
1)Current liabilities
2)Noncurrent liabilities
Current Liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as current
when:
➢ Entity expects to settle the liability within the entity’s normal operating cycle
➢ The entity holds the liability primarily for the purpose of trading
➢ The liability is due to be settled within 12 months after the reporting period
➢ The entity does not have a right to defer settlement of the liability for at least 12
months after the reporting period
Noncurrent Liabilities
PAS 1, paragraph 69, provides that all liabilities not classified as
current are classified as noncurrent:
EXAMPLES:
Noncurrent portion of long-term debt
Finance lease liability
Deferred tax liability
Long-term obligations to company officers
Long-term deferred revenue
Equity
➢ Residual interest in the assets of the entity after deducting all of its liabilities.
➢ Net Assets = Total Assets – Liabilities
➢ Owner’s Equity in a proprietorship
➢ Partner’s Equity in a partnership
➢ Shareholders’ equity in a corporation

Currently Maturing long-term debt
➢ A liability which is due to be settled within 12 months after the reporting period
is classified as current, even if:
➢The original term was for a period longer than 12 months
➢ An agreement to refinance or to reschedule payment on a long-term
basis is completed after the reporting period and before the financial
statements are authorized for issue
➢ However, if the refinancing on a long-term basis is completed on or
before the end of the reporting period, the refinancing is an adjusting
event and the obligation is classified as noncurrent liability
Covenants
➢ restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining
specified level of working capital and so forth
➢ If certain conditions relating to the borrower’s financial situation are breached, the liability
becomes payable on demand
➢ PAS 1 paragraph 74 provides that liability is classified as current even if the lender has agreed,
after the reporting period and before the statements are authorized for issue, not to demand
payment as a consequence of breach.
➢ However paragraph 75 provides that the liability is classified as noncurrent if the lender has
agreed on or before the end of the reporting period to provide a grace period ending at least 12
months after the end of reporting period.
Day 5
RECAP
Day 4 (Last week) – Financial Statements and Reporting Entity (Chapter 4)
Elements of Financial Statements (Chapter 5)
Recognition and measurement (Chapter 6)
Presentation and disclosure (Chapter 7)
Day 5 – Presentation of Financial Statements (Chapter 8)

PAS 1 Income Statement (Chapter 9)
PAS 7 Statement of Cash Flows (Chapter 10)
20XX 2
Day 5
Chapter 8
PAS 1
20XX 3
Problems
DONBELLE Company provided the following account balances on December 31, 2021:
Share Capital 5,000,000
Share Premium 500,000
Retained Earnings 880,000
Serial Bonds Payable (P500,000 due every July 1
Of each year) 2,500,000
Employees Income Tax payable 20,000
Notes Payable (due within 1 year) 100,000
Accrued Expenses 30,000
Accrued interest on note payable 10,000
Income Tax Payable 60,000
Allowance for doubtful accounts 50,000
Advances from customers 100,000
Accounts Receivable 500,000
Accumulated Depreciation-building 1,600,000
Accumulated Depreciation-machinery 1,300,000
Investment in bonds 1,500,000
Land 1,500,000
Machinery 2,000,000
Factory Supplies 50,000
Notes Receivable (collectible within 1 year) 150,000
Building 4,000,000
Cash 420,000
Claim Receivable 20,000
Finished goods 400,000
Franchise 200,000
Goods in process 600,000
Prepaid insurance 20,000
Raw materials 200,000
Financial asset held for trading 250,000
Tools 40,000
Goodwill 100,000
Plant Expansion Fund 500,000
Accounts Payable 300,000
1st step – Identify and classify each element of financial
position (Asset, Liability or Equity)
2nd step - To maintain equality of accounting equation
(A = L + E), contra accounts must be shown as
Solution: deduction (negative sign). Examples: Allowance for
doubtful accounts, accumulated depreciation
3rd step – Group according to the sequence of Notes to
Financial Statements (current, noncurrent)
Step 1
3 Elements of Financial Position
Row Labels Sum of Amount
Asset 9,500,000.00
Liability 3,120,000.00
Equity 6,380,000.00
Grand Total 19,000,000.00
Step 2
Asset 9,500,000.00
Current 2,600,000.00
Noncurrent 6,900,000.00
Step 2 Liability 3,120,000.00
Current 1,370,000.00
Equity 6,380,000.00
N/A 6,380,000.00
Group according to Notes to FS
Step 3
Present in a REPORT format
DONBELLE COMPANY
December 31, 2021

Asset 9,500,000.00
Current 2,600,000.00
Cash and cash equivalents 420,000.00
Financial Assets at fair value 250,000.00
Trade and other receivables 620,000.00
Step 4
Inventories 1,290,000.00
Prepaid Expenses 20,000.00
Property, plant and equipment 4,600,000.00
Intangible Assets 300,000.00
Long-term investments 2,000,000.00
Liability 3,120,000.00
Current 1,370,000.00
Trade and other payables 620,000.00
Current Portion of bonds payable 750,000.00
Noncurrent liabilities -
Noncurrent Portion of bonds payable 1,750,000.00
Equity 6,380,000.00
N/A 6,380,000.00
Share Capital 5,000,000.00
Share Premium 500,000.00
Retained Earnings 880,000.00
Day 5
Chapter 9
PAS 1
Income Statement
20XX 12
Income Statement
➢ formal statement showing the financial performance of an entity for a given period of time
➢ also known as the results of operations of the entity
➢ Sources of income
➢Sale of merchandise to customers
➢Rendering of services
➢Use of entity resources
➢Disposal of resources other than products
Components of expense
a) Cost of goods sold or cost of sales
b) Distribution costs or selling expenses
c) Administrative expenses
d) Other expenses
e) Income tax expense
Cost of Goods Sold (Merchandising)
Beginning inventory 500,000
Net Purchases 2,000,000
Goods available for sale 2,500,000
Ending Inventory (300,000)
Cost of goods sold 2,200,000
Gross Purchases 1,900,000

Freight-in 150,000
Total 2,050,000
Purchase Returns
Discounts/Purchase Allowance (50,000)
Cost of Goods Sold (Manufacturing)
Beginning raw materials 500,000
Raw materials available for use 2,500,000
Ending raw materials (300,000)
Raw materials used 2,200,000
Raw materials used 2,200,000

Direct labor 3,000,000
Factory overhead 1,300,000
Total manufacturing cost 6,500,000
Total manufacturing cost 6,500,000

Beginning goods in process 900,000
Total cost of goods in process 7,400,000
Ending goods in process (1,000,000)
Cost of goods manufactured 6,400,000
Beginning finished goods 1,600,000
Goods available for sale 8,000,000
Ending finished goods (1,500,000)
Cost of goods sold 6,500,000
Classification of expenses
➢ Distribution costs
➢Costs which are directly related to selling, advertising and delivery of goods to customers
EXAMPLES:
Salesmen’s salaries
Salesmen’s commission
Travelling and marketing expenses
Advertising and publicity
Freight out
Depreciation of delivery equipment and store equipment
➢ Administrative expenses
➢ Costs of administering the business
➢ Examples
1) Doubtful accounts
2) Office salaries
3) Expenses of general executives
4) Expenses of general accounting and credit department
5) Office supplies used
6) Certain taxes
7) Contribution
8) Professional fees
9) Depreciation of office building and office equipment
10) Amortization of intangible assets
➢ Other Expenses
➢ Expenses which are not directly related to the selling and administrative
function
➢ Examples
1) Loss on sale of trading investments
2) Loss on disposal of property, plant and equipment
3) Loss on sale of noncurrent investment
4) Casualty loss – flood, earthquake, fire
No more extraordinary items
➢ PAS , paragraph 87 specifically mandates that an entity shall not present
any items of income and expense as extraordinary either on the face of the
income statement or statement of comprehensive income or in the notes.
➢ Extraordinary items refer to those events considered unusual by the

company as they are infrequent.
Day 5
Chapter 10
PAS 7
Statement of Cash Flows
20XX 21
Statement of Cash Flows
➢ Component of financial statements summarizing the
operating, investing and financing activities of an entity.
➢ Provides information about the cash receipts and cash
payments of an entity during a period.
Cash and cash equivalents
➢ Cash equivalents are short term highly liquid investments that are readily convertible to known
amount of cash and which are subject to an insignificant risks of change in value.
➢ PAS 7, paragraph 7 provides that an investment normally qualifies as cash equivalent only when it
has a short maturity of 3 months or less from the date of acquisition.
EXAMPLES:
a) 3 month BSP treasury bill
b) 3 year BSP treasury bill purchased 3 months before date of maturity
c) 3 month time deposit
d) 3 month money market instrument or commercial paper

3 Classification of Cash Flows
1) Operating Activities
2) Investing Activities
3) Financing Activities
Operating Activities
➢ Cash flows derived primarily from the principal revenue producing activities of the entity.
a) Cash receipts from sale of good
b) Cash receipts from royalties, rental, fees, commissions and other revenue
c) Cash payments to suppliers for goods purchased
d) Cash payments for selling, administrative and other expenses
e) Cash receipts and payments for securities held for trading
f) Cash payment or refund of income taxes unless can be identified specifically with
financing and investing activities
Investing Activities
➢ Cash flows derived from acquisition and disposal of long-term assets and other investments not included in cash equivalent.
➢ Cash flows involving nonoperating assets
a) Cash payments to acquire property, plant and equipment, intangible asset and other long term asset
b) Cash receipts from sale of property, plant and equipment, intangible asset and other long-term asset
c) Cash payments to acquire equity or debt instruments of other entities (current and long-term investments)
d) Cash receipts from sale of equity or debt instruments of other entities
e) Cash advances and loans to other parties other than advances and loans made by financial institution
f) Cash advances and loans to other parties other than advances and loans made by financial institution
g) Cash receipts from repayment of advances and loans made to other parties
Financing Activities
➢ Cash flows derived from the equity capital and borrowings of the entity.
➢ Result from transactions between the entity and the owners – equity financing
➢ Result from transactions between the entity and the creditors – debt financing
a) Cash receipts from issuance of ordinary and preference shares
b) Cash payments to acquire treasury shares
c) Cash receipts from issuing bonds, loans, notes, mortgages and other short or long term
borrowings
d) Cash payments for amounts borrowed
e) Cash payments by a lessee for the reduction of the outstanding principal lease liability
Noncash transactions
➢ Statement of cash flows is strictly a cash concept.
➢ Noncash investing and financing transactions shall be disclosed only either in
the notes to financial statements or in a separate schedule or in a way that
provides all relevant information about these transactions.
➢ EXAMPLES:
➢Acquisition of asset by issuing share capital
➢Acquisition of asset by issuing bonds payable
➢Conversion of bonds payable into share capital
➢Conversion of preference shares into ordinary shares
Interest paid and interest received
➢ PAS 7, paragraph 33, provides that interest paid and interest received shall be classified
as operating cash flows because such items enter into the determination of net income or
loss.
➢ Alternatively, interest paid may be classified as financing cash flow because it is a cost of
obtaining financial resources.
➢ Alternatively, interest received may be classified as investing cash flow because it is a
return on investment.
➢ For a financial institution, interest paid and interest received are usually classified as
operating cash flow.
Dividends received
➢ PAS 7, paragraph 33, provides that dividend received shall be
classified as operating cash flow because it enters into the
determination of income.
➢ Alternatively, dividend received may be classified as investing
cash flow because it is a return on investment.
Dividends paid
➢ PAS 7, paragraph 34, provides that dividend paid shall be classified as financing cash flow
because it is a cost of obtaining financial resources.
➢ Alternatively, dividend paid may be classified as operating cash flow in order to assist users to
determine the ability of the entity to pay dividends out of operating cash flow.
Day 6
Chapter 11
PAS 8
Accounting Policies, Estimates
and Errors
20XX 2
Accounting Policies
➢ specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial
statements.
➢ The entity must apply the same accounting policies each
period in order to achieve comparability of financial statements.
Change in accounting policy
is applicable only when:
a) Required by an accounting standard
b) The change will result in more relevant and faithfully
represented information about the financial position,
financial performance and cash flows of the entity
Examples of change in accounting policy
a) Change in the method of inventory pricing from the FIFO to weighted average
method
b) Change from cost model to revaluation model in measuring property, plant
and equipment
c) Change from cost model to fair value model in measuring investment
property
d) Change to a new policy resulting from the requirement of a new PFRS
How to report a change in
accounting policy?
➢ A change in accounting policy required by a standard or an
interpretation shall be applied in accordance with the transitional
provisions therein.
➢ If the standard or interpretation contains no transitional
provisions or if an accounting policy is changed voluntarily, the
change shall be applied retrospectively or retroactively.
Retrospective application
➢ any resulting adjustment from the change in accounting policy shall be
reported as an adjustment to the opening balance of retained earnings.
➢ The amount of the adjustment is determined as of the beginning of the year
of change.
➢ If comparative information is presented, the financial statements of the prior
period presented shall be restated to conform with the new accounting policy.
Illustration of retrospective application
An entity has used the FIFO method of inventory valuation since it began operations in 2021.
The entity decided to change to the weighted average method for determining inventory cost at the beginning of
2022. FIFO Weighted Average
Dec. 31, 2021 1,000,000 750,000
Dec. 31, 2022 1,500,000 1,200,000
FIFO Inventory – Jan. 1, 2022 1,000,000

Weighted Ave. Invty – Jan. 1, 2022 750,000
Decrease in beginning inventory 250,000
Adjusting entry:
Debit – Retained Earnings 250,000
Credit – Inventory – Jan. 1 250,000
Change in Change in
accounting accounting
estimate policy
Prospective Retrospective
application application
Estimates for
Change in
required
method of
doubtful
inventory pricing
accounts
Change from
Useful life and
cost model to
residual value of
revaluation
an asset
model (PPE)
Change to a
Warranty Costs new policy (new
PFRS)
Illustration of Accounting Estimate
A depreciable asset costing Php 500,000 is estimated to have a useful life of 5 years.
At the beginning of the 3rd year, the original life is changed to 8 years. As a result, the asset has a remaining
useful life of 6 years.
Original Estimate Revised

Useful Life 5 years 8 years
Remaining Useful Life
(start of 3rd year - change 3 years 6 years
in estimate)
Cost 500,000
Carrying Amount at the 300,000 300,000
end of 2nd year
On the 3rd year:

Annual Depreciation 100,000 50,000
Prior Period Errors
➢ Omissions and misstatements in the financial statements for one or more periods arising from a
failure to use or misuse of reliable information.
➢ Mathematical mistakes
➢ Mistakes in applying accounting policies, misinterpretation of facts, fraud
➢ Similar to change in accounting policy, the adjustment is also retrospective application.

Day 6
Chapter 12
PAS 10
Events After The Reporting
Period
20XX 12
Events After The Reporting Period
➢ events that could either be favorable or unfavorable that occur between
the end of reporting period and the date on which the financial statements
are authorized for issue.
➢ Events might require either:
(a) Adjustment
(b) Disclosure
Adjusting Events
➢ Provide evidence of conditions that exist at the end of reporting period.
EXAMPLES:
➢ Settlement after the reporting period of a court case
➢ Bankruptcy of a customer
➢ Determination (after the reporting period) of the cost of asset purchased before end of
reporting period
➢ Determination (after the reporting period) of the profit sharing or bonus payment if the
entity has the present obligation at the end of reporting period to make such payment
➢ Discovery of fraud or errors that show the financial statements were incorrect
Nonadjusting Events
➢ Events that are indicative of conditions that arise after the end of reporting period.
EXAMPLES:
➢ Business combination after the reporting period
➢ Plan to discontinue an operation
➢ Major purchase and disposal of asset or expropriation of major asset by government
➢ Destruction of a major production plant by fire after the reporting period
➢ Major ordinary share transactions and potential ordinary share transactions after the reporting
period
➢ Announcing or commencing the implementation of a major restructuring
➢ Entering into significant commitments or contingent liabilities, for example by issuing guarantees
➢ Commencing major litigation arising solely from events that occurred after the reporting period
When are financial statements
authorized for issuance?
➢ When the board of directors reviews the financial statements and authorizes
them issue.
➢ In some cases, an entity is required to submit the financial statements to the
shareholders for approval after the financial statements have been issued.
➢ In such cases, the financial statements are authorized for issue on the date of
issue by the board of directors and not on the date when shareholders approve
the financial statements.
Problem-Solving
CHESKA LIM CORPORATION financial reports for CY2022 is being audited by SGV & Co. and the audit engagement was
completed on March 1, 2023.
The financial statements for 2022 were signed by the managing director on March 15, 2023 and approved by the
shareholders on March 31, 2023.
The following events transpired:
Date Events
Jan. 15, 2023 Emilio Tan filed for bankruptcy. He owes P900,000 to CHESKA LIM CORPORATION.
Mar. 1, 2023 The entity issued additional 25,000 shares at par value. Upon checking, the entity’s
issued share capital comprised 100,000 ordinary shares with P100 par value
Feb. 1, 2023 The results of the investigation pointed the “negligence of the machine operator”
as the cause of the fire incident on Dec. 15 of last year. Hence, CHESKA LIM
Corporation was not awarded with the insurance claims. Based on the accounting
records, the burned equipment had a carrying amount of P525,000. The entity has
booked a receivable of P400,000 from the insurance entity.
Required:
Prepare adjusting entries on December 31, 2022 for the
events after reporting period.
Solution:
Step 1: Determine first which events are adjusting and which are not?
Adjusting Event
Nonadjusting event
Adjusting Event
Solution:
Step 2: Prepare the necessary adjusting entry for ADJUSTING EVENTS only
Debit Credit
Dec. 31, 2022 Allowance for bad debts 900,000
Accounts Receivable 900,000
To record provision for bad debts as a result of Emilio Tan’s bankruptcy.
Debit Credit
Original Entry
Dec. 15, 2022 Losses from Fire 125,000
Receivable from Insurer 400,000
Equipment 525,000
Events After the Reporting Period

Adjusting Entry
Dec. 31, 2022 Losses from Fire 400,000
Receivable from Insurer 400,000
Day 6
Chapter 13
PAS 24
Related Party Disclosures
20XX 21
Related Party
➢ Parties are considered to be related if one party has:
a) Ability to control the other party
b) Ability to exercise significant influence over the other party
c) Joint control over the reporting entity
Examples of related parties:
1) Affiliates
2) Associates
3) Venturers
Day 7
Chapter 14
PAS 2
Inventories
20XX 2
Inventory
➢ Assets which are 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.
Examples of Inventories
➢ Merchandise purchased by a retailer and held for resale
➢ Land and other property held for resale by a subdivision entity and real estate developer
➢ Finished goods produced
➢ Goods in process
➢ Materials and supplies awaiting use in the production process (Factory supplies)
In the case of a service provider:
➢ Labor
➢ Other cost of personnel directly engaged in providing the service including supervisory personnel and
attributable overhead
Classes of Inventories
1) Trading concern
▪ Buys and sells goods in the same form purchased
▪ The term merchandise inventory is generally applied to goods
held by a trading concern
2) Manufacturing concern
▪ Buys goods which are altered or converted into another form
before they are made available for sale.
▪ The term finished goods, goods in process, raw materials and
factory supplies refer to inventories of a manufacturing
concern.
Classes of Inventories
Raw Materials Goods in Process Finished Goods Factory Supplies
Partially completed
Similar to raw materials but
Goods to be used in the products which require Completed products which
their relationship to the end
production process further process or work are ready for sale
product is indirect
before they can be sold
LEGAL TEST
Is the entity
owner of the
NO Exclude as inventory
goods?
YES
Include as inventory
1. Goods owned and on hand

2. Goods in transit and sold FOB destination
3. Goods in transit and purchase FOB Shipping point
4. Goods out on consignment
5. Goods in the hands of salesmen or agents
6. Goods held by customers on approval or on trial
Freight Terms
Freight Collect Freight Prepaid
Freight charge is not yet paid (Courier shall collect

Freight charge already paid
from the buyer)
To be paid by the buyer Paid by the seller

Accounting for Inventories
Periodic System Perpetual System
Physical counting of goods on hand at the end of Maintenance of records called “stock cards”
accounting period to determine quantities (summary of inventory ins and outs)
Applicable for inventories with small peso Applicable for inventories with large peso
investment (groceries, hardware and auto parts) investment (jewelries and cars)
Transactions Periodic System Perpetual System
1. Purchase of merchandise on account, Php 300,000 Debit Credit Debit Credit

Purchases 300,000 Merchandise Inventory 300,000
Accounts Payable 300,000 Accounts Payable 300,000
2. Payment of freight on the purchase, Php 20,000 Debit Credit Debit Credit
Freight-in 20,000 Merchandise Inventory 20,000
Cash 20,000 Cash 20,000
3. Return of merchandise purchased to supplier, Php Debit Credit Debit Credit
30,000. Accounts Payable 30,000 Accounts Payable 30,000
Purchase Return 30,000 Merchandise Inventory 30,000
4. Sale of merchandise on account, Php 400,000 at 40% Debit Credit Debit Credit
gross profit. Accounts Receivable 400,000 Accounts Receivable 400,000
Sales 400,000 Sales 400,000
Cost of Goods Sold 240,000

Merchandise Inventory 240,000
5. Return of merchandise sold from customer, Php 25,000 Debit Credit Debit Credit
Sales Return 25,000 Sales Return 25,000
Accounts Receivable 25,000 Accounts Receivable 25,000

Cost of Goods Sold 15,000
6. Adjustment of ending inventory, Php 65,000 Debit Credit The balance of the Merchandise Inventory account
Merchandise Inventory, end 65,000 represents the Ending Inventory.
Income Summary 65,000
Inventory Shortage or Overage
Balance of Merchandise Inventory Php 65,000
Result of physical count at year-end 55,000
Inventory Shortage Php 10,000
Adjusting Entry:
Debit Credit
Inventory Shortage 10,000
The inventory shortage is usually closed to Cost of Goods Sold because this is often the result of normal
shrinkage and breakage in the inventory.
However, material shortage shall be separately classified and presented as OTHER EXPENSE.
Cost of Inventories
1. Cost of Purchase
2. Cost of Conversion
3. Other Costs incurred in bringing the inventories to their
present location and condition
Cost of Purchase
1) Purchase price
2) Import duties and irrecoverable taxes
3) Freight
4) Handling and other costs directly attributable to the acquisition of finished goods, materials
and services
* Trade discounts, rebates and other similar items are deducted in determining the cost of
purchase.
** Forex rates translation differences arising from acquisition of inventories are also excluded
from the cost of purchase.
Cost of Conversion
➢ Cost directly related to the units of production such as Direct Labor
➢ Fixed production overhead (rent and depreciation of factory building
and equipment)
➢ Variable production overhead (indirect labor and factory supplies)
Other Costs
➢ Included only to the extent that it is incurred in bringing the inventories to their present location and
condition.
The following are excluded from the cost of inventories:
➢ Abnormal amounts of wasted materials, labor and other production costs
➢ Storage costs unless these costs are necessary in the production process prior to a further production
stage
➢ Storage costs on Goods in Process are capitalized but not for Finished Goods because they
are expensed.
➢ Administrative Overheads that do not contribute to bringing inventories to their present location and
condition.
➢ Distribution or selling costs

Inventory Valuation
➢ Lower of Cost or Net Realizable Value (LCNRV)
Cost Formulas (PAS 2, paragraph 25)

1) FIFO (first in, first out)
2) Weighted Average
*** The Standard does not permit anymore the use of of Last-in, First-out (LIFO) as an alternative
formula in measuring cost of inventories.
PAS 2, paragraph 23, provides that the cost of inventories that are not ordinarily interchangeable and
inventories that are segregated for specific projects shall be determined by using specific identification
method.
FIFO
➢ Inventory is expressed in terms of recent or new prices while the cost of goods sold
is representative of earlier or old prices.
➢ Inventory is stated at current replacement cost.
➢ Improper matching of cost against revenue because the cost of goods sold are
valued using older or earlier prices resulting to understatement of cost of sales.
➢ under INFLATION, FIFO method would result to the highest net income
➢ under DEFLATION, FIFO method would result to the lowest net income
Illustration of FIFO Inventory System
Date Description Units Unit Cost Total Cost Sales (in units)
Jan. 1 Beginning balance 800 P 200 P 160,000
8 Sale 500
18 Purchase 700 P 210 P 147,000
22 Sale 800
31 Purchase 500 P 220 P 110,000
Required:
1) Determine the ending inventory in units and in cost using FIFO periodic inventory system.
2) How much is the the cost of goods sold under FIFO-periodic and FIFO-perpetual inventory system.
3) Determine the cost of goods sold under the weighted average-periodic inventory system.
4) Compute for the cost of goods sold under the weighted average-perpetual inventory system.
Measurement of Inventory
➢ Lower of Cost or Net Realizable Value (LCNRV)
Net Realizable Value (NRV) – estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal.
If NRV < Cost = Loss on inventory write down
Journal entry (using allowance method):
Debit – Loss on Inventory Writedown → goes to Income Statement, included in the computation of cost of goods sold
Credit – Allowance for Inventory Writedown → goes to Balance Sheet as deduction from Inventory
Illustration - LCNRV
Inventory
Total Cost NRV LCNRV
Item
A 2,000,000 1,900,000 1,900,000
B 1,500,000 1,550,000 1,500,000
C 2,500,000 2,100,000 2,100,000
D 3,000,000 3,200,000 3,000,000
Total 9,000,000 8,750,000 8,500,000
Seatwork:
(1) Corolla Company provided the following information in relation to an inventory:
Materials 700,000
Storage cost of finished goods 180,000
Delivery to customers 40,000
Irrecoverable purchase taxes 60,000
At what figure should the inventory be measured?
Answer: ____________________
Seatwork:
(2) Parrot Company provided the following inventory data:
Materials 300,000
Production labor cost 330,000
Production overhead 120,000
General administration cost 100,000
Marketing cost 50,000
What amount should be reported as cost of the completed inventory?
Answer: _______________
Seatwork:
(3) Eagle Company incurred the following costs in relation to a certain product:
Direct Materials and labor 180,000
Variable production overhead 25,000
Factory administrative cost 15,000
Fixed production cost 20,000
What amount should be reported as cost of the completed inventory?
Answer: _______________
Seatwork:
(4) Fenn Company provided the following information for the current year:
Merchandise purchased for resale 4,000,000
Freight-in 100,000
Freight-out 50,000
Purchase returns 20,000
Interest on inventory loan 200,000
What amount should be reported as inventoriable cost of the purchase?
Answer: _______________
Seatwork:
(5) Brilliant Company purchased inventory from various countries for export to other countries. The entity
incurred the following costs during the current year:
Cost of purchases based on vendors’ invoices 5,000,000
Trade discounts on purchases already deducted from vendors invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling cost relating to imports 100,000
Brokerage commission paid to agents for arranging imports 200,000
Salaries of accounting department 600,000
Sales Commission 300,000
After-sales warranty cost
What amount should be reported as total cost of the purchases?

Seatwork:
(6) Marsh Company had 150,000 units of product A on hand at January 1 costing
Php 21 each.
Purchases of product A during the month of January were:
Date Units Unit Cost

January 10 200,000 22
January 18 250,000 23
January 28 100,000 24
A physical count on January 31 shows 250,000 units of product A on hand.

What amount should be reported as cost of the inventory on January 31 under FIFO
method?
Seatwork:
(7) Andrea Company used the weighted average method to determine the cost of the
inventory.
During the month of January, the entity recorded the following information pertaining
to inventory:
Transactions Units Unit Cost Total Cost

Balance on January 1 40,000 50 2,000,000
Sold on January 17 35,000
Purchased on January 28 20,000 80 1,600,000
What amount of inventory should be reported on January 31 under the weighted

average method?
Seatwork:
(8) The inventory of Hazel Company at the end of the current year is to be recorded at
the lower of cost and net realizable value. Ending inventory data per unit are
summarized below:
Item Units Cost Estimated Sales Price Cost of Disposal
A 1,000 120 180 30
B 1,500 110 140 20
C 1,200 150 170 30
D 1,800 140 190 30
E 1,700 130 200 40
Determine the inventory value applying the lower of cost and net realizable value.
Day 8
PAS 16
Property, Plant and Equipment
20XX 2
Property, Plant and Equipment
➢ Tangible assets that are held for use in production
or supply of goods or services, for rental to others, or
for administrative purposes, and are expected to be
used during more than one year.
➢ Classified as noncurrent assets
Examples of Property, Plant and Equipment
➢ Land ➢ Aircraft ➢ Patterns, molds and dies

➢ Building ➢ Motor vehicle ➢ Tools
➢ Machinery ➢ Furnitures and fixtures ➢ Leasehold improvements
➢ Ship ➢ Office Equipment ➢ Bearer plants
Bearer Plants
➢ Under IFRS, bearer plants should be accounted for in the same way as PPE because the
operation of bearer plants is similar to that of manufacturing.
➢ Bearer plant is a living plant used in the production of agricultural produce, expected to bear
produce for more than one period and has remote likelihood of being sold as agricultural produce.
➢ EXAMPLES:
➢ Coconut tree is the bearer plant and the fruit is the agricultural produce.
➢ Coconut tree (when immature) can produce buko juice but when mature already, can
produce oil, copra from the dried coconut flesh
➢ Grape vines are the bearer plants and the grapes are the agricultural produce.
Patterns, molds and dies
Recognition of PPE
➢ Measured at cost
➢ Cost is the amount of cash or cash equivalent
paid and the fair value of the other consideration
given to acquire an asset at the time of acquisition
or construction.
Cost of PPE
1) Purchase Price
*** Including import duties and nonrefundable purchase taxes after deducting
trade discounts and rebates
2) Cost directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management
3) Initial estimate of the costs of dismantling and removing the item for which the entity
has a present obligation
Directly Attributable Costs
a) Cost of site preparation
b) Initial delivery and handling cost
c) Installation and assembly cost
d) Professional fees
e) Cost of testing whether the asset is functioning properly, after deducting the
net proceeds from selling any items produced while bringing the asset to that
location and condition, such as samples produced when testing equipment
Costs Not Qualified for Capitalization of PPE
➢ Costs that are expensed rather than recognized as element of cost of PPE
a) Cost of opening a new facility
b) Cost of introducing a new product or service, including cost of advertising and promotion
c) Cost of conducting business in a new location or with a new class of customer (including staff training)
d) Administration and other general overhead costs
e) Cost incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity
f) Initial operating losses
g) Cost of relocating or reorganizing part or all of an entity’s operations

Major Spare Parts
➢ Recognize as PPE when the entity expects to use the major spare parts
more than one period.
➢ If minor spare parts and intended for use in less than one year, record as
inventory and then expense when consumed.
➢ Can be used only in connection with an item of PPE, they are accounted
for as PPE and to depreciated over a time period not exceeding the useful
life of the related asset.
Acquisition of PPE
1) Cash basis 7) Donation
2) On account subject to cash discount 8) Government grant
3) Installment basis 9) Construction
4) Issuance of share capital
5) Issuance of bonds payable
6) Exchange
Acquisition on Cash Basis
➢ The cost of an item of PPE is the cash price equivalent at
the recognition date.
➢ Cash paid plus directly attributable costs such as freight,
installation cost and other cost necessary in bringing the
asset to the location and condition for its intended use.
Acquisition on Cash Basis
➢ Machinery is acquired at a cash price of Php 300,000. In addition to the
cash payment, the entity pays for the following costs in connection with the
machinery: transportation, P20,000; installation cost, P10,000; and cost of
trial runs, P5,000.
JOURNAL ENTRY:
Debit – Machinery 335,00
Credit – Cash 335,000
Basket Price
➢ Lump Sum price
➢ Necessary to allocate the single price to the assets
acquired in order to have a proper basis for computing
depreciation.
➢ The allocation is done on the basis of relative fair value
of the assets acquired.
Basket Price (illustration)
➢ Land and building are acquired at a single cost of P 5,500,000. At the time of acquisition, the land
has a fair value of P 1,000,000 and the building, P 4,000,000. The single cost is allocated as
follows:
Fair Value Fraction Allocated Cost
Land 1,000,000 1/5 1,100,000
Building 4,000,000 4/5 4,400,000
Total 5,000,000 5,500,000
➢ Journal Entry:
Debit – Land 1,100,000
Debit – Building 4,400,000
Cash 5,500,000
Acquisition on account
➢ Invoice price minus the discount (regardless of whether
the discount is taken or not)
➢ If the discount is not taken, recorded under Purchase
Discount Lost account which is shown as Other Expense.
Illustration of Acquisition on account
➢ An equipment is purchased for P100,000, 2/10, n/30. The purchase may be recorded using either the
gross method or net method
Gross Method Net Method
1. To record the acquisition Equipment 100,000 Equipment 98,000

Accounts Payable 100,000 Accounts Payable 98,000
2. Payment within the discount period Accounts Payable 100,000 Accounts Payable 98,000
Cash 98,000 Cash 98,000
Equipment 2,000
3. Payment beyond the discount period Accounts Payable 100,000 Accounts Payable 98,000
Purchase Discount Lost 2,000 Purchase Discount Lost 2,000
Cash 100,000 Cash 100,000
Equipment 2,000
Acquisition on installment basis
Installment Price 350,000
Cash Price 290,000 recorded cost of PPE, not the installment price
Interest 60,000 Amortized over the credit period
1) To record the acquisition of the machinery Debit Credit
Machinery 290,000
Discount on Note Payable 60,000
Cash 50,000
Notes Payable 300,000
2) To record the 1st installment payment Debit Credit

Note Payable 100,000
Cash 100,000
3) To amortize the discount on note payable Debit Credit

Interest Expense 30,000
Discount on note payable 30,000
Acquisition on installment basis
Note Payable Fraction Interest Expense

1st year 300,000 3/6 30,000
2nd year 200,000 2/6 20,000
3rd year 100,000 1/6 10,000
TOTAL 600,000 60,000
Installment but no available cash price
➢ If an asset is acquired by installment and there is no available cash price, the asset is
recorded at an amount equal to present value of all payments using an implied interest rate.
EXAMPLE:
Machinery is acquired at an installment price of P 700,000. The terms are P 100,000 down
payment and the balance payable in three equal annual installments.
A note is issued for the balance of P 600,000. There is no available cash price for the
machinery.
Using an implied interest rate of 10%, the present value of an ordinary annuity of 1 is 2.487 for
three periods.
Cost of Machinery on installment
without available cash price
Items Amount
Down payment 100,000
Present value of note payable (200,000 x 2.487) 497,400
Total 597,400
Items Amount
Present value of note payable (200,000 x 2.487) 497,400
Cost of Machinery on installment without available cash price
Debit Credit
1. To record acquisition.
Machinery 597,400
Cash 100,000
Debit Credit
2. To record first installment payment.
Cash 200,000
Debit Credit
3. To amortize the discount.
Cash 200,000
Effective interest method (Amortizing the discount on note payable)
Year Payment Interest Principal Present Value

January 1 497,400
1st year 200,000 49,740 150,260 347,140
2nd year 200,000 34,714 165,286 181,854
3rd year 200,000 18,146 181,854 -- 0 --
Notes:
(1) Annual interest expense = present value of note x 10%
(2) Principal payment = Annual Payment – Interest Expense
(3) Present value = Preceding present value – Principal payment
Issuance of Share Capital
➢ Proceeds shall be measured by the fair value of the consideration received
➢ Fair Value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.
ORDER OF PRIORITY
1) Fair value of the property received
2) Fair value of the share capital
3) Par value or stated value of the share capital
Issuance of Share Capital
➢ A piece of land is acquired by issuing 20,000 shares with par value of P50. At the time of acquisition, the fair value
of the land is P 1,600,000 and the share is quoted at P90 per share.
Debit Credit
a.) The fair value of the land is used.
Land 1,600,000
Share Capital (20,000 shares @ 50) 1,000,000
Debit Credit
b.) The fair value of the share capital is used.
Land (20,000 shares @ 90) 1,800,000
Debit Credit
c.) The par value of the share capital is used.
Land (20,000 shares @ 50) 1,000,000
Issuance of Bonds Payable
➢ Measure the financial liability at its fair value plus transaction costs
that are directly attributable to the issue of the financial liability.
ORDER OF PRIORITY
1) Fair value of bonds payable
2) Fair value of asset received
3) Fair value of bonds payable
Issuance of Bonds Payable
An investment in equity security with carrying amount of P500,000 is exchanged for an equipment with a fair
value of P550,000. At the time of exchange, the investment has a fair value of P530,000.
Debit Credit
(1) Fair value of investment is used
Equipment 530,000
Investment in equity security 500,000
Gain on exchange 30,000
Debit Credit
(2) Fair value of equipment is used
Equipment 550,000
Debit Credit
(3) Carrying amount of investment is used
Equipment 500,000
EXCHANGE
➢ The cost of an item of PPE acquired in exchange for a nonmonetary
asset or a combination of monetary and nonmonetary asset is measured
at fair value, unless the exchange transaction lacks commercial substance
or the fair value of neither the asset received nor the asset given up is
reliably measurable.
➢ Exchange has commercial substance when the expected cash flows after
the exchange differ significantly from the expected cash flows before the
exchange.
Exchange – no cash involved
➢ If a property is acquired in an exchange with commercial substance
and there is no cash involved, its cost is measured at the following in
the order of priority
1) Fair value of the property given
2) Fair value of the property received
3) Carrying amount of the property given
Exchange – cash is involved
1) Fair value of asset given plus cash payment – on the

part of the payor
2) Fair value of asset given minus cash received – on
the part of the recipient
Aye Bee
Equipment 1,600,000 2,000,000
Accumulated Depreciation 900,000 1,350,000
Carrying Amount 700,000 650,000
Fair value 600,000 800,000
Cash paid by Aye to Bee 200,000 200,000
Books of Aye (PAYOR) Amount Books of Bee (RECIPIENT) Amount

Fair value of asset given 600,000 Fair value of asset given 800,000
Add: Cash Payment 200,000 Less: Cash Received 200,000
Cost of New Asset 800,000 Cost of New Asset 600,000
Fair value of asset given 600,000 Fair value of asset given 800,000
Less: Carrying Amount 700,000 Less: Carrying Amount 650,000
Loss on exchange 100,000 Gain on exchange 150,000
Books of Aye (PAYOR) Debit Credit Books of Bee (RECIPIENT) Debit Credit
Equipment-new 800,000 Cash 200,000
Loss on Exchange 100,000 Equipment-new 600,000
Accumulated Depreciation-old Equip. 900,000 Accumulated Depreciation-old Equip. 1,350,000
Equipment-old 1,600,000 Equipment-old 2,000,000
Cash 200,000 Gain on exchange 150,000
Exchange – no commercial substance
➢ Acquired PPE is not measured at fair value but its cost is measured at
the carrying amount on the part of the recipient.
➢ No gain or loss is recognized when the exchange lacks commercial
substance.
➢ If there is cash involved, cash payment is added to the carrying
amount on the part of the payor and deducted from the carrying
amount on the part of the recipient.
Exchange – no commercial substance
Yee Zee
Equipment 800,000 1,000,000
Accumulated Depreciation 380,000 400,000
Carrying Amount 420,000 600,000
Fair value 450,000 500,000
Cash paid by Yee to Zee 50,000 50,000
Books of Yee (Payor) Debit Credit Books of Zee (Recipient) Debit Credit
Equipment-new 470,000 Equipment-new 550,000
Accumulated Depreciation 380,000 Accumulated Depreciation 400,000
Cash 50,000 Cash 50,000
Equipment-old 800,000 Equipment-old 1,000,000
Note: If there is cash involved, cash payment is added to the carrying amount on the part
of the payor and deducted from the carrying amount on the part of the recipient.
Trade-in
➢ A form of exchange.
➢ Property is acquired by exchanging another property as part
payment and the balance payable in cash or any other form of
payment in accordance with agreed terms.
➢ Involves a non-dealer acquiring the asset from a dealer
➢ Trade-in usually involves a significant amount of cash.
Trade-in (Acquisition of PPE via Exchange)
Cost of new asset is recorded following the order of
priority:
1) Fair value of the asset given plus cash payment
2) Trade-in value of asset given plus cash payment (in
effect, this is the fair value of the asset received)
Trade-in
➢ An entity traded an old equipment with a dealer for newer model. The pertinent data are:
Old Equipment New Equipment
Cost 1,400,000
Accumulated Depreciation 1,000,000
Carrying Amount 400,000
Fair Value 350,000
Trade-in value 500,000
List Price 2,000,000
Trade-in value of old equipment (500,000)
Cash Payment 1,500,000
Trade-in
(1) Fair value approach
The new asset is recorded at the fair value of the asset given plus cash payment.
Fair value of asset given - 350,000 Journal entry:

Plus Cash Payment - 1,500,000
Cost of new asset - 1,850,000 Debit Credit
Equipment – new 1,850,000

Fair value of asset given - 350,000 Accumulated Depreciation 1,000,000
Less: Carrying Amount - 400,000 Loss on Exchange 50,000
Loss on exchange - ( 50,000) Cash 1,500,000
Equipment – old 1,400,000
Trade-in
(2) Trade-in value approach
The new asset is recorded at the trade-in value of the asset given plus cash payment. (FV of asset given not available)
Trade-in value of asset given- 500,000 Journal entry:

Plus Cash Payment - 1,500,000
Cost of new asset - 2,000,000 Debit Credit
Equipment – new 2,000,000

Trade-in value of asset given- 500,000 Accumulated Depreciation 1,000,000
Less: Carrying Amount - 400,000 Cash 1,500,000
Gain on exchange - ( 100,000) Equipment – old 1,400,000
Donation
➢ At present, IFRS does not address donation or contribution.
However, IFRS explicitly addresses government grant. In this regard,
reference is made to local GAAP in relation to accounting for
donation.
➢ Philippine GAAP provides that “contributions, including stock of
an entity, received from shareholders shall be recorded at the fair
value of the items received, with the credit going to donated
capital”.
Government Grant
➢ PAS 20, paragraph 3 defines government grant as
assistance by government in the form of transfer of
resources to an entity in return for part or future
compliance with certain conditions relating to the
operating activities of the entity.
Accounting for Government Grant
➢ An entity received a grant of P 15M from the national government for the purpose of defraying safety and environmental expenses
over the period of 3 years.
The safety and environmental expenses will be incurred by the entity 2M for 1st year, 3M for 2nd year and 5M for 3rd year.
➢ Grant in recognition of specific expenses shall be recognized as income over the period of the related expense.
➢ The grant of P 15M is allocated as income over 3 years in proportion to the costs incurred.
1st year Debit Credit
JOURNAL ENTRIES: Cash 15,000,000
Deferred income – government grant 15,000,000

Income from government grant 3,000,000
Environmental expenses 2,000,000

Cash 2,000,000
Costs Fraction Income

1st year 2,000,000 2/10 3,000,000
2nd year 3,000,000 3/10 4,500,000
3rd year 5,000,000 5/10 7,500,000
Total 10,000,000 15,000,000
Accounting for Government Grant
An entity is granted a tract of land in Mindanao by the national government. The fair value of the land is Php 60M. The grant requires
that the entity shall construct a refinery on the site.
The cost of the refinery is estimated to be Php 100M and the useful life is 20 years. Accordingly, the grant of Php 60M is allocated over
20 years.
➢ Grant related to nondepreciable asset requiring fulfillment of certain conditions shall be recognized as income over the periods which
bear the cost of meeting the conditions.
JOURNAL ENTRIES:
1st year Debit Credit
Land 60,000,000
Refinery 100,000,000
Cash 100,000,000
Depreciation (100M / 20 years) 5,000,000

Accumulated Depreciation 5,000,000
Deferred income – government grant (60M / 20 years) 3,000,000

Income from government grant 3,000,000
Self-Constructed Asset
The cost of self-constructed PPE shall include:
1) Direct cost of materials
2) Direct cost of labor
3) Indirect cost and incremental overhead specifically identifiable or traceable to
the construction
*** If the incremental overhead is not specifically identifiable, allocation
of overhead my be done on the basis of direct labor cost or direct labor
hours.
Overhead Allocation (Cost of Self-Constructed Asset)
An asset is constructed and the following costs are incurred: Materials (normal, P 1,000,000) 1,300,000
Labor (normal, P 800,000) 1,000,000
Manufacturing Overhead 900,000
Total 2,900,000
A B C=A–B
Costs Finished Goods Constructed Asset
Materials 1,300,000 1,000,000 300,000

Labor 1,000,000 800,000 200,000
*** Overhead is allocated based on direct labor cost
Manufacturing Overhead 900,000 720,000 180,000

Total 2,900,000 2,520,000 680,000
Manufacturing Overhead
Direct Labor Fraction Allocated Overhead
to be allocated
800,000 8/10 720,000 Finished Goods
900,000 200,000 2/10 180,000 Constructed Asset
1,000,000 900,000
Saving or Loss on Construction
➢ Any internal profit is eliminated in arriving at the cost of self-constructed asset.
Scenario Actual Cost of Contractor Price
Excess Treatment
Construction Outside (3rd parties)
(1) 10,000,000 11,000,000 1,000,000 Not income but saving
(2) 10,000,000 8,500,000 1,500,000 Cost of constructed asset is still the actual cost
➢ If there is a clear evidence that the actual cost is materially excessive and this is due to construction
inefficiencies or failures whether due to temporary, idle capacity or industrial disputes, it is believed that the
excess shall be treated as loss chargeable against the management.
➢ PAS 16, paragraph 22, provides that “the cost of abnormal amount of wasted material, labor or overhead
incurred in the production of self-constructed asset is not included in the cost of PPE/asset”
➢ Conversely, the cost of normal amount of wasted material, labor and overhead is included in the cost of the
asset.
Derecognition of PPE
➢ Removal of the cost of property, plant and equipment together with the related
accumulated depreciation from the books or accounts of the entity.
➢ PAS 16, paragraph 67 provides that the carrying amount of an item of PPE shall be
derecognized on disposal or when no future economic benefits are expected from its use or
disposal.
➢ Gain or loss from derecognition of PPE shall be included in profit or loss.
Net Disposal Proceeds > Carrying Amount of PPE = Gain from Derecognition of PPE
➢ Gains shall not be included in revenue but treated as other income.
PPE Classified as held for Sale
➢ PFRS 5, paragraph 7, provides that an item of PPE is classified as held for sale if:
(a) Available for immediate sale in its present condition
(b) Within 1 year from the date of classification as held for sale
➢ Excluded from PPE and presented separately as Current Asset
➢ PFRS 5, paragraph 15 further provides that an entity shall measure a noncurrent asset
classified as held for sale at the lower of its carrying amount or fair value less cost to sell.
➢ The writedown to fair value less cost to sell is treated as an impairment loss.
➢ PFRS 5, paragraph 25, further provides that a noncurrent asset classified as held for sale
shall not be depreciated.
Idle or abandoned property
➢ PFRS 5, paragraph 13 provides that an entity shall not classify as
held for sale a noncurrent asset that is to be abandoned.
➢ Temporary or idle activity or abandonment should be depreciated
continually because value of PPE is diminished not only through usage
but also through physical wear and tear and obsolescence.
➢ Noncurrent asset to be abandoned includes an item of PPE that is to
be used until the end of its economic life.
Application
PROBLEM No. 1
HYUNDAI INC. has constructed a production equipment needed for the company’s expansion
program in Mindanao region. HYUNDAI Inc. received a Php 1,500,000 bid from a reputable contractor for
the construction of the equipment.
The cost of direct material and direct labor incurred to construct the equipment were Php 960,000
and Php 600,000 respectively. It is estimated that incremental overhead costs for construction amount
to 140% of direct labor costs.
Fixed costs (excluding interest) of Php 2,100,000 were incurred during the construction period.
This amount was allocated to construction on the basis of total prime costs-the sum of direct labor and
direct material. The prime costs incurred to construct the new equipment amounted to 35% of the total
prime costs incurred for the period. The company’s policy is to capitalize all possible costs on self-
construction projects.
To assist in financing the construction of the production equipment, HYUNDAI INC. borrowed Php
1.5M at the beginning of the 6-month construction period. The loan was for two years with interest at ten
percent.
Question: What is the total cost of the self-constructed equipment?
Application
PROBLEM No. 2
KIA MOTORS INC. received a grant from the Philippine government for a large tract of land to be
used as a plant site. The land’s fair value is determined to be Php 1,620,000.
KIA MOTORS INC. issued 280,000 ordinary shares (par value, Php 50) in exchange for land and
building. The fair value of the property is determined to be Php 16,200,000 which are properly allocated
as follows:
Land – 22%
Building – 78%
KIA MOTORS INC. ordinary shares are not listed on the stock exchange but its records show that a
block of 2,000 shares was sold by a shareholder a year ago at Php 70 per share and another block of
4,000 shares was sold by another shareholder 8 months ago at Php 63 per share.
Question:
(1) Prepare journal entries for the government grant and for the issuance of ordinary shares.
(2) What is the total capitalized cost of Land and Buildings?
Application
PROBLEM No. 3
GEELY COOLRAY INC. constructed a machinery during the year. No entry was made to remove from
the accounts for materials, labor and overhead the following costs that are properly chargeable to the
machinery account.
Raw materials used Php 250,000

Factory supplies used Php 18,000
Direct labor costs incurred Php 320,000
Incremental overhead caused by
construction of machinery (excluding factory supplies used) 54,000
Fixed overhead rate applied to regular manufacturing operations 60% of direct labor costs
The cost of similar machinery would be Php 880,000 if it had been purchased from a dealer.
Questions:
(1) Prepare journal entries to record the transactions above.
(2) What is the recognized capitalized cost of Machinery?
(3) Is there a gain or loss from the transactions above? If yes, how much?
Application
PROBLEM No. 4
SSANGYONG CORP. is a major supplier of computer parts and accessories. To improve delivery
services to customers, the company acquired 4 new trucks on July 1, 2022. The terms of acquisition for
each truck are provided below:
Truck List Price Terms
No. 1 Php 600,000 Acquired for a cash payment of Php 556,000
No. 2 Php 800,000 Acquired for a down payment of Php 80,000 cash and a 1 year, non-interest bearing note with a face
amount of Php 720,000. There was no established cash price for the equipment. The prevailing interest
rate for this type of note is 10%.
No. 3 Php 640,000 Acquired in exchange for a computer package that the company carries in inventory. The computer
package cost Php 480,000 and is normally sold by SSANGYONG CORP. for Php 608,000.
No. 4 Php 560,000 Acquired by issuing 40,000 of SSANGYONG CORP.’s ordinary shares. The shares have a par value per
share of Php 10 and a market value per share of Php 13.
Questions:
(2) What is the total cost of the trucks bought on July 1, 2022?
Application
PROBLEM No. 5
On March 1, 2022, TOYOTA MOTORS CORP. acquired the plant assets of HONDA CARS INC. in exchange for 50,000 ordinary shares (P
100 par value) which had a fair value per share of P 180 on the date of purchase of the property. The property had the following appraised
value:
Land Php 1,600,000
Building Php 4,800,000
Machinery and equipment Php 3,200,000
Below is a summary of TOYOTA MOTORS CORP.’s cash outflows between the acquisition date and December 29, the date when it first
occupied the building.
Repairs to building Php 420,000
Construction of bases for machinery to be installed later Php 540,000
Driveways and parking lots Php 488,000
Remodeling of office space in building, including new partitions and walls Php 644,000
Special assessment by the city government on land Php 72,000
On December 27, TOYOTA MOTORS CORP. paid cash for machinery, Php 1,120,000 (subject to a 2% cash discount) and a freight on machinery of
Php 42,000.
Questions:
(2) Determine the total cost of each of the following:
a.) Land
b.) Buildings
c.) Machinery and equipment
Application
PROBLEM No. 6
Various equipment used by GO FOTON INDUSTRIALS in its operations are either purchased from dealers or self-
constructed. The following items for two different types of equipment were recorded during the calendar year 2022.
Manufacturing equipment (self-constructed):

Materials and purchased parts at gross invoice price (Go Foton failed to take the 2% cash discount) P 450,000
Imputed interest on funds used during construction (stock financing) 36,000
Labor costs 185,000
Overhead costs (fixed- P 40,000 ; variable – P 60,000) 100,000
Gain on self-construction 74,000
Installation cost 8,600
Store Equipment (purchased):

Cash paid for equipment 175,000
Freight & insurance cost while in transit 3,500
Cost of moving equipment into place at store 1,200
Wage cost for technicians to test equipment 7,000
Insurance premium paid during 1 year of
st
operation on this equipment 5,200

Special plumbing fixtures required for this equipment 8,200
Repair cost incurred in 1 year of operations
st
related to this equipment 1,450
Questions:
(1) What is the total cost of self-constructed equipment?
(2) What is the total cost of the store equipment purchased?
Application
PROBLEM No. 7
The national government gives TOBLERONE Company a large tract of land. The condition
attached to this government grant is that TOBLERONE Company is to construct a plant facility on
the site to provide employment opportunities to its residents. The fair value of the land is
determined to be Php 4,000,000.
Question:
Prepare the journal entry for the transaction above.

Day 9
PAS 34
Interim Financial Reporting
20XX 2
Interim Financial Reporting
➢ Preparation and presentation of financial statements for a period of less than
one year.
➢ Could be presented monthly, quarterly or semi-annually
➢ Quarterly interim reports are the most common
➢ Publicly listed companies are encouraged to provide interim financial reports
at least semi-annually and such reports are to be made available not later than
60 days after the end of interim period.
Frequency of interim reporting
➢ PAS 34 does not mandate which

entities are required to publish interim financial reports,
how frequently, or how soon after the end of an interim
period.
Reportorial
Requirement
➢ File quarterly interim financial reports within
45 days after the end of each of the first 3
quarters.
Components of Interim Financial Report
a) Condensed Statement of Financial Position
b) Condensed Statement of Comprehensive Income
c) Condensed Statement of Changes in Equity
d) Condensed Statement of Cash Flows
e) Selected explanatory notes
*** Condensed means that each of the headings and subtotals presented
in the entity’s most recent annual financial statements is required but there is
no requirement to include greater detail unless this is specifically required.
Selected Explanatory Notes
➢ Provide an explanation of significant events and
transactions arising since the last annual financial
statements.
➢ PAS 34 assumes that financial statement users have an
access to the entity’s most recent annual report.
Presentation of Comparative Interim Statements
1. Statement of Financial Position
a) Statement of financial position at the end of current interim period
b) Comparative statement of financial position at the end of preceding year
2. Income Statement
a) Income Statement for the current interim period
b) Income Statement cumulatively for the current financial year to date
c) Comparative income statement for the comparable interim period of the preceding year
d) Comparative income statement cumulatively for the comparable financial year to date of the preceding year
3. Statement of Comprehensive Income

a) Statement of Comprehensive income for the current interim period
b) Statement of Comprehensive Income cumulatively for the current financial year to date
c) Comparative statement of comprehensive income for the comparable interim period of the preceding year
d) Comparative statement of comprehensive income cumulatively for the comparable financial year to date of the preceding year
4. Statement of Changes in Equity

a) Statement of changes in equity cumulatively for the current financial year to date
b) Comparative statement of changes in equity for the comparable financial year to date of the preceding year
5. Statement of Cash Flows

a) Statement of cash flows cumulatively for the current financial year to date
b) Comparative statement of cash flows for the comparable financial year to date of the preceding year
Illustration: SEMI-ANNUALLY
If an entity publishes interim financial reports half-yearly, the following comparative financial
statements are presented on June 30, 2023:
Report Date Report Date
Statement of Financial Position June 30, 2023 December 31, 2022
Statement of Comprehensive Income (6 months ending) June 30, 2023 June 30, 2022
Statement of Cash Flows (6 months ending) June 30, 2023 June 30, 2022
Statement of Changes in Equity (6 months ending) June 30, 2023 June 30, 2022
Illustration: QUARTERLY
If an entity publishes interim financial reports quarterly, the following comparative financial
statements are included in the quarterly interim financial report on June 30, 2023:
Report Date Report Date
Statement of Financial Position June 30, 2023 December 31, 2022
Statement of Comprehensive Income

(3 months ending) March 31, 2023 March 31, 2022
(6 months ending) June 30, 2023 June 30, 2022
(9 months ending) September 30, 2023 September 30, 2022
Statement of Cash Flows (6 months ending) June 30, 2023 June 30, 2022
Statement of Changes in Equity (6 months ending) June 30, 2023 June 30, 2022
Basic Principles
Annual Financial Interim Financial
Statements Statements
1. Accounting Policies Same Same
2. Revenues from products sold or services rendered Same Same
3. Costs and expenses recognized Same Same
4. Inventory measured at Lower of Cost or Net Realizable Value (LCNRV) Same Same
5. Accrual basis YES YES
6. Gains or losses should NOT be allocated over the interim periods

Financial Year VS. Tax Year
Financial Year Tax Year
June 30, 2023 Dec. 31, 2022
Year 2022 ends Dec. 31, 2022

July 1, 2022 to June 30, 2023
Year 2023 ends Dec. 31, 2023
Illustration of Difference in
Financial Reporting VS. Tax Year
Example: An entity’s financial reporting year ends June 30 and it reports quarterly. This means
that the financial reporting is from July 1 of one year to June 30 of next year. The tax year ends
December 31.
Period Income Before Tax Tax Rate Tax Expense
Q1 July 1, 2022 – Sep. 30, 2022 1,525,000 30%

Q2 Oct. 1, 2022 – Dec. 31, 2022 1,790,000 30%
Q3 Jan. 1, 2023 – Mar. 31, 2023 2,225,000 25%
Q4 Apr. 1, 2023 – Jun. 30, 2023 2,562,000 25%
TOTAL
Interim Reporting of Contingencies
An entity is sued over an alleged violation of a patent in one of its products. The entity settles the
litigation in the fourth quarter of the current year.
Under the settlement terms, the entity must retroactively pay a 5% royalty on all sales of the
product including prior years to which the patent applies.
Sales for the product were as follows:

First quarter Php 1,500,000
Second quarter 800,000
Third quarter 1,200,000
Fourth quarter 2,500,000
Cumulative sales from prior years 8,000,000
*** The entity cannot restate the previously issued quarterly financial results to include the royalty
expense.
Instead, the entity shall report the royalty expense for the current year and prior years in the fourth
quarter.
Recognition of Bonus for interim purposes
A bonus is anticipated for interim purposes if and only if:

a) The bonus is a legal obligation or past practice would make the
bonus a constructive obligation for which the entity has no realistic
alternative but to make the payment.
b) A reliable estimate of the obligation can be made.
Depreciation and amortization
➢ For interim period, depreciation shall be based only on
assets owned during that interim period.
➢ Asset acquisitions or dispositions planned for later in the
financial year shall not be taken into account.
Uneven Costs
➢ Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred
for interim purposes only if it is also appropriate to anticipate or defer that type of cost at the end of
the financial year.
➢ EXAMPLES:
a) Provision for warranty is recognized at interim date because the entity has no realistic
alternative but to make transfer of economic benefits as a result of an event that has
created a legal or constructive obligation.
b) Cost of planned major periodic maintenance or overhaul that is expected to occur late in
the year is not anticipated for interim purposes unless an event has caused the entity to
have a legal or constructive obligation.
c) Expenditure for advertising is not deferred but recognized as expense in the interim
period it is incurred because it is not appropriate to defer such cost at year-end.
PROBLEM SOLVING 1:
DIRTY LINEN INCORPORATED has estimated that total depreciation
expense for the year ended December 31, 2023 will amount to Php 500,000, and
that the 2023 year-end bonuses to employees will total Php 1,200,000. In the
interim income statement for the six months ended June 30, 2023, what total
amount of these expenses should be reported?
A. 1,700,000
B. 1,100,000
C. 1,450,000
D. 850,000
PROBLEM SOLVING 2:
MAHARLIKA INVESTMENT CORP. incurred inventory loss from market
decline of Php 840,000 on June 30, 2023. What amount of the inventory loss
should be recognized in the quarterly income statement for the three months
ended June 30, 2023.
A. 210,000
B. 280,000
C. 420,000
D. 840,000
PROBLEM SOLVING 3:
The terms and conditions of employment with DILILIPAT COMPANY include entitlement to
share in the staff bonus system, under which 5% of the profit for the year before charging the
bonus is allocated to the bonus pool, provided the annual profit exceeds Php 50,000,000. The
profit before accrual of any bonus for the first half of the current year amounts to Php 40,000,000
and the latest estimate of the profit before accrual of any bonus for the year as a whole is Php
60,000,000. What amount should be recognized as bonus expense for the first half of the current
year?
A. 1,500,000
B. 3,000,000
C. 2,000,000
D. none
PROBLEM SOLVING 4:
On March 15, 2023, MAGSTAYSAPUP INCORPORATED paid property taxes of Php 180,000 on
the factory building for calendar year 2023. On April 1, 2023 the entity made Php 300,000 in
unanticipated ordinary repairs to plant equipment. What total amount of these expenses should be
included in the quarterly income statement ending June 30, 2023?
A. 75,000
B. 145,000
C. 195,000
D. 345,000
Day 9
PFRS 8
Operating Segments
20XX 2
Operating Segment
a) Engages in business activities from which it may earn revenue and incur expenses, including
revenue and expenses relating to transactions with other components of the same entity.
b) Operating results are regularly reviewed by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance.
c) And for which discrete financial information is available
➢ Distinguishable component of an entity that is engaged in business activities which generate

revenue and incur expenses.
➢ Separate financial information must be available about the segment and its operating results shall
be regularly reviewed by a chief operating decision maker.
➢ Chief Operating Decision Maker

➢ Is a function and not necessarily manager with a specific title.
➢ The function is to allocate resources to the segments and assess their performance
➢ CEO, COO, EXECOM, MANCOM, BOD
Examples of Operating Segment
➢ An operating segment may engage in business activities for which it has yet to earn
revenue.
➢ Start-up operations may be operating segments before earning revenue
➢ Not every part of an entity is necessarily an operating segment or part of an operating
segment.
➢EXAMPLES:
➢Corporate headquarters
➢HR Department
➢Finance Department
➢ An entity’s postemployment benefit plan is NOT an operating segment.
Identifying Operating Segments
➢ The management approach is used in identifying operating segments.
➢ Operating segments are identified on the basis of internal reports about components of an entity
that are regularly reviewed by the chief operating decision maker in order to allocate resources to
the segment and to assess its performance.
➢ Operating segments are identified based on the components of the entity that are considered to
be important for internal management reporting purposes.
➢ The idea is that the reporting of segment information is seen though the “eyes of management”
and users would wish to see the business as the chief operating decision maker sees it.
➢ PFRS 8 has abandoned the “risk and rewards approach” of identifying operations by business
segments and geographical segments.
Reportable Segments
An entity shall report information about an operating segment that meets any of the following
quantitative thresholds:
1) Segment Revenue, including both sales to external customers and intersegment sales or
transfers is 10% or more of the combined revenue, internal and external, of all operating
segments.
2) Absolute amount of profit or loss of the segment is 10% or more of the greater absolute
amount of:
a) Combined profits of all operating segments that reported a Profit.
b) Combined losses of all operating segments that reported a Loss.
3) The assets of the segment are 10% or more of the combined assets of all operating segments
Exception to the Quantitative
Threshold
➢ If management believes that information about the
segment would be useful to the users of the financial
statements. It can be disclosed separately and considered
reportable.
Revenue, Profit or loss and Assets
Revenue Profit (Loss) Assets
Segment A 16,000,000 1,700,000 25,000,000
Segment B 13,000,000 500,000 11,000,000
Segment C 6,000,000 (1,000,000) 3,000,000
Segment D 3,000,000 200,000 2,000,000
Segment E 2,000,000 (100,000) 4,000,000
TOTAL 40,000,000 1,300,000 45,000,000
Determine the reportable segments. _____ , _____ , _____ , _____

Result of Assessment of 10%
Threshold
➢ A, B and C are identified as reportable segments. D & E are
not reportable segments because they do not meet any one of
the 10% quantitative thresholds for identification as reportable
segment.
➢ D & E may be combined for reporting purposes. But A, B and
C being reportable segments shall be disclosed separately.
Overall Size Test – 75% Threshold
➢ If the total external revenue of reportable operating segments
constitutes less than 75% of the entity’s external revenue, additional
operating segments shall be identified as reportable segments even if
they do not meet the 10% quantitative thresholds until at least 75% of
the entity external revenue is included in reportable segments.
Aggregation of Segments
➢ Two or more operating segments may be aggregated into a single operating
segment if the segments have similar economic characteristics and the
segments share a majority of the following five aggregation criteria.
a) Nature of product or service
b) Nature of production process
c) Type or class of customers
d) Marketing method or the method used to distribute the product
e) The nature of the regulatory environment, for example, banking,
insurance or public utility
Illustration
An entity has no intersegment sales and has the following operating segments with their corresponding
revenue:
Segment Revenue Percentage
1 2,400,000 30%
2 1,600,000 20%
3 1,200,000 15%
4 720,000 9%
5 640,000 8%
6 560,000 7%
7 480,000 6%
8 400,000 5%
TOTAL 8,000,000 100%
Based on the revenue criterion, the reportable segments are ___, ___, ___ . The remaining segments are
not reportable.
Illustration
The total external revenue of the reportable segments is as follows:
1 2,400,000 30%
2 1,600,000 20%
3 1,200,000 15%
TOTAL 5,200,000 65%
Observe that the total percentage of the reportable segments is only 65%.
In this case, additional operating segments shall be identified even if they do
not meet any of the 10% quantitative thresholds.
AGGREGATION
Two or more operating segments may be aggregated into “one reportable segment” to achieve the 75% of entity external
revenue threshold.
However, the operating segments to be aggregated must have similar economic characteristics and share a majority of
the five aggregation criteria.
Assume that Segments 7 and 8 have similar products, similar production process, similar marketing method and are not
operating under regulated environment.

1 2,400,000 30%
2 1,600,000 20%
3 1,200,000 15%
7 480,000 6%
8 400,000 5%
TOTAL 6,080,000 76%
Accordingly, Segments 7 and 8 can be aggregated as one reportable segment to achieve the 75% threshold. Thus the
remaining segments 4, 5 and 6 shall be considered not reportable and lumped in the other segments category.
Limit to the number of SEGMENTS
➢ No precise limit has been determined, as the number increases
above ten, the entity shall consider whether a practical limit has
been reached.
➢ If the number of reportable segments exceeds ten, it is likely
that the information may become too detailed and consequently
lose its usefulness.
Information to be disclosed for each segment
1) General information about the operating segment

2) Information about profit or loss, segment assets, segment
liabilities and the basis of measurement.
3) Reconciliations of the totals of segment revenue, profit or loss,
segment assets, segment liabilities and other material segment
items to corresponding items in the entity’s financial
statements.
Disclosure about general information
1) Factors used to identify the reportable segments, including the
basis of organization
2) Type of products and services from which each reportable
segment derives its revenue.
Disclosure of profit or loss, assets and
liabilities
1) An entity shall disclose for each reportable segment a measure
of profit or loss, total assets and total liabilities.
2) An entity shall disclose a measure of profit or loss under all
circumstances.
3) For total assets and liabilities, it shall only be disclosed when if
such amount is regularly provided to the chief operating
decision maker.
Illustration:
An entity provide the following financial information relating to one of its reportable operating segments.
Sales – external 60,000 Total Assets 60,000

Sales – internal 10,000 Addition to noncurrent assets 8,000
Total Sales 70,000 Carrying amount of noncurrent assets sold 5,000
Cost of Sales (30,000) Total Liabilities 20,000

Gross Profit 40,000
Interest Revenue 3,000

The question is: what should be disclosed? At the minimum
Distribution costs (8,000)
Administrative Expenses (4,000)

Doubtful accounts (1,000)
Employee benefit expense (500)

Depreciation and amortization (2,500)
Interest Expense (2,000)
Impairment Loss (5,000)
Profit or Loss 20,000

The minimum disclosure relating to the reportable operating segment shall include the following:
Sales – external 60,000
Sales – internal 10,000
Interest Revenue 3,000

Notes:
(1) The amount of profit or loss is disclosed under all
Depreciation and amortization 2,500
circumstances.
(2) The other items disclosed are specified in PFRS 8 and
Impairment Loss 5,000 are disclosed only because these are included in the
measure of profit or loss, measure of total assets and
Profit or Loss 20,000 measure of total liabilities reviewed by the chief
operating decision maker.
Total Assets 60,000 (3) The impairment loss is disclosed because the amount is
deemed material.
Addition to noncurrent assets 8,000
Total Liabilities 20,000

Reconciliations
An entity shall provide reconciliations of segment amounts and amounts shown in the entity’s
financial statement related to all of the following:
1) Total Revenue of all reportable segments to the entity revenue
2) Total profit or loss of all reportable segments to the entity profit or loss before income tax
expense and discontinued operations
3) Total assets of all reportable segments to the entity total assets
4) Total liabilities of all reportable segments to the entity total liabilities
5) Total for every other material item of information disclosed by the reportable segments to the
corresponding amount for the entity
Illustration
The Implementation Guidance 3 of PFRS 8 provided the following suggested format for disclosing
information about reportable segment profit or loss, total assets and total liabilities.
In this illustration, the Chief Operating Decisionmaker decided not to allocate income tax expense
to reportable segments as a measure of profit or loss.
The entity has 3 reportable segments:
1) Software
2) Electronics
3) Car Parts
*** The “other segments” which are not reportable include small property business, equipment rental
business and warehouse leasing.
** All amounts are assumed.
Illustration:
Software Electronics Car Parts Others Total
Revenue – external 12,500 17,000 5,000 1,000 35,500
Revenue – internal 3,000 1,500 4,500
Interest revenue 1,500 2,300 3,800
Interest expense 1,000 1,700 2,700
Depreciation 300 1,600 1,100 3,000
Profit or loss 1,100 2,400 500 100 4,100
Impairment loss 200 200
Total assets 25,000 47,000 7,000 2,000 81,000
Expenditure for noncurrent assets 800 1,500 600 2,900
Total liabilities 16,000 24,000 4,000 200 44,200
Question: What reconciliations are necessary?

Illustration:
Revenue Total Assets
Revenue of reportable segments 39,000 Total assets of reportable segments 79,000
Revenue of nonreportable segments 1,000 Total assets of nonreportable segments 2,000
Elimination of intersegment revenue (4,500) Unallocated corporate assets 1,500
Entity Revenue shown in income statement 35,500 Entity total assets shown in statement of
82,500
financial position
Profit or Loss Total Liabilities

Profit or loss of reportable segments 4,000 Total liabilities of reportable segments 44,000
Profit or loss of nonreportable segments 100 Total liabilities of nonreportable segments 200
Elimination of intersegment profit (500) Unallocated corporate liabilities 5,000
Unallocated amount: Entity total liabilities in statement of
49,200
financial position
Litigation settlement received 500
Corporate expenses (750)
Entity profit or loss shown in income
3,350
statement
Illustration:
Other Material Items
Segment Total Adjustment Entity Total
Interest revenue 3,800 150 3,950

Interest expense 2,700 100 2,800
Depreciation 3,000 3,000
Impairment loss 200 200
Expenditure for noncurrent assets 2,900 1,000 3,900
*** The reconciling item to adjust expenditure for noncurrent assets is the
amount incurred for the corporate headquarters building.
Entity-Wide Disclosures
➢ Additional information that is required to be disclosed by all entities if
such information is not provided as part of the reportable segment
information.
➢ An entity shall disclose information about the following:
a) Information about products and services
b) Information about geographical areas
c) Information about major customers
Revenue from products and
services
➢ An entity shall disclose the revenue from external customers for
each product and service, or each group of similar products and
services, unless the necessary information is not available and the
cost to develop it would be excessive.
Revenue and assets from
geographical areas
➢ An entity shall disclose the following geographical information:
a) Revenue from external customers in the entity’s country of domicile, and in all foreign
operations in total.
b) Separate disclosure of material revenue from external customers in an individual foreign

country.
c) The basis for attributing revenue from external customers to individual countries.
d) Noncurrent assets, other than financial instruments, deferred tax assets, post employment
benefit assets and rights under insurance contracts, located in the entity’s country of domicile
and in all foreign countries in total.
Example: Entity-Wide Disclosure
About Geographical Areas
Revenue Noncurrent Assets

Philippine 19,000 11,000
Japan 4,000
China 3,500 6,000
USA 3,000 4,000
Other Countries 6,000 3,000
Total 35,500 24,000
Major Customer
➢ Single external customer providing revenue which amounts to 10% or more of an entity’s external revenue.
➢ The following shall be considered a single customer:

a) A group of entities under a common control
b) A government and entities under the control of such government
➢ Disclosure about major customer

➢The major customer disclosure means that “an entity shall provide information about the extent of its
reliance on its major customers”.
➢ The entity shall disclose such fact of reliance on major customers, the total amount of revenue from
major customers and the identity of the segment or segments reporting the revenue.
➢ The entity is not required to disclose the identity of the major customer or the amount of revenue that
each segment reports from that customer.
Day 10
Cash basis
to
Accrual basis
2
Cash vs. Accrual Basis
CASH BASIS ACCRUAL BASIS
Earned even if cash is not yet

1 Income is recognized when Cash is received
received
Incurred even if cash is not yet

2 Expense is recognized when Cash is paid
paid
Accounts Receivable, Accounts payable, Accrued

3 Income, Deferred Income, Accrued Expense, and Not recognized Recognized
Prepaid Expense
Illustration:
MAGSTAYSAPUP Incorporated reported the following data which constitute a condensed
description of the business for the 1st year of operations ending Dec. 31, 2022.
Cash Sales 500,000

Sales on account 3,000,000
Collections from customers 2,800,000
Cash Purchases 300,000
Purchases on account 2,000,000
Payments to trade creditors 1,600,000
Salaries Paid 650,000
Office Supplies paid 200,000
Other Expenses paid 50,000
Interest received 40,000
Equipment 400,000
Illustration:
Additional information:
The equipment was acquired on January 1 and has an estimated useful life of 10 years with no
residual value. On December 31, 2022, the following amounts are properly determined:
Accrued Salaries Payable 70,000
Office Supplies unused 50,000
Accrued interest receivable 10,000
Doubtful accounts 90,000
Ending inventory 400,000

Illustration:
The comparative income statement under cash basis and accrual basis is as follows:
MAGSTAYSAPUP Incorporated
Income Statement
Year Ended December 31, 2022
Cash Basis Accrual Basis
Sales 3,300,000 3,500,000
Cost of Sales:
Purchases 1,900,000 2,300,000
Inventory-December 31 (400,000) (400,000)
Cost of Sales 1,500,000 1,900,000
Gross Income 1,800,000 1,600,000
Interest Income 40,000 50,000
Total Income 1,840,000 1,650,000
Expenses:
Salaries Expense 650,000 720,000
Office supplies expense 200,000 150,000
Other expenses 50,000 50,000
Doubtful accounts 90,000
Depreciation 40,000 40,000
Total Expenses 940,000 1,050,000
Net Income 900,000 600,000
Computation: 1. Cash sales
Cash Basis
500,000
Accrual Basis
500,000
Sales on account 3,000,000
Collections from customers 2,800,000
Total Sales 3,300,000 3,500,000
2. Cash purchases 300,000 300,000

Purchases on account 2,000,000
Payments to trade creditors 1,600,000
Total Purchases 1,900,000 2,300,000
3. Interest received 40,000 40,000

Accrued Interest Receivable 10,000
Interest Income 40,000 50,000
4. Salaries paid 650,000 650,000

Accrued salaries payable 70,000
Salaries Expense 650,000 720,000
5. Office Supplies paid 200,000 200,000

Office Supplies unused (50,000)
Office Supplies Expense 200,000 150,000
6. Depreciation ( 400,000 / 10 yrs) 40,000 40,000

Conversion from
Cash to Accrual
Computation of Sales
Cash Sales XXX
Sales on account:
Trade accounts and notes receivable, ending bal. XXX
Collection of trade accounts and notes receivable XXX
Sales returns, discounts, and allowances XXX
Accounts and notes receivable written off XXX
Trade notes receivable discounted (NR directly credited) XXX
Total XXX
Less: Trade accounts and notes receivable, beginning ( XXX ) XXX
Total Sales – accrual basis XXX
Note:
Add back all items that decreased trade receivables to the
ending balance of accounts receivable and notes receivable.
Conversion from
Cash to Accrual
Computation of Purchases
Cash Purchases XXX
Purchases on account:
Trade accounts and notes payable, ending bal. XXX
Payment of trade accounts and notes payable XXX
Purchase returns, discounts, and allowances XXX
Total XXX
Less: Trade accounts and notes payable, beginning ( XXX ) XXX
Total Purchases – accrual basis XXX
Note:
Add back all items that decreased trade payables to the ending
balance of accounts payable and notes payable.
Computation of Income other than Sales Cash to Accrual
Income received – cash basis XXX
Add: Deferred income – beginning XXX
Accrued income - ending XXX
Total XXX
Less: Deferred Income – ending XXX
Accrued Income – beginning XXX XXX
Income for the current year – accrual basis
Notes:
(1) Deferred income or unearned income or pre-collected income is income already received but not yet earned. Thus, this is a liability
account.
Examples of Deferred income: Unearned rental income, Unearned interest income
(2) Accrued income is income already earned but not yet received. It is a receivable and therefore an asset.
Examples: Accrued interest receivable, accrued rental receivable, or accrued royalties receivable
(3) Deferred income-beginning is added because this is received in the preceding year and earned in the current year.
(4) Deferred income-ending is deducted because this is received in advance in the current year and to be earned only in the next year.
(5) Accrued income-beginning is deducted because this is already recognized as income in the preceding year although it is received
only in the current year.
(6) Accrued income-ending is added because this is already earned in the current year although not yet received. It is to be received
next year.
Computation of EXPENSES in general Cash to Accrual
Expenses paid – cash basis XXX
Add: Prepaid expenses – beginning XXX
Accrued expenses - ending XXX
Total XXX
Less: Prepaid expenses – ending XXX
Accrued expenses - beginning XXX XXX
Expenses – accrual basis
Notes:
(1) Prepaid expenses are expenses paid in advance but not yet incurred and therefore are assets. Examples: Prepaid insurance,
Prepaid taxes, prepaid rent, prepaid interest and prepaid salaries.
(2) Accrued expenses are expenses already incurred but not yet paid. These are liabilities. Examples: Accrued salaries payable,
accrued interest payable and accrued rental payable.
(3) Prepaid expense – beginning is added because this is paid in the preceding year and only expensed in the current year.
(4) Prepaid expense – ending is deducted because this is paid in the current year and to be expensed next year.
(5) Accrued expense – beginning is deducted because this is incurred in the preceding year although only paid in the current year.
(6) Accrued expense – ending is added because this is incurred in the current year and to be paid next year.
PROBLEM-SOLVING
JUNGCOOK Corporation began operations on January 1, 2021. During the year ended December 31, 2022, the
accounting records have been maintained on a double entry basis but the cash basis of accounting has been
employed.
The trial balance prepared from these records on December 31, 2022 appeared as follows:
Debit Credit
Cash 1,800,000
Land 730,000
Equipment 3,000,000
Purchases 3,000,000
Expenses 790,000
Note Payable 1,500,000
Sales 5,500,000
Share Capital 2,000,000
Retained Earnings 500,000
Total 9,500,000 9,500,000

Continuation:
JUNGCOOK Corporation decided to convert the accounting records to the accrual basis on December 31, 2022.
The following information was made available:
1. Accounts Receivable
◦ Dec. 31, 2022 500,000
◦ Dec. 31, 2021 350,000
2. Accounts Payable
◦ Dec. 31, 2022 450,000
◦ Dec. 31, 2021 400,000
3. Included in sales was Php 100,000 deposited by a customer for merchandise to be delivered 2023.
4. Expenses include Php 30,000 one-year insurance dated May 1, 2022.
5. The note payable of Php 1,500,000 is a one-year note issued and discounted at 12% on November 1, 2022.
6. It is estimated that 5% of the outstanding accounts receivable on Dec. 31, 2022 may prove uncollectible.
7. Accrued Expenses
◦ Dec. 31, 2022 75,000
◦ Dec. 31, 2021 60,000
Continuation:
JUNGCOOK Corporation decided to convert the accounting records to the accrual basis
on December 31, 2022.
The following information was made available:
8. Inventory
◦ Dec. 31, 2022 600,000
◦ Dec. 31, 2021 450,000
9. The equipment was acquired on January 1, 2021. The estimated life is 10 years.
REQUIRED: Prepare the necessary adjusting entries to convert

cash basis to accrual basis of accounting.
Laban lang.
Future CPAs
Thank you & GOD BLESS!

B S A 2 - 1 Pup Binan Campus

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CFAS

PUP BINAN CAMPUS

Accounting is a service activity. The accounting

• Auditing • Local & overseas • Custody and administration

*** CPD has become mandatory for CPAs

➢ This exemption is applicable only for the renewal of CPA

➢ rules, procedures, practice and standards followed in the

➢ like laws that must be followed in financial reporting

➢ Create a common understanding between preparers and users of financial statements

Philippine Interpretations Interpretations of the IFRIC

➢ an attempt to provide an overall theoretical foundation for accounting.

a.) To assist the IASB to develop IFRS based on consistent concepts.

Assets – economic Changes in economic

Fundamental Qualitative Characteristics Enhancing Qualitative Characteristics

2. Faithful representation 2. Understandability

➢ Descriptions and figures must match what really existed or happened.

Ingredients of Faithful Representation

➢ Enhancing Qualitative Characteristics

a.) Within an entity a.) Across entities

b.) Through time or from one accounting period to the

b.) Helps to achieve the goal b.) Goal

➢ Verifiability implies consensus.

➢ Verifiable financial information provides results that would be substantially duplicated by

Direct Verification Indirect Verification

Checking the inputs to a model, formula or other

Carrying Amount of Inventory

➢ Cost constraint on useful information

Financial Statements and

Balance Sheet Income Statement

Equity (net assets)

2) Unconsolidated financial statements – parent alone

GOING CONCERN assumption

➢ specific business organization, which may be a proprietorship, partnership or corporation.

➢ Calendar year – 12 month period that ends on December 31

Elements of Financial Position Elements of Financial Performance

A resource controlled by A present economic

*** asset is an economic resource and that the potential

RIGHTs that have the potential to produce economic benefits

a. To receive contractual cash flows (from a lessor perspective-monthly lease payments)

e. To extinguish a liability by transferring an economic resource (payment of trade liabilities)

A present obligation of A present obligation of an

Profit or Loss Other

Foreign currency gains or losses

Unrealized gains/losses from financial

OLD RECOGNITION CRITERIA NEW (REVISED) RECOGNITION CRITERIA

Cost can be measure reliably Even if probability is low

(2) Systematic and rational allocation

(3) Immediate recognition

(1) Historical Cost

(2) Current Value

b) Value in use for asset

c) Fulfillment value for liability

(1) Transaction approach

Ending Net Assets 1,300,000

Beginning Net Assets (500,000)

Add: Dividends Paid 300,000 Add: Investment XXX

➢ Net Assets = Total Assets – Liabilities

➢ Owner’s Equity in a proprietorship

➢ Partner’s Equity in a partnership

➢ Shareholders’ equity in a corporation

Day 5 – Presentation of Financial Statements (Chapter 8)

Row Labels Sum of Amount

Gross Purchases 1,900,000