INTERMEDIATE ACCOUNTING 3 (REVIEWER)

CHAPTER 1 – FINANCIAL STATEMENT (p. 01)

CHAPTER 2- STATEMENT OF FINANCIAL POSITION (p. 27)
CHAPTER 6 – NONCURRENT ASSET HELD FOR SALE (p. 163)
CHAPTER 8- ACCOUNTING CHANGES (p. 203)
CHAPTER 14 – CASH AND ACCRUAL BASIS (p. 378)
CHAPTER 16 – ERROR CORRECTION (p. 454)
CHAPTER 17 – STATEMENT OF CASH FLOWS (p. 489)

CHAPTER 1

FINANCIAL STATEMENTS

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 CHAPTER 2

STATEMENT OF FINANCIAL POSITION

- To define a statement of financial position

- To understand the current and noncurrent classifications of assets and liabilities
- To understand refinancing of a currently maturing debt
- To identify components of equity in a corporation
- To identify the minimum line items in a statement of financial position.
- To be able to prepare statement of financial position using Philippine format and IFRS format

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STATEMENT OF FINANCIAL POSITION
- is a formal statement showing three elements comprising financial position, namely assets,
liabilities and equity.
- Investors, creditors and other statement users analyze the statement of financial position to
evaluate such factors as liquidity, solvency and the need of the entity for additional financing.
 Liquidity – is the ability of the entity to meet currently maturing obligations.
- To pay its liability in time.
- Available to pay expenses and debts as they become due

 Solvency – is the availability of cash over the longer term to meet maturing obligations.
- Current obligation

 Information about liquidity and solvency is useful in predicting the ability of the entity to
comply with future financial commitments and to pay dividends to shareholders.

CURRENT AND NONCURRENT DISTINTION

- Provides that an entity shall present current and noncurrent assets, and
current and noncurrent liabilities, as a separate classification in the
statements of financial position.
-When an entity supplies goods o services within a clearly identifiable operating cycle, the
separate classification of current and noncurrent assets and liabilities is a useful information.
-For some entities, such as financial institutions, a presentation of assets and liabilities in
increasing or decreasing liquidity provides information that is faithfully represented and more
relevant.

COMPOSITION OF STATEMENT OF FINANCIAL POSITION

 Assets
 Liabilities
 Equity

ASSETS
- A present economic resource controlled by the entity as a result of past events.

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CURRENT ASSETS
- Cash or cash equivalent unless the asset is restricted to settle a liability for
more than 12 moths after the reporting period.
- Entity holds the asset primarily for the purpose of trading.
- Expects to realize the asset within 12 months after the reporting period
- Entity expects to realize the asset or intends to sell or consume it within the
entity’s normal operating cycle.

CASH AND CASH EQUIVALENT

- Should be unrestricted (available anytime for payment of current obligation)
- Cash equivalents
- Short term highly liquid investments readily convertible into cash
- Short maturity of 3 months or less from the date of acquisition.
Example of CASH EQUIVALENTS
- Three-month BSP treasury bill
- Three-year BSP treasury bill purchased three months before date of maturity
- Three-month time deposit
- Three-month money market instrument

FINANCIAL ASSET HELD FOR SALE

- Debt and equity securities that are purchased with the intent of selling them in
the “near term” o very soon in order to generate short-term gains or profits.
- Acquired principally for the purpose of selling it in the near term/
- Initial recognition, part of a portfolio which has evidence of recent actual
patter of short-term profit taking
- Derivative, except when it is a financial guarantee contract or designated as an
effective hedging instrument.

EXPECTED TO BE REALIZED WITHIN 12 MONTHS

- Short-term nontrade receivables
- Represent claims arising from sources other that the sale of merchandise or
services in the ordinary course of business

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REALIZED, SOLD O CONSUMED
- Trade receivables, inventories and prepayments
- Current assets because they are expected to be realized, sold or consumed
within the normal operating cycle or one year, whichever is longer.

OPERATING CYCLE
- Time between the acquisition of assets for processing and their realization in
cash or cash equivalents.
- Operating cycle of a trading entity
- Operating cycle of a manufacturing entity.

PRESENTATION OF CURRENT ASSETS

- In order of liquidity
- Cash and cash equivalents
- Financial assets at FVPL
- Trade and other receivables
- Inventories
- Prepaid expenses

NONCURRENT ASSETS
- All other assets not classified as current
- INCLUDES: PPE
- Long-term investments
- Intangible assets
- Other noncurrent assets

PROPERTY, PLANT AND EQUIPMENT

- Tangible assets which are held by an entity for use in production or supply of
goods and services, for rental to other or for administrative purposes and are
expected to be used during more than one period.
Example:
 Land
 Land Improvement
 Building

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  Machinery
 Furniture and fixtures
 Office equipment
 Bearer Plants

LONG TERM INVESTMENT

- Asset held by an entity for the accretion of wealth through capital distribution,
such as interest, royalties, dividends and rental for capital appreciation or for
other benefits to the investing entity such as those obtained though trading
relationship.
Examples of Long-term Investment
 Investment in shares and bonds
 Investment in subsidiaries
 Investment in associates
 Investment in funds such as sinking fund
 Investment property
 Cash surrender value of life insurance policy
 Investment in joint venture

INTANGIBLE ASSETS
- An identifiable nonmonetary asset without physical substance
- Controlled by the entity as a result of past event and from which future
economic benefits are expected to flow to the entity
- Includes
 Patent
 Franchise
 Copyright
 Trademark
 Computer software

OTHER NONCURRENT ASSETS

- Those assets that do not fit into the definition of the previously mentioned
noncurrent assets.

LIABILITIES

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 - Defined as a present obligation of an entity to transfer an economic
resource as a result of past events.

CURRENT LIABILITIES
- Expects to settle the liability within the entity’s normal operating cycle
- Holds the liability primarily for the purpose of trading
- Due to be settled within 12 months after the reporting period
- Does not have an unconditional right to defer settlement of the liability for
at least 12 months after the reporting period

Examples of Current Liabilities

 Trade payables and accruals for employee and other operating costs
 Obligations that are not settled as part of the normal operating cycle but are due for
settlement within 12 months after the end of the reporting period
 Financial liabilities held for trading are financial liabilities that are incurred with an
intention to repurchase them in the near term.

LONG-TERM DEBT CURRENTLY MATURING

- It is current if 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 end of reporting period and before the financial
statements are authorized for issue.

DISCRETION TO REFINANCE
- If the entity has the discretion to refinance or roll over an obligation for at
least 12 months after the reporting period under existing loan facility, it is
noncurrent.
- The discretion should be the with the entity
- Third party- current (discretion)
- Entity- noncurrent (discretion to refinance)

COVENANTS
- Attached to borrowing agreements which represent undertaking by the
borrower.
- If breached, the liability becomes payable on demand.

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 - It is still current even if the lender has agreed after the end of the reporting
period and before the statements are authorized for issue, not to demand
payment as a consequence of the breach.

PRESENT OF CURRENT LIABILITIES (line items)

 Trade and other payables
 Current provisions
 Short term borrowing
 Current portion of long-term debt
 Current tax liability

NONCURRENT LIABILITIES
- Residual definition
- Noncurrent portion of long-term debt
- Lease liability
- Deferred tax liability
- Long-term obligations to entity officers
- Long-term deferred revenues

EQUITY
- Residual interest in the assets of the entity after deducting all of the
liabilities
- Net assets
- Called depending on the form of the entity
 Owner’s equity
 Partner’s equity
 Shareholder’s equity

LISTING OF LINE ITEMS IS NOT EXCLUSIVE

- Additional line items can be done when such presentation is relevant
to the understanding of the financial position of an entity
- Judgement is needed in presenting separate line items
- Nature and liquidity of assets
- Function of assets within the entity
- Amount, nature and timing of liabilities
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FORMS OF STATEMENT OF FINANCIAL POSITION
- No prescribed form
- Has two types
 Report Form - vertical
 Account Form – horizontal
- “As of” date of the balance sheet

CHAPTER 6

NONCURRENT ASSET HELD FOR SALE

- is a residual definition, does not meet the definition of a current asset.

Example:
 Land
 Building
 Disposal Group

DISPOSAL GROUP
- is a group of assets to be disposed of in a single transaction and liabilities directly
associated with those assets that will be transferred in the transaction.

- Noncurrent asset or disposal group as part of ongoing business but instead intends to sell it and
recover the carrying amount principally to sale.
- not be depreciated
- present current asset

CONDITIONS FOR CLASSIFICATION AS HELD FOR SALE

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 1. The asset or disposal group is available for immediately sale in its present condition.
(sold as seen)
2. The sale must be highly profitable.

CONDITIONS TO BE MET IN ORDER FOR THE SALE TO BE HIGHLY PROBABLE

1. Management must be committed to a plan to sell the asset o disposal group.
2. An active program to locate a buyer and complete the plan must have been initiated.
3. Sale price is reasonable in relation to the FV.
4. The sale is expected to be a “complete sale” within 1 year from date of reclassification
5. Actions required to complete the plan indicate that it is unlikely that the plan will be
significantly changed or withdrawn.

MEASUREMENT OF NCAHFS
- Noncurrent asset or disposal group classified as held for sale at the lower carrying
amount or fair value less cost of disposal or sell.
- shall not be depreciated

WRITEDOWN TO FAIR VALUE LESS COST OF DISPOSAL

- If FVLCTS is lower than Carrying amount of the asset, it is treated as
IMPAIRMENT LOSS.

SUBSEQUENT INCREASE IN FAIR VALUE

- If subsequently there is an increase in the FVLCTS, it recognized a gain but not
excess of any impairment loss previously recognized.

REVALUED ASSET CLASSIFIED AS HELD FOR SALE

- An entity adopts revaluation model for the measurement of assets, any asset classified as held
for sale should be revalued to fair value immediately prior to the classification as held for sale.

 ADDITIONAL REVALUATION SURPLUS

- is equal to the fair value at the classification date less the carrying amount at that date.

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- Any cost of disposal at classification date should be recognized as impairment loss for the
period and deducted from the asset held for sale.
- At subsequent year-end, the revalued asset classified as held for sale shall be measured at the
lower of carrying amount and FVLCTS.

ABANDONED NONCURRENT ASSET

- An entity shall not classify as held for sale a noncurrent asset o disposal group that is to
be abandoned.
- because the carrying amount will be recovered principally through continuing use or the
noncurrent asset is to be used until the end of its economic life.
TEMPORARILY ABANDONED
- An entity shall not account for a noncurrent asset that has been temporarily taken out of
use as if it had been abandoned.

CHAPTER 8

ACCOUNTING CHANGES

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 CHAPTER 14

CASH AND ACCRUAL BASIS

METHODS OF ACCOUNTING
CASH BASIS
- Income is recognized when received regardless of when earned, and
expense is recognized when paid regardless of when incurred.
ACCRUAL BASIS
- Income is recognized when earned regardless when received, and
expense is recognized when incurred regardless of when paid

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DEFERRED INCOME
- Also known as unearned income or pre-collected income is income already received but
not yet earned.
ACCRUED INCOME
- It is an income already earned but not yet received.
PREPAID EXPENSE
- Are expenses paid in advance but not yet.
ACCRUED EXPENSE
- Are expenses incurred but not yet paid.

CASH AND ACCRUAL BASIS

Cash sales XX
Add: Trade accounts and notes receivable, end XX
Collection of Trade accounts and notes receivable xx
Sales returns, discounts and allowances XX
Accounts and notes receivable written off XX
Trade notes receivable discounted XX
Less: Trade accounts and notes receivable, beginning XX
Total Sales - Accrual basis XX

CHAPTER 16

ERROR CORRECTION

PERIOD ERRORS - are omissions and misstatement in the entity’s financial statement for one
or more periods arising from failure to use or misuse of reliable information was available when
financial statements for these periods were authorized for issue.
● could reasonably be expected to have been obtained and taken into account in the preparation
of hose financial statements.

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PRIOR ERRORS MAY INCLUDE:

❖ Mathematical mistakes

❖ Mistakes in applying accounting policies

❖ Misinterpretation of facts

❖ Fraud

TYPES OF ERRORS
• Statement of financial position errors
• Income statement errors
• Combined statement of financial position and income statements errors

COUNTERBALANCING ERRORS
- errors which, if not detected, are automatically counter balanced or corrected in the next
accounting period.
a. Inventory, including purchases and sales
b. Prepaid expense
c. Accrued expense
d. Deferred income
e. Accrued income

EFFECTS:
• The income statements for two successive periods are incorrect
• The statement of financial position at the end of the 1st period is incorrect
• The statement of financial position at the end of 2nd period is correct

NONCOUNTERBALANCING ERRORS
- if not detected, are not automatically counterbalanced or corrected in the next
accounting period.

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EFFECTS:
 The income statement of the period in which the error is committed is incorrect but the
succeeding income statement is not affected.
 The statement of financial position of the year of error and succeeding statement of the
financial position are incorrect until the error is corrected.

EVENTS AFTER THE REPORTING PERIOD

- Events after the reporting period are “those events, favorable or unfavorable, that occur
between the end of the reporting period and the date that the financial statements are
authorized for issue.” (PAS 10)

TWO TYPES OF EVENTS AFTER THE REPORTING PERIOD

1. Adjusting events after the reporting period
– are those that provide evidence of conditions that existed at the end of the reporting
period.
2. Non-adjusting events after the reporting period – those that are indicative of conditions
that arose after the reporting period

DATE OF AUTHORIZATION OF THE FINANCIAL STATEMENTS

- This date is the date when management authorizes the financial statements for issue
regardless of whether such authorization for issue is for further approval or for final
issuance to users.

CHAPTER 17

STATEMENT OF CASH FLOWS

- A statement of cash flows is a component of financial statements summarizing the operating,

investing, and financing activities of an entity.
- The primary purpose of a statement of cash flows is to provide relevant information about cash
receipts and cash payments of an entity during a period.

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CASH AND CASH EQUIVALENTS
 CASH
- comprises cash on hand and demand deposits

 CASH EQUIVALENTS
- are short term, highly liquid investments that are readily convertible into known amount
of cash and which are subject to an insignificant risk of changes in value.
- An investment normally qualifies as a cash equivalent only when it has a short maturity
of three months or less from date of acquisition.

CLASSIFICATION OF CASH FLOWS

- Cash flows are inflows and outflows of cash and cash equivalents.
 Operating activities
 Investing activities
 Financing activities

BANK OVERDRAFTS
- which are repayable on demand form an integral part of an entity’s cash management.
In the Philippines, bank overdrafts are not permitted.

OPERATING ACTIVITIES
- are the cash flows derived primarily from the principal revenue producing activities of
the entity.

Examples of Cash flows from operating activities are:

a) Cash receipts from sale of goods and rendering services
b) Cash receipts from royalties, rentals, fees, commissions and other revenue
c) Cash payments to suppliers of goods and services
d) Cash payments for selling, administrative and other expenses
e) Cash receipts and cash payments of an insurance enterprise for premiums and
claims, annuities and other policy benefits
f) Cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities.
g) Cash receipts and payments for securities held for dealing or trading purposes

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TRADING SECURITIES
- Cash flows arising from the purchase and sale of dealing or trading securities are
classified as operating activities.
- Cash advances and loans made by a financial institution are usually classified as
operating activities since they relate to the main revenue producing activity of that
entity.

INVESTING ACTIVITIES
- are the cash flows derived from the acquisition and disposal of long-term assets and
other investments not included in cash equivalent.

Examples of cash flows from investing activities are:

a) Cash payments to acquire property, plant and equipment, intangibles and other
long-term assets
b) Cash receipts from sale of property, plant and equipment, intangibles and other
long-term assets.
c) Cash payments to acquire equity or debt instruments of other entities and interest
in joint ventures (current and long-term investments)
d) Cash receipts from sales of equity or debt instruments of other entities and interest
in joint venture
e) Cash advances and loans to others parties (other than advances and loan made by
financial institutions)
f) Cash receipts from repayment of advances and loans made to other parties
g) Cash payments for future contract, forward contract, option contract and swap
contract
h) Cash receipts for future contract, forward contract, option contract and swap
contract

FINANCING ACTIVITIES
- are the cash flows derived from the equity capital and borrowing of the entity.

Financing activities are the cash flows that result from transactions:
 Between the entity and the owners - equity financing
 Between the entity and the creditors – debt financing

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 Financing activities include the cash flows from transactions involving nontrade
liabilities and equity of an equity.

Examples of cash flows from financing activities are:

a) Cash receipts from issuing shares or other equity instruments for example
issuance of ordinary and preference shares
b) Cash payments to owners to acquire or redeem the enterprise’s shares, for
example, payment for treasury shares
c) Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other
short or long-term borrowings
d) Cash payments for amount borrows
e) Cash payments by a lessee for the reduction of the outstanding principal lease
liability

NONCASH TRANSACTIONS
- that investing and financing transactions that do not require use of cash or cash
equivalents shall be excluded from the statement of cash flows.
- Such transactions shall be disclosed elsewhere in the financial statements either in the
notes to financial statements or in separate schedule or in a way that provides all relevant
information about these transactions.

The statement of cash flows is strictly a cash concept.

Accordingly, the following noncash transactions are disclosed separately:

a) Acquisition of asset either by assuming directly related liability
b) Acquisition of asset by means of issuing share capital
c) Conversion of bonds payable to share capital
d) Conversion of preference share to ordinary share

INTEREST
- That interest paid and interest received shall be classified as operating cash flows
because they enter into the determination of net income or loss.
- alternatively, interest paid may be classifies as financing cash flows because it is a cost
of obtaining financial resources.

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 - 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 flows.
- Cash flows from interest paid and interest received shall be classified in a consistent
manner from a period to period as either operating, investing or financing activities.

DIVIDENDS
- That dividend received shall be classified as operating cash flow because it enter into
the determination of net income.
- alternatively, dividend received may be classified as investing cash flow because it is a
return on investment.
- 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 flows.
- the classificatory of dividend received and dividend paid as either operating, investing
or financing activity shall be made on a consistent basis from period to period.

INCOME TAXES
- That cash flow arising from income taxes shall be separately disclosed as cash blows
from operating activities unless they can be specifically identified with investing and
financing activities.
- Tax cash flows are often difficult to match to the originating underlying transaction, so
most of the time all tax cash flows are classified as arising from operating activities.

DIRECT METHOD
- that an entity shall report cash flows from operating activities using either the direct
method or indirect method.
- the direct method shows in detail or itemizes the major classes of gross cash receipts
and gross cash payments. The cash receipts are listed one by one, the cash payments are
listed one by one, and the diffidence represents the net cash flow from operating
activities.

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INDIRECT METHOD
- the indirect method means that net income or loss is adjusted for the effects of
transactions of noncash nature, any deferrals or accruals of past or future operating cash
receipts and payments, and items of income or expense associated with investing and
financing activities.
- the indirect method of presenting the cash flow from operations begins with accrual
basis net income and applies a series of adjustment to convert the income to cash basis.

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