MODULE 1: THE ACCOUNTANCY PROFESSION

ACCOUNTING
● Accounting Standards Council:
○ Accounting is a service activity. Provide Quantitative information primarily
financial in nature, about economic entities, that is intended to be useful in
making economic decisions.
● Committee on Accounting Terminology of the American Institute of CPA:
○ Accounting is the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are in part at least
of financial character and interpreting results thereof.
● American Accounting Association (Basic Accounting Theory):
○ Accounting is the process of identifying, measuring, and communicating
economic information to permit informed judgment and decisions by users of the
information.

IMPORTANT POINTS
● Accounting is about quantitative information
● Information is likely to be financial in nature
● Information should be useful in decision-making
● Transactions
○ Economic activities of an entity
● External transactions
○ Involving one entity and another entity
● Internal transactions
○ Entity only
● American Accounting Association
○ Provide quantitative information to be useful in making an economic decision
○ 1. Identifying
■ recognition/non-recognition of business activities as “accountable events”
■ All business transactions are accountable
■ An event is accountable/quantifiable when it has an effect on asset,
liability, and equity
■ Subject matter of accounting is economic activity/the measurement of
economic resources and obligations
■ Only economic activities are emphasized and recognized in accounting
○ 2. Measuring
■ Assigning of peso amount
■ If accounting information is to be useful, it must be expressed in terms of
a common financial denominator
■ Measurement bases are historical cost and current value
■ Historical cost - original acquisition cost, common measure of financial
transactions
 ■ Current value - includes fair value, value in use, fulfillment value, current
cost
○ 3. Communicating
■ Process of preparing and distributing accounting reports to potential users
of accounting info
■ Reason why accounting is called the “universal language of business”
■ Implicit in the communication process are the recording, classifying, and
summarizing aspects of accounting
■ Recording/journalizing - process of systematically maintaining a record
of all economic business transactions after they have been identified and
measured.
■ Classifying - sorting/grouping of similar and interrelated economic
transactions into their respective classes, accomplished by posting to the
ledger
■ Ledger - group of accounts which are systematically categorized into
asset, liability, equity, revenue, and expense accounts.
■ Summarizing - preparation of financial statements (includes statement of
financial position, income statement, statement of comprehensive income,
statements of changes in equity, and statement of cash flows)

ACCOUNTING AS AN INFORMATION SYSTEM

● Measures business activities, process information into reports, and communicates the
reports to decision-makers
● Set of financial statements - the key product of information system, the doc that reports
financial information about an entity to decision-makers
● Financial reports - tell us how well an entity is performing in terms of profit and loss and
where it stands in financial terms.
● Overall objective of accounting - provide quantitative information about a business that is
useful to statement users particularly owners and creditors in making economic
decisions.
● Accountant’s primary task - supply financial information so that the statement users can
make informed judgments and better decisions. The essence of accounting is decision -
usefulness

ACCOUNTANCY PROFESSION
RA No. 9298 (Philippine Accountancy Act of 2004)
● Law regulating the practice of accountancy in the Philippines
● Board of Accountancy - body authorized by law to promulgate rules and regulations
affecting the practice of the accountancy profession in the Philippines. Responsible for
preparing and grading the Philippines CPA examination (May & October)
● Limitation of the Practice of Public Accountancy
○ Single practitioners & partnerships for the practice of public accountancy shall be
registered CPAs in the Philippines
 ○ Certificate of accreditation shall be issued to CPA in public practice upon showing
in accordance with rules and regulations promulgated by BoA and PRC
○ Registrant has acquired a minimum of 3 years of experience in any of the areas
of public practice including taxation.
○ SEC shall not register any corporation organized for the practice of public
accountancy.
● Accreditation to Practice Public Accountancy
○ BoA & PRC (Professional Regulation Commission) - CPAs are required to
register for the practice of public accountancy
○ Certificate of Registration - the PRC will issue upon favorable recommendation to
the BoA, valid for 3 years and renewable every 3 years upon payment of required
fees.

CPAs generally practice their profession in 3 main areas:

1. PUBLIC ACCOUNTING
○ Render independent and expert financial services to the public
○ Offer 3 kinds of services: auditing, taxation, and management advisory service
○ Auditing - primary service offered by most public accounting practitioners.
External auditing examination of financial statements by an independent CPA for
the purpose of expressing an opinion as to the fairness with which the financial
statements are prepared. External auditing is the asset function of independent
CPAs.
○ Taxation - includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business endeavors. the
public accountant must be thoroughly familiar with the tax laws and regulations.
○ Management Advisory Services - no precise coverage. Refer to services to
clients on matters of accounting, finance, business policies, organization,
procedures, product cost, distribution and many other phases of business
conduct and operations. Includes:
○
A. Advice on installation of comp system
B. Quality control
C. Installation and modification of accounting system
D. Budgeting
E. Forward planning and forecasting
F. Design and modification of retirement plans
G. Advice on mergers and consolidations
- includes maintaining the records, producing the financial reports,
preparing the budgets, controlling and allocating the resources of the
entity.

2. PRIVATE ACCOUNTING
○ CPAs - accounting staff, chief accountant, internal auditor, and controller
 ○ Controller - highest accounting officer of an entity. Private accountants have the
responsibility for the determination of the various taxes and the entity is obliged
to pay. includes maintaining the records, producing the financial reports,
preparing the budgets, controlling and allocating the resources of the entity.

3. GOVERNMENT ACCOUNTING
○ encompasses the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of
government funds and property and interpreting the results thereof.
○ FOCUS: the custody and administration of public funds; BIR, COA, Department
of Budget and Management, SEC. BSP

4. EDUCATION

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

● inculcation and acquisition of advanced knowledge, skill, proficiency, and ethical and
moral values after the initial registration of the CPA for assimilation into professional
practice and lifelong learning
● raises and enhances the technical skill and competence of the CPA
RA NO. 10912
● Law mandating and strengthening the CPD program for all regulated professions,
including the accountancy profession

CPD CREDIT UNITS

● CPD credit hours required for the renewal of CPA license and accreditation of a CPA to
practice the accountancy profession every 3 years
● Under the new BOA Resolution, all CPAs, regardless of sector shall be required to
comply with 120 CPD credit units
● required for the practice of CPA license and accreditation of CPA to practice the
accountancy profession
● Only 15 CPD credit units are required for the renewal of CPA license
● 120 CPD credit units are required for accreditation of a CPA to practice the accountancy
profession

EXEMPTION FROM CPD

● PERMANENTLY EXEMPTED - upon reaching the age of 65
● The exemption applied only to the renewal of a CPA license and not for the purpose of
accreditation to practice the accountancy profession

Accounting vs Auditing
Accounting
● embraces auditing
● essentially constructive in nature ceases when FS are already prepared
Auditing
 ● Analytical
● Work of an auditor begins when the work of the accountant ends
● Auditor examines the FS to ascertain whether they are in conformity with generally
accepted accounting principles

Accounting vs Accountancy
Accountancy
● Profession of accountancy practice
Accounting
● Used in reference only to a particular field of accountancy such as public, private, and
government accounting

Accounting vs Bookkeeping
Bookkeeping
● Procedural
● concerned with development and maintenance of accounting records
● “How” of accounting
● Procedural element of accounting
Accounting
● Conceptual
● Concerned with the “why”, reason or justification for any action adopted

Financial accounting vs Managerial Accounting

Financial
● Recording of business transactions and eventual preparation of FS
● Focuses on general purpose reports known as FS intended for internal and external
users area of accounting that emphasizes reporting to creditors and investors
Managerial
● Accumulation and preparation of financial reports for internal users only
● Developing accounting information within an entity

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

● Accounting rules, procedures, and practices
● Principles have developed on the basis of experience, reason, custom, usage, and
practical necessity
● Represents the rules, procedures, practices, and standards followed in the preparation
of FS
● “Like laws” that must be followed in FS
● The process of establishing GAAP is a “political process” which incorporates political
actions of various interested user groups as well as professional judgment, logic, and
research.

PURPOSE OF ACCOUNTING STANDARDS

● Identify accounting practices for the preparation and presentation of FS
 ● Creates a common understanding between preparers and users of FS (assets and
liability)
● To ensure comparability and uniformity

FINANCIAL REPORTING STANDARDS COUNCIL

● ASC - GAAP is formalized nitially
● Replaced the ASC
● accounting standard setting body created by the PRC upon rec of the BOA to assist the
B0A in carrying out its powers and functions provided under RA No 9298
● main function: establish and improve accounting standards that will be generally
accepted in the ph
● accounting standards promulgated by FRSC constitutes the “highest hierarchy” of GAAP
in the ph
● Philippine Accounting Standards/ Philippine Financial Reporting Standards (PFRS) -
approved statement of FRSC

COMPOSITION OF FRSC
● 15 members w/ a chairman (senior accounting practitioner)
● 3 yrs renewable for another term
● Any member of ASC, not disqualified from being appointed

PHILIPPINE INTERPRETATIONS COMMITTEE

● formed by FRSC (Aug, 2006)
● replaced IC (Interpretations Committee), formed by ASC (May, 2000)
● Role: prepare interpretations of FRSC for approval by the FRSC & to provide timely
guidance on financial reporting issues, not specifically addressed in current PFRS
○ interpretations are intended to give authoritative guidance = unacceptable
treatment, because standards do not provide clear- cut rules
● IFRIC - counterpart of PIC (UK), replaced Standing interpretations Committee (SIC)c

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE

● independent private sector body
● Objectives: achieving uniformity in the accounting principles which are used by business
for financial reporting around the worid-formed June 1973
○ Australia, Canada, France, Germany, Japan, Mexico, Netherlands, UK, Ireland,
US- headquartered in London, UK
● Obectives of IASIC
○ To formulate and publish in the public interest accounting to be observed in the
presentation of ES and to promote their worlovide acceptance and observance
○ To work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of FS
INTERNATIONAL ACCOUNTING STANDARDS BOARD
● Replaced IASC
● International Financial Reporting Standards - IASB publishes standards in a series of
pronouncements adopted the body of standards issued by lASC
● IAS - Pronouncement of the IASC continue to be designateD correct order research,
discussion paper, exposure draft and accounting standard

MOVE TOWARD IFRS

● USA FA Slandards Board (FASB) & iASB are considered
○ most of the Philippine standards issued are based on American accounting
standards (past years)
○ FRSC adopted IAS and IFRS entirety (present)
○ ObJective: one uniform and clobally accepted financial reporting standards
○ Philippines is fully compliant with IFRS effective Jan 2005 (started 1907), moving
USA GAAP tO IFRS
● Support of IAS by Ph organizations (PH SEC, BOA, PICPA)
● Increasing internalization of business which has heightened interest in a common
language for financial reporting
● Improvement of IAS/removal of free choices of accounting treatments
● Increasing recognition of IAS by the Word Bank, Asian Development Bank, World Trace
Organization

PHILIPPINE FINANCIAL REPORTING STANDARDS

● the FRSC issues standards in a series of pronoufcements called "PFRS*
● Correspond to IRS
○ *the PFRS are numbered the same as their counterpart in IFRS
● Correspond to lAS
○ *numbered the same
● Correspond to interpretations of the FRIC and the Standing Interpretations Committee, &
the Interpretations developed by the Philippine Interpretations Committee
MODULE 3: PFRS 5, PAS 1, 7 AND 8

PAS 1 - PRESENTATION OF FINANCIAL STATEMENTS

FIVE IMPORTANT FS
1. Balance sheet < Statement of Financial Position
2. Statement of Financial Performance
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to the FS

*Income Statement + Statement of comprehensive income = Statement of Financial

Performance
*depende sa framework kung ano ginagamit nila para pangalanan ang financial statements
*FPRS = SFP
*Small entities = Balance Sheet

Objective: to provide information about the SFP, SFP, and cash flows at an entity that is useful
to a wide range of users in making economic decisions.

Frequency: at least annually.

*depende sa time period; if corp or part it’s either calendar year (Jan. 1 to Dec. 31) or fiscal year
(pwedeng ibang cycle)

STATEMENT OF FINANCIAL POSITION

● A formal statement showing the 3 elements comprising financial position, namely assets,
liabilities and equity.
● Used to evaluate factors such as liquidity (short term na utang na kayang bayaran),
solvency (katatagan ng isang company, maganda yung pagpapatakbo, kapag nabayaran
na ang short and long term ay meron pang tirang assets), and the need of the entity for
additional financing.
● ASSET
○ A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic
benefits.
● CURRENT ASSETS
○ Asset is cash or cash equivalent unless the asset is restricted to settle a liability
for more than 12 months after reporting period
○ Entity holds asset for the purpose of trading
○ Entity expects to realize the asset within 12 months after the reporting period
○ Entity expects to realize the asset within the entity’s normal operating cycle
■ Cash and cash equivalents
■ Financial assets at fair value such as trading securities and other
investment in quoted equity instruments
 ■ Trade and other receivables
■ Inventories
■ Prepaid expenses
● NON CURRENT ASSETS
○ Residual definition
■ Property, plant and equipment
● PAS 16
■ Long term investments
● 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 entity
such as those obtained thru trading relationships.
■ Intangible assets
● PAS 38; identifiable nonmonetary asset without physical
substitute. (presence only; example: franchise)
■ Deferred tax assets
■ Other non-current assets
● LIABILITIES
○ Are present obligations of the entity to transfer an economic resource as a result
of past events. An obligation is a duty of responsibility that the entity has no
practical ability to avoid.
● CURRENT LIABILITIES
○ Entity expects to settle the liab within the entity’s normal operating cycle
○ Entity holds the liability primarily for the purpose of trading
○ The liability is due settled within 12 months after the reporting period.
○ The entity does not have an unconditional right to defer settlement of the liab for
at least 12 months after the reporting period.
■ Trade & other payables
■ Current provisions
■ Short-term borrowing
■ Current portion of long-term debt
■ Current tax liability
● NON-CURRENT LIABILITIES
○ Non-current portion of long-term debt
○ Finance lease liability
○ Deferred tax liability
○ Long-term obligations of company offices
○ Long-term deferred revenue
● Currently maturing long-term debt
○ A liability that is due to be settled within twelve months after the reporting period
is classified as current, even if
■ The original term was 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 FS are authorized
for issue.
● Discretion to Refinance
○ Or roll over an obligation for at least 12 months after the reporting period under
an existing loan facility, the obligation is classified as noncurrent.
○ Refinancing or rolling over must be at the discretion of the entity.
● Covenants
○ Are often attached to borrowing agreements that represent undertakings by the
borrower.
○ Effects of breach of a contract
■ IAS 1, paragraph 74: the 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 the
breach.
● EQUITY
○ Is the residual interest in the assets of the enterprise after deducting all its
liabilities.
○ IAS 1, paragraph 7: The holders of instruments classified as equity are simply
known as owners.
● SHAREHOLDERS’ EQUITY
○ Is the residual interest of owners in the assets of a corporation measured by the
excess of assets over liabilities.
○ If individual: owner’s equity
● Two ways of presenting the SFP
○ Account form (A=L+E)
○ Report form

STATEMENT OF FINANCIAL PERFORMANCE

INCOME STATEMENT
● Showing the financial performance of an entity for a given period of time
● Useful in predicting future performance and ability to generate future cash flows
● PROFIT OR LOSS
○ Revenue
○ Finance cost
○ Share of profits and losses of associates and joint ventures accounted for using
the equity method
○ A single amount for the total of discontinued operation
○ Tax expense
● OTHER COMPREHENSIVE INCOME
○ Unrealized gain/loss on debt investment measure at fair value thru OCI
○ Gain/loss from translation of the FS of a foreign operation
○ Unrealized gain/loss from derivative contracts designated as cash flow hedge
○ Unrealized gain/loss on equity investment measured at fair value thru OCI
 ○
Revaluation surplus during the year
○
Remeasurements of defined benefit plan, including actuarial gain/loss
○
Change in fair value attributable to credit risk of a financial liability designated at
fair value thru profit/loss
● SOURCES OF INCOME
○ Sales of merchandise to customers
○ Rendering of services
○ Use of entity resources
○ Disposal of resources other than products
● COMPONENTS OF EXPENSE
○ COGS or COS
○ Distribution costs or selling expenses
○ Administrative expenses
○ Other expenses
○ Income tax expense
● Two ways of presenting
○ Function basis
■ COGS method
○ Nature basis
■ Nature of expense method
STATEMENT OF COMPREHENSIVE INCOME
○ Starts with profit or loss as shown in the income statement plus or minus the
components of OCI
○ Can be presented separately from the income statement or a single statement.

STATEMENT OF CHANGES IN EQUITY

● Effect of change in accounting policy
● Appropriation of retained earnings
● Statement of retained earnings (optional, pwedeng isama na sa SCE lalo na kung maliit
lang ang company)
○ Profit or loss for the period
○ Prior period errors
○ Dividends declared and paid to shareholders
○ Effect of change in accounting policy
○ Appropriation of retained earnings

NOTES TO FS
● Present info about the basis on which the financial statements were prepared and which
specific accounting policies were chosen and applied to significant transaction
● Disclose any info that is required by IFRSs
● Show any additional information that is relevant to understanding that is not shown
elsewhere in the FS.
● Information about the company, the basis of FS, breakdown of expenses
PAS 8 - ACCOUNTING POLICIES, ESTIMATES, AND ERRORS
Objective
● How to select and apply our accounting policies
● How to account for the changes in accounting policies
● How to account for changes in accounting estimates; and
● How to correct the errors made in the previous reporting periods.

IMPORTANT TERMS TO REMEMBER

● Accounting Policies - the specific principles, bases, conventions, rules, and practices
adopted by one entity in preparing and presenting financial statements.
● Change in accounting estimates - an adjustment of the carrying amount of an asset or a
liability or the amount of the periodic consumption of an asset.
● Material - omissions or misstatements of items are material if they could influence the
economic decision that users make on the basis of the FS.
● Retrospective Application - applying a new accounting policy to transactions, other
events and conditions as if that policy had always been applied.

Accounting policies are determined by applying the relevant IFRS and considering any
relevant implementation Guidance issued by the IASB for that IFRS.

When there is no applicable IFRS or interpretation, management should use its

judgment in developing and applying an accounting policy that results in information that
is relevant and reliable.

An entity must select and apply its accounting policies for a period consistently for similar
transactions, other events and conditions.

ACCOUNTING POLICIES
WHEN CAN CHANGES BE APPLIED?
● The change is required by an IFRS
● The change will result in a more appropriate presentation of events or transactions in the
FS of the entity.

In the case of tangible non-current assets, a policy of a revaluation adopted for the first
time is not treated as a change in policy under IAS 8, but as a revaluation under IAS 16
PPE. Where a new IFRS is adopted, resulting in a change in accounting policy, IAS 8
requires any transitional provisions in the new IFRS itself to be followed. If none are
given, provisions of IAS 8 shall be followed.

WHAT SHOULD BE DISCLOSED?

● Reasons for the change/nature of change
● Reasons why new policy provides more relevant/reliable information
● Amount of the adjustment for the current period and for each period presented
 ● Amount of the adjustment relating to periods prior to those included in the comparative
information
● The fact that comparative information has been restated or that it is impracticable to do
so

The same accounting policies are usually adopted from period to period, to allow users
to analyze trends over time in profit, cash flows, and financial position.

Pwedeng i-apply sa previous periods para maging comparable; present and past

ACCOUNTING ESTIMATES
● Estimates arise in relation to business activities because of the uncertainties inherent
within them.
● Examples: bad debt allowance, useful lives of depreciable assets, and obsolescence of
inventory.
● The rule here is that the effect of a change in an accounting estimate should be included
in the determination of net profit or loss in one of:
○ The period of the change if the change affects that period only
○ The period of the change and the future periods, if the change affects both
IMPORTANT TERMS TO REMEMBER
● Prospective application - application of a change in accounting policy and recognizing
the effect of a change in an accounting estimate.
● Impracticable - it is impracticable when an entity cannot apply a requirement after
making every reasonable effort to do so.
● Prior period errors - are omissions from, and misstatements in, the entity’s FS for one or
more prior periods arising from a failure to use, or misuse of reliable information.
● Retrospective restatement - correcting the recognition, measurement, and disclosure of
amounts of elements of FS as if prior period errors have never occurred.

ACCOUNTING POLICIES ACCOUNTING ESTIMATES

What is it? Principles/measurement basis Amounts/patterns

Example Change from historical cost to fair
value
Change from incurred credit loss
(IAS 34) to expected credit loss
(IFRS 4)
Change of the provision amount
based on fair value
Change in estimated % of loss
allowances

Accounting Retrospectively Prospectively

VARIOUS DISCLOSURES NEEDED

● Nature of the prior period error
● For each prior period, to the extent practicable, the amount of the correction
● The amount of correction at the beginning of the earliest prior period presented
 ● If retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of how and
from when the error has been corrected. Subsequent periods need not repeat these
disclosures.

PAS 7 - STATEMENT OF CASH FLOWS

● A component of FS summarizing the operating, investing, and financing activity of an
entity.
● The primary purpose of a SCF is to provide relevant information about cash receipts and
cash payments of an entity during a period.
● An entity shall prepare an SCF and present it as an integral part of the FS for each
period for which FS is presented.

Users can gain further appreciation of the change in net assets, of the entity’s financial
position (liquidity and solvency), and the entity’s ability to adopt to changing
circumstances by affecting the amount and timing of cash flows. SCF enhances
comparability as they are not affected by differing accounting policies used for the same
type of transaction.

CASH AND CASH EQUIVALENTS (nakakaapekto sa SCF)

● The SCF is designed to provide information about the change in an entity’s cash and
cash equivalents
● Cash - compromises cash on hand and demand deposit
● Cash equivalents - short-term highly liquid investments that are readily convertible to a
known amount of cash and which are subject to an insignificant risk of change in value.

According to IAS 7, paragraph 7: an investment normally qualifies as a cash equivalent

only when it has a short maturity of 3 months or less from date of acquisition. Meaning,
the investment must be acquired 3 months or less before the date of maturity.

● Examples of cash equivalents

○ Three-month BSP treasury bill
○ Three-year BSP treasury bill purchased three months before date of maturity
○ 3-month money market instrument or commercial paper
○ 3-month time deposit
● Two methods of presenting SCF
○ Direct method
■ The most obvious way because it is obtained by simply extracting
information from the accounting records, may be a laborious task.
○ Indirect method
■ Undoubtedly easier from the point of view of the preparer of the statement
of cash flows.
■ The net profit or loss of the period is adjusted for:
 ● Changes during the period in inventories, operating receivables
and payables
● Non-cash items, e.g. depreciation, provisions, profits/losses on the
sales of assets
● Other items, the cash flow from which should be classified under
investing or finance activities

BASIS OF DISTINCTION INDIRECT METHOD DIRECT METHOD

Definition Net income is reported first,
and then non-cash expenses,
losses from fixed assets, and
changes in opening balances
and ending balances of current
assets are adjusted to
reconcile the net income
balance.
Uses the basis of cash for
preparing the cash flow
statement. In this direct
method, cash flow from
operating activities is
computed by using all cash
receipts and cash payments
during the year.

Basis of Accounting The cash flow from operating The cash flow from operating
activities is computed on activities is computed on cash
accrual basis of accounting. basis of accounting.

CASH FLOWS FROM OPERATING ACTIVITIES

● Derived primarily from the principal revenue-producing activities of the entity.

CASH FLOWS FROM INVESTING ACTIVITIES

● Reports how much cash has been generated or spent from various investment-related
activities in a specific period.
● Provides an account of cash used in the purchase of non-current assets or long-term
assets that will deliver value in the future. Investing activity is an important aspect of
growth and capital.
● Investing activities include purchases of physical assets, investments in securities, or the
sale of securities or assets. Negative cash flow is often indicative of a company's poor
performance. However, negative cash flow from investing activities might be due to
significant amounts of cash being invested in the long-term health of the company. such
as research and development.
● A change to property. plant, and equipment. (PPE). a large line item on the balance
sheet is considered an investing activity. When investors and analysts want to know how
much a company spends on PPE, they can look for the sources and uses of funds in the
investing section of the cash flow statement.
● CAPITAL EXPENDITURE (CapEx) - is a popular measure of capital investment used in
the valuation of stocks. An increase in capital expenditures means the company is
investing in future operations. However, capital expenditures are a reduction in cash
flow. Typically. companies with a significant amount of capital expenditures are in a state
of growth
 ● Examples:
○ Purchase of fixed assets (-)
○ Purchase of investments: stocks or securities (-)
○ Lending money (-)
○ Sale of fixed assets (+)
○ Sale of investment securities (+)
○ Collection of loans and insurance proceeds (+)

CASH FLOWS FROM FINANCING ACTIVITIES

● Activities that result in change in size and composition of the equity capital and
borrowings of the entity. Include rom the transaction involving non-trade liabilities and
equity of the entity.
● Between the entity and the owners - equity financing
● Between the entity and the credits - debt financing
● In lAS 7, paragraph 43, provides that investing and financing transactions that do not
require the use of cash or cash equivalents shall be excluded from the statement of cash
flows. Such transaction shall be disclosed elsewhere in the financial statement either in
the notes to the financial statement or in a separate schedule or in a way that provides
about the transactions.
● Examples:
○ Inflow:
■ Cash receipt from issuance of ordinary and preference shares
■ Cahs receipt from isuing debentures, loans notes, bonds, mortgages, and
other short or long term borrowings
○ Outflow:
■ Cash payments for amounts borrowed
■ Cash payments by a lease for the reduction of the outstanding principal
lease liability
■ Cash payment for dividends to shareholders
■ Cash payments to acquire treasury shares
● DIVIDENDS
○ IAS 7. paragraph 33, provides that dividends received shall be classified as
operating cash flow because it enters into the determination of net income.
Alternatively, the dividend received may be classified as investing cash flow
because it is a return on investment.
○ IAS 7, paragraph 34, provides that dividends paid shall be classified as financing
cash flow because it is the cost of obtaining financial resources. Alternatively,
dividends paid may be classified as operating cash flow in order to assist users in
determining the ability of the entity to pay dividends out of operating cash flows
● INTEREST
○ In lAS 7, paragraph 33, provides 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 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 the return on
investment. For a financial institution, Interest paid and interest received are
usually classified as operating cash flows.
● INCOME TAXES
○ lAS 7, paragraph 35, provides that cash flow arising from income taxes shall be
separately disclosed as a cash flows from operating activities unless they can be
specifically identified with investing and financing activities

PFRS 5: NONCURRENT ASSET HELD FOR SALE

● Requires assets “held for sale” to be recognized separately in the SFPosition. It sets out
the criteria for recognizing a discontinued operation.
● Noncurrent asset - does not meet the definition of current assets.
● Noncurrent asset held for sale
○ IFRS 5, paragraph 6, provides that a noncurrent asset or disposal group is
classified as held for sale if the carrying amount will be recovered principally thru
a sale transaction rather than thru continuing use.
● Conditions for classification as held for sale
○ The asset or disposal group is available for immediate sale in the present
condition.
○ The sale must be highly probable.
○ Highly probable
■ Mgt must be committed to a plan to sell the asset or disposal group.
■ An active program to locate a buyer and complete the plan must have
been initiated.
■ The sale is expected to be a “completed sale” within one year from the
date of classification as held for sale.
■ The asset or disposal group must be actively marketed for sale at a sale
price that is reasonable in relation to the fair market value
■ Actions required to complete the plan indicate that it is unlikely that the
plan will be significantly changed or withdrawn.
● Measurement
○ PFRS 5, p 15, provides that asset held for sale shall be measured at the lower of
carrying amount or fair value less cost of disposal.
○ P 25, further provides that it shall not be depreciated.
● Abandoned noncurrent asset
○ P13 provides that an entity shall not classify as held for sale a noncurrent asset
that is to be abandoned.
○ P14 provides that an entity shall not account for a noncurrent asset that has been
temporarily taken out of use as if it had been abandoned.
● Change in classification
○ P27 provides that the entity shall measure the noncurrent asset that ceases to be
classified as held for sale at the lower between:
■ Carrying amount of the asset on the basis that the asset had not been
classified as held for sale.
 ■ Recoverable amount at the date of the subsequent decision not to sell.
● Presentation
○ A noncurrent asset classified as held for sale shall be presented separately as a
current asset.
○ P38 provides that if the noncurrent asset is a disposal group classified as held for
sale, the assets and liability of the group shall be presented separately and
cannot be offset as a single amount.
○ The liab of the disposal group shall be described as a liab directly associated with
noncurrent assets classified as held for sale presented separately as a single
amount under current liabilities.