CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
ESTIMATES AND ERRORS
FINAL EXAMINATION REVIEWER
Consolidated by: Jemima T. Fernandez, BSACC 2-YA-2
PAS 7 – STATEMENT OF CASH FLOW
 Provides information about the sources and utilization (uses) of cash and
cash equivalents.
 It helps users assess:
o The ability of the entity to generate cash and cash equivalents.
o The timing and certainty of the generation of cash flows.
o The needs of the entity to utilize those cash flows.
o Also provides information on the quality of earnings of an entity.
Classification of Cash Flows
 Operating Activities
 Affects income and expenses; profit or loss.
o Cash flow derived primarily from “revenue generating activities”.
o Includes cash inflow and outflow on items of income and expenses.
 Investing Activities
 Purchase and sale of long-term assets and business investments;
only affects the asset account.
o Acquisition and disposal of non-current assets and other
investments.
 Financing Activities
 Increase and decrease in cash with corresponding movement in
liability or equity account.
o Those that affect the entity’s equity capital and borrowing structure.
Presentation of Cash Flows from Operating Activities
 Direct Method – shows each major class or gross cash receipts and
gross cash payments.
 Indirect Method – profit or loss is adjusted for the effects of non-cash
items and changes in operating assets and liabilities.
PAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
Accounting Policies
 Specific principles, bases, conventions, rules and practices and applied
by an entity in preparing and presenting financial statements.
 In selecting accounting policies, the hierarchy must be followed:
o PFRS
o Judgement
 Consider the following:
 Requirements in other PFRS dealing with similar
transactions.
 Conceptual Framework.
 Pronouncements issued by other standards setting bodies.
 Other accounting literature and industry practices.
 Changes in accounting policy order of priority
o Transitional provision in a PFRS, in any.
o Retrospective application, in the absence of transitional provision.
o Prospective application, if retrospective application is
impracticable.
Changes in Accounting Estimates
 Change in accounting estimate is change in realization of expected
inflow of economic benefits from assets or liabilities.
Errors
 Omissions and misstatements in the financial statements from a failure
to use or misuse of reliable information. These are:
o Mathematical/numeral mistakes.
o Mistakes in applying accounting policies
o Misinterpretation of facts.
o Fraud or oversight.
PAS 10 – EVENTS AFTER REPORTING PERIOD
 Events, favorable or unfavorable that occur between the end of the
reporting period and the date when the financial statements are
authorized for issue.
 Date of authorization – date when management authorizes the financial
statements for issue.
Types of Events After Reporting Period
 Adjusting events after the reporting period
o Events that are occurring after the reporting date that provide
evidence of conditions that existed at the end of the reporting
period.
 Non-Adjusting events after the reporting period
o Do not require adjustments of amounts in the financial statements.
o However, they are disclosed in the notes, if material. (changes in
FV)
Going Concern
 PAS 10 prohibits the preparation of financial statements on a going
concern basis if management determines after the reporting period either
that it intends to liquidate the entity or cease trading, or it has no
realistic alternatives but to do so.
PAS 12 – INCOME TAXES
 Accounting Profit/Loss – is the profit or loss before deducting tax
expense.
 Taxable Profit (tax loss) – profit or loss for a period, determined in
accordance with the rules established by taxation authorities upon which
income taxes are payable.
 Income Tax Expense – total amount included in the determination of
profit or loss for the period, it comprises:
o Current tax expense (income) – the amount of income tax
payable/recoverable in respect to the taxable profit (tax loss) for a
period.
o Deferred tax expense (income) – the sum of the net changes in
deferred tax assets and deferred tax liabilities during the period.
PAS 16 – PROPERTY, PLANT AND EQUIPMENT
 Tangible Assets – have physical substance.
 Used in business – production, services, for rental or for administrative
purposes.
 Long term in nature – expected to be used for more than one period.
 Examples of PPE
o Held for future plant site
o Held for environmental and safety reasons
o Major spare PPE and long-lived stand
o Furniture and fixtures
o Bearer plants
 Examples of not PPE
o Held for speculation or held for undetermined future use
o PPE classified as investment property under PAS 40
o Held for sale in the ordinary course of business or classified under
PFRS 5
o Biological assets related to agricultural activity, other than bearer
plants
o Intangible assets
o Minor spare PPE and short-lived stand by
Recognition
 It is probable that future economic benefits associated with the item will
flow into the entity.
 The cost of the item can be measured reliably.
 Spare parts, stand-by/servicing equipment – recognized as PPE, if it
meets the definition of PPE (expected lifespan for more than one
period).
 Safety and environmental equipment – recognized as PPE if it’s
necessary in obtaining the future economic benefits from other assets.
Initial Measurement
 Purchase price includes: import duties; non-refundable purchase taxes;
and/or less trade discounts and rebates.
 Direct costs of bringing the asset to the location and condition necessary
for it to be used in the manner intended by the management.
 Initial estimate of dismantlement, removal and site restoration costs for  Has remote likelihood of being sold as agricultural produce, except for
which the entity incurs an obligation by acquiring or using the asset incidental scrap sales.
other than to produce inventories.
Measurement of Costs
Direct Attributable Costs
 Measured at cash price equivalent at the acquisition date
 Employee benefits arising directly from construction or acquisition of  If at deferred payment (installment) – the difference between the cash
PPE price equivalent and the total payment is recognized as interest over the
 Costs of site preparation credit period.
 Initial delivery and handling costs  If acquired through an exchange (order of priority)
 Installment and assemble costs o Fair value of the asset given up
 Testing costs gross of disposal proceeds of samples produced during o Fair value of the asset received
testing (the proceeds and the cost of the samples are recognized in profit o Carrying amount of the asset given up
or loss) o If the exchange lacks commercial substance, PPE acquired is
 Professional fees
measured at the carrying amount of the asset given up
Expensed Outright

 Costs of opening a new facility

 Costs of introducing a new product or service
 Costs of conducting business in a new location or with new class of
customers
 Administration and other general overhead costs
 Incidental operations
o Before or during the construction of PPE are not necessary in
bringing the PPE to the location and condition necessary for it to be
capable or operating in the manner intended by management.
o Income and related expenses are recognized in profit or loss

Self-Constructed Assets

 Cost incurred is determined using the same principles as for an acquired

asset.
 Excludes internal profits (e.g. savings) and the cost of abnormal
amounts of wasted material, labor, or other sources incurred in self-
constructing the asset.
Bearer Plants

 A living plant used in the production or supply of agricultural

production.
 Expected to bear/produce for more than one period.
 INTERMEDIATE ACCOUNTING 1 Average method formula for inventory estimation:
FINAL EXAMINATION REVIEWER Cost Retail
Consolidated by: Jemima T. Fernandez, BSACC 2-YA-2
Beginning inventory XXX XXX
Net purchases XXX XXX
Mark up XXX
Chapter 8: Inventory Estimation
Mark up cancellation XXX
 Gross profit method – allows expressing and using a gross profit Markdown XXX
percentage based on either cost of goods sold or net sales to estimate Markdown cancellation XXX
inventory value. Goods available for sale XXX XXX
o Based on net sales – net sales = 100%; COGS = COGS/net sales;
GPR = net sales-COGS)/net sales Average cost-to-retail ratio (GAFS cost/retail) XXX%
o Based on cost – COGS = 100%; GPR = net sales-COGS)/COGS;
net sales = COGS+GPR or net sales/COGS Goods available for sale XXX XXX
 Retail inventory method – applies retail (sales price) information to Less: Net sales (sales – sales return) XXX
determine its relationship with costs (cost ratio) and ultimately, the
Ending inventory at retail price XXX
estimated ending inventory.
Multiply by cost-to-retail ratio XXX%
 Conservative method – considers only the price markups and
Ending inventory at cost XXX
markups cancellations.
 Average method – considers both price markups and price
markdowns. FIFO method formula for inventory estimation:
Cost Retail
Net purchases XXX XXX
Mark up XXX
Mark up cancellation XXX
Markdown XXX
Markdown cancellation XXX
Purchases during the period XXX XXX

FIFO cost-to-retail ratio (GAFS cost/retail) XXX%

Purchases during the period XXX XXX

Less: Net sales (sales – sales return) XXX
Ending inventory at retail price XXX
Multiply by cost-to-retail ratio XXX%
Ending inventory at cost XXX
 FIFO method – cost-to-retail ratio is only based on current period
purchases which exclude beginning inventory.
Chapter 9: Investments
Investments are assets held by an entity for the accretion of wealth through
distribution, such as interest, royalties, dividends, and rentals, for capital
appreciation or other benefits to the investing entity such as those obtained
through trading relationships.

Chapter 10: Investment in Debt Securities

A security is an interest or share in a debt or equity of another entity that is
represented in a financial instrument, which is being dealt on capital markets.
Equity securities represent ownership interest such as ordinary and
preference shares, which gives the holder certain rights to acquire or dispose At a premium: EIR < NIR
of any ownership interest, at an agreed or determinable price. FA * NIR PV * EIR IR – II PV – Amort
Debt securities are financial assets that represent the terms of loan between Interest Receivable Interest income Amortization Present Value
the creditor and the lender. These typically includes the maturity value,
interest rate payments, and a maturity date. Issued by a company and sold to At a discount: EIR > NIR
an investor.
FA * NIR PV * EIR II – IR PV + Amort
An entity shall recognize a financial asset or financial liability in its Interest Receivable Interest income Amortization Present Value
statement of financial position when and only when the entity becomes a
party to the contractual provisions of the instrument.
These financial instruments shall be initially measured at fair value (all other
financial instruments at FVPL) or at fair value plus transaction cost (all other
financial instruments at amortized cost or FVOCI)