Acccob 2 Min 2 Accounting Finals Reviewer - Compress

Acccob 2-min-2 - Accounting nals reviewer
Financial Accounting and Reporting (all) (ACYFAR 1 - 5)
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PROPERTY OF BUSINESS MANAGEMENT SOCIETY
CH1: Introduction to Financial Accounting - Need to know if the company is capable

Accounting to pa loans and interests when due
- the process by which financial - Suppliers do monthly or yearly
information about a business is payments, so they need assurance that
recorded, classified, summarized, the company can pay when due
interpreted, and communicated to Government
owners, managers, and other interested - They require information in order to
parties (investors -> banks, traders,) regulate the activities of enterprises,
Bookkeeping determine taxation policies and bases of
- Doesn’t have to be accountants statistics helpful and address some
- Procedural or mechanical aspect of concerns.
accounting. It involves the set-up, Other Users
update, and maintenance of accounting Management
records - Help them make good business
- Recording information in a way to keep decisions for the business to ensure it
track of it only becomes profitable and stable
Financial Information - Can only help identify and check the
- Summary of all transactions of a overall status
business over a period of time - *But depends, cause if ex you are the
Purpose of Accounting manager of the chef of a hotel, you
- supply financial information to users to don’t need FS! You need to know how
help them make informed judgment many people enter, etc etc. They need
and decisions other financial and non financial
Primary Users information and qualitative data and we
Investors cant see these in financial statements.
- They need the information to help them Employees
determine whether they should buy, - Only interested in information that
hold, or sell their investments. reassures them the company can pay
- People outside the organization who them, give retirement benefits,
want to understand the business employment opportunities, etc.
- Potential investors are not allowed to Financial Accounting
have access to managerial accounting - Process of preparing financial
reports. They only need to know if the statements that companies use to show
company is profitable, liquid, their financial performance and position
Lenders and Creditors to people outside the company.
- Banks, suppliers. - Different from managerial accounting
- They are interested in information that - These are published in the PSE for those
enables them to determine whether that are publicly listed
their loans and the interest will be paid - Those that are not, they submit their
when due. reports to BIR
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Purpose:
- To assist the Board in the development
of future PFRSs and in its review of
existing PFRSs;
- To assist the Board in promoting
- Managerial accounting reports is not harmonization of regulations,
published outside the company standards, and procedures.
- Ex: Cost data sheet of one product. The - To assist national standard-setting
cost and profit is available to managers bodies in developing national standards
only, not to the public - To assist preparers of financial
- Ex: Summary of salaries statements in applying PFRSs and in
- Managerial accounting, no standards dealing with topics that have yet to
but there are concepts. Flexible cause form the subject of a PFRS
dependent on the need of the users. - To assist auditors in forming an opinion
on whether financial statements comply
Philippine Financial Reporting Standards (PFRS) with the PFRSs
- IFRS is adopted in the PH so we changed - To assist users of financial statements in
I to P interpreting the information contained
- Accounting standards tackle specific in financial statements prepared in
items complying with PFRSs
- The PFRS is comprised of different - To provide those who are interested in
standards and interpretations that lay the work of the IASB with information
out the guidelines and principles to be about its approach to the formulation of
followed in the presentation of the PFRSs.
items shown in the general purpose
financial statements, as well as their According to the Conceptual Framework, useful
disclosures. financial information must have these two
- The standards help minimize, if not general characteristics: Fundamental
totally eliminate, the occurrence of Characteristics and Enhancing Characteristics
information asymmetry.
- The standards allow for comparability. Fundamental characteristics
1. Relevance
The Conceptual Framework for Financial - Relevant if the information is capable of
Reporting making a difference in the decisions
- It’s not a standard made by the user. Information is
- If no standard for doing FS, you can go relevant if it is being used in the
follow the conceptual framework for decision making process
guidance
- Accounting standards constantly change 2. Faithful Representation
- Has to be complete, neutral, and free
from material error
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Enhancing characteristics 2. Accrual Basis

1. Comparability - Accrual basis requires that the effects of
- The qualitative characteristic that transactions and other events are
enables users to identify and recognized when they occur, and not as
understand similarities in, and cash is received or paid.
differences among, items. - Revenue is earned once service is
rendered
2. Consistency
- Refers to the use of the same methods 3. Materiality
for the same items, either from period - The relative importance/significance of
to period within a reporting entity or in an item
a single period across entities. - Value of money, significance of this
value
3. Verifiability - It may be different from one company
- It means that different knowledgeable to another, depending on the size of the
and independent observers could reach company
a consensus, although not necessarily - Considered material if it will affect the
complete agreement, that particular decision of prudent users
information is a faithful representation.
Financial Statements
4. Timeliness 1. SFP: Balance Sheet
- Information should be available in time 2. SPL
to be capable of influencing decisions 3. SCE
4. SCF
5. Understandability 5. Notes to FS
- Financial information is understandable
if it is classified, characterized, and Assets
presented clearly and concisely. - A present economic resource controlled
Moreover, the users should have by the entity as a result of past events
adequate background of the financial - Legal ownership is not required for an
statements, the financial information, asset to be called as such.
and of course, financial accounting. - Finance lease: as if renting property but
using it equal to its useful life, it’s like
Underlying Assumptions in Preparation of you have full control over the asset
Financial Statements - Future plans of buying/selling should
1. Going Concern not be recording in the accounting
- Financial statements are prepared records
under the assumption that an entity is a
going concern and will continue in
operation for the foreseeable future.
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Liabilities ○ Traveler’s check: is for a prepaid

- A present obligation of the entity to fixed amount and operates like
transfer an economic resource as a cash
result of past events ● Cash In Bank:
- There should be a transaction birthing ○ Savings and checking account
the asset/liability. ○ Postal money order/Money
- Should always have a past transactioin order: pay a pre-specified
amount of money from prepaid
Equity funds
- Residual interest in the assets of the ○ Checking accounts: positive
entity after deducting all its liabilities amounts are included as cash.
negative amounts are included
CH2: Cash and Cash Equivalents as ank overdrafts/liability
● Cash Fund from current use:
Cash ○ Petty cash fund,
- Medium of exchange – either received ○ Payroll fund,
or given up in a cash transaction ○ Tax fund
- Financial asset ○ Purchasing fund
- Most liquid – availability; can be easily ○ Travel fund
taken or received ○ Interest fund
- Money and other negotiable instrument ○ Dividend fund
that is payable in money and acceptable
by the bank for deposit and immediate Reporting of Foreign Currencies on Hand
credit. - Foreign currencies are converted,
totaled, and recorded as part of cash on
Categories of Cash hand at their peso equivalent based on
● Cash On Hand: the closing rate at the end of the year.
○ Checks on hand, - Local currency is reported at face value
○ Manager’s checks: assuming
need to pay 500,000 for school. Cash Equivalents
But you’re in a savings account. - Short-term, highly liquid investments
Bring to school to issue a check (purchased 90 days or less before MD)
even if you don’t have a check that is readily convertible into known
○ Cashier's checks amounts of cash
○ Bank drafts: a written order - Subject to an insignificant risk of
addressed to the bank to pay an changes in value because of changes in
amount of money to the order interest rates
of the maker - Include investments that have been
○ Undeposited cash collections: purchased near their maturity date that
currencies such as bills and they have insignificant risk
coins
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- 90 day time deposits, time - Bank overdraft: checks or withdrawals

deposits, certificates of deposit that exceed the balance of the amount
- Treasury bills: short term bills the entity currently has. Liability.
issued by the government
- Money market instrument and Internal Controls
Commercial papers: issued by - Separation of cash duties
corporations - Receiver and depositor should
- Undelivered check: written but be different from the one
not yet delivered to payee, if preparing the reconciliation
not postdated, its considered as - Prevents employees from
CASH. Usually added. having access to both cash and
- Undeposited checks accounting records
- Limiting access to cash
Other Notes - Cash receipts for the day should
- Compensating balance: minimum be deposited to the bank
balance that an account holder should - Cash on hand should be kept in
maintain in his bank at all times; if there a lock box or vault
are restrictions to how its used, its - Proper documentation of cash receipts
under the other assets account. If no - TImely recording of cash
restrictions, then its cash receipts
- Issuance of official receipts to
Accounts that are NOT part of cash balance. support cash inflow
- Post-dated checks: checks that are valid - Strict control of cash disbursements
for a future date. Considered as cash IF - Disbursements with large
the date on the check has arrived. If amounts must be done through
not, its a receivable. check
- Stale checks: Expired checks; usually - Disbursements must be
valid for 6 months only. NOT part of supported with documents and
cash and should be restated to the cash must be signed and approved
balance of the owner. by the approving authorities
- NSF check: no sufficient balance at the - Smaller disbursements may be
time to pay for the check when you paid using a petty cash fund set
present the it. up by petty cash custodians
- Bond sinking fund: cash set aside for
settlement of a bond, a long term Voucher System
liability!! - Method of authorizing and controlling
- IOU: are classified as receivables cash disbursements
- Cash set aside for acquisition of - Prevents indiscriminate and
non-current assets/used for something: unauthorized purchases and
restricted for use for future transaction. incurrences of expense
Non current asset.
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- Cash voucher: document that supports - Actual Cash < Calculated Cash Balance =
cash transaction; identify what has to Shortage
be paid, amount, and accounts to be
recorded Bank Reconciliation
- Sample Process - Explains the difference between the
amount presented in the bank
statement and the amount shown in the
books
- Usually, this is caused by timing and
errors.
- Three major types of deposit accounts:
- - Savings account
- Time deposit
Imprest System - Checking account: Bank’s utang
- A control measure for both cash to us
receipts and cash disbursement. - An entity opens a checking account with
- Cash receipts are deposited intact daily a particular bank and records the same
to the bank and all payments of assets, as Cash in Bank in its books.
liabilities, and expenses should be made - The bank records a liability account in
by check except for small or petty its books to recognize the initial amount
expenditures deposited by the entity to its checking
- Cash receipts journal = Official Receipts account.
= Bank’s Machine Validated Deposit Slip - This is usually done on a daily basis
- Monthly, the bank issues a bank
Petty Cash Fund statements which summarizes all
- Purchase of small items increases and decreases in the entity’s
- Responsibility of the petty cash checking account
custodian – doesnt have to be an - Book balance and bank balance may be
accountant different
- In charge of documenting it - There are two types of reconciling
only items:
- Whenever used, need to fulfill a petty - Reconciling items due to timing
cash voucher and signs it difference
- Expense is recorded by batch upon - Reconciling items due to error
replenishment of the fund
Book Reconciliating Items: recorded by the bank
Audit Petty Cash Fund but not yet reflected in the book
- Petty Cash Fund – Total Amount of Bank Reconciliating Items: recorded by the book
Vouchers Issued = Remaining Cash but not yet reflected in the bank
- Actual Cash > Calculated Cash Balance =
Overage
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Types of Book Reconciling Items

1. Bank credit memos: increase company’s
bank account. Ex: collections of interest
from accounts. Reducing liability of the
bank
2. Bank debit memos: decrease the
company’s bank account. Ex: service
charge, NSF, cost of checkbooks. What
2-2
the bank adds in our account
2. IOU is a receivable
Undeposited check - only what bank accepts
Types of Bank Reconciling Items
Petty cash - only add the bills and coins!
1. Deposit in transit: cash receipts
Dont deduct bank overdraft
recognized by the company but did not
reach bank cutoff
2-3
2. Outstanding check: cash issued to
Cash equivalents only 90 days or less! Treasury
payees but in the bank, money is not
bill is exactly 90 days. Treasury notes is 105 days
yet deducted because the check wasn't
so it’s reported as short term investment and
cashed in yet
not cash equivalent
Format of Bank Reconciliation

2-5
Statements
Deduct items that are not cash. Retain
currencies and coins. Remove notes receivable.
Remove postdated checks. Remove NSF checks.
145,000 was delivered on the following year so
this is an undelivered check, so add this back!
2-6
Check redeposited so we need to add this
back!! Not an NSF anymore
Excluded in balance so deduct.
2-7
Stale check and postdated should be removed.
Bank overdrafts should be part of liability and
not deducted from cash. Need to add back 40k.
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CH3: Receivables Types of trade receivables

Receivable Account receivable
- Financial asset that represents a - Short term receivables arising from
contractual right to receive cash or ordinary course of trade or business
other financial assets from another - Arises from the sale on account of
entity goods or merchandise that are
- Trade receivables: arise from ordinary presented as current assets
course of business operations; sell - Follows initial recognition – recorded at
goods on account, cost/face value (Ex: Invoice price,
- Other receivables: may come from revenue, sales)
other sources of agreements as long as - Subsequent recognition – at the end of
we gain a contractual right to gather the reporting period, AR is reported at
cash its net realizable value (estimated
- Business to business: realize receivables amount that can be eventually collected
from accounts receivables from the customer’s account)
- Business to customer: realize - Derecognition – could happen if
receivables from credit card sales 1) contractual right to the cash
flow expires; this means the AR
Other receivables has been paid already means
Claim receivables our right to receive the cash has
- amounts expected to be received from been extinguished.
insurance companies for any claims in 2) when the entity transfers the
one’s insurance policy receivable and the transfer
- Receivable that does not arise from qualifies for derecognition
normal business operations - When we dont have
- Recognize if we insured our business cash and we have no
property caused by different events choice but to sell our
AR so the right to
Interest Receivable receive cash is
- Amount of interest earned, but not yet transferred to another
received at the end of the year entity
Advances to affiliates ADA

- Amounts given in advanced to - What cannot be collected anymore
employees and suppliers
- Ex: Cash advances to employees – is a Estimating Loss on AR/ To compute the loss in
cash receivable from our employees NRV
- Allowance for Doubtful Accounts (ADA)
= AR - NRV of the AR
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Estimating ADA
- Can use either
1) Use a certain percentage of AR or
2) Aging the AR
Using percentage method

1. ADA is estimated at a certain
percentage of AR (Req allowance - ADA
before adj)
2. ADA is increased to a certain percentage
of AR (Req allowance - ADA before adj)
3. ADA is increased by a percentage of AR
Required allowance is the ADA of the - Increase by, calculating for the
end of the year increase/movement!!!
Increase/movement of ADA is recorded - AR * Estimated loss rate = Doubtful
as doubtful accounts expense accounts expense
- AR and ADA is part of SFP
- Doubtful accounts Expense is part of
SPL
- ADA is a contra AR, meant to reduce our

AR
- Scenario 1, 450,000 net of AR in SFP. But
EXAMPLE in the notes, you will see the AR and
ADA. Shows 450,000 as a conservative
approach
Aging of AR
- Estimating bad debts based on groups
that show the number of days the
accounts are already past due
- Account is past due if it is not fully paid
after the expiration of the credit period
- 2/10 n/30 means 2% discount within 10
days after purchase date otherwise,
customer should settle within the 11th
to the 30th day without discount
- Detailed analysis of the probability of
collection or non-collection
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- The longer the account past due, the - Can be short term or long term
higher the estimated loss rate - Also a trade receivable but a more
formal claim to a sum of money
-
- Initial recognition:
- Short term interest bearing
note, record at fair market value
+ transaction costs (same as AR)
- Long term note: record at
present value
- Derecognize:
- When contractual rights to cash
flows expire
- Transfers financial asset and this
qualifies for derecognition
Computing for present value

- Use effective interest rate or market
rate which reflects the true amount of
interest due on any interest-paying
- AR times % Uncollectible = Required
investment when the effects of
Allowance
compounding over time are taken into
account.
- Effective interest rate
- Rate used to compute for
present value of a notes
receivable
- Real interest rate you should be
earning from your notes
receivable/loan
- Different from the note’s
nominal or coupon rate which
determines the cash the payee
will receive regularly from the
note
Notes Receivables - Nominal rate
- Amount of cash you will be
- Written promise to pay a certain sum of
money at a specific future date receiving
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- If the nominal rate is zero, this

means the note is a
non-bearing interest one
- If Effective rate > nominal rate, the note
is recorded at a discount
- If Effective rate < nominal rate, the note Step 3. Get the sum of the PV of the principal
is recorded at a premium and PV of the annual interest payments to get
the PV of the note.
Example:
Step 1. Compute for the Present Value of the Step 4. Subsequent Recognition. Ammortization
Principal using PV of a single sum formula. Table.
PV = FV (1 + i)-t
Where:
• PV represents the Present Value of
the principal.
• FV is the future value of the
principal.
• i stands for the effective interest - In the interest earned, the CA is
rate from the previous term
• t stands for the term of the note
Step 1. Compute for the Present Value of the

Principal using PV of a single sum formula.
PV = 1,000,000 (1 + .11)-5
PV = ₱593,451.33 Step 1. Compute for PV of principal

Nominal Interest using PV of an ordinary
annuity formula.
*Ordinary annuity: receive payment at
the end of the year
Nominal Interest using PV of an ordinary
annuity formula.
Where:
• P stands for the periodic payment
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Step 3. Get the sum of the PV of the principal - AR turnover = Net credit sales / average
and PV of the annual interest payments to get AR
the PV of the note.
Average collection period
- Refers to the number of days an entity
can collect from its credit customers
- More efficient for an entity to have a
shorter collection period compared to
its normal credit terms
Step 4. Subsequent Recognition & - Average collection period = 365 / AR
Derecognition turnover
Receivable Financing
- We need cash now and we cannot wait
for customers to pay us
- A technique used by entitites to
expedite cash flows from their AR which
involves selling, pledging, assigning, and
- Cash received is higher than the factoring of customers accounts
interest earned (what we were - Cash can be obtained thru discounting
supposed to received). So the of notes receivable
excess, will boost the carry
amount of the notes receivable. Pledging
- Carrying amount decreases if - Get a loan from a bank and use
the cash received is higher than AR as a collateral
the interest earned - If the debtor defaults on his
debt, the entire amount of
Discounting of Notes Receivable receivables pledged will be used
- Entity endorses the note to a financial as payment of existing loan
institution which is usually a bank - AR pledged will not be removed
- If the note is discounted with recourse, from the books, only disclosed
the bank may go after the entity to
collect the maturity value of the note Assignment
- If note is discounted without recourse - Entity obtains a loan from the
the bank can no longer collect from the credito (assignee)
entity - Creditor can collect the loan but
the ownership is still of the
Accounts receivable turnover entity
- Used to quantify the company’s
effectiveness in collecting receivables
- Presents the number of times per year a
business collectes its average AR
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Factoring - Fluctuations in fair value (When

- Entity selling its AR to a buyer we sell investments aka stock
called the factor trading)
- Factor will pay a portion of the - May be measured at FVPL, FVOCI, or at
face value of the AR factored amortized cost
- If AR is deemed worthless, the
factor bears the loss from the 2 Types of Tests to Measure Financial
non collection of accounts Instruments
Contractual cash flow test
Discounting of NR - Are the cash flows from the
- Entity endorses the note to a financial assets on the specified
financial institution date solely payments of
- If it is discounted with recourse principal and interest?
(if they didnt pay), bank can go - Asking if this is a debt
after the entity to collect instrument or not
- Just like Notes Receivable
CH4: Investments in Equity and Debt - Only receive interest income
Instruments from debt instruments
Financial Liability Business model test

- A contractual right to exchange - Are the financial assets used for
financial instruments with another collecting the contractual cash
entity undercondition that are flows? Or selling (by taking
potentially unfavorable advantage of fair value)? Or
both?
Financial Instrument - Receive dividends income from
- Any contract that gives rise to a equity instruments
financial asset of one entity and a
financial liability/equity of another. Classifying Financial Assets
- When we invest, recorded as asset for 1. At Amortized Cost (Debt)
us, liability/equity of another. - Main purpose is to collect
- Investments are either debt or equity contractual cash flows and pay
instruments of another entity classified principal and interests
as passive income - Contractual cash flow test
- Debt instruments: entitled to receive - Cash flows are solely
money in the future in the form of payments of principal
loans/notes receivables/interest income and interests. Debt
- Passive income earned through: instruments (like bonds
- Interests (Debt) issued by entities)
- Dividends (Equity) - Business model test
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- You hold the financial Decision Tree

asset only to collect
contractual cash flows
- UNLESS fair value thru profit or
loss (FVPL) option is used; has
to be explicitly stated
2. At Fair Value Thru Other Comprehensive

Income (FVOCI) (Debt)
- Main purpose is to collect Equity Instruments
contractual cash flows, collect
- Shares of stocks bought by an investor
and sell financial assets, pay - Ordinary stocks: have voting
principal and interests
rights, stockholders are
- Contractual cash flow test involved, higher rewards but
- Cash flows are solely
riskier
payments of principal
- Preferred stocks: no voting
and interests
rights, earn dividends at a fixed
- Business model test rate, safer!
- you hold the financial
- May be measured at FVPL, FVOCI, or
asset to collect investment in associates (PAS 28
contractual cash flows Investment in Associate and Joint
and sell financial assets
Ventures)
if FV > acquisition cost - Dividends received are presented as
- UNLESS FVPL option is used; has
other income in SPL
to be explicitly stated
1. At FVPL
3. At Fair Value Thru Profit & Loss (FVPL) - Initial recognition:
(Equity)
- Recognize at fair value.
- Cash flows are not solely - Transaction costs are
payments of principal and expensed in SPL
interest; It is an equity
- Subsequent recognition:
instrument (like stocks)
- At the end of each
- UNLESS FVOCI option is used;
reporting period, these
has to be explicitly stated instruments will
continue to be
presented at fair value
of the time.
- Changes in the fair
values (unrealized gain
or loss) are recognized
on the SPL
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- Derecognition:
Derecognition
- Upon sale of the
investment, a gain or
loss may be recorded
on the SPL if the selling
price differs from the
current fair value.
- One entry for the 2. At FVOCI
change in FV, if any, - Initial recognition:
record the unrealized - Recognized at fair
gain/loss compared to value.
the subsequent period, - Transaction costs not
and another entry expensed but included
when you sell the as part of the
share, record the investment value.
realized gain/loss. - Subsequent recognition:
- Record at realized gain - Presented in fair value
or loss. but the changes in FV
will be recognized
Example under the SCI.
- Cumulative unrealized
At Initial gain or loss is recorded
Recognition on the SFP (Equity).
Include dividend
income in SPL
- Derecognition: if sold,
- 1) Derecognize current
carrying amount,
- 2) The latest balance of
At the cumulative
Subsequent unrealized gain or loss
Recognition is closed to retained
earnings, and
- 3) The gain or loss from
Unrealized gain because the FV of sale is directly closed to
shares increased. retained earnings as
well.
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Example investee company, the investment is

classified as Investments in Associate
At Initial
- Entity gains significant influence over an
Recognition
investee of a company when the
a. Representation on the board of
directors or equivalent body
Include transaction cost in SFP,
b. Participation in policy making
NOT at SPL processes
At Subsequent c. Material transactions between
the entity and its investee
Recognition
d. Exchange in material personnel
- General rule: once an entity owns at
SCI reports the changes in least 20% of shares, of the outstanding
gain/loss based on (present shares of an investee company, it can
FV*shares) - (previous SFP which exercise significant influence over the
includes transaction costs, if any) operations and policies of the investee
- Initial recognition:
- Recorded as NCA at acquisition
cost + transaction costs
- Dividends received ->
SFP Equity: shows the cumulative reduction to the carrying
gain/loss, compare it from the amount of the investment (not
current year FV and the initial as dividend income).
recognized amount; 2.4M (current - Investors share in income of the
for that year) - 2.5M (pinaka investee -> increase in carrying
initial) amount of the investment and
is also recorded as investment
Derecognition
income on the SPL
- Also known as Equity Method in
Accounting
Cumulative loss in SFP Equity is
transferred to Retained Earnings Example
100,000 Gain in Retained Earnings At Initial
because you got to sell it at a Recognition
higher price than last
Investment in Associate
At
- Once the investor owns enough shares Subsequent
in the company such that it can already
Recognition
exercise significant influence over the
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SFP: Previous SFP + (Investment - Discount on bond investment: Nominal

rate < Effective rate
income) - (Dividends received)
SPL: Investment income - Premium on bond investment: Nominal
rate > Effective rate; Cash received is
higher in interest payment compared to
interest income
- Market quotations: a certain
Adjust accordingly for investment percentage of the face amount of the
income bond which is also used in determining
the bond’s present value (e.g., 97
Debt Instruments means 97% of the bond’s face value
- Investments in debt instruments are in a while 103 means 103% of the face
form of bonds. value).
- If an entity wants to increase its capital,
but doesn’t want to issue shares for the 1. At FVPL
company, the will issue bonds instead - Initial recognition:
- Bonds are like you pautang from the - Recognized at fair
public value.
- A bond is a contract of debt whereby - Transaction costs are
one party called the issuer borrows expensed in SPL.
fund from another party called the - Subsequent recognition:
investor. - At the end of each
- Bond investments may be measured at reporting period, these
FVPL, at FVOCI, or at amortized cost instruments will
(AC). continue to be
- As an investor, they want debt presented at fair value.
instruments because with their extra - Changes in the fair
cash, they will gain higher interest from values (unrealized gain
bonds, even though it has higher risk. or loss) are recognized
- High risk, high reward on the SPL.
- Interest income is
Effective Interest Method of Accounting for computed based on
Bond Investment nominal rate. *Don’t
- Nominal rate or coupon rate: the rate use amortization table
appearing on the face of the bond - Derecognition:
which determines the amount of - Upon sale of
periodic interest to be received by the investment, a gain or
investor. loss may be recorded
- Effective rate: market-dictated rate on the SPL if the selling
which determines the periodic interest price differs from the
income to be recorded by the investor. current fair value.
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Example - An amortization table is

prepared for the
At Initial
purpose of comparing
Recognition
the ”would be”
carrying amount of the
bond investment under
the effective interest
method with its fair
value at the same year
end.
- Not just comparing FV
yearly, but compare the
At Subsequent carrying amount of the
Recognition instrument at the end
of the year vs the FV of
that investment at the
SPL: Interest income (based on same year
nominal rate, in this its fixed - Interest income is
10%*1,000,000 every year) + computed based in the
changes in FV (920,000 in previous effective interest rate
-> 925,000 in current SFP = 5,000 and is recorded on the
gain) SPL.
- The periodic changes in
Derecognition
fair value -> report in
SCI
- Cumulative unrealized
gain or loss -> report in
There’s a loss of sale because sold SFP Equity
for only 950,000 when it was - Derecognition:
previously valued at 960,000 - Upon sale of the bond
investment, the current
2. At FVOCI balance of cumulative
- Initial recognition: unrealized gain or loss
- Recognized at fair is transferred to SPL
value. rather than to retained
- Fair value: based on earnings.
market quotation. - The actual gain or loss
- Transaction costs from sale is also
included as part of the recorded on the SPL
fair value.
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Example
Derecognition
At Initial
Recognition
During the sale, transfer the

cumulative G/L to the SPL (second
Fair value: 92% of 1,000,000 =
row).
920,000
Then, calculate for the gain/loss
At upon the sale. Here, it’s 10,000
Subsequent because it was sold for
Recognition 95%*1,000,000 = 950,000.
Interest income: effective interest

rate 3. At Amortized Cost
Cash received: nominal interest - Similar to Notes Receivable
rate - Intial Recognition:
- Recognized at fair
value.
- Fair value: based on
market quotation or
compute for PV + PVOA
if not given
SFP: 92.5%*1,000,000
- Transaction costs
P&L: based on amortization table
included as part of the
SFP Equity/Cumulative G/L: FV - CA
fair value.
of the year (in amort. table);
- Subsequent Recognition:
925,000 - 939,253 = -14,253
- Based on carrying
*Solve for SFP Equity first to get
amount from the
the SCI
amortization table.
- Derecognition:
- Gain or loss on sale is
recognized in the SPL.
Example
SFP: 96%*1,000,000 At Initial
P&L: based on amort. table Recognition
SFP (Equity)/Cumulative G/L:
960,000 - 951,963 = a gain of
8,037;
SCI: Present CGL - Previous CGL
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At Subsequent FVOCI:
Recognition
Equit FVPL:
Carrying amount @ end of year y Recognize
is straight forward, based on UGL in SPL
the amortization table.
FVOCI:
Derecognition
Intial: If FVPL, transaction costs are expensed in
SPL. FVOCI or AC, transaction costs are included
in the value of investment
To determine the gain/loss, Subsequent: FVPL and FVOCI, report FV at the
(95%*1,000,000) - Carrying end of each year, AC, based on amortization
amount table.
Equity: Investment in associate method
Ch4 Book Exercises
1. Always check the contractual cash flow CH5: Inventory
test and business model test before - Assets held for sale in the ordinary
classifying the investment course of business, or in the process of
2. If the problem states “at FVOCI” ‘at production for sale, or in the form of
FVPL” then no need to do those ^ tests materials or supplies to be consumed in
the production process or rendering of
Summary service
- General rule: all goods which the entity
Equity Debt (usually Investments
has title shall be included in the
(usually FVOCI and in Associates
inventory, regardless of location (or
FVPL) AC)
ownership)
Initial FVPL: Fair
value, Classification of Inventory
Transaction 1. For merchandising firms
expense at
- Merchandise inventory: goods
SPL
a company purchases and plans
FVOCI: FV + to resell to customers at a
Transaction higher price; completed goods
expense and readily available for sale
- Supplies inventory: items
Subse FVPL:
purchased for store or office
quent Dividend
income and use, not for sale, but part of our
Unrealized assets
gain/loss at
SPL 2. For manufacturing firms
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- Raw materials inventory: 2. Periodic inventory system

materials used to manufacture - Physical count at the end of the
a product period and does not keep track
- Work in process inventory: cost of inventory daily
incurred for partially completed - Cost of inventory on hand is
items (includes raw materials determined by counting
used, labor, overheading merchandise inventory in stock
expense, etc) - Usually used for small size
- Finished goods inventory: operations (Eg. grocery stores)
goods that have been - Cost of inventory purchases are
completed by the recorded in a Purchases account
manufacturing process but (an expense account).
which have not yet been sold to - Dr Purchases
customers - Cr Cash
- Inventory value =
Inventory Record Systems Quantities*Recorded unit costs
1. Perpetual inventory system - Net purchases = Purchases
- Costs of purchases (including (including freight in) - Purchase
freight costs and discounts) and Discounts - PRA
sales (including returns and - Total goods available for sale =
allowances) are recorded Beginning inventory + Net
directly in the Merchandise purchases
Inventory (MI) account. - COGS = Total goods available
- Purchases: Increase for sale - Ending inventory
inventory/asset account
- Sale: Decrease inventory/asset Inventory Valuation
account and recognize Cost of I. Items included in inventory
Goods Sold (COGS) Good in transit
- COGS: an expense, - For delivery to the customer, no
report in the P&L longer in the premise of the
statement seller and not yet received by
- Ending balance of the MI is buyer
done by a periodic physical
inventory count for every FOB Shipping Point
purchase - Buyer shoulders shipping costs
- Used when inventory is of high (freight in) in the POV of buyer.
value (Eg. jewelry, cars) - Ownership is transferred to the
- Dr Merchandise buyer once the goods are
Inventory delivered to the carrier.
- Cr Cash/AP - Forms part of buyer’s inventory
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FOB Destination Point As a manufacturing firm, need to

- Seller shoulders shipping costs account for cost of conversion
(freight out). (including fixed and variable
- Ownership is transferred to the manufacturing overheads) and other
buyer once the delivery costs incurred in bringing the
receives the product. inventories to their present location and
- Forms part of sellers inventory condition
Consignment Cash discounts

- Trading arrangement where the - Remove from net purchases
seller (consignor) sends goods - Gross method: record purchase
to another entity (consignee) at gross price, amount of
who pays the seller when the discount is recorded if the
consigned goods are sold discount is taken
- Sending products to another - Purchase Discount:
entity for them to resell it but reduces purchases
the ownership is still to the account
ultimate seller - Net method: purchases
recorded at net price even if the
Goods out on consignment discount wasn’t applied/used
- Remain as property of the seller yet
and is included as part of its - Purchase Discount Lost:
inventory at cost + handling + is listed under other
shipping incurred during the income and expense in
delivery the SPL
Goods held on consignment by the consignee Product Costs

- Included in the inventory of the - Includes freight charges on
seller goods purchased, other direct
- Excluded from the inventory of costs of acquisition, and labor
the consignee - All costs related to inventory
II. Costs included in inventory Period Costs

+ Cost of purchase - Costs incurred in selling and
- Trade and cash discounts other administrative purposes
+ Freight in, tax, insurance - Costs charged to expense
+ Warehousing cost + other charges
paid by the purchases to bring the items Variable (direct) Costing
to a location - Costs that varies based on
= Total cost of inventory production volume
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- Increase in quantity, increase in average cost after each

cost purchase
- Fixed manufacturing costs are - Weighted-average method
expensed as incurred (periodic): average cost is
determined once at the end of
Absorption (full) Costing the period
- Use this - Average Cost = Total
- Including fixed expenses that goods available for sale
are related to production of / Units available for
goods sale
- Includes all manufacturing - Total goods available
costs, variable and fixed, direct for sale = unit*price of
and indirect, that are incurred unit
in the production in the cost of Example:
inventory
Weighted
-average
III. Cost Flow Assumption method
- An assumption that determines the
order in which costs should flow out of
a balance sheet account (e.g.,
inventory) when the item is sold.
- Transfer costs from SFP to SPL
- Helps determine the cost allocated to
ending inventory and cost of goods sold.
Sales (200 + 140 units) * Average cost

Three cost flow assumptions:
(PHP 56) = PHP 19,040
1. Specific Identification
- Specific costs are attributed to Moving
identified items in inventory average
- Used for small items of costly method
items
- Not ideal for large number of
If the row is a purchase, the balance
items that are interchangeable
should increase and the cost per unit
will change!
2. Average Cost If the row is a sale, the balance
- Goods are indistinguishable and should decrease and the cost per unit
interchangeable will stay the same!
- Moving-average method
For Jan 9 (Purchases)
(perpetual): requires
- 100 (balance) + 300
computation after a new
(purchase) = 400
- 16,200 + 5,840 = 22,040
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- 22,040 / 400 = PHP 55.10 sale, only the

(Average cost) units
For Jan 25 (Sales)

- 290 - 140 = 150
- 16,420 - 7,297 = 8,493
- 8,493 / 150 = PHP 56.62
(Average cost)
3. First-in, First-out (FIFO)

- Assumes that the items of
inventory that were purchased Lower of Cost
or produced first are sold out - Initial recognition:
first. - Recognize inventory at cost
- Items remaining in inventory at - Subsequent recognition:
the end of the period are those - Inventory is measured at the
most recently purchased or lower of cost and NRV
produced. - Value of invevntories can decline
- Earliest costs are charged to because of obsolescence, price level
COGS and ending inventory are changes, and damaged goods
stated at recent costs - Loss is recognized in the period the
decline happened
Example: - Reversals are recognized in the SPL in
the period it happened
- June 8 sale, the
units are
Net Realizable Value
deducted from
the June 1 - NRV = Estimated selling price - Cost to
balance sell
- June 29 sale, - NRV > cost, use the cost in
the units are ending inventory
deducted from - NRV < cost, use NRV
the inventory in
June 14
Recording inventory write-down:
1. Direct method
- Ending - Record write-down of inventory
inventory: what cost directly to the inventory
was left/natira and COGS account
- If total goods
available for
sale, units*price 2. Allowance method
of unit - Uses an allowance account
- If total units which will be treated as a
available for contra-asset
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- Market decline is recorded as Disclosures in the FS for Manufacturing and

an increase to a loss account Merchandising Companies
- Allowance account is deducted - Accounting policy for inventories
from inventory on the SFP - Carrying amount, generally classified as
merchandise, supplies, materials, work
Example: in process, and finished goods.
- Carrying amount of any inventories
carried at fair value less cost to sell
(NRV)
- Amount of any write-down of
inventories recognized as an expense in
Compute for lower the period.
cost and NRV. - Amount of any reversal of a write-down
to NRV and the circumstances that led
NRV = Selling price -
to such reversal.
cost to sell
- Carrying amount of inventories pledged
NRV amount will be as security for liabilities.
used in the ending - Cost of inventories recognized as
inventory IF expense (cost of goods sold).
- NRV > cost,
use the cost
Internal Control Measures:
in ending
- Clear lines of responsibility
inventory
- NRV < cost, - Effective record keeping
use NRV - Segregation of duties between
employees
- Insurance for key assets
SFP Presentation
- Adequate security systems
Financial Ratios
a. Inventory Turnover Ratio
- Measures the average number of times
- a company sells inventory in a period
- Measures liquidity of the inventory and
SPL Presentation how efficient the company is in
handling goods it manufactures or buys
to sell
- How many times a company can sell its
inventory
- - Inventory turnover = COGS / Average
inventory
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b. Average days to sell inventory - Total goods available for sale =

- Measures the average number of days’ unit*price of unit
sales which a company has inventory on - If total goods available for sale,
hand units*price of unit
- Number of days funds are tied up in - If total units available for sale,
inventory only the units
- If you exceed the number of days, no - NRV = Estimated selling price -
more inventory on hand Cost to sell
- Average days to sell inventory = 365 - NRV > cost, use the cost in
days / Inventory turnover ratio ending inventory
- NRV < cost, use NRV
Example:
CH6: Plant Assets and Natural Resources

Property, Plant, & Equipment (PPE)
- - Also known as plant assets, property
assets, or fixed assets, include the
Summary various tangible assets used by a
Formulas company to carry out its operations.
- Inventory value = - These are assets necessary in
Quantities*Recorded unit costs day-to-day operations, not held for
- Net purchases = Purchases resale, and are expected to be used
(including freight in) - Purchase during more than one period
Discounts - PRA - Reported as noncurrent assets on the
- Total goods available for sale = SFP (PAS – PPE)
Beginning inventory + Net - Normally depreciate
purchases - Tangible in nature
- COGS = Total goods available - Ex: Land, building, machinery, vehicles,
for sale - Ending inventory furniture and fixtures, office equipment,
- Costs included in inventory tools, leasehold improvements, book
+ Cost of purchase plates, etc
- Trade and cash discounts - Recognized when:
+ Freight in, tax, insurance - Future economic benefits
+ Warehousing cost + other associated with the asset are
charges paid by the purchases expected to flow to the
to bring the items to a location enterprise
= Total cost of inventory - Cost of asset can be measured
- Average Cost = Total goods reliably
available for sale / Units - Measurement:
available for sale - At acquisition
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- Costs should include those - Interest on debt incurred

incurred initially to acquire or - Cost of training employees to
construct the PPE and costs use plant assets
incurred subsequently to add, - Annual property taxes,
replace, or service the asset insurance costs, VAT on
purchase of PPE (recorded as
Components of Costs normal business expense)
- Should include purchase price - Expenditures from accidents,
- Includes import duties and neglect and theft (losses)
non-refundable purchase taxes - Should include the initial estimate of
after deducting trade and cash the costs of dismantling and removing
discounts the item and restoring the site on which
- Cash discounts, whether taken it is located. Also called asset
or not, is still deducted from retirement obligation.
invoice price for asset valuation - Cost of PPE will not only include
- Should include any directly attributable cost of asset but also when
cost of bringing the asset to working this’ll be removed and restoring
condition or intended use the land the asset was placed
- Cost of employee benefits from
the construction or acquisition Cost of Land
of of PPE - Included in the cost of land:
- Cost of site preparation - Purchase price
- Initial delivery and handling - Legal fees and other
costs expenditures for establishing
- Installation and assembly costs clean title
- Costs of testing - Cost of relocation or
- Costs of testing (after deducting reconstruction or property
the net proceeds from selling belonging to others in order to
the items produced while acquire possession
’testing’) - Broker’s commission
- Professional fees - Fees for registration and
- Costs that are not capitalized (charged transfer of title
to expense outright): - Surveying fees
- Cost of opening a new facility, - Mortgages, encumbrances and
- Costs of introducing a new interest in such mortgages
product or service, assumed by the buyer.
- Costs of conducting a business - Delinquent real estate taxes
in a new location or with a new assumed by buyer
class of customer, and - Razing or removing unwanted
- Administration and other buildings, less any salvage value
general overhead costs
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- Demolishment of old building in a condition suitable

building/thing in the land for its intended use
- Grading and leveling - Unpaid taxes up to date of
- Payments to tenants to induce acquisition
them to vacate the premises - Interest, liens and other
- Special assessments for paving encumbrances on the building
a public street bordering the assumed by the buyer
land including sidewalks, - Payments to tenants to induce
drainage, sewers, waterlines them to vacate the building
and streetlights b. If constructed, building costs includes
- Note: Land held for a - Architect fees and
currently undetermined superintendent fee
used and for long term - Cost of building permit or
capital appreciation are licenses
classified as Investment - Excavation costs
Property. While land - Construction costs (material,
held for sale by a real labor, overhead, interest on
estate developer is construction loans, and
classified as Inventory. insurance)
- Cost of temporary buildings
Example used as construction offices and
tools or materials shed
- Cost of service equipment and
fixtures made a permanent part
of the structure
- Cost of temporary safety fence
No need to include (if permanent, report as land
the PHP400,000 improvement)
cause that’s reported - Safety inspection fee and
as land
demolition costs
improvement.
Example
Cost of Building - Landfill for
a. If acquired, acquisition costs includes building site not
- Purchase price included cause
- Realtor commissions it’s part of cost
- Legal fees and other expenses of land
- Land survey also
incurred in connection with the
part of cost of
purchase
land not of
- Reconditioning, renovation and building
remodeling costs to put a
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Cost of Land Improvements

- Enhancement made to a land, not really
necessarily needed by the land
- Include the following:
- Driveways
Cost of Equipment, Machinery, Furniture and
- Parking lots
Fixtures
- Private roads
- Include the following:
- Fence
- Purchase price
- Water system
- Freight, handling, storage, and
- Drainage system
other costs related to the
- Sidewalks
acquisition
- Pavements
- Insurance while in transit
- Costs of trees, shrubs, and
- Installation cost, including site
other landscaping
preparation and assembling
- Note: If sidewalks,
- Cost of testing and trial runs for
pavements, parking lot,
use
and driveways are part
- Modifying for use
of the blue print for the
- Repairs & reconditioning
construction of a
(purchase of used equipment)
building, they are
- Cost of dismantling and
charged to the building
removing the asset
account.
Example
Summary: If items are assessed by the
- Include the government, part of cost of land. If not, part as
cash land improvement. But, if part of blueprint to
discount,
construct building, part of building account.
even if the
company
wasn’t able Example
to avail of it - Assessments
(do this for are part of
PPE!) cost of land
- Add
- No need to
everything
include
except the
normal
assessment
repairs and
maintenanc
e cause Different Modes of Acquiring PPE
these are 1. Lump sum (basket) purchase
expensed - Acquisition for more than one PPE for a
outright
single purchase price
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- The acquisition cost is allocated among as stated, PHP 200,000

the assets purchased using their relative
fair values Cash price not
given
Example - Pertains to periodic
payment, use PVOA
formula for periodic
payments
- Since semi-annual,
effective interest rate of
6%, t is 10, P is 25,000
- Get the fraction
based on the FV, -
and then
multiply by the
total cost of the
acquisition cost
- Land:
9,800,000*48%
= 4,704,000
- Warehouse: 3. Issuance of Equity (shares) Security
9,800,000*36% = - The cost of the asset acquired is
3,528,000
measured using the following order of
priority:
1. FV of the asset received
2. Deferred payment or purchase on 2. FV of the shares issued
account 3. Par value of the shared
- Purchaser issues a note payable for the issued
amount due and pays in installments - If equity shares of the company is
- Cost of asset purchases is the cash price traded in an active market, the fair
equivalent of the asset value of the shares issued is the clear
- Discount on NP: difference between the indication of the fair value of the asset
cash price and total payments acquired.
- If the cash price is equivalent is
indeterminable, the asset and related Example
liability are recorded at the present
value of the cash payments. - FV of asset
received is given
so use this
Example - Recorded cost of
Cash price land is PHP 2.4M
given - If not
given, use
- Since cash price is given, the
the cost of the machine is market/fai
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(if payor) or minus cash received (if

r value of
shares recipient).
which is
140*20,00 Example
0
- If not - Carrying/book
value: 332,500
given, use
par value - FV: 350,000
which is
100*20,00
- Since there’s
0
commercial
substance, FV
4. Donation + cash paid
- The cost of the asset received through - Gain or loss:
FV + CV =
donation is the fair value of the asset
350,000 +
received + any incidental costs incurred. (-332,500) =
- The increase in asset from a donation 17,500
should correspondingly increase
revenue.
If the exchange
- Nonreciprocal transfer: a transfer for
lacks
which no assets are given in exchange;
commercial
donations. substance, CV
+ Cash paid
5. Exchanges
- When the exchange has commercial
Costs Incurred Subsequent to Acquisition
substance, a gain or loss equal to the
- Items paid for after acquiring PPE
difference between the fair value and
- Subsequent expenditures: capitalized
the carrying value of the asset given up.
only when it is probable that future
- Commercial substance: if the
economic benefit will flow to the
future cash flows change as a
enterprise in excess of the original
result of the transaction
assessed standard of performance.
(improvement of PPE).
- Capitalize subsequent expenditures
- If the exchange has commercial
(capital expenditures) that are material
substance, the cost of the asset
in amount that:
acquired is measured at the fair value
- Extend useful life
of the asset given plus cash paid (if
- Increase capacity
payor) or minus cash received (if
- Substantially improve output
recipient).
quality
- If the exchange lacks commercial
- Enable substantial reduction in
substance, the cost of the asset
operating cost
acquired is measured at the carrying
- Expense subsequent expenditures that:
value of the asset given plus cash paid
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- Maintain a given level of indication that an asset may be

services impaired.
- Benefit only current period - Imparied: value of asset is
lower than the carrying value
Major Type of Expenditures presented in SFP
- Additions – modifications or alterations - Some examples of indications of
which increase the physical size or impairment:
capacity of the asset. Capitalized. a. External sources – market
- Improvements or Betterments – value declines, negative changes in
modifications or alterations which technology, markets, economy, or laws
increase the service life or the capacity b. Internal sources –
of the asset. Capitalized and simply obsolescence or physical
added to the cost of the existing asset. damage
- Rearrangement – relocation or
reinstallation of an asset. Expensed 2. Revaluation Model
unless it is probable that future - Revalued Amount = FV at the date of
economic benefits associated with the revaluation - Subsequent Depreciation
asset will flow to the enterprise then (provided that fair value can be
this will be capitalized. measured reliably)
- Replacements – involve substitution but - Revaluations should be carried out
the new asset is not better that the old regularly, so that the carrying amount
asset. of an asset does not differ materially
a. Replacement of the old asset from its fair value.
by a new one. – capitalized. - If an item is revalued, the entire class of
b. Replacement of major parts assets to which that asset belongs
(extra ordinary repairs) – should be revalued.
capitalized. - Revalued assets are depreciated in the
c. Replacement of minor parts same way as under the cost model.
(ordinary repairs) – expensed.
- *Capitalized means it will be added to Depreciation
the cost of the PPE - All plant assets, except land, decrease
its value and usefulness due to the
Measurement Subsequent to Initial Recognition passage of time.
1. Cost Model - Depreciation is the allocation of an
- Asset = Cost - Accumulated asset’s cost to expense in a systematic
Depreciation and Impairment. and rational manner, over the periods
- An impairment loss must be recognized expected to benefit from the use of the
whenever the carrying amount exceeds asset.
its recoverable amount. - Two types of depreciation:
- An enterprise should assess at each
reporting date whether there is any
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a. Physical Depreciation – - Working hours or service hours

physical wear and tear and - Units of output or production
deterioration of the asset
b. Functional or Economic Method of Depreciation
Depreciation – market 1. Straight-line method
conditions that cause an asset - This method of depreciation considers a
to become obsolete and function of time rather a function of
inadequate. usage. This method yields equal
- Depreciation begins when an asset is amounts of depreciation expense at the
available for use. end of every accounting period.
- Depreciation does not stop when the - Depreciation Expense = Cost - Residual
asset becomes idle or is retired from Value / Life in Years
active use unless the asset is fully - Depreciation Expense = (Cost - Residual
depreciated. Value)(Annual Depreciation Rate)
- Don’t depreciate assets that are
classified as held for sale 2. Activity Method
- This method bases depreciation on
Accumulated Depreciation usage rather than time.
- the total amount of a plant asset’s cost - The more activity during the year, the
that has been allocated to depreciation more depreciation is recorded; the less
expense since the asset was put into activity, the less depreciation is
service recorded.
- a long-term contra asset account (credit a. Working hours method:
balance) that is presented in the SFP as - Depreciation =
a reduction from the gross amount of (Depreciable Cost ÷ Life
PPE. in terms of hours) x
- Carrying value = Cost – Accumulated Actual Hours
Depreciation b. Output or Production
method:
Factors of depreciation are: - Depreciation =
1. Depreciable base/depreciable cost = (Depreciable Cost ÷ Life
Cost of the asset - estimated residual in terms of units) x
value. Actual Units
2. Scrap value/residual value/salvage value
– the amount estimated to be 3. Decreasing Charge or Accumulated
recovered when the asset is retired Method
from use. - this method yields high depreciation
3. Estimated useful life – the expected expense during early years of the assets
economic or service life of the asset. It life and low depreciation expense
can be expressed in terms of: during the latter years.
- Time periods in years or months
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a. Sum-of-the-year’s Digits asset is permanently withdrawn from

Method: use and no future economic benefit is
- Depreciation = expected from its disposal.
Depreciable Cost x - Gains and losses from retirement or
(Remaining life / S) disposal should be recognized in the
- S = [n (n + 1)] / 2 income statement as follows:
- where n = life in - Loss on sale if carrying value >
years cash proceeds from sale
b. Double Declining Balance - Gain on sale if carrying value <
Method: cash proceeds from sale
- Depreciation =
Declining book value x Example
2 x Straight-line rate
- Straight line
rate =
1/estimated
useful life
- DBB rate = 2 x
1/useful life
- Ignore residual value
Examples Natural Resources

- Also known as wasting assets, are
material objects of economic value and
utility to man produced by nature.
- These include oil, gas, minerals, timber,
coal, ore, and precious metals like gold
and silver.
- They are physically exhausted over a
- ⅛ because period of time and irreplaceable.
computing
depreciation for Cost of Natural Resources
the first year - Acquisition costs – the price paid to
only out of 8 obtain the property containing the
natural resource
- Exploration and evaluation costs – the
costs incurred in an attempt to locate
the natural resource that can be
Retirement and Disposals economically extracted or exploited.
- An item of PPE should be derecognized - Successful effort method:
from the SFP upon disposal or when the capitalizing only successful
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explorations, unsuccessful - Salvage value – amount expected to be

explorations are expensed (not derived from the sale of the property
included in costs) after extraction activities.
- Full cost method: advocates - Estimated useful life – life of wasting
capitalizing all costs of assets in terms of outputs extracted or
exploration mined.
- Development costs – costs incurred to - Depletion Rate/Cost per Unit:
exploit or extract the natural resource Cost - Salvage value / Total
that has been located. These include estimated units
drilling costs, extraction costs, and the - The depreciation of the tangible
construction of tunnels, shafts, and equipment used in the development of
wells. the wasting asset is computed over the
- Note: Tangible equipment for life of the equipment or the life of the
extracting and shipping natural wasting asset which ever is shorter:
resources is treated as PPE - Use straight line method if
- Restoration costs – costs to restore depreciated over the life of the
property to its natural state after equipment
extraction has occurred. - Use output method if
depreciated over life of wasting
Depletion asset
- Systematic allocation of the cost or
other basic value of a wasting asset over Example
the period the natural resource is
extracted or produced.
- It represents the removal, extraction, or
exhaustion of a natural resource.
- Depletion expense is considered as an
inventoriable cost or product cost.
- Depletion on the sold extracted units ->
Cost of goods sold
- Depletion on the unsold units -> Mine
inventory
- Depletion base – includes the
acquisition costs, development costs,
exploration and evaluation costs, and
restoration costs.
- Depletion Expense: Depletion
cost per unit * number of units
extracted
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250,000 units sold CH7: Intangible Assets

50,000 units left
Intangible Assets
- Non monetary assets
- No physical substance but used as PPE
- Initial recognition: Recorded at cost
- Derecognition: carrying value is
Capitalized Vs. Expensed
eliminated and gain or loss on sale
- Ask the question, will the cost continue
- Has indefinite life, cost is not allocated
to provide benefits for more than a
year?”
Attributes of Intangible Asset
- Yes? → Capitalize
1. Identifiability
- No? → Expense
- Separable: separate from the entity, can
be leased, rented, or franchised out
List of Items to be expensed
- Expense subsequent expenditures that:
2. Control
- Maintain a given level of
- Has power to determine who has access
services
to future economic benefits
- Benefit only current period
- Ex: Oxygen, cannot recognize as your
- Rearrangement – relocation or
own cause you don’t have access or
reinstallation of an asset. Expensed
control over this
unless it is probable that future
economic benefits associated with the
3. Future economic benefit
asset will flow to the enterprise then
- Building: being able to operate helps
this will be capitalized.
you earn revenue
- Cost of opening a new facility,
- Revenue from sale of products, cost
- Costs of introducing a new product or
saving, etc
service,
- Costs of conducting a business in a new
Criteria for Recognition
location or with a new class of
- Should be recorded as an expense
customer, and
outright, cannot capitalize in the SFP
- Administration and other general
- FF items must be charged to expense
overhead costs
when incurred:
- Interest on debt incurred
- Internally generated goodwill
- Cost of training employees to use plant
- Start-up, pre-opening, and
assets
pre-operating costs
- Annual property taxes, insurance costs,
- Training costs
VAT on purchase of PPE (recorded as
- Advertising and promotional
normal business expense)
costs
- Expenditures from accidents, neglect
- Relocation costs
and theft (losses)
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Criteria for Measurement A. Trademark or trade name

- Intangible assets and PPE is initially - A word, phrase, jingle, logos, or
measured at cost symbol that distinguishes or
- Purchase price: including import duties identifies a particular company
and non-refundable purchase taxes or product.
- Directly attributable costs that include: - Can be protected through the
- Cost of employee benefits and registration with the IPO
professional fees arising directly - This gives the owner the right to
from bringing the assets to its use the mark and prevent
working condition others from using it
- Cost of testing the asset - Registration is renewable for
- Excludes: cost of introducing a periods of 10 years after the
new product or services, cost of expiration of the original
conducting business in new ten-year term
location, administration and
overhead costs, costs incurred B. Masthead
while asset is incapable of - list at the top of a page that
operating, initial operating includes the names of editors,
losses writers, and owners, as well as
the title of the newspaper or
Acquiring Intangibles magazine
- When it is acquired for consideration
other than cash, the cost of the C. Internet domain names
intangible is at FV of the consideration - Labels used to identify one or
given or intangible received, whoever is more IP addresses
more evident
- Costs incurred to create 2. Customer-related intangibles
internally-generated intangibles are - Customer lists, orders and
expensed production backlogs,
- Intangibles can be acquired by contractual and non-contractual
- Separate purchase relationships
- Part of business combination - This customer database
- Government grant normally includes name,
- Exchange of assets contact information, order
- Self creation (internal history, and demographic
generation) information.
- Companies can or do lease, sell,
Categories of Intangible Assets buy or otherwise trade such
1. Marketing-related intangible information.
- Used in marketing promotions - Customer list is a limited-life
intangible asset that should be
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amortized on a straight-line B. License or permit

basis, - Granted by a governmental
- Cause 10 years from body to business enterprises to
now, they might be allow the enterprise to use
dead na public property in performing
- When your its services.
product/service caters - Example: Use of public land for
to a specific age group. telephone or electric lines, use
If they get older of phone lines for cable TV, use
of city streets for a bus line, or
3. Artistic-related intangibles use of airwaves for radio or TV
- Involves ownership rights to broadcasting.
literary works, musical works, - The cost of franchise with finite
pictures, photographs, videos, life should be amortized as
and audio-visual materials. operating expenses / life of
- Copyrights are granted by the franchise
government, giving the owner - The cost of franchise with
the exclusive right to reproduce indefinite life is not amortized
and sell an artistic or published but tested for impairment at
work. least annually
- In the Philippines, copyright - Annual payments made under
protection for artistic, literary, the franchise agreement are
and derivative works lasts expensed as incurred
during the lifetime of the
author plus 50 years after the 5. Technology-related intangibles
author’s death.
A. Patent
4. Contract-related intangibles - An exclusive right issued by the
government through the
A. Franchise Intellectual Property Office of
- A contractual arrangement the Philippines that enables the
under which the franchisor recipient to manufacture, sell,
grants the franchisee the right or otherwise control his or her
to sell certain products, to invention for a period of 20
render specific services, or to years from the date of grant.
use certain trademarks or - The initial cost of a patent is the
tradenames, usually within a cash or cash equivalent price
designated geographical area. paid when the patent is
- Example: Jollibee, McDonald’s, acquired.
Shell, etc.
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- Legal costs incurred in skilled employees, high-quality

defending the patent are products, fair pricing policies,
expensed immediately. and harmonious relations with
- The cost of the patent should labor unions.
be amortized over its legal life - In a business combination or
of 20 years or useful life, acquisition of business, the cost
whichever is shorter is first assigned to identifiable
tangible and intangible net
B. Software assets, and the remainder is
- Collection of instructions that recorded as goodwill.
enable a user to perform tasks - It can only be sold by selling the
with a use of computer whole business.
hardware. It can be a system
software or an application Example
software.
- Purchased computed software
is capitalized
- Internally developed software is
charged to expense until
technological feasibility –
probable future benefits, intent
and ability to use or sell the
Research and Development Costs
software, resources to complete
the software, and ability to - These are costs that are spent on
measure cost. developing new products and
- The cost of computer software processes. Such costs are usually
recorded as expense when incurred.
is amortized over its useful life,
using straight-line basis. - Research costs: charged to
expense.
6. Goodwill - Development costs: capitalized
only after technical and
- Is an intangible asset that can
arise when a buyer acquires an commercial feasibility of the
existing business. asset.
- Goodwill = FV of assets - FV of - If an entity cannot distinguish the
liabilities research phase of an internal project to
- It is the excess of the purchase create an intangible asset from the
consideration over the total development phase, the entity treats
value of the assets minus the the expenditure as if it were incurred in
liabilities. the research phase only expensed.
- This excess is attributed to the
entity’s superior management, Measurement After Intitial Recognition
1. Cost model
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- after initial recognition, intangible ● Important issues related to the long

assets should be carried at cost less term debt should be disclosed in the
accumulated amortization and financial statements or notes
impairment losses.
- Always use this for this class. BONDS PAYABLE
● Represent an obligation of issuing
2. Revaluation model corporation to pay a sum of money at a
- Intangible assets may be carried at a designated maturity date plus periodic
revalued amount (based on fair value) interest at a specified rate on the face
less any subsequent amortizations and value
impairment losses. ● Debt instruments issued by an entity to
- Recalculate a new depreciation model borrow funds from the general public or
institutional investors
Amortization ● Use of bonds provides the issuer an
- Always use SL method opportunity to divide a large amt of
- Amortization is the systematic write off long-term indebtness among many
of an intangible asset. small investing units
- The cost less residual value of an ● Bonds may be sold through an
intangible asset with a finite useful life underwriter
should be amortized over that life. ○ Guarantees a certain sum to the
- The amortization charge is recognized corporation and assumes the
as an Amortization Expense with risk of sale
corresponding increase in Accumulated ○ Agrees to sell the bond issue on
Amortization or a decrease in Intangible the basis of commission.
Asset Account. ● May sell bonds directly to a large
- Indefinite useful life: no foreseeable institution without the end aid of an
limit to the period over which the asset underwriter
is expected to generate net cash inflows
for the entity. TYPES OF BOND
- Finite useful life: a limited period of ● Secured bond. Bond issued with specific
benefit to the entity. assets of the issuer pledged as collateral
for the bonds
Ch8: Liabilities ● Unsecured bond or debenture bond.
Bond issued against the general credit
LIABILITY of the borrower This bond is used
● Obligations maturing beyond one year extensively by large entities with good
● Formal agreement between parties credit ratings
often includes covenants and ● Term bond. Bond that matures at a
restrictions for the protection of both single specified date
lenders and borrowers ● Serial bond. Bond issued in which the
● Bond indenture, note agreement principal is repaid (retired) in regular
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installments over the life (maturity ● Amortization of discount = + bond

period) of the issue. expense
● Registered bond. Bond issued in the ● Amortization of premium = - bond
name of the owner. The transfer of expense
bonds requires cancellation of the
bonds by the entity and issuance of new EFFECTIVE INTEREST AMORTIZATION
bonds ● Preferred is effective interest method
● Bearer or coupon bond. Bond that is ● Interest cost for each period is the EIR
not registered. Holders of bearer bond (Effective Interest Rate)*Carrying Value
must send in coupons to receive (Book Value)
interest payments. Coupon bond may ● Schedule of Bond Interest Amortization
be transferred directly to another party. - schedule provides the information
● Convertible bond. Bond that can be necessary for each semi-annual entry
converted into ordinary shares at the for interest and discount or premium
bondholder's option. amortization
● Callable bond. Bond subject to
retirement at a stated amount prior to MORTGAGE PAYABLE
maturity at the option of the issuer. ● Mortgage payable is used to purchase
property
BONDS ISSUANCE ● Early payments consist of more interest
● Bond issue are a set out in a legal than principal
document called bond indenture
● Bond certificate provides information ANALYSIS OF LIABILITIES
such as the name of the issuer, face
value, contractual interest rate and 1. WORKING CAPITAL
maturity date. ● Working Capital = Current Assets −
● Market rate or effective yield of interest Current Liabilities
is the interest rate earned by the ● Liquidity is the ability to pay maturing
bondholder when he is selling the bond obligations and meet unexpected needs
either at discount or at a premium.
● Effective rate > stated rate bonds sell at 2. CURRENT RATIO
a discount ● Current Ratio = (Current
● Effective rate < stated rate bonds sell at Assets)/(Current Liabilities)
a premium ● Ideal current ratio between 1.2 to 2
● Below 1 means that the company does
DISCOUNTS AND PREMIUM not have enough liquid assets to cover
● Recorded at the time the bonds are sold its short term liabilities
● Amts recorded as discounts or ● A ratio equal to 1 indicates the current
premiums are amortized each time assets are equal to current liabilities
bond interest is paid
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3. DEBT TO TOTAL ASSETS RATIO AND THE certificate of

TIMES INTEREST EARNED RATIO incorporation provides
● Debt to Total Assets Ratio= (Total otherwise;
Liabilities)/(Total Assets) iii) To adopt and use a
● The greater the risk that the company corporate seal;
may be unable to pay its maturing debt iv) To amend its articles of
● Times Interest Earned= (Income Before incorporation in
Income Taxes+Interest accordance with the
Expense)/(Interest Expense) provisions of this Code;
○ times interest earned less than v) To adopt bylaws, not
2.5 are considered a much contrary to law, morals
higher risk for bankruptcy or public policy, and to
amend or repeal the
CH 9: Corporations: Organization & Share same in accordance
Capital Transactions with this Code;
vi) In case of stock
CORPORATION DEFINED corporations, to issue
● A corporation is an artificial being or sell stocks to
created by operation of law, having the subscribers and to sell
right of succession and the powers, treasury stocks in
attributes, and properties expressly accordance with the
authorized by law or incidental to its provisions of this Code;
existence. (SECTION 2 of Revised and to admit members
Corporation Code of the Philippines) to the corporation if it
be a nonstock
CHARACTERISTICS OF A CORPORATION corporation;
vii) To purchase, receive,
1) SEPERATE LEGAL ENTITY take or grant, hold,
● Viewed as a separate and distinct convey, sell, lease,
person from its owners pledge, mortgage, and
● Own juridical personality otherwise deal with
● Corporation name can be used to make such real and personal
business transactions seperate from its property, including
owners securities and bonds of
other corporations, as
2) CORPORATE POWERS AND CAPACITY the transaction of the
a) Section 35: lawful business of the
i) To sue and be sued in corporation may
its corporate name; reasonably and
ii) To have perpetual necessarily require,
existence unless the subject to the
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limitations prescribed i) Power to increase or

by law and the decrease share capital;
Constitution; incur, create, or
viii) To enter into a increase bonded
partnership, joint indebtness
venture, merger, d) Section 38:
consolidation, or any i) Power to deny
other commercial preemptive right
agreement with natural e) Section 39:
and juridical persons; i) Sale or other
ix) To make reasonable disposition of assets
donations, including f) Section 40:
those for the public i) Power to acquire own
welfare or for hospital, shares
charitable, cultural, g) g. Section 41:
scientific, civic, or i) Power to invest
similar purposes: corporate funds
Provided, That no h) h. Section 42:
foreign corporation i) Power to declare
shall give donations in dividends
aid of any political party i) i. Section 43
or candidate or for i) Power to enter into
purposes of partisan management contract
political activity;
x) To establish pension, 3) Unlimited Life/Perpetual Term
retirement, and other ● Batasang Pambansa 68
plans for the benefit of ○ 50 years life
its directors, trustees, ○ Revised Corporation Code of
officers, and 2019
employees; and ● Corporation has perpetual existence
xi) To exercise such other unless otherwise is amended in the
powers as may be articles of incorporation
essential or necessary
to carry out its purpose 4) Limited Liability/Ease of Capital
or purposes as stated in Acquisition
the articles of ● Limited liability
incorporation. ● The liability upon dissolution of
b) Section 36: the corporation does not
i) i. Power to extend or extend to the personal
shorten corporate term properties of the shareholders
c) Section 37:
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● Can obtain capital by selling ● Corporate officers have the inherent

stock or bonds which gives a obligation to act in the protection of its
longer pool of resources owners and creditors who entrusted to
the corporation their money and other
5) Ease of Transferring Ownership Rights interests represented by shares held by
● Shareholders are owners of the corp shareholders and creditors claim
● It has the right to issue a fixed number
of shares called authorized shares FORMING A CORP
○ Shows evidence of ownership
● Can have millions of owners ONE PERSON CORPORATION (OPC)
● Each shareholder has the right to vote ● One owner-shareholder
proportionate to the number of shares ● Only natural persons, trust or an estate
they own. may form an OPC
○ The more shares = more power ● Licensed person cannot incorporate an
● Shareholders may sell shares can easily OPC for the practice of his profession
do so and does not need approval of
other CLASSES OF CORPO
1. Stock Corporation
6) Double Taxation a. one whose capital is divided
● Pay taxes on their annual earnings into shares of stock and profits
● When dividends pay out to earned are authorized to be
shareholders, the dividend payments distributed to its owners in the
incur liabilities for the shareholders who form of dividend
receive them 2. Non-stock corporations
a. those whose profit is not
7) Professional Management available for distribution as
● The shareholders may vote on decisions dividend. Examples of this
for board of directors include educational
● The majority shareholder is the founder organizations and business
and main leader of the company leagues.
● Also possible to hire a company 3. Public Corporation
leadership a. one that is formed to carry out
functions and purposes for the
8) Trust Fund Doctrine government.
● Trust fund doctrine is a principle of b. An example of this is the Bank
judicial invention which says that of the Philippine Islands.
corporate assets are held as trust fund 4. Private Corporation
for the benefit of the shareholders and a. one formed for commercial and
creditors and that corporate officers private purposes,
have a fiduciary duties to deal with b. an example of this is Jollibee
them properly. Food Corporation.
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5. Ecclesiastical Corporation b. An example of this is Pepsi-Cola

a. one forme for spiritual purposes Products Philippines, Inc. which
or for a particular religion follows the laws of America.
6. Lay Corporation 11. Holding corporation
a. formed other than for religious a. where activities are limited only
purposes. This can either be to investing and managing the
further classified as operations of other
eleemosynary or civil. corporations. An example of
Eleemosynary is a corporation this is Alliance Global Group,
formed for charitable purposes Inc.
and an example of this is Bantay 12. Subsidiary corporation
Bata 163. As for civil a. one that is partly owned by
corporations, it is for the another corporation called
benefit of pecuniary group. parent corporation or holding
b. An example of this is SMEC corporation.
Philippines. b. For example, Walt Disney owns
7. 7. Close corporations 100% of Marvel Entertainment
a. those with shares of stock that which produces movies.
are not offered for public 13. De jure corporation
ownership but for limited a. one that exists in both fact and
private individuals who are law. These corporations are
generally members of the considered to be a legal entity,
family. however, they are granted
b. An example of this is Publix limited liability under the law.
Super Markets Inc. in the 14. 14. De facto corporation
United States. a. one that exists in fact but not in
8. 8. Open Corporations law. These are corporations
a. those with shares of stocks that who failed to meet all statutory
can be offered to public and is requirements, therefore, the
listed in the Philippine Stock corporation’s owners or
Exchange. An example of this is directors will not be protected if
BDO Unibank, Inc. challenged by the state in a quo
9. Domestic Corporation warranto proceeding but will be
a. one formed and incorporated protected against third parties.
under Philippine laws. An 15. One-person corporation
example of this is San Miguel a. one that is owned by only one
Corporation. incorporator or owner. Banks,
10. Foreign Corporations quasi-banks, pre-need
a. those that are formed and companies, insurance
incorporated under foreign companies, publicly-listed
laws. companies, and government
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owned and controlled 2. Bylaws

corporations cannot a. Section 46
incorporate as OPC. This is also 3. Certificate of Incorporation
not valid for a licensed person a. Corp must start operating
who has the purpose of within 5 years after its
practicing his profession. establishment.
b. Failure to operate within this
period means will result to
COMPONENTS OF CORPORATION revocation of its Cert by SEC
1. Corporators 4. Corporate Treasurer
a. people who compose the 5. Shareholders Rights
corporation and are further
classified as incorporators, CORPORATE CAPITAL
shareholders, or members
2. Shareholders CLASSES OF SHARE CAPITAL
a. corporators of stock corporation 1. ORDINARY SHARE CAPITAL
3. Members a. The basic share capital of the
a. corporators of non-stock corporation
corporation b. If there is only one class of
4. Incorporators share, it is automatically
a. founders of the corporation assumed as an ordinary share
5. Subscribers c. Ordinary shares comes with the
a. those who agreed to acquire right:
and pay shares of stock of the i. Right to vote
corporation All incorporators ii. Right to participate in
are subscribers but not all corp's profit - right to
subscribers are incorporators participate in residual
6. Promoters profit
a. those who bring about or cause d. Ordinary shares receive higher
to bring about the formation profit for having higher residual
and organization of a profit
corporation. e. If no profit or low profit, the
7. Underwriters also receive lower residual
a. these are generally investment profit or no profit
bankers who help the f. PAR VALUE
corporation in issuing shares of i. Minimum amount that
stock each share can initially
be sold or issued by the
DOCUMENTS NEEDED TO FORM A COPORATION corporation
1. Articles of Incorporation ii. Amount is stated in
a. Section 14 articles of incorporation
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and on the face of the

share certificate
g. NO PAR VALUE
i. Stated value and no par
share without stated
value
ii. No amount fixed in the
articles of incorporation
and on the face of the
share of the certificate
iii. If the amount is stated
after the incorporation,
it is called stated value
iv. Only ordinary shares
can be issued as no par
shares and for a
minimum amount of 5
pesos per share
2. PREFERENCE SHARE CAPITAL
a. Share has preference or priority
over ordinary shares
b. Advantages:
i. Preference as to asset
ii. Preference as to
dividends
1. Cumulative
preference
share
2. Participating
preference
shares
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Acccob 2-min-2 - Accounting nals reviewer

Financial Accounting and Reporting (all) (ACYFAR 1 - 5)

CH1: Introduction to Financial Accounting - Need to know if the company is capable

Enhancing characteristics 2. Accrual Basis

Liabilities ○ Traveler’s check: is for a prepaid

- 90 day time deposits, time - Bank overdraft: checks or withdrawals

Types of Book Reconciling Items

Format of Bank Reconciliation

CH3: Receivables Types of trade receivables

Advances to affiliates ADA

Using percentage method

- ADA is a contra AR, meant to reduce our

Computing for present value

- If the nominal rate is zero, this

Step 1. Compute for the Present Value of the

Step 2. Compute for the Present Value of the

Factoring - Fluctuations in fair value (When

Financial Liability Business model test

- You hold the financial Decision Tree

2. At Fair Value Thru Other Comprehensive

Example investee company, the investment is

SFP: Previous SFP + (Investment - Discount on bond investment: Nominal

Example - An amortization table is

During the sale, transfer the

Interest income: effective interest

- Raw materials inventory: 2. Periodic inventory system

FOB Destination Point As a manufacturing firm, need to

Consignment Cash discounts

Goods held on consignment by the consignee Product Costs

II. Costs included in inventory Period Costs

- Increase in quantity, increase in average cost after each

Sales (200 + 140 units) * Average cost

- 22,040 / 400 = PHP 55.10 sale, only the

For Jan 25 (Sales)

3. First-in, First-out (FIFO)

- Market decline is recorded as Disclosures in the FS for Manufacturing and

b. Average days to sell inventory - Total goods available for sale =

CH6: Plant Assets and Natural Resources

- Costs should include those - Interest on debt incurred

- Demolishment of old building in a condition suitable

Cost of Land Improvements

- The acquisition cost is allocated among as stated, PHP 200,000

(if payor) or minus cash received (if

- Maintain a given level of indication that an asset may be

a. Physical Depreciation – - Working hours or service hours

a. Sum-of-the-year’s Digits asset is permanently withdrawn from

Examples Natural Resources

explorations, unsuccessful - Salvage value – amount expected to be

250,000 units sold CH7: Intangible Assets

Criteria for Measurement A. Trademark or trade name

amortized on a straight-line B. License or permit

- Legal costs incurred in skilled employees, high-quality

- after initial recognition, intangible ● Important issues related to the long

installments over the life (maturity ● Amortization of discount = + bond

3. DEBT TO TOTAL ASSETS RATIO AND THE certificate of

limitations prescribed i) Power to increase or

● Can obtain capital by selling ● Corporate officers have the inherent

5. Ecclesiastical Corporation b. An example of this is Pepsi-Cola

owned and controlled 2. Bylaws