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ACC 124 Intermediate Accounting

Conceptual Framework and Intermediate Accounting (University of Mindanao)

Studocu is not sponsored or endorsed by any college or university

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UNIVERSITY OF MINDANAO
College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)

Course/Subject: ACC 124 – CONCEPTUAL FRAMEWORK

AND INTERMEDIATE ACCOUNTING 1

Name of Teacher: _________________

Name of Author: MARY GRACE S. SOMBILON/

LORD EDDIE I. AGUILAR

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS INTENDED
USE. THIS IS INTENDED ONLY FOR THE USE OF THE STUDENTS
WHO ARE OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.

THIS IS NOT FOR COMMERCIAL USE.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

TABLE OF CONTENTS
COURSE OUTLINE POLICY .................................................................................................. iv
Course Information – see/download course syllabus in the Black Board LMS .................. viii
Big Picture: ULO 1-10 ..................................................................................................... - 1 -
Week 1-3 ............................................................................................................................... - 1 -
Big Picture in Focus: ULO 1-3 ......................................................................................... - 1 -
Metalanguage and Essential Knowledge ................................................................................ - 1 -
Self-Help ................................................................................................................................ - 7 -
Let’s Check ............................................................................................................................. - 7 -
Let’s Analyze .......................................................................................................................... - 8 -
In a Nutshell .......................................................................................................................... - 8 -
Evaluation Rubric ................................................................................................................... - 9 -
Q&A List ...............................................................................................................................- 10 -
Keywords Index ....................................................................................................................- 10 -
Big Picture in Focus: ULO 4-6 ....................................................................................... - 11 -
Metalanguage .......................................................................................................................- 11 -
Essential Knowledge .............................................................................................................- 14 -
Self-Help ...............................................................................................................................- 25 -
Let’s Check ............................................................................................................................- 25 -
Let’s Analyze .........................................................................................................................- 28 -
In a Nutshell .........................................................................................................................- 29 -
Evaluation Rubric ..................................................................................................................- 29 -
Q&A list ................................................................................................................................- 30 -
Keywords Index ....................................................................................................................- 30 -
Big Picture in Focus: ULO 7 & 8 .................................................................................... - 31 -
Metalanguage .......................................................................................................................- 31 -
Essential Knowledge .............................................................................................................- 32 -
Self-Help ...............................................................................................................................- 41 -
Let’s Check ............................................................................................................................- 41 -
Let’s Analyze .........................................................................................................................- 42 -
In a Nutshell .........................................................................................................................- 43 -
Evaluation Rubrics ................................................................................................................- 44 -

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Q&A List ...............................................................................................................................- 45 -

Keywords Index ....................................................................................................................- 45 -
Big Picture in Focus: ULO 9 & 10 .................................................................................. - 46 -
Metalanguage .......................................................................................................................- 46 -
Essential Knowledge .............................................................................................................- 46 -
Self-Help ...............................................................................................................................- 54 -
Let’s Check ............................................................................................................................- 54 -
Let’s Analyze .........................................................................................................................- 56 -
In a Nutshell .........................................................................................................................- 57 -
Evaluation Rubric ..................................................................................................................- 58 -
Q&A list ................................................................................................................................- 58 -
Keywords index ....................................................................................................................- 58 -
Course Schedule ...................................................................................................................- 59 -
Online Code of Conduct ............................................................................................... - 60 -

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

COURSE OUTLINE: ACC 124 – Conceptual framework and Intermediate

Accounting 1
Course Coordinator : Mary Grace Sombilon/Lord Eddie Aguilar
Email : [email protected]/
[email protected]
Student Consultation : By BlackBoard LMS Message
Phone : c/o UM CAE 305-0645
Effectivity Date : May 25, 2020 (Summer/Term)
Mode of Delivery : Blended (On-Line with Face-to-Face or Virtual Sessions)
Time Frame : 54 Hours
Student Workload : Expected Self-Directed Learning
Requisites : ACC 111 – Financial Accounting and Reporting
Credit : 6.0 units
Attendance Requirements : A minimum of 95% attendance is required at all scheduled
virtual or face-to-face sessions.

COURSE OUTLINE POLICY

Area of Concern Details
Contact and Non-Contact This 6-unit course self-instructional manual is designed for blended
Hours learning mode of instructional delivery with scheduled face-to-face or
virtual sessions. The expected number of hours will be 54 including the
face-to-face or virtual sessions. The face-to-face sessions shall include
the summative assessment tasks (examinations) since this course is
crucial in the CPA licensure examination (CPALE).

Assessment Task Submission of assessment tasks shall be on 3rd, 5th, 7th and 9th week
Submission of the term. The assessment paper shall be attached with a cover page
indicating the title of the assessment task (if the task is performance),
the name of the course coordinator, date of submission and name of
the student. The document should be emailed to the course
coordinator. It is also expected that you already paid your tuition and
other fees before the submission of the assessment task.

If the assessment task is done in real time through the features in the
Blackboard Learning Management System, the schedule shall be
arranged ahead of time by the course coordinator.

Since this course is included in the licensure examination for teachers,

you will be required to take the Multiple-Choice Question exam inside
the University. This should be scheduled ahead of time by your course
coordinator. This is non-negotiable for all licensure-based programs.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Turnitin Submission (if To ensure honesty and authenticity, all assessment tasks are required to
necessary) be submitted through Turnitin with a maximum similarity index of 30%
allowed. This means that if your paper goes beyond 30%, the students
will either redo her/his paper or explain in writing addressed to the
course coordinator the reasons for the similarity. In addition, if the
paper has reached more than 30% similarity index, the student may be
called for a disciplinary action in accordance with the University’s OPM
on Intellectual and Academic Honesty.

Please note that academic dishonesty such as cheating and

commissioning other students or people to complete the task for you
have severe punishments (reprimand, warning, expulsion).

Penalties for Late The score for an assessment item submitted after the designated time
Assignments/Assessments on the due date, without an approved extension of time, will be reduced
by 5% of the possible maximum score for that assessment item for each
day or part day that the assessment item is late.

However, if the late submission of assessment paper has a valid reason,

a letter of explanation should be submitted and approved by the course
coordinator. If necessary, you will also be required to present/attach
evidences.

Return of Assessment tasks will be returned to you two (2) weeks after the
Assignments/Assessments submission. This will be returned by email or via Blackboard portal.

For group assessment tasks, the course coordinator will require some or
few of the students for online or virtual sessions to ask clarificatory
questions to validate the originality of the assessment task submitted
and to ensure that all the group members are involved.

Assignment Resubmission You should request in writing addressed to the course coordinator
his/her intention to resubmit an assessment task. The resubmission is
premised on the student’s failure to comply with the similarity index and
other reasonable grounds such as academic literacy standards or other
reasonable circumstances e.g. illness, accidents financial constraints.

Re-marking of You should request in writing addressed to the program coordinator

Assessment Papers and your intention to appeal or contest the score given to an assessment
Appeal task. The letter should explicitly explain the reasons/points to contest
the grade. The program coordinator shall communicate with the
students on the approval and disapproval of the request.

If disapproved by the course coordinator, you can elevate your case to

the program head or the dean with the original letter of request. The
final decision will come from the dean of the college.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Grading System All culled from BlackBoard sessions and traditional contact
Course discussions/exercises – 40%
Formative assessments from 1st to 7th (5% each) - 35%

All culled from on-campus/onsite sessions (TBA):

Final exam – 25%
Submission of the final grades shall follow the usual University system
and procedures.

Preferred Referencing Harvard Referencing Style

Style
Student Communication You are required to create a umindanao email account which is a
requirement to access the BlackBoard portal. Then, the course
coordinator shall enroll the students to have access to the materials and
resources of the course. All communication formats: chat, submission of
assessment tasks, requests etc. shall be through the portal and other
university recognized platforms.

You can also meet the course coordinator in person through the
scheduled face-to-face sessions to raise your issues and concerns.

For students who have not created their student email, please contact
the course coordinator or program head.

Contact Details of the Lord Eddie I. Aguilar

Dean Email: [email protected]
Phone: (082) 3050645 local 137
Contact Details of the Jade D. Solaña
Program Head (BSA, BSMA)
Email: [email protected]
Phone: (082) 3050645 local 137

Devzon U. Porras
(BSIA, BSAIS)
Email: [email protected]
Phone: (082) 3050645 local 137

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Student with Special Students with special needs shall communicate with the course
Needs coordinator about the nature of his or her special needs. Depending on
the nature of the need, the course coordinator with the approval of the
program coordinator may provide alternative assessment tasks or
extension of the deadline of submission of assessment tasks. However,
the alternative assessment tasks should still be in the service of
achieving the desired course learning outcomes.

Online Tutorial Through LMS or PM Chats

Library and Information Brigida E. Bacani

Center (LIC) Resource Email: [email protected]
09513766681

for inquiries, you can email

at [email protected], [email protected] or
chat with us here http://library.umindanao.edu.ph/
Facebook page: https://www.facebook.com/UM-Learning-and-
Information-Center-Davao-City-962331877193048/

Well-Being Welfare Ronadora E. Deala

Support Help Desk Email: [email protected]
09212122846

GSTC Facilitator
Zerdszen P. Rañises
Emai: [email protected]
09058924090

GSTC Facebook Page:

https://facebook.com/UM-GSTC-Main-CAE-
111901303784349/?modal=admin_todo_tour

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Course Information – see/download course syllabus in the Black Board LMS

Course Coordinator Voice: Hello future accountants! Welcome to our ACC 124 course –
Conceptual Framework and Intermediate Accounting 1. This is your 2nd accounting
course in your chosen profession. Hopefully, by now, you are able to adjust and see
yourself become an Accountant someday. Meeting with key executives in the
company and helping them in their respective businesses.

Course Outcomes: This course is a continuation of your ACC 111 – Financial Accounting and
Reporting. Our goal here is for you to be acquainted with the works of an Accountant
in making and preparing a financial statements. In our previous accounting courses
(ACC 111), we learned that financial statements is a medium where we communicate
what happened to the business (company’s financial position, the result of
itsoperations, etc). In this course, you will learn the nature, scope, and functions of
framework and elements of financial statements. To add, the accounting principles
relative to recognition, measurement, valuation, and financial statement presentation
on cash and cash equivalents and receivables (accounts receivable, notes receivable
and loans receivable), receivable financing, inventories, biological asset, investments
(debt and equity), investment in associates, inventory property, and funds and other
investments. Also, you need to do complete bookkeeping as part of the course
competency.

Let us begin!

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Big Picture: ULO 1-10

Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

1. Discuss the meaning of Generally Accepted Accounting Principles(GAAP).

2. Discuss the major standard-setting bodies (international and Philippine scene) and their role
in the standard setting process.
3. Explain the practice of the accountancy profession and its nuances.
4. Discuss the nature, purpose and usefulness of a conceptual framework
5. Explain the qualitative characteristics of accounting information
6. Compare the basic elements of financial statements and underlying assumptions
7. Explain the uses, limitation and content of statement of financial position.
8. Prepare a statement of financial position
9. Explain the uses, limitation and content of statement of comprehensive income.
10.Prepare a separate income statement and a single statement of comprehensive income

ACCOUNTANCY PROFESSION

Big Picture in Focus: ULO 1-3

ULO 1: Discuss the meaning of Generally Accepted Accounting Principles(GAAP).

ULO 2: Discuss the major standard-setting bodies (international and Philippine scene)
and their role in the standard setting process.
ULO 3: Explain the practice of the accountancy profession and its nuances.

Metalanguage and Essential Knowledge

Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term. Essential knowledge is a
detailed discussion of the topic or concept.

Generally Accepted Accounting Principles

The presence of reliable accounting information is the core of why economies flourish across the globe. From small business
to multi-national companies and even the government, accounting information is pivotal on how economic decisions are made.
The need to develop a standard is of paramount importance as companies prepare a single set of general-purpose financial
statements. Gearing in mind that users have both coinciding and conflicting different information needs. Users expect these
statements to present fair, transparent and complete financial operations.
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
This common set of standards and procedures is called generally accepted accounting principles (GAAP). It represents the
rules, procedures, practice and standards followed in the preparation and presentation of financial statement.
The term “generally accepted” means either that an authoritative accounting rule-making body has established a principle of
reporting in a given area or that over time a given practice has been accepted as appropriate because of its universal application.
Although principles and practices continue to provoke both debate and criticism, most members of the financial community
recognize them as the standards that over time have proven to be most useful. Thus, GAAP has substantial authoritative
support.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

International Scene
The standard-setting structure: The diagram below illustrates the structure within which
standards are set by the International Accounting Standards Board (IASB).

• The Monitoring Board is a group of capital market authorities and provides a formal link
between the Trustees and public authorities in order to enhance the public accountability of the
IFRS Foundation.

• The International Financial Reporting Standards (IFRS) Foundation is a not-for-profit

international organization responsible for developing a single set of high-quality, global
accounting standards, known as IFRS Standards. IFRS Standards are set by the IFRS
Foundation’s standard-setting body, the IASB.
- The Trustees of the IFRS Foundation are responsible for the governance and
oversight of the IASB, including the due process for the development of the
accounting standards.

• The International Accounting Standards Board (IASB) is the independent standard-setting

body of IFRS Foundation responsible for the development and publication of IFRS and for
approving Interpretations of IFRS as developed by the IFRS Interpretations Committee. It
replaces the International Accounting Standards Committee (IASC).

• The IFRS Interpretations Committee is the interpretative body of the International

Accounting Standards Board, which reviews implementation issues.

• The IFRS Advisory Council provides advice and counsel to the Trustees and the Board,
while the Board also consults extensively with a range of other standing advisory bodies and
consultative groups.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

• The Accounting Standards Advisory Forum (ASAF) provides an advisory forum in which
members can constructively contribute towards the achievement of the IASB’s goal of
developing globally accepted high-quality accounting standards.

• The Working Groups are a number of other formal advisory bodies like Capital Markets
Advisory Committee and Emerging Economies Group to mention a few that provide input on
IASB’s work and resources to consult.

The IFRS, with the acceptance of these organizations, is a global phenomenon in order to
achieve greater transparency and a higher degree of comparability in financial reporting.

Philippine Scene
The development of generally accepted accounting principles is formalized through the
Financial Reporting Standards Council (FRSC), which replaces the Accounting Standards
Council(ASC).

Adoption of International Financial Reporting Standards

• In July 2005, the Philippines adopted the Philippine Financial Reporting Standards, which
are fully converged with the International Financial Reporting Standards.

Philippine Regulatory Commission (PRC) performs two important functions:

• conducts and administers licensure examinations to aspiring professionals, and
• regulates and supervises the practice of the professions exercised in partnership with the forty-
three (43) Professional Regulatory Boards (PRBs) in the fields of health, business, education,
social sciences, engineering and technology.
- The Board of Accountancy (BOA) is a leg of PRC that regulates the accountancy
profession in the Philippines.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Financial Reporting Standards Council (FRSC)

• The FRSC was established by the Professional Regulatory Commission (PRC) to assist the
Board of Accountancy (BOA) in carrying out its power and function to promulgate accounting
standards in the Philippines. The FRSC’s main function is to establish generally accepted
accounting principles in the Philippines.

• The FRSC monitors the technical activities of the IASB and invites comments on exposure
drafts of proposed IFRSs as the IASB issues these.. When finalized, these are adopted as
Philippine Financial Reporting Standards (PFRSs). The FRSC similarly monitors issuances of
the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, which it
adopts as Philippine Interpretations–IFRIC. PFRSs and Philippine Interpretations–IFRIC
approved for adoption are submitted to the BOA and PRC for approval.

• The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist
the FRSC in establishing and improving financial reporting standards in the Philippines. The
role of the PIC is principally to issue implementation guidance on PFRSs. The PIC members
are appointed by the FRSC and include accountants in public practice, the academe and
regulatory bodies and users of financial statements.

Members of FRSC Composed of fifteen (15) members with a chairman and fourteen (14)
representatives from:
BOA, SEC, BSP, COA, BIR 5 (1 each)
Financial Executives Institute of the Phil. (FINEX) 1
PICPA: Public Practice, Commerce and Industry,
Academe/Education, Government 8 (2 each)
Total 14

Philippine Interpretations Committee (PIC)

• Assists FRSC in establishing and improving financial reporting standards in the Philippines.
The role is principally to issue implementation guidance on PFRSs.

Philippine Institute of Certified Public Accountants (PICPA)

• The PICPA is the only accredited national professional organization of CPAs in the
Philippines. Its primary functions established for the benefit and welfare of the CPAs, the
advancement of their profession, and the attainment of other professional ends.

Practice of Accountancy Profession

At present, Republic Act No. 9298, also known as “Philippine Accountancy Act of 2004” is
the law regulating the practice of accountancy in the Philippines.

In order to qualify to practice the accountancy profession, a person must first finish a degree in
Bachelor of Science in Accountancy and pass the government examination given by the Board
of Accountancy (BOA).

This computer-based examination is offered twice a year, one in May and another in October,
in authorized testing centers around the country.

Limitation and Accreditation to practice public Accountancy

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

The Securities and Exchange Commission shall not register any corporation organized for the
practice of public accountancy. As such, there will only be single practitioners and partnership
that will be registered in the Philippines.

A certificate of accreditation shall be issued and required to CPAs in the practice of public
accountancy. It is only upon complying with the rules and regulations set by BOA and
approved by PRC that such registrant has acquired a minimum of three years of meaningful
experience in any of the areas of public practice including taxation.

The accreditation issued shall be valid for three years and renewable every three years upon
payment of required fee and compliance with the required continuing professional development
(CPD).

Continuing Professional Development (CPD)

CPD refers to the inculcation and acquisition of advanced knowledge, skill, proficiency, and
ethical and moral values after the initial registration of the CPA for assimilation into
professional practice and lifelong learning.

Republic Act. No. 10912 is the law mandating and strengthening the continuing professional
development program for all regulated professionals, including the accountancy profession.
CPD raises and enhances the technical skill and competence of the CPAs.

CPD credit units and Exemption from CPD

The CPD credit units refer to the CPD credit hours required for the renewal of CPA licenses
and the accreditation of a CPA to practice the accountancy profession every three years. Under
the BOA Resolution, all CPA regardless of area or sector of practice shall be required to comply
with the 120 CPD credit units in a compliance period of three years.

Excess credit units earned shall not be carried over to the next three-year period, except credit
units earned for masteral and doctoral degrees. A CPA shall be permanently exempted from
CPD requirements upon reaching the age of 65 years for the renewal of CPA license. However,
not for accreditation to practice the accountancy profession.

CPAs generally practice their profession in three main areas, namely:

1.Public Accounting or Public Accountancy

The field is composed of individual practitioners, small accounting firms and large
multinational organizations that render independent and expert financial services to the public.
- Public accountants usually offer three kinds of services, namely auditing, taxation and
management advisory services.
- As such, large multinational accounting firms have separate division on for each of
these services.
- Auditing is a primary service. It is the examination of financial statements by the
independent certified public accountant to express an opinion as to the fairness with
which the financial statements are prepared. Further, it is the attest function of
independent CPAs. Primary users (creditors and investors) place considerable reliance
on audited FS on making economic decisions, and Other users like Bureau of Internal
Revenue (BIR) requires audited FS in the filing of the annual income tax return.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

- Taxation service includes the preparation of annual income tax returns and the
determination of tax consequences of certain proposed business endeavors. CPAs
frequently represents the client in tax investigations. Such service requires thorough
familiarity with the tax laws and regulations and updated with changes in taxation law
and court cases concerned with interpreting taxation law.
- Management Advisory Services have become increasingly important in recent
years. Such service has no precise coverage but is used generally to refer to services to
clients on matters of accounting, finance, business policies, organization procedures,
product costs, distribution and many other phases of business conduct and operations.

2.Private Accounting
- CPAs who are employed on business entities in various capacity as accounting staff,
chief accountant, internal auditor and controller (highest accounting officer). The
primary objective of a private accountant is to assist management in planning and
controlling the entity’s operation like maintaining the records, producing the financial
reports, preparing budgets and controlling and allocation resources of the entity. It also
has the responsibility of determining various taxes the entity is obliged to pay.

3.Government Accounting
- Encompasses the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of government
funds and property and interpreting the results thereof. Its focus is the custody and
administration of public funds. CPAs are employed in many branches of the
government, more particularly Bureau of Internal Revenue (BIR), Commission on
Audit(COA), Department of Budget and Management(DBM), Securities and
Exchange Commission(SEC) and Bangko Sentral ng Pilipinas(BSP).

The diagram below are the Council for Accreditation and Quality Control of Practicing
CPA’s:

• Securities and Exchange Commission (SEC) – Accredits practitioners who audit publicly
listed companies, companies with at least Php50 million worth of assets and companies with
secondary licenses.

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College of Accounting Education

3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

• Bangko Sentral ng Pilipinas (BSP) – Accredits practitioners who audit banks and other
financial institutions
• Insurance Commission (IC) – Accredits practitioners who audit insurance companies
• Board of Accountancy (BOA) – accredits CPAs in public practice with basic requirements.

Self-Help: You can also refer to the following sources to help you further understand the
lesson.

Valix et al. (2019). Intermediate Accounting 1

International GAAP (2018). Generally Accepted Accounting Practice under Internation

Financial Reporting Standards. EY. Wiley

Kieso, Donald E., Weygandt, Jerry J., Warfield, Terrey D., Young, Nicola M., Wiecek, Irene
M.

McConomy, Bruce J. (2016). Intermediate Accounting. John Wiley & Sons Canada, Ltd.

Let’s Check (ULO 1, 2 & 3)

Exercise 1
After reading all the terms, principles and concepts on the accountancy profession, let us check
your understanding on these. In the space provided, write the term/s being asked in the
following statements:

_______________ 1. The standard-setting body in the international scene at the present time.

_______________ 2. The law regulating the practice of accountancy in the Philippines.

_______________ 3. The body authorized by law to promulgate rules and regulations affecting
the practice of the accountancy profession in the Philippines.

_______________ 4. The Securities and Exchange Commission can register any corporation
organized for the practice of public accounting. True or False?

_______________ 5. Accountants employed in entities in various capacity as accounting staff,

chief accountant or controller.

_______________ 6. The FRSC is created by PRSC upon recommendation of BOA to assist

BOA in carrying out its powers and functions under RA No.9298. True or False?

_______________ 7. The chairman and members of FRSC are appointed by PRC upon
recommendation of BOA and shall have a term of three years renewable for another term. True
or False?

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

_______________ 8. The Continuing Professional Development is required for both renewal

of CPA license and accreditation to practice the accountancy profession. True or False?

_______________ 9. Accredits practitioners who audit publicly listed companies, companies

with at least Php50 million worth of assets and companies with secondary licenses.

_______________ 10. Assists FRSC in establishing and improving financial reporting

standards in the Philippines. The role is principally to issue implementation guidance on
PFRSs.

Let’s Analyze (ULO 1)

Activity 1
Some argue that having various organizations establish accounting principles is wasteful and
inefficient. Rather than mandating accounting rules, each company could voluntarily disclose
the type of information it considered important. In addition, if an investor wants additional
information, the investor could contact the company and pay to receive the additional
information desired. Comment on the appropriateness of this viewpoint (100 words).
___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

In a Nutshell (ULO 1,2,&3)

Activity 2

Gerlie Escudero, a new accounting staff, is confused because of the complexities involving
accounting standard-setting. Specifically, she is confused by the number of bodies issuing
financial reporting standards of one kind or another and the level of authoritative support that
can be attached to these reporting standards. Gerlie decides that she must review the
environment in which accounting standards are set, if she is to increase her understanding of
the accounting profession.

Instructions (50 words each)

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1. Gerlie asks for guidance regarding authoritative support. Please assist her by explaining
what is meant by authoritative support.
2. What authority for compliance with GAAP has existed throughout the history of rule-
making?

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

Evaluation Rubric

Criteria VERY GOOD FAIR (2) UNACCEPTABLE WTS (3) TOTAL

(3) (1) POINTS
Accounting Especially Accurate but Inaccurate use of _____ X
Concepts skillful limited use accounting 5
identification of concepts
and analysis accounting
of accounting concepts
concept
Assertions Fully Assertions Lack of assertions, _____ X
developed and exist but are development 5
supported not and/or support
assertions developed or
supported
adequately

Structure Particularly Paragraph Lack of focus _____ X

clear ideas flow and 5
with logical transitions
transitions are adequate
throughout

Language Language Minor errors Serious errors in _____ X

especially in mechanics. Lack 5
clear and mechanics.

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concise with Sentences on clarity and

flawless could be concision.
mechanics more
effective

Q&A List

Do you have any question for clarification?

Questions/Issues Answers

1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

Keywords Index

generally accepted Financial Reporting Continuing Professional

accounting principles Standards Council (FRSC) Development (CPD)
International Accounting Auditing and Assurance Republic Act. No. 10912
Standards Board (IASB) Standards Council (AASC)
Monitoring Board Philippine Regulatory Public Accounting
Commission (PRC)
International Financial Board of Accountancy Auditing
Reporting Standards (BOA)
Foundation
International Financial International Financial Taxation
Reporting Standards (IFRS) Reporting Interpretations
Committee (IFRIC)
IFRS Interpretations Philippine Interpretations Management Advisory
Committee Committee (PIC) Services
IFRS Advisory Council Philippine Institute of Private Accounting
Certified Public Accountants
(PICPA)
Accounting Standards Republic Act No. 9298 Government Accounting
Advisory Forum (ASAF)
Financial Reporting Philippine Institute of
Standards Council (FRSC) Certified Public Accountants
(PICPA)
Accounting Standards Republic Act No. 9298
Council(ASC).

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CONCEPTUAL FRAMEWORK

Big Picture in Focus: ULO 4-6

ULO 4: Discuss the nature, purpose and usefulness of a conceptual framework

ULO 5: Explain the qualitative characteristics of accounting information

ULO 6: Compare the basic elements of financial statements and underlying

assumptions

Metalanguage

Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.

Users – it refers to primary users and other users. Primary users refer to existing and potential
investors, lenders and other creditors. In contrast, other users refer to employees, customers,
governments and their agencies, and the public.

Financial position - information about the entity’s economic resources(assets) and the claims
(liabilities and equity) against the reporting entity at a particular moment in time.

Liquidity - is the availability of cash in the near future to cover currently maturing obligations.

Solvency - is the availability of cash over the long term to meet financial commitments when
they fall due.

Financial Performance - comprises revenue, expenses and net income or loss for a period of
time.

Qualitative characteristics - are the qualities or attributes that make financial accounting useful
to the users.

Fundamental qualitative characteristics - relate to the content or substance of financial

information. It has two characteristics namely, relevance and faithful representation.

Relevance - is the capacity of the information to influence a decision.

Materiality – is also known as the doctrine of convenience.

Faithful representation – the financial reports represent economic phenomena or transaction in

words and number.
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Completeness - requires that relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. It is the result of principle of adequate
disclosure.

Standard of adequate disclosure – all significant and relevant information leading to the
preparation of financial statements shall be clearly reported.

Neutrality – the information is free from bias.

Free from error – means that there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has been selected and
applied with no errors in the process.

Enhancing Qualitative Characteristics – relate to the to the presentation or form of the financial
information.

Verifiability- means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful
representation.

Comparability – means the ability to bring together the points of likeness and differences.

Consistency – refers to the use of the same methods for the same items, either from period to
period within a reporting entity or in a single period across entities.

Understandability – requires that financial information must be comprehensible or intelligible

if it is to be most useful.

Timeliness – means that financial information must be available or communicated early enough
when a decision is to be made.

Elements of financial statements – refer to the quantitative information reported in the balance
sheet and income statement(IS).

Probable means that the chance if the future economic benefit arising is more likely rather than
less likely.

Asset - is recognized in the balance sheet when it is probable that the future economic benefits
will flow to the entity and the asset has a cost or value that can be measured reliably.

Liability - is recognized in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the
amount at which the settlement will take place can be measured reliably.

Equity - is the residual interest in the assets of the entity after deducting all its liabilities.

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Income - is recognized in the income statement when an increase in future economic benefits
related to an increase in an asset or a decrease of a liability has arisen that can be measured
reliably.

Expenses - are recognized in the income statement when a decrease in future economic benefits
related to a decrease in an asset or an increase of a liability has arisen that can be measured
reliably.

Losses - represent other items that meet the definition of expenses and may, or may not, arise
in the course of the ordinary activities of the entity.

Recognition - is a term which means the reporting of an asset, liability, income or expense on
the face of the financial statements of an entity.

Revenue - arises in the course of ordinary regular activities like sales, fees, interest, dividends,
royalties and rent.

Gains - arises other than the course of ordinary regular activities like gains include gain from
disposal of noncurrent assets and unrealized gain on trading securities to mention a few.

Measurement – is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognized and carried in the statement of financial position
and income statement.

Historical cost – is the amount of cash or cash equivalent paid or the fair value of the
consideration given to acquire an asset at the time of acquisition.

Current cost – is the amount of cash or cash equivalent that would have to be paid if the same
of equivalent asset was acquired currently.

Realizable value – is the amount of cash or cash equivalent that could currently be obtained by
selling the asset in an orderly disposal.

Present value – is the discounted value of the future net cash inflows that the asset is expected
to generate in the normal course of business.

Accounting assumptions – are the basic notion or fundamental premises on which the
accounting process is based. It is also known as postulates.

Going Concern or continuity assumption – in the absence of evidence to the contrary, the
accounting entity is viewed as continuing in operation indefinitely.

Accounting entity- the entity is separate from the owners, managers, ad employees who
constitute the entity.

Time period – requires that the indefinite life of an entity is subdivided into accounting periods
which are usually of equal length for the purpose of preparing financial reports on financial
position, performance and cash flows of an entity.

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Monetary unit – assumes that transactions and events are measured in terms of monetary unit
which are both stable and dependable.

Essential Knowledge

Financial statement users face challenging questions on how to recognize and measure
financial items. To address these concerns, financial accounting and reporting relies on
conceptual framework. To be useful, rule-making should build on and relate to an established
body of concept. A strong and reliably developed framework ensures a coherent set of
standards over time and solve more quickly, new and emerging practical problems.

Now, everyone agrees that accounting needs a framework and in this context, a conceptual
framework that will help guide in the development of standards.

As a reminder, the Conceptual Framework is not a standard, and none of the concepts override
the concepts or requirements in any standard. The purpose of the Conceptual Framework is to
assist the Board in developing standards, to help preparers develop consistent accounting
policies where there is no applicable standard in place and to assist all parties to understand
and interpret the standards.

On March 29,2018, IASB issued a revised conceptual framework for financial reporting. It
comprised of three levels to which the first level is the objective of financial reporting, the
second level is the qualitative characteristics of accounting information and elements of
financial statements while the third level is the recognition, measurement and disclosure
concept.

The first level is the purpose of financial reporting and the second level are both the qualitative
characteristics which makes the financial statements useful and the elements of financial
statements(Assets, Liabilities, Equity, Income and Expenses). Further, the third level is used in
establishing and applying accounting standards and the specific concepts to implement the
objective. These concepts include assumptions, principles, and a cost constraint that describe
the present reporting environment.

Purpose of Conceptual Framework

1. To assist the FRSC in developing accounting standards.
2. To assist preparers of financial statement in applying accounting standards and in
dealing with issues not yet covered by GAAP.
3. To assist the FRSC in the review and adoption of IFRS.
4. To assist in the users of financial statements in interpreting the information contained I
the financial statements.
5. To assist auditors in forming an opinion as to whether financial statements conform
with Philippine GAAP.
6. To provide information to those interested in the work of the FRSC in the formulation
of PFRS.
The objective of financial statements is the foundation of the conceptual framework. Other
aspects of the framework flow logically from the objective. Those aspects of the framework
help to ensure that financial reporting achieves its objective.

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Objective of Financial Reporting

The objective of financial reporting forms the foundation of the Conceptual Framework. The
objective is the “why”, purpose or goal of accounting.

The objective of general-purpose financial reporting is to provide financial information about

the reporting entity that is useful to present and potential equity investors, lenders and other
creditors in making decisions about providing resources to the entity.

Users of Financial Information

The users of financial information may be classified into two, namely:
a. Primary users –Existing and potential investors-are concerned with risk inherent in
and return provided by their investors. Investors need information to help them
determine whether they should buy, hold or sell. Shareholders are interested to assess
the ability of the entity to pay dividends. While existing and potential lenders and other
creditors are interest to determine whether loans, interest thereon and other amounts
owing to them will be paid when due.
b. Other users –Employees are interested about the stability and profitability of the entity
which enables them to assess the ability of the entity to provide remuneration,
retirement benefits and employment opportunities. Customers have interest about the
continuance of an entity especially when they have long-term involvement with or are
dependent on the entity. Government and their agencies are interested in the allocation
of resources and thereafter the activities of the entity. These agencies require
information to regulate the activities of the entity, determine taxation policies and as a
basis for national income and similar statistics. Public are interest on information about
the trend and the range of its activities.

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Specific objectives of financial reporting

The overall objective of financial reporting is to provide information that is useful for decision
making. Specifically, the Conceptual Framework states the following objectives of financial
reporting:
a. To provide information useful in making decisions about providing resources to the
entity.
b. To provide information useful in assessing the cash flow prospects of the entity.
c. To provide information about entity resources, claims and changes in resources and
claims.
Economic decisions is like the decisions made by investors on whether to buy, hold or sell.
Further, lender and other creditors needs information on whether to provide or settle loans and
other forms of credit.

Assessing cash flow prospects for the investors depend on the returns that they expect from
the investment , for example, dividends. Similarly, for the creditors on the principal and
interest payments or other returns that they expect. Consequently, financial reporting should
provide information that is useful in assessing the amount, timing and uncertainty of prospects
for future net cash inflows to the entity.

Economic resources and claims

General purpose financial reports provide information about the financial position of a
reporting entity.
This position can help users identify the entity’s financial strength and weakness. Further, it
will help users to assess the entity’s liquidity, solvency and the need for additional financing.

Information about priorities and payment requirements of existing claims can help users to
predict how future cash flows will be distributed among those with a claim against the reporting
entity.

Changes in economic resources and claims

Financial reports also provide information about the effects of transaction and other events that
change the economic resources and claims. This change result from financial performance and
from other events or transactions such as issuing debt or equity instruments.

Performance is the level of income earned by the entity through the efficient and effective use
of its resources. It is also known as results of operations and is portrayed in the income
statement and statement of comprehensive income.

Information about past financial performance is helpful in predicting the future returns on the
entity’s economic decisions. Information during a period is useful in assessing the entity’s
ability to generate future cash inflows from operations.

Limitations of Financial Reporting

a. General purpose financial reports do not and cannot provide all of the information that
existing and potential investors, lenders and other creditors need.
b. General purpose financial reports are not designed to show the value of an entity but
the reports provide information to help the primary users estimate the value of the
entity.

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c. General purpose financial reports are intended to provide common information to users
and cannot accommodate every request for information.
d. To a large extent, general purpose financial reports are based on estimate and judgment
rather than exact depiction.
Qualitative Characteristics
The second level provides conceptual building blocks that explain the qualitative
characteristics of accounting information and define the elements of financial statements . That
is, the second level forms a bridge between the why of accounting (the objective) and the how
of accounting (recognition, measurement, and financial statement presentation).

For an information to be useful, it needs to have certain qualitative characteristics. Presented

in the illustration below, qualitative characteristics are either fundamental or enhancing ,
depending on how they affect the decision-usefulness of information.

Fundamental Qualitative Characteristics

There are two fundamental characteristics that should always be achieve each time one prepares
the financial statement, namely: relevance and faithful representation. Both are necessary for
the information to be useful. Neither a faithful representation of an irrelevant phenomenon nor
an unfaithful representation of a relevant phenomenon helps users make good decisions.

Relevance: Predictive Value and Confirmatory Value

Relevance is one of the two fundamental qualities that make accounting information useful for
decision-making. At the end of the day, the financial statement should be relevant. If it is not
relevant, then no one will use them. It should be able to forecast what can potentially happen
in the future, it should have predictive value. It should be able to confirm what has happened
in the past, it should have confirmatory value. The moment the financial statement has these
values, it can actually be used by someone so they are relevant. We forecast mainly on, Is the
information that the company is producing capable of making a difference in the decision
making. Without that information given, would the investor or a creditor have change their
mind before using the information or after using the information would change their mind, the
information contributed to the decision process. Therefore, they are relevant.

Materiality is a company-specific aspect of relevance. Information is material if omitting it or

misstating it would influence decisions that users make on the basis of the reported financial
information. An individual company determines whether information is material because both

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the nature and/or magnitude of the item(s) to which the information relates must be considered
in the context of an individual company’s financial report.

For example, What will happen to San Miguel Corporation or to a Sari-Sari Store when these
companies suffered a net loss of P10,000. Imagine the impact of this loss to these companies.
It will be nothing to a conglomerate company but it would be a disaster to a small business or
shall I say a “Sira-Sira Store”.

Materiality is a practical rule in which strict compliance to GAAP is not required when the
items are not significant enough to affect the evaluation, decision, and fairness of the financial
information. The relevance of information is affected by its nature or materiality. In other
words, materiality is the subquality or the threshold connected closely to relevance. As such,
Information is immaterial, and therefore irrelevant, if it would have no impact on a decision-
maker. In short, it must a difference or a need not report it.

Faithful Representation
Faithful Representation is the second fundamental characteristic that makes the information
useful to the users. To be useful, it has to faithfully represent the phenomena what it purport
to represent. As such, information provided should match what has happened or occurred.

For example, if the representation expense portrayed only P120,000 when it should have been
P195,000 then it fails to faithfully present the correct expenses. On one hand, a company may
hide the said expense and record it as part of miscellaneous expense when it is material enough
to be recognize as a representation expense just to avoid the heat from BIR.

To have faithful representation, it should have the quality of completeness, neutrality and free
from error. Completeness necessitates that all necessary/relevant information should be
provided in order to be useful to the user. An omission of which can cause a misleading or false
information therefore detrimental to the users as they make decisions. For example, an ongoing
litigation as of the year-end but before the FS issuance, the company is required to pay a
massive amount as a result of a defective product. Another example is the disclosure of cash
component, one would understand whether the company is simply keeping more cash on hand
rather than in bank or it could be in money market instrument. Thus, to be complete the
financial statement should go hand and in hand with notes to financial statement since the
purpose of the notes is to provide the necessary information required by the PFRS.

Neutrality portrays that the information provided will not favor one party over the other. For
instance, it should not favor the company over the creditor. Like a deliberate increase of assets
or income and decrease of liability or expenses to portray a liquid, stable and even profitable
borrower in order to sway the lender to grant the loan. On one hand, it must not also forcefully
decrease income and increase expenses to be conservative as this is also a mistake. To be
neutral, it should embrace the principle of fairness.

Faithful representation does not mean that information is perfectly accurate in all respect. How
can it be? When the preparers use estimate of various type to measure the elements. However,
Free from error would portray that information is describe clearly and accurately as being an
estimate, the nature and limitations of the estimating process are explained, and no errors have
been made in selecting and applying an appropriate process for developing the estimate. For

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example, the determination of depreciation expense that requires the useful life and salvage
value estimation by using the management’s best judgement.

Applying the fundamental qualitative characteristics

To be useful, an information must be both relevant and faithfully represented. Preparers cannot
choose one over the other, it has to be both. The most efficient and effective process in applying
the fundamental characteristics are as follows:

(1) Identify an economic phenomenon that is potentially useful to the users.

(2) Identify the type of information about that phenomenon that would be most relevant if
it is available and can be faithfully represented.
(3) Determine whether that information is available and can be faithfully represented.
Enhancing Qualitative Characteristics
Enhancing qualitative characteristics are complementary to fundamental qualitative
characteristics. These characteristics will help the users determine which is more useful from
less useful information. It is just like any complete meal, the need to have some desserts. For
health buff, one would go for fruits but for the sake of remembering these characteristics we
may call it VCUT (known junk food) to finish the meal. Verifiability, Comparability,
Understandability and Timeliness the four enhancing characteristics that will help determine
which of two ways should be used to depict a phenomenon if both are considered equally
relevant and faithfully represented.

Verifiability implies consensus. It occurs when two independent measurers, using same
methods, obtain similar results. Even if the information is relevant and faithfully represented if
it is not verifiable by the users as to its veracity then it is useless. Verifiability occurs in this
two situations.
1. Two independent auditors conduct physical count on the inventory of Nike and arrives
at the same physical quantity (Direct verification).
2. Two independent auditors compute the inventory value using the FIFO inventory
valuation. Verification can occur by checking the quantity and cost (input value) and
recalculating the ending inventory (output) using the same method. (Indirect
verification)
Comparability
Unlike other characteristics comparability does not relate to a single item but it relates to two
or more to compare. It identifies the real similarities and differences within an entity (horizontal
comparability or intracomparability) between and across companies (dimensional
comparability or intercomparability). Even if the information is relevant and faithfully
represented but if it cannot be used to compare one from the other by the users then it is useless

For simplicity’s sake, comparing two persons using the same glutathione and be able to
determine who is whiter among the two, considering how it was used and how these two
protected themselves from the sun. Or like comparing which among the company is more
profitable when both are using similar principles/methods.
Implicit with comparability is the principle of consistency. Consistency is there when the
company applies the same accounting treatment to similar event, from period to period. It is
just like determining the efficacy of a dandruff shampoo if it is used consistently, like every
day. Then one could conclude if the shampoo is effective or not. It is the same for a company

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of using similar method like FIFO for inventories or straight line method for depreciation for
one year, in the next year, in the succeeding year and so on.

Comparability is the goal and consistency helps achieve that goal. However, it must be noted
that it is inappropriate to remain the same when there are there are better and acceptable
alternative exist. There should be full disclosure of the change and it’s effect thereof.

Understandability
For information to be useful, there should be a link(understanding) between the users and their
decisions. One could not just discard a phenomena simply because it is complex and it cannot
be reduced to simple terms. It is expected that users have a reasonable knowledge of business
and economic activities and who review and analyze the information diligently.

For instance, Aboitiz Group of Companies release an interim report that shows a significant
decline. Though the information is both relevant and faithfully represented, two users may have
different actions. One could have understood the impact and decided to sell while other one
simply hold his share and was surprised later on when the company declared smaller dividends
and a decline in share price. Hence, even if the information is relevant and faithfully
represented but if not understood by the users then it is useless.

Timeliness
Timeliness is having information available before it losses its capacity to influence decision.
Basically, the older the information the less useful. Though there are some information that
may prove to be timely even after the reporting period as this will help users identify and assess
trends.

Let’s take for example, the manager needs to decide whether to hire additional staff with the
increasing demand. Unfortunately, the financial statement was not ready and the manager hired
additional staff anyway. When the FS was presented, the demand was just superficial and the
company cannot afford to sustain the additional cost. Hence, the user made a mistake in its
decision because the FS came too late when it should have been available in time to make an
informed decision.

Applying the enhancing qualitative characteristics

Enhancing qualitative characteristics must be considered up to the hilt. However, even if the
FS has all the enhancing characteristics it does not make the useful if it is not relevant and
faithfully represented. Applying enhancing characteristics do not follow a prescribed process.
For example, minimizing comparability by adopting a new standard may be valuable to
improve relevance and faithful representation in the longer term. On one hand, providing the
necessary disclosure to partially compensate noncomparability.

Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed the elements of financial statements. The elements in determining the financial position
in the balance sheet are assets, liabilities and equity while the elements in determining the
performance in the income statement are income and expenses.

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Recognition of elements
There are four main recognition principles used as basis in the preparation and presentation of
financial statements, as follows:
1. Asset recognition principle
2. Liability recognition principle
3. Income recognition principle
4. Expense recognition principle
Asset recognition principle
Asset is recognized in the balance sheet when it is probable that the future economic benefits
will flow to the entity and the asset has a cost or value that can be measured reliably. The
future economic benefit is the potential to contribute cash and cash equivalents whether directly
or indirectly to the entity. For instance, classroom used in the conduct of school operation is
an asset to the institution since the student will pay in a form of tuition fees which will increase
company’s cash flows.

Cost principle in inherent in asset recognition. Cost of the asset in a cash transaction, is
equivalent to cash payment. In a noncash or an exchange transaction, cost is equal to fair value
of the asset given or received whichever is clearly evident. If there is none, the cost is equal to
the carrying amount of the asset given. These cost may be the same all throughout, may be
changed by depreciation, amortization or writeoff, or maybe shifted to other categories like
raw materials to finished goods.

Liability recognition principle

liability is recognized in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the
amount at which the settlement will take place can be measured reliably. It is important that
that the company recognizes its present obligation which maybe legal or constructive
obligation.

Legal would mean as a consequence of a binding contract or statutory requirement like a

company will recognize accounts payable when the goods is purchased on account or income
tax payable when the company owed the government whenever output tax is higher than input
tax.

On one hand, constructive would mean a company will recognize its obligation when the
company known for advocating social responsibility and unfortunately pollutes the river
nearby as a result of its operation. Hence, even without the sanction from the government the
company takes upon itself to take care of the environment.

The following example are the ways to settle the liability:

1. Payment of cash
2. Transfer of noncash assets
3. Provision of services
4. Cancellation of the liability for another liability
5. Transfer of liability into equity.
Income recognition principle
Income encompasses revenue and gains. Basic Income recognition means income shall be
recognized when earned.

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Income is recognized when it is probable that an increase in future economic benefits related
to an increase in an asset or a decrease in a liability has arisen and that increase in economic
benefits can be measured reliably. It means that recognition of income occurs simultaneously
with the recognition of increases in assets or decreases in liabilities (for example, the net
increase in assets arising on a sale of goods or services or the decrease in liabilities arising from
the waiver of a debt payable).

The italic requirement above is present at the point of sale which is usually the point of delivery.
It is at this point where there is a transfer of risk and rewards from the seller to the buyer.

Exceptions at the point of sale:

1. Installment method – revenue is recognized at the point of collection;
(collections x gross profit rate = revenue)
2. Cost recovery method or sunk cost method – similar to installment method however all
collections are first applied to cost of merchandise.
3. Percentage of completion method – Contract revenue and contract expense are both
recognized based on the stage of completion of the construction contract.
4. Production method – revenue is recognized at the point of production which is
applicable to agricultural, forest and mineral products.
Other income recognition:
1. Interest revenue – shall be recognized on a time proportion basis that takes into account
effective yield on the asset.
2. Royalties – shall be recognized on an accrual basis in accordance with the substance if
the relevant agreement.
3. Dividends – shall be recognized when the shareholder’s right to receive payment is
established
(date of declaration)
4. Installation fees – shall be recognized over the period of installation based on the stage
of completion.
5. Subscription revenue – shall be recognized on a straight-line basis over the subscription
period.
6. Admission fees – shall be recognized when the event takes place.
7. Tuition fees – shall be recognized over the period in which the tuition is provided.
Expense recognition principle
Basic expense recognition principle means that expenses are recognized when incurred.

Expenses are recognized when it is probable that a decrease in future economic benefits related
to decrease in an asset or an increase in liability has occurred and that the decrease in economic
benefits can be measured reliably.

This concept is the application of the matching principle. Further, matching principle has three
types, namely:
1. Cause and effect association
2. Systematic and rational allocation
3. Immediate recognition

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Cause and effect association

This is the strict matching of cost with revenue concept. There is direct or clear
association of the expense with specific revenue. Wherein, inventory is recognized as
asset when it is still unsold, once it is sold, there is simultaneous recognition of expense
(Cost of Sales) and revenue (Sales). Other examples are doubtful accounts, warranty
expense and sales commissions.

• Merchandise Inventory
Unsold • (asset; dr)

• Cost of Sale vis-a-vis Sales

Sold • (expense;dr) (Revenue; cr)

Systematic and rational allocation

These costs are expense by simply allocating over the periods benefited. Unlike
cause and effect association, there is no direct association of expense and revenue for
systematic and rational allocation. As such, the assumption is that benefits are expected to arise
several accounting periods which is why expenses are recognized on the basis of systematic
and allocation procedures. The following examples are: depreciation for property, plant and
equipment; amortization of intangibles and allocation of prepaid rent, insurance and other
prepayments.

Immediate recognition
These costs are expense outright because of uncertain future economic benefits
or difficulty of associating costs with future revenue. The expense is recognized immediately
because there is no future economic benefit and the cost incurred does not qualify or ceases to
qualify for recognition as an asset. The following example are officer’s salaries and most
administrative expenses, advertising and most selling expenses. Many losses are immediately
recognized because they are not directly related to revenue like loss on lawsuit; on inventory
writedown; on sale of building, investment...; and even casualty loss.

Measurement of elements
There are four measurement bases or financial attributes, namely:
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
For instance, let us likened this to the cellphone that you are holding right now. Assuming you
have Iphone 7 128gb, when you both this in 2016 it cost you P43,990 and that is precisely the
historical cost. It is also known as past purchase exchange price and it is the measurement basis
most commonly adopted.

Assuming further that, you do not have enough money to pay your tuition this time (2020) and
you need to pay as well your land lady. As a result, you decided to sell your phone but you can

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only sell it for P9,900 and that my friend is the Realizable value. This is also known as current
sale exchange price.

On one hand, let’s say it is still 2020 and want to buy a brand new iphone 7 128gb at Power
Mac Center which is being sold and bought for P19,000. The said amount is called Current
cost. This is also known as current purchase exchange price.

To add, what if you can only use this for only four years? Considering how you normally use
the phone (wear and tear plus a few drops here and there) and magically, you were able compute
that the value you’ve actually used/max out on that phone is only P13,000 and not P19,000.
That P13,000 is actually the present value of the phone. This is also known as future exchange
price.

Underlying Assumptions
The Conceptual Framework for Financial Reporting is based on the assumption that the
business is a going concern and will continue in operation for the foreseeable future. Hence, it
is assumed that the entity has every intention of making good in their business operations and
prosper.

Let’s take for example from a sari-sari store to mini-grocery to a convenience store and even a
super market. Why not? Dream big as they say. No one in their right mind would think of
investing (money, time and effort) and thinking of closing it down in a week’s time.

Since the business is viewed to operate indefinitely, it is the very foundation of cost principle.
Hence, assets are measured at cost and market value are ignored. Once, the business suffers
so much losses and it decided to stop in its operation then the going concern postulate is
abandoned and that means changing the cost principle to realizable value or could be market
value.

Though, framework only mentioned going concern assumption there are basic assumptions
implicit in the accounting. The following are: Accounting entity, time period and monetary
unit.

Accounting entity
Transactions of the entity is separate and distinct from its owners. It means Davao Light
payment for the owner’s home paid by the business is not the expense of the business operations
but could be viewed as a drawing of the owners. Similarly, if the owner operates two businesses
like Sari-Sari store and Water refilling station, salary paid “tindera” is an expense of the Sari-
Sari store and not of the other. “Ija-Ija Ahu-Ahu” as what Boholano would say, it squarely
applies to this concept. Each business is an independent accounting entity. The purpose is to
have fair presentation of financial statements.

Time Period
Understanding what happened to the business whether it be a complete success or a failure is
captured when the business stops to operate and is liquidated. However, users of financial
information cannot wait that long and needs timely information (periodic reports) for making
economic decision.

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Periodic reports entails one year whether it be calendar year or a natural business year which
is referred as an accounting period. A calendar year is a twelve-month period that ends on
December 31. While, a natural business year is a twelve-month period that ends on any month
besides December typically, lowest month or experiencing lean/slack season like resorts.

Monetary Unit
The monetary unit assumption has two aspects namely, quantifiability and stability of peso.
Quantifiability implies that elements are measured in one common unit of measure, for this
country the Philippine peso. It is very awkward for the user to see in the report, the following
items: cash & cash equivalents ( ) ; inventory ( ) and Property, Plant and Equipment( ).

On the other hand, Stability of peso pertains to purchasing power that is constant and any
difference are considered to be insignificant therefore ignored. The accounting function is
nominal only and does not consider the purchasing power. But when the amount is found to be
unbelievable e.g. a 100 square meter both in 1940 at P20,000 and remain unchanged in the
2020 financial report, then it is not faithfully represented. The entity may use the revaluation
model policy since stability of peso over time is not necessarily valid.

Cost constraint on useful information

In providing useful information, companies must consider an overriding factor that limits
(constraint) the reporting and this is referred as cost constraint. Benefit should exceed the cost
in obtaining information. The difficulty in cost-benefit analysis is that cost and more so with
benefit are not always evident or measurable. Unfortunately, there is no hard and fast rule in
determining benefits as the evaluation of cost constraint is substantially based on professional
judgement.

Self-Help: You can also refer to the following sources to help you further understand the
lesson.

Valix et al. (2019). Intermediate Accounting 1

International GAAP (2018). Generally Accepted Accounting Practice under Internation

Financial Reporting Standards. EY. Wiley

Kieso, Donald E., Weygandt, Jerry J., Warfield, Terrey D., Young, Nicola M., Wiecek, Irene
M.

McConomy, Bruce J. (2016). Intermediate Accounting. John Wiley & Sons Canada, Ltd.

https://www.ey.com/Publication/vwLUAssets/ey-applying-conceptual-framework-
april2018/$FILE/ey-applying-conceptual-framework-april2018.pdf

Let’s Check (ULO 4,5 & 6)

Exercise 2

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After reading all the terms, principles and concepts on conceptual framework, let us check your
understanding on these. In the space provided, write the term/s being asked in the following
statements:

1. As regards the Framework, which of the following statements is true?

I. The Framework is a reporting standard
II. In cases of conflict, the requirements of the Framework prevail over those of
the relevant IFRS
a. I only c. Both I and II
b. II only d. Neither I nor II

2. Which is purpose of the Conceptual Framework?

a. To assist the IASB to develop IFRS based on consistent concepts.
b. To assist all parties to understand and interpret the standards.
c. To assist preparers to develop consistent accounting policy when no standard applies to a
particular transaction or when standard allows a choice of accounting policy.
d. All of these can be considered a purpose of Conceptual Framework.
3. Which of the following is not a purpose of the conceptual framework of accounting?
a. To provide specific guidelines for resolving situations not covered by existing accounting
standards.
b. To assist auditors in forming an opinion as to whether financial statements conform with
GAAP.
c. To assist users in interpreting the information contained in financial statements.
d. To provide parties interested in the work of the FRSC with information about its approach
in formulating PFRS.
4. In the Conceptual Framework for financial Reporting, what provides “the why” (i.e., the
purpose) of accounting?
a. Elements of financial statements
b. Objective of financial reporting
c. Qualitative characteristics of accounting information
d. Recognition, measurement and disclosure concepts such as assumptions, principles and
constraints

5. Financial accounting is the area of accounting that emphasizes reporting to

a. Management
b. Regulatory authorities
c. Internal auditors
d. Creditors and investors
6. These are the attributes that make the information provided in financial statements useful
to users.
a. Qualitative characteristics
b. Quantitative characteristics
c. Underlying assumptions
d. Qualitative and quantitative characteristics
7. Information has the quality of relevance when
I. It influences the economic decisions of users by helping them evaluate past, present or
future events or confirming or correcting their past evaluations.

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II. It is free bias and error and can be depended upon by users to represent faithfully that
which it either purports to represent or could reasonably be expected to represent.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
8. If there is undue delay in the reporting of information, it may lose its
a. Relevance
b. Relevance and reliability
c. Reliability
d. Usefulness
9. The quality of information that means the numbers and descriptions match what really
existed or happened is _________________
a. Relevance
b. Neutrality
c. Completeness
d. Faithful representation

10. Proponents of historical cost ordinarily maintain that in comparison with all other valuation
alternatives for general purpose financial reporting, statements prepared using historical
costs are more _____________
a. Relevant
b. Verifiable
c. Conservative
d. Indicative of the entity’s purchasing power

11. According to the IASB conceptual framework, both timeliness and understandability are
a. Enhancing qualitative characteristics of useful financial information
b. Fundamental what items to include in the financial statements
c. Characteristics of relevance
d. Characteristics of faithful representation

12. Which of the following is true regarding the cost-benefit constraint?

a. Benefits are more difficult to quantify than costs
b. The IASB seeks input on costs and benefits as part of due process
c. Benefits to preparers may include access to capital at a lower cost
d. All of the choices are correct

13. Users are assumed to have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information with reasonable diligence.
a. Relevance c.Understandability
b. Reliability d.comparability
14. Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics. These broad
classes are termed as the
a. Elements of financial statements c.Accounting constraints
b. Features of accounting d.Concepts of capital and capital maintenance
15. Which statement is correct concerning he elements of the financial statements?

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I. The elements directly related to the measurement of financial position are assets, liabilities
and equity.
II. The elements directly related to the measurement of financial performance are income and
expenses.
a. I only c.Both I and II
b. II only d.Neither I nor II
16. A liability is recognized in the statement of financial position when
I. It is probable that an outflow of resources embodying economic benefits will result
from settlement of present obligation.
II. The amount at which the settlement will take place can be measured reliably.
a. I only c.Both I and II
b. II only d.Neither I nor II
17. Which statement is correct concerning recognition of income and expense?
I. Income is recognized when an increase in future economic benefit related to an increase
in an asset or decrease in liability has arisen that can be measured reliably.
II. Expense is recognized when a decrease in future economic benefit related to a decrease
in an asset or an increase in liability has arisen that can be measured reliably.
a. I only c.Both I and II
b. II only d.Neither I nor II
18. This process involves the simultaneous or combined recognition of revenue and expenses
that result directly and jointly from the same transactions or other events on the basis of
direct association between the costs incurred and the earning of specific items of income.
a. Matching of revenue with costs c. Systematic and rational allocation
b. Matching of costs with revenue d.Immediate recognition
19. BOYHUGOT Company suffered a P500,000 loss from a recent volcanic eruption occurred
in the middle of December and charged the whole amount to profit or loss statement for the
year ended December 31, 2015. What expense recognition principle did the company
exemplify from the above transaction?
a. Cause and Effect Association c.Immediate recognition
b. Systematic and Rational Allocation d.Materiality

20. Current cost is the

a. Amount of cash or cash equivalent paid or the fair value of the consideration given at the
time of acquisition.
b. Amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquired currently.
c. Amount of cash or cash equivalent that could currently be obtained by selling the asset in
an orderly disposal.
d. Discounted value of the future net cash inflows that an item is expected to generate in the
normal course of business.
Let’s Analyze (ULO 5 & 6)

Exercise 3
Identify and justify the principle or concept that is most clearly violated by the accounting
practice described. Do not use any answer more than once.
1. XYS Company records sales after inventories has been produced but before it is sold.
2. An entity having 200 accounts receivable list each account among the assets the statement
of financial position.

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3. ABC company does not report the major details about the shareholders equity.
4. MNO company follows a policy of recording an item as an asset when the entity is in doubt
whether the item is an asset or expense of the current period.
5. Chimes Davao changes accounting method every year in order to report a higher net income
possible under accounting standards.

In a Nutshell (ULO 5)

Activity 3
After learning the principles and concepts of the Conceptual found in the essential, Nokia
Corporation has hired you to review its accounting records prior to the closing of the revenue
and expense accounts as of December 31,2019. The following information comes to your
attention. State whether or not you agree with the decisions made by Nokia Corporation.
Support your answers with reference, whenever possible, to the generally accepted principles,
conceptual framework, assumptions, and cost constraint applicable in the circumstances.
(100 words each)
1. During the current year, Nokia Corporation changed its policy in regard to expensing
purchases of small tools. In the past, it had expensed these purchases because they
amounted to less than 2% of net income. Now, the president has decided that the
company should follow a policy of capitalization and subsequent depreciation. It is
expected that purchases of small tools will not fluctuate greatly from year to year.

2. The company constructed a warehouse at a cost of P1,000,000. It had been depreciating

the asset on a straight-line basis over 10 years. In the current year, the controller doubled
depreciation expense because the replacement cost of the warehouse had increased
significantly.

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

Evaluation Rubric

Criteria VERY GOOD FAIR (2) UNACCEPTABLE WTS (3) TOTAL

(3) (1) POINTS

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Accounting Especially Accurate but Inaccurate use of _____ X

Concepts skillful limited use accounting 5
identification of concepts
and analysis accounting
of accounting concepts
concept
Assertions Fully Assertions Lack of assertions, _____ X
developed and exist but are development 5
supported not and/or support
assertions developed or
supported
adequately

Structure Particularly Paragraph Lack of focus _____ X

clear ideas flow and 5
with logical transitions
transitions are adequate
throughout

Language Language Minor errors Serious errors in _____ X

especially in mechanics. Lack 5
clear and mechanics. on clarity and
concise with Sentences concision.
flawless could be
mechanics more
effective

Q&A list

Do you have any question for clarification?

Questions/Issues Answers

1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

Keywords Index

Financial statement Fundamental qualitative Elements of financial

characteristics statements
Users Relevance Asset recognition Principle

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Conceptual Framework Materiality Liability recognition

principle
Objective of financial Faithful representation Income recognition principle
reporting
Specific objectives Enhancing qualitative Expense recognition
characteristics principle
Economic decisions Verifiability Measurement of elements
Economic resources and Comparability Underlying assumptions
claims
Limitations of financial Understandability
reporting
Qualitative characteristics Timeliness

STATEMENT OF FINANCIAL POSITION

Big Picture in Focus: ULO 7 & 8

ULO 7: Explain the uses, limitation and content of statement of financial position.

ULO 8: Prepare a statement of financial position

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
Financial statements –

Financial statements are a structured representation of the financial position and financial
performance of an entity.

Liquidity – the ability of the company to transfer assets into cash to pay short-term obligations
and operating needs.

Solvency – ability to meet long-term financial obligations.

Operating Cycle – is the time between the acquisition for asset for processing and the eventual
realization to cash or cash equivalents.

Current assets – are cash and other assets a company expects to convert into cash, sell, or
consume either in one year or in the operating cycle, whichever is longer.

Noncurrent assets – an entity shall classify all other assets not classified as current as
noncurrent.

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Current liabilities – are the obligations that a company reasonably expects to settle either
through the use of current assets or the creation of other current liabilities.

Noncurrent liabilities are obligations that a company does not reasonably expect to settle within
the normal operating cycle.

Shareholder’s Equity is the residual interest of owners in the net assets of an entity which is
determined to be the excess of assets over liabilities.

Notes to financial statements – provide narrative description or disaggregation of items

presented in the financial statements and information about items that do not qualify for
recognition.

Essential Knowledge

Essential knowledge is a detailed discussion of the topic or concept.

General purpose financial statements (referred to as ‘financial statements’) are those intended
to meet the needs of users who are not in a position to require an entity to prepare reports
tailored to their particular information needs.

A complete set of financial statements comprises:

1. a statement of financial position as at the end of the period;
2. a statement of profit or loss and other comprehensive income for the period;
3. a statement of changes in equity for the period;
4. a statement of cash flows for the period;
5. notes, comprising significant accounting policies and other explanatory information;

Uses of financial position

The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions. It also shows the outcome of the management’s stewardship of
the resources entrusted to them. To meet these objectives, the financial statement provides the
following information:
1. assets;
2. liabilities;
3. equity;
4. income and expenses, including gains and losses;
5. contributions by and distributions to owners in their capacity as owners; and
6. cash flows.
The listed information above, along with other information in the notes, assists users of
financial statements in predicting the entity’s future cash flows and, in particular, their timing
and certainty.

By now you must know that Total Assets = Total Liabilities + Shareholder’s Equity. That is,
the assets equal liabilities and equity as such it should balance. The Statement of financial
position, sometimes referred as balance sheet, reports the assets, liabilities and shareholder’s

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equity of an entity at a certain point in time. By reporting these, it provides a basis for
computing rates of return and evaluating the capital structure of the company. The statement
also provides information that is useful to assess a company’s risk and future cash flows in the
form of company’s liquidity, solvency, and the need for additional financing.

Limitations of financial position

Most assets and liabilities are recognized at historical cost. As a result, it does not provide a
more relevant fair value like the case of land used in operation. Secondly, estimates were used
in many of the items presented in the statement. For instance, estimated life of the building and
collectivity of accounts receivable to mention a few. Lastly, the company omits the recognition
of many items that are of financial value but notoriously hard to measure objectively like the
brilliant minds of the teachers it cannot be reliably measure the value of employees and other
intangible assets (e.g. reputation and customer loyalty).

Classification of Assets
Statement of financial position accounts are classified. The three general classes are assets,
liabilities and equity and these are further divided to further subclassifications. Assets are
classified into two, namely current assets and noncurrent assets. This classification is an
important information between assets that are continuously circulating as working capital from
assets used in long-term operations.

Figure below shows the typical operating cycle but when the operating cycle is not clearly
identifiable like having several cycle within one year then the duration is assumed to be one
year. But if the operating cycle is longer than one year then the entity must use the longer
period.

Cash

Receivable Inventory

Production

Current assets
PAS 1, paragraph 66, an entity shall classify an asset as current when:
1. the entity expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle;
2. the entity holds the asset primarily for the purpose of trading;
3. the entity expects to realize the asset within twelve months after the reporting period;
or

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4. The asset is cash or a cash equivalent unless the asset is restricted from being exchanged
or used to settle a liability for at least twelve months after the reporting period.

Current asset are listed in the order of liquidity. PAS 1, paragraph 54, provides a minimum line
items under current assets are:
1. Cash and cash equivalents
2. (Short-term investments) Financial assets at fair value such as trading securities and
other investments in quoted equity instruments
3. Trade and other receivables
4. Inventories
5. Prepaid expenses

Cash and cash equivalents is the first line item presented in the current asset section. These
items must be available for payment of current obligations and not subject to any restrictions,
contractual or otherwise.

All securities whether it be debt or equity measured at fair value and the changes thereto is
reflected in the profit or loss statements comprises short-term investments.

Trade receivable include accounts receivable and note receivable (collectible from customers)
whereas other receivable (collectible from noncustomer) comprised of nontrade receivables
that are currently collectible. These are presented in the statement of financial position as one
line item called Trade and other receivable.

The inventories is another line item wherein the details shall be disclosed in the notes of
financial statement. The notes shall include the composition of the inventories for instance,
manufacturing concern as finished goods, goods in process, raw materials and manufacturing
supplies.

An entity shall include as Prepaid expenses in the current assets provided that they will
received benefits within one year or operating cycle, whichever is longer. The amount to be
included is the unexpired or unconsumed cost.

A entity does not report these five items as current assets if it cannot be realized in one year or
in the operating cycle, whichever is longer. An entity shall classify all other assets as non-
current.

Noncurrent assets
All other assets that does not meet the definition of current assets are classified as noncurrent
assets. The following are:
1. Property, plant and equipment
2. Long-term investments
3. Intangible assets
4. Deferred tax assets Other noncurrent assets
The first line item under noncurrent asset is Property, plant & equipment which pertains to
tangible assets used in the regular operations of the business for more than one year. With the
exception of land, the entity either depreciates or depletes these assets. Since all are measured
at cost less accumulated depreciation/accumulated depletion except land.

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Long-term investments are not directly identified with the operating activities of the entity
unlike trading securities which are classified under current assets. The revenue coming from
these investments occupy an additional relationship to the main revenue producing activities
of the entity.

Intangible assets lack physical substance and are not financial instruments. Companies
amortize the intangible assets with definite life over its useful life while periodically assess
intangibles with indefinite life for impairment

PAS 12, paragraph 15, provides that Deferred tax assets shall be recognized for all deductible
temporary differences. Regardless of the reversal in terms of period this account is always
presented as noncurrent assets.

Current Liabilities
An entity shall classify a liability as current when:
1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period (see paragraph 73). Terms of a liability that
could, at the option of the counterparty, result in its settlement by the issue of equity
instruments do not affect its classification.

An entity shall classify all other liabilities as non-current.

PAS 1, paragraph 54, provides a minimum line items under current liabilities are:
1. Trade and other payables
2. Current provision
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability

Trade payables include accounts payable and note payable (payable to suppliers) whereas other
payables (payable to non-suppliers) comprised of nontrade payables that are current
obligations. These are presented in the statement of financial position as one line item called
Trade and other payables.

The entity recognize the amount of expense with a probable liability now even though there is
no exact information provided it is measured reliably. Such liability is typically recognized as
current liability and should be regularly reviewed if it needs adjustments. This line item is
called current provision.

Short-term borrowings is the amount of loan payable to the lender/financial institution like
banks and third-party capital provider. This debt is interest bearing and to be paid within 12
months.

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An entity can also borrow long-term period like 3yrs, 5yrs or even longer are paid not one time
but on a staggered basis. This is sometimes called serial/series/installment payment wherein a
five-year debt is paid five installments. Wherein a portion of the liability is settled within 12
months after the reporting period is classified as current. This line item is identified as current
portion of long-term debt.

Current tax liability is the amount of tax to be paid or payable for a year as determined by
applying the provision of the enacted tax law. For instance, Income tax payable and
withholding tax payable.

The same normal operating cycle applies to the classification of an entity’s assets and liabilities.
When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve
months.

Noncurrent liability
All other liabilities that does not meet the definition of current liabilities are classified as
noncurrent liabilities. The following are:
1. Noncurrent portion of long-term debt
2. Finance lease liability
3. Deferred tax liability
4. Long-term obligation to company officers
5. Long-term deferred revenue

The entity expects to settle the other part of the obligation more than one year after the reporting
period. In other words, this noncurrent portion of long-term debt is the remaining unpaid
balance of the current liability’s line item called current portion of long-term debt.

A lessee is required to recognize a right-of-use asset representing its right to use the underlying
leased asset and a lease liability representing its obligation to make lease payments.

PAS 12, paragraph 15, provides that Deferred tax liability shall be recognized for all taxable
temporary differences. Regardless of the reversal in terms of period this account is always
presented as noncurrent liability.

Generally, long-term obligation to officers is substantial in amount and settled beyond one
year after the reporting period.

Long-term Deferred revenue is realizable in more than one year. Typical example are
unearned revenue from long-term contracts and long-term leasehold advances.

Shareholder’s Equity
The equity of an entity depends on the form of business organization. These are,
Proprietorship - Owners equity
Partnership - Partner’s equity
Corporation - Stockholder’s equity or shareholder’s equity

The holder of this equity instruments are known as owners and the term equity may be used
for all business companies.

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The elements comprising the shareholder’s equity with equivalent IAS term are:
IAS TERM PHILIPPINE TERM
Share capital Capital stock
Subscribe share capital Subscribe capital stock
Preference share capital Preferred stock
Ordinary share capital Common stock
Share premium Additional paid capital
Accumulated profits/(losses) Retained earnings(deficit)
Appropriation reserve Retained earnings appropriated
Revaluation reserve Revaluation surplus
Treasury share Treasury stock

Notes to financial statements

On top of what is recognized on the face of the financial statements, note contains additional
necessary information in order to enhance understandability required by Philippine Financial
Reporting Standards.

Forms of statement of financial position

There are two customary forms in presenting the statement of financial position, namely:
1.Report form – the three major sections of assets, liabilities and equity are presented in
sequence downward.
2.Account form – the three major sections are presented in sequence sideways.

The following is an illustration of the two forms of statement of financial position.

Report form
Instance Corporation
Statement of Financial Position
As at 31 December 2019

ASSETS
Note
Current assets:
Cash and cash equivalents (1) ₱ 200,000
Financial assets at fair value 120,000
Trade and other receivable (2) 300,000
Inventories (3) 400,000
Prepaid expenses (4) ₱ 40,000
Total current assets ₱ 1,060,000

Noncurrent assets:

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Property, plant and equipment (5) ₱ 4,000,000

Long-term investments (6) 800,000
Intangible assets (7) 500,000
Other noncurrent assets (8) ₱ 200,000
Total noncurrent assets ₱ 5,500,000
Total assets ₱ 6,560,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Trade and other payables (9) ₱ 230,000
Current provision – warranty liability 30,000
Note payable -Short-tem debt 120,000
Current portion of bonds payable 100,000
Income tax payable ₱ 50,000
Total current liabilities ₱ 530,000

Noncurrent liabilities:

Bonds payable-remaining portion

₱ 800,000
Deferred tax liability 180,000
Long-term deferred revenue (10) 200,000
Total noncurrent liabilities ₱ 1,180,000

Shareholders’ equity
Share capital, P50 par ₱ 2,000,000
Reserves 1,000,000
Retained earnings 1,850,000
Total shareholder’s equity ₱ 4,850,000
Total liabilities and shareholders’ equity ₱ 6,560,000

Note 1 – Cash and cash equivalents

Cash on hand ₱ 40,000
Cash in bank-current account 70,000
Petty cash fund 10,000
Treasury bills, purchased 11/1/2019
maturing 1/15/20 80,000
Total cash and cash equivalents ₱ 200,000

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Note 2 – Trade and other receivables

Accounts receivable,net ₱ 105,000
Notes receivable 150,000
Interest on notes receivable 5,000
Dividends receivable 40,000
Total trade and other receivable ₱ 300,000

Note 3 – Inventories
Finished goods ₱ 200,000
Goods in process 100,000
Raw materials 80,000
Manufacturing supples 20,000
Total inventories ₱ 400,000

Note 4 – Prepaid expense

Office supplies ₱ 2,000
Prepaid insurance 15,000
Prepaid rent 13,000
Total prepaid expense ₱ 30,000

Note 5 – Property, plant and equipment

Land ₱ 1,200,000
Building 2,000,000
Machinery and equipment 1,000,000
Furniture and fixtures 500,000
Total 4,700,000
Accumulated depreciation 700,000
Carrying amount ₱ 4,000,000

Note 6 – Long-term investments

Investment in associates,equity ₱ 500,000
Plant - 39 -xpansion fund 300,000
Total long-term investments ₱ 800,000

Note 7- Intangible assets

Patent ₱ 350,000
Franchise 150,000
Total long-term investments ₱ 500,000

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Note 8 – Other noncurrent assets

Long-term advances to officers ₱ 120,000
Long-term refundable deposits 80,000
Total long-term investments ₱ 200,000

Note 9 – Trade and other payables

Notes payable ₱ 70,000
Accounts payable 100,000
Interest on notes payable 20,000
Accrued expenses 40,000
Total inventories ₱ 230,000

Note 10 – Long-term deferred revenue

Long-term contracts unearned revenue ₱ 120,000
Long-term leasehold advances 80,000
Total long-term investments ₱ 200,000

Account form
Instance Corporation
Statement of Financial Position
As at 31 December 2019

ASSETS LIABILITIES AND EQUITY

Current assets: Notes Current liabilities: Notes
Cash and cash equivalents (1) ₱ 200,000 Trade and other payables (9) ₱ 230,000
Financial assets at fair value 120,000.00 Current provision - warranty liability 30,000.00
Trade and other receivable (2) 300,000.00 Note payable -Short-tem debt 120,000.00
Inventories (3) 400,000.00 Current portion of bonds payable 100,000.00
Prepaid expenses (4) 40,000.00 Income tax payable 50,000.00
Total current assets ₱ 1,060,000 Total current liabilities ₱ 530,000.0

Noncurrent assets: Noncurrent liabilities:

Property, plant and equipmen (5) ₱ 4,000,000 Bonds payable-remaining portion ₱ 800,000.00
Long-term investments (6) 800,000.00 Deferred tax liability 180,000.00
Intangible assets (7) 500,000.00 Long-term deferred evenue (10) 200,000.00
Other noncurrent assets (8) 200,000.00 Total noncurrent liabilities ₱ 1,180,000
Total noncurrent assets ₱ 5,500,000.00
Shareholders' equity
Share capital, P50 par ₱ 2,000,000
Reserves 1,000,000.00
Retained earnings 1,850,000.00
Total shareholder's equity 4,850,000.00
Total assets ₱ 6,560,000 Total liabilities and shareholders' equity ₱ 6,560,000

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The common practice in the Philippine setting is to present current assets before noncurrent
assets, current liabilities before noncurrent liabilities and equity after liabilities. Though, it
must be noted that PAS 1, paragraph 57 does not prescribe the order or format in which items
are to be presented in the statement of financial position.

Self-Help: You can also refer to the following sources to help you further understand the
lesson.

Valix et al. (2019). Intermediate Accounting 1

International GAAP (2018). Generally Accepted Accounting Practice under Internation

Financial Reporting Standards. EY. Wiley

Kieso, Donald E., Weygandt, Jerry J., Warfield, Terrey D., Young, Nicola M., Wiecek, Irene
M.

McConomy, Bruce J. (2016). Intermediate Accounting. John Wiley & Sons Canada, Ltd.

Let’s Check (ULO 7)

Exercise 4
1. Which of the following statements best describes the term “liability”?
a. An excess of equity over current assets
b. Resources to meet financial commitments as they fall due
c. The residual interest in the assets of the entity after deducting all its liabilities
d. A present obligation of the entity arising from past events

2. Financial statements must be prepared at least

a.Monthly c. semiannually
b.quarterly d. annually

3. Which of the following statements is true?

a. Dividends paid should be recognized in the statement of comprehensive income
b. A loss on disposal of assets should be recognized in the statements of changes in equity
c. Provisions should be recognized in the statement of financial position
d. A revaluation surplus on noncurrent assets should be recognized in the statement of changes
in equity

4. Which of the following statements best describes the term “financial position”?
a. The net income and expenses of an entity.
b. The net of financial assets less liabilities of an entity.
c. The potential to contribute to the flow of cash and cash equivalents o the entity
d. The assets, liabilities and equity of an entity.

5. In which section of the statement of financial position should cash that is restricted for the
settlement of a liability due 18 months after the reporting period be presented?
a. Current assets c. Noncurrent liabilities
b. Equity d. Noncurrent assets

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6. An entity shall classify a liability as current when (choose the incorrect one)
a. The entity expects to realize, or intends to sell or consume it, in its normal operating cycle.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The asset is cash or cash equivalent restricted to settle a liability for more than twelve
months after the reporting period.

7. When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed
to be
a. Twelve months
b. Six months
c. Three months
d. Twenty four months

8. The operating cycle of an entity

- Is the time between the acquisition of assets for processing and their realization in cash or
cash equivalents.
- Refers to the seasonal variation experienced by entities.
- Shall be used to classify assets and liabilities as current if it is less than one year.
- Cannot exceed one year.

9. These provide narrative description or disaggregation of items disclosed in the financial

statements and information about items that do not qualify for recognition.
a. Notes c.Nonfinancial reports
b. Accounting policies d.Disclosures

10. The statement of financial position is useful for analyzing all of the following, except
a. Solvency c.Liquidity
b. Profitability d. Financial flexibility or need for
additional financing

Let’s Analyze (ULO 7)

Problem 1
Presented below are a number of balance sheet accounts of Deep Blue Something, Inc. For
each of the accounts, indicate the proper balance sheet classification. In the case of borderline
items, indicate the additional information that would be required to determine the proper
classification. (line-item)
a. Debt Investments
b. Treasury Shares
c. Ordinary Shares
d. Dividends Payable.
e. Accumulated Depreciation—Equipment.
f. Notes payable-lending company.
g. Petty Cash.
h. Interest Payable.
i. Deficit.
j. Equity Investments (ownership stake of less than 20%).

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k. Income Taxes Payable.

l. Unearned Subscriptions Revenue.
m. Work in Process.
n. Salaries and Wages Payable.
Problem 2
The following trial balance of an entity on December 31, 2019 has been adjusted except for
income tax expense.
Dr Cr
Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000 __________
126,000,000 126,000,000

During the year, estimated tax payments of P5,000,000 were charged to income tax
expense. The tax rate is 30% on all types of revenue. Inventory and accounts payable
included goods purchased in transit, FOB destination, costing P500,000, and unsold goods
held on consignment at year-end, costing P300,000. The perpetual system is used. The
preference share capital is redeemable mandatorily on December 31, 2020.

1. What amount should be reported as current assets on December 31, 2019?

2. What amount should be reported as current liabilities on December 31, 2019?
3. What is the net income for 2019?
4. What amount should be reported as total shareholders’ equity on December 31, 2019?

In a Nutshell (ULO 8)

ACTIVITY 4
Calm Corporation provided the following information for the purpose of presenting the
statement of financial position on December 31,2019. Prepare in good form a properly
classified statement of financial position on December 31,2019 with supporting notes and
computation using Account form and report form.

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Evaluation Rubrics

Criteria VERY FAIR (2) UNACCEPTABLE WTS (3) TOTAL

GOOD (3) (1) POINTS
Accuracy No part is At least 1 to 3 More than 3 _____ X
incorrect. components components is/are 6
is/are incorrect.
incorrect.
Completeness All the At least 1 to More than 2 _____ X
(Criteria: with criteria are 2 missing missing criteria 6
proper present criteria.
heading; with
Proper order of
account titles;
proper placing

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of the
balances; rule
(double or
single)
Timeliness Activity Activity was Activity was 2 or _____ X
was 1 day late more days late 3
received on
or before
due date

Q&A List

Do you have any question for clarification?

Questions/Issues Answers

6. 6.
7. 7.
8. 8.
9. 9.
10. 10.

Keywords Index

General purpose financial statements Noncurrent assets

Uses of financial position Current Liabilities
Limitations of financial position Noncurrent liability
Classification of Assets Shareholder’s Equity
operating cycle Forms of statement of financial position
Current assets

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STATEMENT OF COMPREHENSIVE INCOME

Big Picture in Focus: ULO 9 & 10

ULO 9: Explain the uses, limitation and content of statement of comprehensive income.

ULO 10: Prepare a separate income statement and a single statement of comprehensive
income

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
Financial statements -

Income statement – is a formal statement showing the financial performance of an entity for a
given period of time.

Comprehensive income – is the change in equity during a period resulting from transactions
and other events, other than changes resulting from transactions with owners in their capacity
as owners.

Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.

The income statement measures the success of the entity’s operation for a given period of time.
This statement provides the users information needed to determine profitability, investment
value and the borrowing power of the entity.

Uses of income statement

The income statement helps predict future cash flows. The primary users use the information
to:
1. Assess prior performance
2. Provides a basis in predicting future performance
3. Assess the risk of achieving future cash flows
Information from income statement - income, expenses, gains and losses helps the user
evaluate whether the company’s performance is better than before. It could also help determine
important trends, that if continued, provide information future performance. Further, it could
also help determine the uncertainty of not achieving future targets.

Limitations of income statements

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Users need to be aware that income statement incorporate estimates amounts and consider a
number of assumptions that limits the information provided. These are:
1. Only items that can be measured reliably are recognized
2. Income provided is affected by different methods used
3. Income measurement involves judgement
When companies have improve and better product quality and customer service, these are
ignored since it is notoriously hard to measure. To add, similar companies in the same industry
might be using different depreciation method like accelerated method one company while other
may be using straight line. On one hand, there might be companies that are optimistic in
evaluating useful life of its property and equipment than the others. Thus, these circumstances
and difference may reduce the usefulness of its information in making economic decisions.

Comprehensive income includes components of profit or loss and components of other

comprehensive income. Profit or loss is the traditional income statement where in the bottom
figure is either net income or net loss. Other comprehensive income (OCI) represents income
and expenses not recognized in the profit or loss. The following are:
1. Unrealized gains or losses on equity and debt investments (Financial assets are fair
value through OCI)
2. Gains and losses from translation of financial statements of a foreign operation
3. Revaluation surplus
4. Unrealized gain or losses from derivative contracts designated as cash flow hedge
5. “Remeasurements” of defined benefit plan, including actuarial gain or loss
6. Change in fair value attributable to credit risk (financial liability designated at fair value
through profit or loss)

PAS 1, paragraph 82A, statement of comprehensive income shall present line item classified
by nature. As follows:
1. OCI that will be reclassified subsequent to P/L
- Unrealized gains or losses on debt investments (Financial assets are fair value through OCI)
- Gains and losses from translation of financial statements of a foreign operation
- Unrealized gain or losses from derivative contracts designated as cash flow hedge

2. OCIT that will not be reclassified subsequent to P/L

- Unrealized gains or losses on equity investments (Financial assets are fair value through
OCI), it will be reclassified to retained earnings upon disposal
- Revaluation surplus reclassified to retained earnings
- “Remeasurements” of defined benefit plan, including actuarial gain or loss may be transferred
within equity or retained earnings
- Change in fair value attributable to credit risk (financial liability designated at fair value
through profit or loss) may be transferred within equity or retained earnings
Sources of income
1. Sales of merchandise to customers -Gross sales minus sales returns, discounts and
allowances equals net sales
2. Rendering of services - These includes professional fees, commissions, admission fees
and tuition fees
3. Use of entity resources – These includes interest, rent, royalty and dividend income
4. Disposal of resources other than products – gain on sale of investments; property, plant
and equipment and intangible assets.

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Component of expenses
1. Cost of goods sold or cost of sales
2. Distribution costs or selling expenses
- Salesmen’s salaries
- Salesmen’s commission
- Travelling and marketing expense
- Advertising and publicity
- Freight out
- Depreciation of delivery equipment and store equipment
3. Administrative expenses
- Doubtful accounts
- Office salaries
- Expenses of general executives
- Expenses of general accounting and credit department
- Offices supplies used
- Certain taxes
- Contribution
- Professional fees
- Depreciation of office building and office equipment
- Amortization of intangible assets
4. Other expense
- Loss on sale of trading securities
- Loss on sale of property, plant and equipment
- Loss on sale of noncurrent investment
- Casualty loss – flood, earthquake,fire
5. Income tax expense

PAS 1, paragraph 82, the profit or loss section or the statement of profit or loss shall include
line items that present the following amounts for the period:

1. Revenue;
2. Gains and losses arising from the derecognition of financial assets measured at amortized
cost;
3. Finance costs;
4. Share of the profit or loss of associates and joint ventures accounted for using the equity
method;
5. Income tax expense;
6. A single amount comprising discontinued operations;
7. Profit or loss for the period;
8. Total other comprehensive income
9. Comprehensive income for the period, total of Profit or loss for the period and other
comprehensive income

Forms of income statement

PAS 1, paragraph 99, the entity may present the analysis of expenses in the income statement,
as follows:

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1. Functional presentation – expenses are classified according to function like cost of

sales, distribution cost, administrative cost and other expenses.
2. Natural presentation - expenses of the same nature are group and presented as one item.

“Functional” Income Statements

Instance Corporation
Income Statement
For the year ended December 31,2019

Note
Net Sales (1) ₱ 1,800,000.00
Cost of Goods Sold (2) 1,100,000.00
Gross Income 700,000.00
Other Income (3) 190,000.00
Investment Income (4) 70,000.00
Total Income ₱ 960,000.00

Expenses:
Distribution costs (5) 270,000.00
Administrative cost (6) 200,000.00
Other expenses (7) 54,000.00
Finance cost (8) 36,000.00 560,000.00
Income before tax 400,000.00
Income tax expense 108,000.00
Net Income 292,000.00

Note 1 - Net sales

Gross sales ₱ 1,875,000.00

Sales return and allowance (50,000.00)

Sales discount (25,000.00)

Net sales ₱ 1,800,000.00

Note 2 - Cost of goods sold

Inventory, Jan. 1 ₱ 300,000.00
Purchases ₱ 1,400,000.00
Freight in 80,000.00
Total 1,480,000.00
Purchases return and allowances (220,000.00)
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Purchase discount ₱ (60,000.00) ₱ 1,200,000.00

Goods available for sale 1,500,000.00

Inventory, Dec. 31 (400,000.00)

Cost of sales ₱ 1,100,000.00

Note 3 - Other income

Interest income ₱ 100,000.00
Dividend income 90,000.00
Total ₱ 190,000.00

Note 4 - Investment income

Share in net income of associate (22%) ₱ 70,000.00

Note 5 - Distribution costs

Sales salaries ₱ 204,000.00
SSS and Philhealth - sales 4,000.00
Sales commission 40,000.00
Store supplies expense 6,000.00
Delivery expense 10,000.00
Depreciation expense - store equipment 6,000.00
Total distribution cost ₱ 270,000.00

Note 6 - Administrative costs

Office salaries ₱ 140,000.00
SSS and Philhealth - office 3,000.00
Bonuses 34,000.00
Office supplies expense 2,000.00
Taxes and licenses 10,000.00
Doubtful accounts 5,000.00
Depreciation expense - store equipment 6,000.00
Total distribution cost ₱ 200,000.00

Note 7 - Other expenses

Loss on sale of investment 40,000.00
Loss on sale of equipment 14,000.00
Total 54,000.00

Note 8 - Finance costs

Interest expense on note payable 6,000.00
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Interest expense on bond payable 30,000.00

Total finance costs 36,000.00

“Natural” Income Statements

Instance Corporation
Income Statement
For the year ended December 31,2019

Note
Net Sales (1) ₱ 1,800,000.00
Other Income (2) 190,000.00
Investment Income (3) 70,000.00
Total income ₱ 2,060,000.00

Expenses:
Increase in inventory (4) ₱(100,000.00)
Net purchases (5) 1,200,000.00
Employee benefit cost (6) 385,000.00
Sales commission 40,000.00
Supplies expense (7) 8,000.00
Delivery expense (8) 10,000.00
Depreciation expense 12,000.00
Taxes and licenses 10,000.00
Doubtful accounts 5,000.00
Other expense (9) 54,000.00
(10
Finance cost ) ₱ 36,000.00 ₱ 1,660,000.00
Income before tax 400,000.00
Income tax expense (108,000.00)
Net income ₱ 292,000.00

Note 1 - Net sales

Gross sales ₱ 1,875,000.00
Sales return and allowance (50,000.00)
Sales discount (25,000.00)
Net sales ₱ 1,800,000.00

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Note 2 - Other
income
Interest income ₱ 100,000.00
Dividend income 90,000.00
Total ₱ 190,000.00

Note 3 - Investment income

Share in net income of associate (22%) ₱ 70,000.00

Note 4 - Increase in inventory

Inventory - Dec. 31 ₱ 400,000.00
Inventory - Jan. 1 300,000.00
Increase in inventory ₱ 100,000.00

Note 5 - Net Purchases

Purchases ₱ 1,400,000.00
Freight in 80,000.00
Purchases return and allowances (220,000.00)
Purchase discount (60,000.00)
Net purchases ₱ 1,200,000.00

Note 6 - Employee benefit costs

Sales salaries ₱ 204,000.00
SSS and Philhealth - sales 4,000.00
Office salaries 140,000.00
SSS and Philhealth - office 3,000.00
Bonuses 34,000.00
Total employee costs ₱ 385,000.00

Note 7 - Supplies expenses

Store supplies
expense ₱ 6,000.00
Office supplies expense 2,000.00
Total supplies expenses ₱ 8,000.00

Note 8 - Depreciation expenses

Depreciation expense - store equipment ₱ 6,000.00
Depreciation expense - store equipment 6,000.00
Total depreciation ₱ 12,000.00

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The standard does not prescribe any format as long as the company will select the presentation
that is reliable and more relevant.

Presentation
There are two option of presenting comprehensive income, namely:
1. Two statements
1.1 income statement (profit or loss)
1.2 statement of comprehensive income (profit or loss plus or minus OCI)
2. Single statement of comprehensive income – combined statement of 1.1 and 1.2

Under the two statements, in addition to the income statement illustrated above, a second
statement of comprehensive income is also prepared in order to show the total comprehensive
income. As follows:

Only the income of P292,000 is carried to retained earnings however the P20,000 is carried to
“reserves” or shown separately in the statement of changes in equity.

Single statement of comprehensive income is the combined income statement and statement of
comprehensive income. In the preceding data, a functional presentation of single statement
comprehensive income is as follows:

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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

Self-Help
Valix et al. (2019). Intermediate Accounting 1

International GAAP (2018). Generally Accepted Accounting Practice under Internation

Financial Reporting Standards. EY. Wiley

Kieso, Donald E., Weygandt, Jerry J., Warfield, Terrey D., Young, Nicola M., Wiecek, Irene
M.

McConomy, Bruce J. (2016). Intermediate Accounting. John Wiley & Sons Canada, Ltd.

Let’s Check (ULO 9)

Exercise 5
1. Which of the following is included in comprehensive income?
a. Investments by owners

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b. Revaluation surplus
c. Distribution to owners
d. Change in accounting policy

2. Which of the following is FALSE about the preparation of statement of comprehensive

income?
a. Income from operation excludes finance cost
b. Income from continuing operation plus income from discontinues operation equals total
profit or loss
c. Income tax related to discontinued operation shall be disclosed on the face of income
d. Other comprehensive income shall be disclosed on the face of income statement after tax

3. Which of the following statements best describes the term “financial performance”?
a. The income, expenses and profit or loss of an entity
b. The financial assets less liabilities of an entity
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The assets, liabilities and equity of an entity

4. Which of the following statements is true?

I. An entity presenting a single statement of comprehensive income should present a
statement of changes in equity
II. An entity presenting a separate income statement and a statement of comprehensive
income should present a statement of changes in equity
a. I only c. Both I and II
b. II only d. Neither I nor II

5. Comprehensive income includes

II. Profit or loss
III. Other comprehensive income
a. I only
b. II only
c. Both I and II
d. Neither I nor II

6. Other comprehensive income includes all of the following, except

a. Gain and loss arising from translation of financial statements of a foreign operation
b. Gain and loss on remeasuring available for sale financial asset
c. The effective portion of gain and loss on hedging instrument in cash flow hedge
d. Dividend paid to shareholders

7. Information about financial performance of an entity is primarily provided in the

a. Statement of financial position
b. Income statement
c. Statement of cash flows
d. Statement of changes in equity

8. This term comprises items of income and expenses including reclassification adjustments
that are not recognized in profit or loss as required or permitted by PFRS.

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a.Profit or loss
b.Retained earnings
c.Comprehensive income
d.Other comprehensive income

9. Separate line items in analysis of expenses by function include

a.Purchases, transport cost, employee benefits, depreciation
b.Purchases, distribution costs, administrative costs, employee benefits, depreciation, taxes
c.Depreciation, purchases, transport costs, employee benefits and advertising cost
d.Cost of goods sold, administrative and distribution costs

10. Which of the following is not an acceptable option of reporting other comprehensive
income ?
a.in the notes
b.in a statement of changes in equity
c.in the single statement of comprehensive income
d.in a separate statement of comprehensive income

Let’s Analyze (ULO 9)

Problem 3
Presented below is information related to Yellow Company at December 31, 2019, the end of
its first year of operations.
Sales revenue 310,000
Cost of goods sold 140,000
Selling and administrative expenses 50,000
Gain on sale of plant assets 30,000
Unrealized gain on debt investments (FVOCI) 10,000
Interest expense. 6,000
Loss on discontinued operations 12,000
Dividends declared and paid 5,000

Instructions
Compute the following: (a) income from operations, (b) net income, (c) comprehensive income

Problem 4
An entity reported the following data for the current year:
Net sales 9,500,000
Cost of goods sold 4,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated as a cash flow 400,000
hedge

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Phone No.: (082)300-5456 Local 137

Increase in projected benefit obligation due to actuarial 300,000

assumptions
Foreign translation adjustment – debit 100,000
Revaluation surplus 2,500,000

1. What amount should be reported as income from continuing operations?

2. What net amount should recognized in other comprehensive income for the year?
3. What net amount in OCI should be presented as “may not be recycled to profit or loss?
4. What amount should be reported as net income?
5. What amount should be reported as comprehensive income?

In a Nutshell (ULO 10)

ACTIVITY 5
Brown Corporation provided the following information for 2019:

Purchases 5,250,000.00
Purchase returns and allowances 150,000.00
Merchandise inventory, Jan. 1 1,000,000.00
Sales discounts 10,000.00
Loss on sal of investments 50,000.00
Rental income 250,000.00
Selling expenses:
Freight out 175,000.00
Salesmen's commission 650,000.00
Depreciation - Store equipment 125,000.00
Merchandise inventory, Dec. 31 1,500,000.00
Sales 7,850,000.00
Administrative expenses:
Officer's salaries 500,000.00
Depreciation - Office equipment 300,000.00
Freight in 500,000.00
Dividend revenue 150,000.00
Income tax 250,000.00
Sales returns and allowances 140,000.00
Loss on sale of equipment 50,000.00
Purchase discounts 100,000.00

Required:
a. Prepare an income statement for the year using the “functional” method with supporting
notes.
b. Prepare an income statement for the year using the “nature” method with supporting
notes.

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Phone No.: (082)300-5456 Local 137

Evaluation Rubric
Criteria VERY FAIR (2) UNACCEPTABLE WTS (3) TOTAL
GOOD (3) (1) POINTS
Accuracy No part is At least 1 to 3 More than 3 _____ X
incorrect. components components is/are 6
is/are incorrect.
incorrect.
Completeness All the At least 1 to More than 2 _____ X
(Criteria: with criteria are 2 missing missing criteria 6
proper present criteria.
heading; with
Proper order of
account titles;
proper placing
of the
balances; rule
(double or
single)
Timeliness Activity Activity was Activity was 2 or _____ X
was 1 day late more days late 3
received on
or before
due date

Q&A list

Do you have any question for clarification?

Questions/Issues Answers

11. 11.
12. 12.
13. 13.
14. 14.
15. 15.

Keywords index

Income statement Comprehensive income Forms of income statements

Uses of income statement Sources of income Functional
Limitations of income Component of expenses Natural
statement

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Course Schedule

This section calendars all the activities and exercises, including readings and lectures, as well
as time for making assignments and doing other requirements.

Activity Date Where to Submit

Orientation BlackBoard LMS
Let’s Check –Exercise 1 BlackBoard LMS
Let’s Analyze – Activity 1 BlackBoard LMS
In a Nutshell –Activity 2 BlackBoard LMS
Q&A – Accounting Any day BlackBoard LMS – Forum
Profession
Let’s Check –Exercise 2 BlackBoard LMS
Let’s Analyze – Exercise 3 BlackBoard LMS
In a Nutshell – Exercise 4 BlackBoard LMS
Q&A – Conceptual Any day BlackBoard LMS – Forum
Framework
Let’s Check – Exercise 5 BlackBoard LMS
Let’s Analyze – Problem 1 BlackBoard LMS
&2
In a Nutshell – Activity 3 BlackBoard LMS
Q&A – Statement of Any day BlackBoard LMS
financial position
Let’s Check – Exercise 6 BlackBoard LMS
Let’s Analyze – Problem 3 BlackBoard LMS
&4
In a Nutshell – Activity 4 BlackBoard LMS
Q&A – statement of Any day BlackBoard LMS – Forum
comprehensive income
1st Formative Assessment January 29,2021 BlackBoard LMS

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Phone No.: (082)300-5456 Local 137

Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone and all are exhorted to exercise self-
management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line Blended Delivery (OBD) course. Any
breach and violation shall be dealt with properly under existing guidelines, specifically in Section 7 (Student Discipline)
in the Student Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core Values, specifically in the adherence
to intellectual honesty and integrity; academic excellence by giving due diligence in virtual class participation in all
lectures and activities, as well as fidelity in doing and submitting performance tasks and assignments; personal discipline
in complying with all deadlines; and observance of data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The University shall institute monitoring
mechanisms online to detect and penalize plagiarism.
5. Students shall independently and honestly take examinations and do assignments, unless collaboration is clearly required
or permitted. Students shall not resort to dishonesty to improve the result of their assessments (e.g. examinations,
assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students shall not post or share their answers,
assignment or examinations to others to further academic fraudulence online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the Online Code of Conduct, as well as
all the requirements and protocols in handling online courses.

Course prepared by:

MARY GRACE S. SOMBILON/

LORD EDDIE I. AGUILAR
Authors

Course reviewed by:

DEVZON U. PORRAS JADE D. SOLAÑA

PH-BSAIS/BSIA PH-BSA/BSMA

MARY GRACE S. SOMBILON

AD

Approved by:

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LORD EDDIE I. AGUILAR

Dean

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