CHAPTER 1 Production – the process by which resources

are transformed into products.

The Accountancy Profession Casualty - is any sudden or unanticipated
events termed as ‘Acts of God’.
Accounting Standards Council
Accounting is a service activity. Its function to MEASURING - is the assigning of peso amounts
provide quantitative information, primarily to the accountable economic transactions and
financial in nature, about economic entities, events.
that is intended to be useful in making
economic decisions. COMMUNICATING - is the process of preparing
and distributing accounting reports to potential
AICPA users of accounting information.
Accounting is the art of recording, classifying,
and summarizing in a significant manner and in 1. Recording/Journalizing - the process of
terms of money, transactions and events which systematically maintaining a record of
are in part at least of a financial character and all economic business transactions after
interpreting the results thereof. they have been identified and
measured.
American Accounting Association
Accounting is the process of identifying, 2. Classifying - the sorting or grouping of
measuring and communicating economic similar and interrelated economic
decisions to permit informed judgment and transactions into their respective
decision by users of the information. classes.
Ledger – group of accounts.
3 important points;
1. It is about QUANTITATIVE INFORMATION 3. Summarizing – the preparation of
2. The information is likely to be FINANCIAL IN financial statements.
NATURE
3. The information should be USEFUL IN Financial statements – the documents that
DECISION MAKING. report financial information about an entity to
decision makers.
IDENTIFICATION is the recognition or
nonrecognition of business activities as The objective of accounting is to provide
ACCOUNTABLE events. quantitative financial information about a
Accountable/quantifiable - Has an effect on A = business that is useful to statement users
L + OE particularly owners and creditors, in making
economic decisions.
Subject matter of accounting – Economic
activity or the measurement of economic The accountant’s objective is to supply financial
resources and economic obligations information so that the statement users could
make informed judgment and better decisions.
Transactions - economic activities of an entity.
REPUBLIC ACT 9298 or PHILIPPINE
External Transactions – Economic events
involving one entity and another. ACCOUNTANCY ACT OF 2004 is the law
regulating the practice of accountancy in the
Internal Transactions – Economic events Philippines.
involving the entity only.
BOARD OF ACCOUNTANCY is the body controlling and allocating the resources of the
authorized by law to promulgate rules and entity.
regulations affecting the practice of the Controller - Highest accounting officer.
accountancy profession in the Philippines.
Single practitioners and partnerships for the 3. GOVERNMENT ACCOUNTING
practice of public accountancy shall be FOCUS: the study and administration of public
registered CPA in the Philippines funds.
This encompasses the process of analyzing,
CERTIFICATE OF ACCREDITATION – shall be classifying, summarizing and communicating
issued to CPAs in public practice only upon ball transaction involving the receipt and
showing in accordance with rules and disposition of government funds and property
regulations promulgated by the BOARD OF and interpreting the results thereof.
ACCOUNTANCY and approved by the
PROFESSIONAL REGULATION COMISSION that CONTINUING PROFESSIONAL DEVELOPMENT
such registrant has acquired a MINIMUM OF 3 (CPD) refers to the inculcation, assimilation and
YEARS of meaningful experience in any of the acquisition of knowledge, skill, proficiency, and
areas of public practice. ethical and moral values after the initial
registration of the CPA.
1. PUBLIC ACCOUNTING CPD credit units shall be 60 credit units for
Composed of individual practitioners, three years.
small accounting firms and large multinational EXEMPTIONS:
organizations that render independent and 1. 65 years old
expert financial services to the public.
TEMPORARY EXEMPTIONS:
External Auditing / Auditing The CPA is practicing the profession or
Examination of financial statements by furthering studies abroad. The exemption is for
independent CPAs for the purpose of expressing the duration of stay abroad.
an opinion as to the fairness with which the
financial statements are prepared The CPA has been out of the country for at least
2 years immediately prior to the date of
Taxation Service renewal of license and accreditation.
Includes the preparation of annual income tax
returns and determination of tax consequences ACCOUNTING VS AUDITING
of certain proposed business endeavors.
ACCOUNTING AUDITING
Management Advisory Services Broad Embraces One of the
Include advice on installation of computer sense auditing. areas of
system, quality control, installation and Accounting
modification of accounting system, budgeting, specialization.
forecasting, design or modification of
retirement plans and even entity mergers and Limited CONSTRUCTIVE ANALYTICAL
takeovers. Sense Ceases when Work starts
financial when the work
2. PRIVATE ACCOUNTING statements are of the
OBJECTIVE: to assist management in planning prepared. accountant
and controlling the entity’s operation. ends.
Includes maintaining the records, producing the
financial reports, preparing the budgets and
 AUDITOR – examines the financial PURPOSE OF ACCOUNTING STANDARDS
statements to ascertain whether they To identify proper accounting practices for the
are in conformity with the GAAP. preparation and presentation of financial
statements.
ACCOUNTING VS BOOKKEEPING
FINANCIAL REPORTING STANDARDS COUNCIL
ACCOUNTING BOOKKEPING The accounting standard setting body created
CONCEPTUAL PROCEDURAL by the PROFESSIONAL REGULATION
Concerned with Concerned with COMMISSION upon recommendation of the
reason or development and BOA to assist the BOA in carrying out it’s
justification or any maintenance of powers and functions provided under RA act
action adapted. accounting record. 9298.
‘HOW’ MAIN FUNCTION – establish and improve
ACCOUNTING STANDARS THAT WILL be
generally accepted in the Philippines.
ACCOUNTING VS ACCOUNTANCY PAS and FRSC – approved statements of the
FRSC.
ACCOUNTANCY ACCOUNTING 1 CHAIRMAN – had been or is presently a senior
Refers to the Used in reference accounting practitioner.
profession of only to a particular BOA 1
accounting practice. field of accountancy SEC 1
BSP 1
BIR 1
FINANCIAL ACCOUNTING VS MANAGERIAL COA 1
ACCOUNTING FINEX 1
PUBLIC PRACTICE 2
FINANCIAL ACCOUNTING COMMERCE AND 2
Primarily concerned with the recording of INDUSTRY
business transactions and the eventual ACADEME 2
preparation of financial statements. It is GOVERNMENT 2
intended for EXTERNAL AND INTERNAL USERS.
It emphasizes reporting to CREDITORS AND
*3 years term renewable for another term
INVESTORS.
*any member of the ASC shall not be
disqualified from being appointed to the FRSC
MANAGERIAL ACCOUNTING
The accumulation and preparation of financial
PHILIPPINE INTERPRETATIONS COMMITTEE
reports for INTERNAL USERS ONLY. It
emphasizes developing accounting information
Formed by the FRSC (AUG 2006) and replaced
for use WITHIN AN ENTITY.
the Interpretations committee (formed by the
ASC in MAY 2000)
GENERALLY ACCEPTED ACCOUNTING
Role: to prepare interpretations of PFRS for
PRINCIPLES
approval by the FRSC and in the context of the
Represent the rules, procedures, practice and
conceptual framework, to provide timely
standards followed in the preparation and
guidance on financial reporting issues not
presentation of financial statements.
specifically addressed in the PFRS.
INTERNATIONAL ACCOUNTING STANDARDS 4. To assist auditors in forming an opinion as to
COMMITTEE (June 1973) whether financial statements conform with
An independent private sector body, with the Philippine GAAP.
objective on achieving uniformity in the 5. To provide information to those interested in
accounting principles which are used by the work of the FRSC in the formulation of PFRS.
business and other organizations for financial
reporting around the world. USERS OF FINANCIAL INFORMATION
OBJECTIVES:
To formulate and publish in the public interest PRIMARY USERS
accounting standards to be observed in the The parties to whom general purpose financial
presentation of financial statements and to reports are primarily directed. Includes the
promote their worldwide acceptance and existing and potential investors, lenders and
observance. other creditors.
To work generally for the improvement and  INVESTORS – need information to help
harmonization of regulations, accounting them determine whether they should
standards, and procedures relating to the buy, hold, or sell.
presentation of financial statements.  SHAREHOLDERS – need information to
assess the ability of the entity to pay
INTERNATIONAL ACCOUNTING STANDARDS dividends.
BOARD  LENDERS and CREDITORS – need
Replaced the IASC. information to determine whether their
Intended to bring about greater TRANSPARENCY loan, interest thereon and other
and a higher degree of COMPARABILITY in amounts owing to them will be paid
financial reporting. when due.

1. IFRS=PFRS OTHER USERS

2. IAS = PAS Are users of financial information other than
3. IC = PIC the existing and potential investors, lenders and
other creditors. Includes the employees,
CHAPTER 2 customers, government and their agencies, and
the public.
Conceptual Framework  EMPLOYEE – needs information about
Financial Reporting and Assumptions the stability and profitability of the
entity to assess the ability of the entity
CONCEPTUAL FRAMEWORK – is the summary to provide remuneration, retirement
of the terms and concepts that underlie the benefits and employment
preparation and presentations of financial opportunities.
statements for external users.  CUSTOMERS - need information about
the continuance of an entity especially
Purposes of conceptual framework when they have a long term
1. To assist the FRSC in developing accounting involvement with or are dependent on
standards that will represent the Philippines the entity.
GAAP.  GOVERNMENT AND THEIR AGENCIES –
2. To assist preparers of financial statements in need information to regulate the
applying accounting standards and in dealing activities of the entity, determine
with issues not yet covered by GAAP. taxation policies and as a basis for
3. To assist the FRSC in review and adoption of national income and similar statistics.
IFRS.
  PUBLIC – providing information about STABLE PESO POSTULATE – an amplification of
the trend and the range of its activities. the going concern assumption so much so that
adjustments are unnecessary to reflect any
ACCOUNTING ASSUMPTIONS/ POSTULATES are changes in purchasing power.
the basic notions or fundamental premises on
which the accounting process is based. ACCOUNTING FUNCTION
To account for nominal pesos only and no for
The conceptual framework for financial constant peso or changes in purchasing power.
reporting only mentions one assumption,
GOING CONCERN. CHAPTER 3

4 BASIC ASSUMPTIONS Conceptual Framework

Qualitative Characteristics
1.GOING CONCERN
Means that in the absence of evidence in the QUALITATIVE CHARACTERISTICS are the
contrary, the accounting entity is viewed as qualities or attributes that make financial
continuing in operation indefinitely. accounting information useful to the users.

2. ACCOUNTING ENTITY Fundamental qualitative characteristics;

The entity is separate from the owners, 1. Relevance
managers and employees who constitute the The capacity of the information to influence a
entity. To have fair presentation of financial decision.
statements.
Financial information has PREDICTIVE VALUE if
3. TIME PERIOD it can be used as an input to processes
Requires that the indefinite life of an entity is employed by users to predict future outcome.
subdivided into time periods or accounting
periods which are usually of equal length for the Financial information has CONFIRMATORY
purpose of preparing financial reports on VALUE if it provides feedback about previous
financial position, performance and cash flows. evaluations.

Calendar year - 12 month period that ends on MATERIALITY or doctrine of convenience is a

December 31 practical Rule in accounting which dictates that
Natural business year – 12 month period that strict Adherence to GAAP is not required when
ends on any month when the business is at the the items are not significant enough to affect
lowest or experiencing slack season. evaluation, decision and fairness of the financial
statements.
4. MONETARY UNIT
2 aspects 2. Faithful Representation
QUANTIFIABILITY ASPECT – The assets, Financial reports represent economic
liabilities, equity, income, and expenses should phenomena or transactions in words or
be stated in terms of a unit of measure which is numbers
the PESO IN THE PHILIPPINES.
INGREDIENTS OF FAITHFUL REPRESENTATION
STABILITY OF THE PESO ASSUMPTION – the
purchasing power of the pesos stable or  COMPLETENESS
constant and that its instability is insignificant Requires that relevant information should be
and therefore may be ignored. presented in a way that facilitates
understanding and avoids erroneous income are not overstated and liabilities or
implications. expenses are not understated.

STANDARD OF ADEQUATE DISCLOSURE ENHANCING QUALITATIVE CHARACTERISTICS

Disclosure of any financial facts significant Relate to the presentation and from of financial
enough to influence the judgment of informed statements. Intended to increase the usefulness
users. of the financial information that is relevant and
faithfully represented.
NOTES TO FINANCIAL STATEMENTS
Provide narrative description or disaggregation COMPARABILITY
of the items presented in the financial The ability to bring together for the purpose of
statements and information about items that noting points of likeness and difference.
do not qualify for recognition.
COMPARABILITY WITHIN AN ENTITY or
 NEUTRALITY or PRINCIPLE OF FAIRNESS HORIZONTAL COMPARABILITY or
The information contained in the financial INTRACOMPARABILITY
statements must be free from bias.
The quality of information that allows
 FREE FROM ERROR comparisons within a single entity through time
There are no errors or omissions in the or from one accounting period to the next.
description of the phenomenon or transaction,
and the process used to produce the reported COMPARABILITY BETWEEN AND ACROSS
information has been selected and applied with ENTITIES or DIMENSIONAL COMPARABILITY or
no errors in the process. INTERCOMPARABILITY

SUBSTANCE OVER FORM The quality of information that allows

If information is to represent faithfully the comparisons between two are more entities
transactions and other events it purports to engaged in the same industry.
represent, it is necessary that transactions and
events are accounted in accordance with their CONSISTENCY
substance and reality and not merely their legal The accounting methods and practices should
form. be applied on a uniform basis from period to
period.
CONSERVATISM
In case of doubt, record any loss and do not UNDERSTANDABILITY
record any gain. Financial information must be comprehensible
or intelligible if it is to be most useful.
CONTINGENT LOSS – recognized as a provision if
the loss is probable and the amount can be VERIFIABILITY
reliably measured. Different knowledgeable and independent
CONTINGENT GAIN – not recognized but observers could reach consensus, although not
disclosed only. necessarily complete agreement, that a
particular depiction is a faithful representation.
PRUDENCE
The desire to exercise care and caution with DIRECT VERIFICATION – verifying an amount or
dealing with the uncertainties in the other representation through direct
measurement process such that assets or observation.
INDIRECT VERIFICATION – checking the inputs EQUITY – is the residual interest in the assets of
to a model, formula or other technique and the entity after deducting all of the liabilities.
recalculating the inputs using the same
methodology. The elements directly related to the
measurement of financial performance:
TIMELINESS
Financial information must be available or INCOME – is increase in economic benefit
communicated early enough when a decision is during the accounting period in the form of an
to be made. inflow or increase in asset or decrease of
liability that results in increase in equity, other
COST CONSTRAINT than contribution from equity participants, and
Cost – a pervasive constraint on the
information that can be provided by financial EXPENSES – is decrease in economic benefit
reporting. during the accounting period in the form of an
inflow or decrease in asset or increase of
liability that results in decrease in equity, other
CHAPTER 4 than contribution from equity participants.

Conceptual Framework These are broad classes of events or

Elements of Financial Statements transactions that are grouped according to their
economic characteristics.
Recognition is the process of reporting an
asset, liability, income or expense on the face of What are the conditions that must be present
the financial statements of an entity. This also for the recognition of an item that meets the
involves inclusion of peso amount in the definition of an element?
financial statements.
1. It is probable that any future economic
What are the elements of financial statements? benefit associated with the item will
flow to or from the entity.
The elements of financial statements refer to 2. The item has cost or value that can be
the quantitative information shown in the measured reliably.
statement of financial position and statement of
comprehensive income. Explain the asset recognition principle.
Two conditions must be present for the
The elements directly related to the recognition of an asset:
measurement of financial position: 1. It is probable that any future economic
benefit associated with the item will
ASSETS – is defined as resource controlled by flow to or from the entity.
the entity as a result of past event and from 2. The item has cost or value that can be
which future economic benefit are expected to measured reliably.
flow to the entity.
Inherent in asset recognition the cost principle.
LIABILITIES – is a present obligation of the entity This principle requires that assets shall be
arising from a past event the settlement of recorded initially at original acquisition cost.
which is expected to result in an outflow from
the entity of resources embodying economic In other words, the financial statements shall be
benefits, and based on historical cost rather than market
value. The reason is that cost is objective and
therefore verifiable while market value is payment is establishment, when the
subjective. dividends are declared.
D. Installation fees – over the period of
Explain the liability recognition principle. installation by reference to the stage of
Two conditions must be present for the completion.
recognition of a liability: E. Subscription fees – on a straight line
1. It is probable that an outflow of basis over the subscription period.
economic benefit will be required for F. Admission fees – when the event takes
the settlement of a present obligation. place.
2. The amount of obligation can be G. Tuition fees – over the period in which
measured reliably. tuition is provided.

Explain the income recognition principle or

realization principle. Explain the expense recognition principle.
The basic principle is that “income shall be Two conditions must be present for the
recognized when earned.” recognition of expenses:
But the question is when is income considered 1. It is probable that a decrease in future
to be earned: economic benefits has occurred.
Two conditions must be present for the 2. The decrease in economic benefits can
recognition of an income: be measured reliably.
1. It is probable that future economic
benefits will flow to the entity as a Expenses – arises in the course of ordinary
result of increase in an asset or a regular activities.
decrease in liability. Losses - represent other items that meet
2. The economic benefits can be definition of expenses but does not arise in the
measured reliably. course of ordinary regular activities.
Undoubtedly, both conditions are present at
the point of sale. The point of sale is the point of The expense recognition principle is the
revenue recognition. application of the matching principle. This
requires that those costs and expenses incurred
Revenue - arises in the course of ordinary in earning a revenue should be reported in the
regular activities. same period.
Gains – represent other items that meet
definition of income but does not arise in the In other words, there should be simultaneous or
course of ordinary regular activities. combined recognition of revenue and expenses
that result directly from the same transactions
Explain the recognition of revenue from: and events.
A. Interest – shall recognized on a time
proportion basis that takes into account Expenses are incurred in conformity with the
the effective yield on the asset. three applications of the matching principle
B. Royalties – shall be recognized on an namely:
accrual basis in accordance with the
substance of the relevant agreement. 1. Cause and Effect Association (Strict
C. Dividends – shall be recognized when Matching Principle) – the expense is
the shareholder’s right to receive recognized when the revenue is already
recognized on the basis of presumed
 direct association of the expense with FINANCIAL STATEMENTS are the means by
specific revenue. which information accumulated and processed
E.g. Doubtful accounts, warranty in financial accounting is communicated to the
expense and sales commissions. users.
2. Systematic and Rational Allocation
Principle – some costs are expensed by OBJECTIVE OF FINANCIAL STATEMENTS
simply allocating them over the periods To provide information about the financial
benefited. position, financial performance, and cash flows
E.g. Depreciation and amortization. of an entity that is useful to a wide range of
3. Immediate Recognition Principle – the users in making economic decisions.
cost incurred is expensed outright
because of uncertainty of future COMPONENTS OF FINANCIAL STATEMENTS
economic benefits or difficulty of
reliably associating certain costs with 1. Statement of financial position - formal
future revenue. E.g. officer’s salaries. statement showing the three elements
MEASUREMENT BASES comprising financial position, namely
assets, liabilities and equity.
A. HISTORICAL COST or PAST PURCHASE and equity.
EXCHANGE PRICE ASSET
The amount of cash or cash equivalent paid Resource controlled by the entity as a result of
or the fair value of the consideration given past events and from which future economic
to acquire an asset at the time of benefits are expected to flow the entity.
acquisition.
Essential characteristics of an asset
B. CURRENT COST or CURRENT PURCHASE
EXCHANGE PRICE 1. The asset is controlled by the entity
The amount of cash or cash equivalent that 2. The asset is the result of a past transaction or
would have to be paid if the same or event.
equivalent asset was acquired currently. 3. The asset provides future economic benefits
4. The cost of the asset can be measured
C. REALIZABLE VALUE or CURRENT SALE reliably.
EXCHANGE PRICE
The amount of cash or cash equivalent that Classifications of assets
could currently be obtained by selling the
asset in an orderly disposal. CURRENT ASSETS
PAS 1 paragraph 66 provides that an
A. PRESENT VALUE or FUTURE EXCHANGE entity should classify asset as current asset
PRICE when:
The discounted value of the future net cash
inflows that the asset is expected to a. The asset is cash or cash equivalent unless
generate in the normal course of business. the asset is restricted from being exchanged or
used to settle a liability for at least 12 months
CHAPTER 5 after the reporting period.
b. The entity holds the asset primarily for the
Presentation of Financial Statements purpose of trading.
Statement of Financial Position c. The entity expects to realize the asset within
twelve months after the reporting period.
D. the entity expects to realize the asset or Assets that do not fit in the definition of
intends to use or consume it within the entity’s noncurrent assets.
operating cycle.
LIABILITY
PAS 1 paragraph 54, the line items under Present obligation of an entity arising
current assets are: from past events, the settlement of which is
expected to result in an outflow from the entity
A. Cash and cash equivalents of resources embodying economic benefits.
B. Financial assets at fair value such as trading
securities and other investments in quoted Essential characteristics of a liability
equity instruments.
C. Trade and other receivables a. The liability is the present obligation of a
D. Inventories particular entity.
E. Prepaid Expenses b. The liability arises from past transaction or
event.
C. the settlement of the liability requires an
NONCURRENT ASSETS outflow of resources embodying economic
PAS 1 paragraph 66 states that an entity shall benefits.
classify all other assets not classified as current
as noncurrent. CURRENT LIABILITIES
PAS 1 paragraph 69 provides that an
This includes; entity should classify a liability as current when:

A. PROPERTY, PLANT AND EQUIPMENT A. The entity expects the liability to settle within
PAS 16 paragraph 6, tangible assets the entity’s normal operating cycle.
which are held by an entity for use in B. the entity holds the liability primarily for the
production or supply of goods and services, for purpose of trading.
rental to others, or for administrative purposes, C. the liability is due to be settled within 12
and are expected to be used during more than months after the reporting period.
one period. D. the entity does not have an unconditional
right to defer settlement of the liability for at
B. LONG-TERM INVESTMENTS least 12 months after the reporting period.
IASC defines investment as an asset
held by an entity for the accretion of wealth PAS 1 paragraph 54, the line items under
through capital distribution, such as interest, current liability are:
royalties, dividends and rentals, for capital
appreciation or for other benefits to the a. Trade and other receivables
investing entity such as those obtained through B. current provisions
trading relationships. c. Short term borrowing
D. current portion of long term debt
C. INTANGIBLE ASSETS E. current tax liability
An identifiable nonmonetary asset
without physical substance. NONCURRENT LIABILITIES
PAS 1 paragraph 69 states that an entity shall
D. DEFERRED TAX ASSETS classify all liabilities not classified as current are
classified as noncurrent.
E. OTHER NONCURRENT ASSETS
A. Noncurrent portion of a long term debt
B. Finance lease liability B. ACCOUNT FORM
C. Deferred tax liability The assets are shown on the left side and the
D. Long term obligations to company officers liabilities and equity on the right side of the
E. Long term deferred revenue. balance sheet.

EQUITY PAS 1, paragraph 54, balance sheet line items

Residual interest in the assets of the entity after 1. Cash and cash equivalents
deducting all of its liabilities. 2. Financial assets
The holders of instruments classified as equity 3. Trade and other receivables
are OWNERS. 4. Inventories
5. Property, plant and equipment
SHAREHOLDER’S EQUITY -is the residual 6. Investment in associates accounted for by the
interest of owners in the net assets of a equity method
corporation measured by the excess of assets 7. Intangible assets
over liabilities. 8. Investment property
PHILIPPINE TERM IAS TERM 9. Biological asset
Capital Stock Share Capital 10. Total assets classified as held for sale and
Subscribed Capital Subscribed Share assets included in disposal group classified as
Stock Capital held for sale
Preferred Stock Preference Share 11. Trade and other payables
Capital 12. Current tax liabilities
Common Stock Ordinary Share 13. Deferred tax asset and deferred tax liability
Capital 14. Provisions
Additional Paid In Share Premium 15. Financial liabilities
Capital 16. Liabilities included in disposal group
Retained Earnings Accumulated Profits classified as held for sale
(deficit) (Losses) 17. Noncontrolling assets
Retained Earnings Appropriated 18. Share capital and reserves
Appropriated Reserve
Revaluation Surplus Revaluation Reserve CHAPTER 6
Treasury Stock Treasury Share Presentation of Financial Statements
Statement of comprehensive income
NOTES TO FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
Provide narrative description or
The change in equity during a period
disaggregation of items presented in the
resulting from transactions and other events,
financial statements and information about
other than changes resulting from transactions
items that do not qualify for recognition.
with owners in their capacity as owners.
Purpose: to provide the necessary disclosures
Includes:
required by PFRS.
A. Components of profit or loss
FORMS OF FINANCIAL POSITION
Profit or loss - the total income less expenses,
excluding the components of other
A. REPORT FORM
comprehensive income.
This form sets form the three major sections in
a downward sequence of assets, liabilities and
B. Components of other comprehensive
equity.
income
Comprises items of income and expenses as shown in the income statement
including reclassification adjustments that are plus or minus the components of
not recognized in profit or loss as required or other comprehensive income
permitted by PFRS.
2. SINGLE STATEMENT OF
Components: COMPREHENSIVE INCOME
A. OCI that will be reclassified subsequently to This is the combined statement showing
profit or loss when specific conditions are met. the components of profit or loss and
1. Unrealized gain or loss on equity components of other comprehensive
investment measured at fair value
income in a single statement.
through other comprehensive income.
2. unrealized gain or loss on debt 3. Income statement
investment measured at fair value A formal statement showing the financial
through other comprehensive income. performance of an entity for a given period of
3. Gain or loss from translation of the time.
financial statements of a foreign
operation. SOURCES OF INCOME
Sales of merchandise to customers
B. OCI that will not be reclassified subsequently Rendering of services
to profit or loss Use of entity resources
4. revaluation surplus during the year. Disposal of resources other than products
5. Unrealized gain or loss from
derivative contracts designated as cash COMPONENTS OF EXPENSE
flow hedge. A. Cogs or cos
6. “remeasurements” of defined benefit B. Distribution costs or selling expenses
plan, including actuarial gain or loss. C. Administrative expenses
7. Change in fair value attributable to D. Other expenses
credit risk of a financial liability E. Income tax expense
designated at fair value through profit
or loss. DISTRIBUTION COSTS constitute costs which
are directly related to selling, advertising and
Presentation of other comprehensive income delivery of goods to customers.

PAS 1 paragraph 82A, provides that the ADMINISTRATIVE EXPENSES constitute cost of
statement of comprehensive income shall administering the business. These ordinarily
present line items for amounts of other include all operating expenses not related to
comprehensive income during the period selling and cost of goods sold.
classified by nature.
OTHER EXPENSES are those expenses which are
The line items for amounts of OCI shall be not directly related to the selling and
grouped as follows. administrative function.

PRESENTATION OF COMPREHENSIVE INCOME PAS 1 paragraph 87, An entity shall not present
1. TWO STATEMENTS any items of income and expense as
A. An income statement showing the extraordinary items, either on the face of the
components of profit or loss. income statement or the statement of
B. A statement of comprehensive comprehensive income or in the notes.
income beginning with profit or loss
PAS 1 paragraph 82, Income statement and 2. NATURAL PRESENTATION/NATURE OF
statement of comprehensive income line items. EXPENSE METHOD
Expenses are aggregated according to
A. Revenue their nature and not allocated among
B. Gain and loss from the derecognition of the various functions within the entity.
financial asset measured at amortized cost as
required by PFRS 9 PAS 1 paragraph 105, Because each
C. Finance Cost presentation has merit for different types of
D. Share in income or loss of associate and joint entities, management is required to select the
ventures accounted for using equity method presentation that is reliable and more relevant.
E. Income tax expense STATEMENT OF RETAINED EARNINGS
F. A single amount comprising discontinued
operations Shows the changes affecting directly the
G. Profit or loss for the Period retained earnings of an entity and relates the
H. Total Other Comprehensive income income statement to the statement of financial
I. Comprehensive income for the period being position.
the total of profit or loss and other
comprehensive income. Should be disclosed in the statement of
retained earnings:
The following items shall be disclosed on the
face of the income statement and statement of A. Profit or loss for the period
comprehensive income: B. prior period errors
C. dividends declared and paid to shareholders
A. profit or loss for the period D. effect of change in accounting policy
attributable to noncontrolling interest and E. appropriation of retained earnings
owners of the parent
4. Statement of changes in equity
B. total comprehensive income for the Shows the movements in the elements
period attributable to noncontrolling interest or components of the shareholders equity
and owners of the parent.
5. Statement of cash flows
FORMS OF INCOME STATEMENT Summarizes the operating, investing
and financing activities of an entity.
PAS 1 paragraph 99. An entity shall present an
analysis of expenses recognized in profit or loss 6. Notes, comprising a summary of
using in classification based on either the significant accounting policies and other
function of expenses or their nature within the explanatory notes
entity, whichever provides information that is
more reliable and more relevant. CHAPTER 7

2 ways to present an income statement PAS 2:

INVENTORIES
1. FUNCTIONAL PRESENTATION/COST OF
SALES METHOD Inventories are assets which are held for sale in
This form classifies expenses according the ordinary course of business, in the process
to their function as part of cost of sales , of production for such a sale or in the form of
distribution costs, administrative
materials or supplies to be consumed in the
activities and other activities.
production process or in the rendering of The objection in this method is that there is
services improper matching of cost against revenue
because the goods sold are stated at earlier or
Cost of inventories: older prices resulting in the understatement of
a) cost of purchase cost of goods sold.
b) cost of conversion
c) other cost in bring the inventories to Sample problem:
their present location and condition. Purchases of Product A during the month of
January were:
Cost of purchase includes purchase price, Units Unit Cost
import duties, irrecoverable taxes, freight, January 10 200,000 22
handling and other costs directly attributable to January 18 250,000 23
the acquisition of finished goods, materials and January 28 100,000 24
services.
Trade discounts, rebates and other similar items A physical count on January 31 shows 250,000
are deducted in determining the cost of units of product A on hand.
purchase
What is the cost of the inventory on January 31
Cost of conversion of inventories includes under the FIFO method?
direct labor and fixed and variable production
overheads. Solution:
Units Unit Cost Total
Other cost in bring the inventories to their January 18 150,000 23 3,450,000
present location and condition. January 28 250,000 24 2,400,000
However, the following costs are excluded from Total FIFO Cost 250,000 5,850,000
the cost of inventories;
 Storage costs on goods in process are 2. Weighted Average
capitalized but storage costs on finished The cost of the beginning inventory plus the
goods are expensed. total cost of purchases during the period is
 Abnormal amounts are expensed. divided by the total units purchased plus the
beginning inventory to get a weighted average
Cost of inventories of a service provider unit cost.
consists primarily of the labor and other costs of
personnel directly engaged in providing the The argument for the weighted average method
service, including supervisory personnel and is that it is relatively, easy to apply especially
attributable overhead with computer. The argument against it is that
there may be a considerable lag between the
Cost Methods current cost and inventory valuation since the
1. First In, First Out (FIFO) average unit cost involves early purchases.
First come, first sold; consequently the goods
remaining in the inventory at the end of the Sample problem:
period are those most recently purchased or X Company provided the following inventory
produced. card during February:
Purchase Units Balance
In period of inflation, FIFO method would result Price Used Units
to the highest net income. However, in period Units
of deflation, FIFO method would result to the Jan 10 100 20,000 20,000
lowest net income. Jan 31 10,000 10,000
 Feb 08 110 30,000 40,000
Feb 09 1,000 41,000
Return
Feb 28 11,000 30,000

Solution:
Units Unit Cost Total Cost
Jan 10 20,000 100 2,000,000
Feb 08 30,000 110 3,300,000
50,000 5,300,000
Weighted average unit cost (5,300,000/50,000)= 106
Cost of Inventory (30,000X106)= 3,180,000

The standard does not permit anymore the use

of the last in, first out (LIFO) as an alternative
formula in measuring cost of inventories.

Net realizable value is the estimated selling

price in the ordinary course of the business less
estimated cost of completion and the estimated
cost necessary to make the sale.

Inventories are usually written down to NRV on

an item by item or individual basis. It is not
appropriate to write down inventories based on
a classification of inventory.