WEEK 1-3

Generally Accepted Accounting Principle

- The rules, procedures, practice and standards followed in the preparation and
presentation of financial statements.
- 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.

International scene

Monitoring board
- is a group of capital market authorities and provides a formal link between trustees and
public authorities in order to enhance the public accountability of the ifrs foundation.

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 standars are set
by the ifrs foundation’s standard setting body, the IASB.
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.

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).

IFRS Interpretations committee

- is the interpretative body of the International accounting standards board, which
reviews implementation issues.

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.

Accounting standards advisory forum

- 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.
Working group
- are 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.

International scene-ifrs foundation and iasb

Ifrs is a global phenomenon in order to achieve greater transparency and a higher degree of
comparability in financial reporting.

Philippine scene

Frsc replaces the asc

Adaptation of international financial reporting standards

- In July 2005, the Philippines adopted the Philippine financial reporting standards, which
ae fully converged with the international financial reporting standards.

Philippine regulatory commission (prc) has 2 functions:

- Conducts and administers licensure examinations to aspiring professionals, and
- Regulates and supervise the practice of the professions exercised in partnership with
the forty-three professional regulatory boards in the field of health, business, education,
social sciences, engineering, and technology.
o Board of accountancy (boa) is a leg of Prc that regulates the accountancy
profession in the Philippines.

Financial reporting standards council (frsc)

- Was established by the PRC to assist BOA in carrying out its power and function to
promulgate accounting standards in the Philippines. The FRSC’s main function is to
established generally accepted accounting principles in the Philippines.
- Monitors the technical activities of IASB and invites comments on exposure drafts of
proposed IFRSs as the IASB issues these. When finalized, these are adopted as PFRSs.
FRSC monitors issuances of the IFRIC of IASB, which adopt as Philippines interpretations-
ifpic. Pfrss and Philippine interpretation- ifric approved for adoption are submitted to
the boa and prc for approval.
- Formed in the Philippine interpretations committee (pic) in august 2006 to assist frsc in
establishing and improving financial reporting standards in the Philippines. The role of
pic is to issue implementation guidance on pfrs.

Philippine Interpretation Committee (PIC)

- Formed by FRSC on August 2006
- Replaced the interpretations committee (IC) which was formed by the ASC in May 2000.
 - The role is to prepare interpretations of PFRS for approval by FRSC in the context of the
Conceptual Framework, to provide timely “authoritative” guidance on financial
reporting issues not specifically addressed in current PFRS.
- The counterpart in the United Kingdom is the International Financial Reporting
Interpretations Committee (IFRIC) which has replaced the Standing Interpretations
Committee (SIC).

Philippine institute of certified public accountants

- Only accredited national profession organizations of CPA’s in the Philippines.
- For the benefit and welfare of the CPAs, the advancement of profession, and the
attainment of other profession ends.

THE ACCOUNTANCY PROFESSION

➢ The law regulating the practice of accountancy in the Philippines which is known as the
“Philippine Accountancy Act of 2004” is widely known as RA 9298.
➢ Board of Accountancy (BOA)
● the body authorized by law to promulgate rules and regulations affecting the
practice of the accountancy profession in the Philippines.
● It is responsible for preparing and grading the Philippine CPA Examination (May
and October).
➢ REQUISITES:
● BSA Degree Holder
● Pass the CPA Licensure Examination
Philippine Institute of Certified Public Accountants (PICPA) - national organization for CPA’s

➢ CAREER OPPORTUNITIES
● Public Practice
● Association of Certified Public Accountants of Public Practice (ACPAPP)
● Commerce & Industry
● Association of Certified Public Accountant in Commerce and Industry
(ACPACI)
● Government Service
● Government Association of Certified Public Accountant (GACPA)
● Education/Academe
➢ Limitation of Practice of Public Accountancy
● Single practitioners and partnerships for the practice of public accountancy shall
be registered CPAs in the Philippines.
● Certification of accreditation shall be issued to CPAs in public practice only upon
showing in accordance with rules and regulations promulgated by the BOA and
 approved by the PRC that such registrant has acquired a minimum of 3 years of
meaningful experience in any of the areas of public practice including taxation.
● The sec shall not register any corporation for the practice of public accountancy.
➢ Accreditation to Practice Public Accountancy
● Certificate of registration to practice public accountancy shall be valid for 3 years
and renewable every 3 years.
● CPAs generally practice in 3 main areas
● Public Accounting
● Private Accounting
● Government Acct.

● Public Accounting
● Composed of individual practitioners, small accounting firms and large
multinational organizations that render independent and expert financial service
to the public.
● Private Accounting
● Three kinds of services usually offered:
➢ Auditing
❖ The primary service offered by most public accounting practitioners
❖ The examination of financial statements by independent certified public
accountant for the purpose of expressing an opinion as to the fairness
with which the financial statements are prepared. (The attest function of
the independent CPAs). The BIR required audited FS to accompany the
filing of annual income tax return.
➢ Taxation Service
❖ Includes the preparation of annual tax returns and determination of tax
consequences of certain proposed business endeavors.
➢ Management Advisory Services
❖ 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.
❖ Includes advice on installation of computer systems, quality control,
installation and modification of accounting systems, budgeting,
forecasting design or modification of retirement plans and even company
mergers and takeovers.
● CPAs are employed in business entities in various capacities as accounting staff,
chief accountant, internal auditor and controller.
● The highest accounting officer is known as the controller.
 ● The objective of an accountant is to assist the management in planning and
controlling the entity’s operations.

● Government Accounting
● Encompasses the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition of
government funds and interpreting the results thereof.
● The focus is the custody and administration of funds.
● CPAs are employed in BIR, COA, BBM, SEC and NBI.

Core competencies framework

1. Professional Knowledge-general; organizational and business; IT; Accounting
2. Technical Skills-intellectual (analysis, problem-solving, critical thinking); interpersonal
(team player); communication (oral and written)
3. Values-professional ethics; moral values

Continuing Professional Development (CPD)

- inculcation, assimilation and acquisition of knowledge, skill, proficiency, and ethical and
moral values after the initial registration of the CPA
- 120 CPD credit units/hours required every 3 years
Renewal of CPA license
Accreditation to practice the accountancy profession
- Exemptions from CPD
Permanent exemption at the age of 65 but only for license renewal
Temporary exemption: CPA is working or practicing the profession or furthering
studies abroad; out of the country for at least 2 years immediately prior to the
date of renewal of license and accreditation.

CONCEPTUAL FRAMEWORK
Definition
- A complete, comprehensive, and single document promulgated by the International
Accounting Standards Board (IASB).
 - Summary of the terms and concepts that underlie the preparation and presentation of
financial statements
- Defines the basic objectives, terms, and concepts of accounting for use in developing
standards of financial accounting and reporting
- An attempt to provide an overall theoretical foundation for accounting which will guide
standard-setters, preparers, and users of financial information in the preparation and
presentation of statements
- Underlying theory for the development of accounting standards and revision of
previously issued accounting standards
- Concerned with general purpose FS, including consolidated statements
- Special purpose financial reports are not covered

March 29, 2018

- IASB issued a revised conceptual framework for financial reporting
- 3 levels:
o Objective of financial reporting
o Qualitative characteristics of accounting information and elements of financial
statements (Assets, Liabilities, Equity, Income and Expenses)
o Recognition, measurement, and disclosure concept.
o Concept of capital and capital maintenance.
Purposes:
- Assist the frsc in developing accounting standards.
- Assists prepare of financial statements in applying accounting standards and in dealing
with issues not yet covered by GAAP.
- Assist the frsc in the review and adaptation of ifrs.
- Assist in the users of financial statements in interpreting the information contained in
the financial statements.
- Assist auditor in forming an opinion as to whether financial statements conform with
Philippine gaap
- Provide information to those interested in the work of the frsc in the formulation of
pfrs.

Status
- Not a Philippine Accounting Standard (PAS) and Philippine Financial Reporting Standards
(PFRS), and hence does not define standards for any particular measurement or
disclosure issue
- In case of conflict, the requirements of the PAS and PFRS prevail.

Objective of financial reporting

- The “why”, purpose or goal of accounting:
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders, and other creditors in making decisions about providing
resources to the entity
Specific objectives of financial reporting
- To provide information useful in making decisions about providing resources to the
entity
- To provide information useful in assessing the prospects of future net cash flows to the
entity
- To provide information about entity resources, claims and changes in resources and
claims

Objectives of financial statements

- 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
- FS also shows the results of management’s stewardship of the resources entrusted to it.
- Info provided: Assets, Liabilities, Equity, Income and Expenses (gains and losses),
Contributions by and distributions to owners, Cash Flow and other info

Definitions
Financial Position
- pertains to the liquidity, solvency and the need of the entity for additional financing;
comprised of assets, liabilities and equity at a particular moment in time (statement of
financial position)
Financial Performance
- the level of income earned by the entity through the efficient and effective use of its
resources; comprised of revenue, expenses and net income or loss for a period of time;
results of operations (income statement and statement of comprehensive income)
Cash Flows
- the cash receipts and cash payments arising from operating, investing and financing
activities of the entity (statement of cash flows)
Liquidity
- ability to pay interest as it comes due and to repay the principal of the debt at maturity;
ability to meet currently maturing obligations
Solvency
- the ability of the company to survive over a long period of time; the availability of cash
over the longer term to meet maturing obligations
Financial structure
- source of financing for the assets of the entity; what amount of assets has been
financed by creditors (borrowed capital) and how much has been financed by owners
(invested or equity capital)

Accrual l basis
- An entity shall recognize assets, liabilities, equity, income and expenses in accordance
with the recognition criteria in the Conceptual Framework.
- Effects of transactions and other events are:
 a. recognized when they occur and not as cash or its equivalent is received or paid
b. recorded and reported in the FS of the periods to which they relate
In simple language,
- Assets are recognized when they are receivable rather than when they are physically
received, and liabilities are recognized when they are payable rather than when actually
paid.
- Income is recognized when earned regardless of when received and expense is
recognized when incurred regardless of when paid.
 The essence of accrual accounting: recognition of accruals (AR and AP) and deferrals
(prepaid expenses and unearned revenues)

Limitations of financial reporting

- general purpose financial reports do not and cannot provide all information that existing
and potential investors, lenders and other creditors need (general economic conditions,
political events and industry outlook)

Responsibility for FS
- management has the primary responsibility for the preparation and presentation of FS;
BOD reviews and authorizes the FS for issue before these are submitted to the
shareholders

Accountability of management
- safekeeping of entity’s resources and for their proper, efficient and profitable use

Statement of Financial Position

- A formal statement showing the three elements comprising financial positions: ASSETS,
LIABILITIES AND EQUITY.
- used to evaluate the following factors:
a. Liquidity – ability of the entity to meet currently maturing obligations
b. Solvency – availability of cash over the longer term to meet maturing obligations
c. Need for additional financing
* Info about 1 & 2 are useful in predicting entity’s ability to comply with its
future financial commitments.

Present as separate classifications:

a. Current and Noncurrent Assets
a. Current and Noncurrent Liabilities

This presentation also highlights:

- Assets expected to be realized w/n the current operating cycle
- Liabilities due for settlement w/n the same period
 ASSETS
(CURRENT ASSETS)
CCE

- CASH ON HAND
- CASH ON BANK
- CASH EQUIVALENTS
- PETTY CASH FUND
RECEIVABLES

- ACC RECEIVABLES
- ADVANCES OF EMPLOYEES
INVENTORIES

- SUPPLIES, MERCHANDISE, RAW MATERIALS, FINISHED

GOOD INVENTORIES, PURCHASES
PREPAYMENTS

- PREPAID INSURANCE, TAXES, INTEREST, ADVERTISING

MARKETABLE SECURITIES

(NON-CURRENT) LONG TERM

PPE

o LAND, BUILDING, EQUIPMENT, FURNITURE,

FIXTURES
INVESTMENT PROPERTY
INVESTMENTS (LONG-TERM)
INTANGIBLES

- GOOD WILL, PATENT, COPYRIGHTS

(CONTRA ASSETS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ACCUMULATED DEPRECIATION

LIABILITIES
(CURRENT LIABILITIES) SHORT TERM

- ACCOUNT PAYABLES
- INTEREST PAYABLE
- INCOME TAXES PAYABLE
- ACCRUED EXPENSES
- UNEARNED REVENUE
- CUSTOMER’S DEPOSIT
- CURRENT PORTION OF LONG-TERM PAYABLES

(NON-CURRENT LIABILITIES) LONG TERM

- MORTGAGE PAYABLE
- NOTES PAYABLE
- BONDS PAYABLE
- DEFERRED TAX LIABILITIES
- MORTGAGE PAYABLE
- CAPITAL LEASES

OWNER’S EQUITY
CAPITAL
WITHDRAWAL
REVENUES

- SERVICE INCOME
- SALES
- ALL FEES!!!
EXPENSES
RED PU CYA MEANS CREDIT ANG NORMAL BAL TAPOS BLUE PU KAC
DEBIT PU XIA HIHE…

FORMULAS :>
THE ACCOUNTING EQUATION
Assets = Liabilities + Equity

CURRENT ASSETS
Current assets are the sum of assets that will convert into cash in less than
12 months.
Current Assets = Cash + Accounts Receivable + Inventory + Prepaid
Expenses etc.

NET FIXED ASSETS

Net fixed assets are the book value of fixed assets.
Net Fixed Assets = Fixed Assets @ cost – Accumulated Depreciation

TOTAL ASSETS
The sum of all assets
Total Assets = Current Assets + Other Assets + Net Fixed Assets
Or Total Assets = Total Liabilities + Total OE

CURRENT LIABILITIES
Bills due within 12 months of the Balance Sheet date.
Current Liabilities = Accounts Payable + Accrued Expenses + Current
Portion of Debt + Income Taxes Payable etc.

SHAREHOLDER’S EQUITY
Shareholder’s equity is the value of the company to its owners. Also called
net worth.
Shareholder’s Equity = Capital Stock + Retained Earnings

TOTAL LIABILITIES & EQUITY

This is the total obligation plus worth of the entity.
Total Liabilities & Equity = Current Liabilities + Long-Term Debt +
Shareholders’ Equity

GROSS MARGIN
The left over amount after cost of goods sold are taken away from net
sales.
Gross Margin = Net Sales – Cost of Goods Sold

OPERATING EXPENSES
The sum of expenses paid for developing and selling the product or
service.
Operating Expenses = Sales & Marketing + Research & Development
+ General & Administrative

INCOME FROM OPERATIONS

Net profit from the product or services sold.
Income From Operations = Gross Margin – Operating Expenses

NET INCOME
Net income is all income minus total expenses and costs.
Net Income = Income From Operations + Interest Income – Income
Taxes
Or Net Income = Revenue - Expenses

GOODS AVAILABLE FOR SALE

GAS = Beginning Inventory + Purchases (net purchase)

COST OF GOODS SOLD

COGS = Beg. Inventory + Net Purchases – Ending Inventory

BEGINNING INVENTORY
Beg. Inventory = (COGS + ending inventory balance) – Net purchases

ENDING INVENTORY
End. Inv. = Beg. Inv. + Net Purchases – COGS

BOOK VALUE OF FIXED (DEPRECIABLE) ASSETS = Original cost –

accumulated depreciation

STRAIGHT LINE DEPRECIATION = (Original cost – salvage value) /

number of years in useful life
TRUE OR FALSE

Solvency is the availability of cash in the near future to cover currently maturing obligations.
A) True
B) False
C) None of the above
D) Partly true
ANSWER: B
Financial characteristics are the qualities or attributes that make financial accounting useful to
the users.
A) False
B) True
C) Partly true
D) None of the above
ANSWER: A
Is the capacity of the information to influence a decision.
A) Materiality
B) Solvency
C) Relevance
D) None of the above
ANSWER: C
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.
A) Neutrality
B) Free from error
C) Completeness
D) Faithful representation
ANSWER: B
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.
A) Consistency
B) Comparability
C) Timeliness
D) Verifiability
ANSWER: A

FINANCIAL POSITION – PROBLEM 1-9

Mars Company’s December31, 2020 statement of financial position reported the following
current assets:
Cash 4,300,000
Accounts Receivable 7,500,000
Inventory 4,000,000
Deferred Tax Asset 1,200,000
17,000,000

An analysis of the accounts receivable disclosed that accounts receivable comprised the
following:

Trade accounts receivable 5,000,000

Allowance for doubtful accounts (500,000)
Selling price of Mars Company’s (consignor)
unsold goods sent to Venus Company on
consignment @ 150% of cost And excluded from
Mars’ ending inventory 3,000,000
7,500,000

On December 31, 2020, What amount should be reported as total current assets?

ANSWER: 14,800,000

SOLUTION

Cash 4,300,000
AR 5,000,000
Allowance for DA (500,000)
Inventory (4M + 2M) 6,000,000
14,800,000

The following data pertain to Daki Company on December 31, 2020:

Cash, including sinking fund of P500,000 with trustee 2,000,000

Notes receivable (including P200,000 pledged and P700,000 discounted) 1,200,000
Accounts receivable – unassigned 3,000,000
Accounts receivable – assigned 800,000
Note receivable discounted 700,000
Equity of assignee in accounts receivable assigned 500,000
Inventory, including P600,000 cost of goods sold in transit
Purchased FOB Destination. The goods were received on
January 3, 2021 2,800,000
Allowance for doubtful accounts 100,000

How much current assets should be shown in the statement of financial position?
ANSWER: 7,900,000

SOLUTION

Cash (2M – 500k) 1,500,000

Notes Receivable 1,200,000
NR Discounted (700,000)
AR – unassigned 3,000,000
AR – assigned 800,000
Allowance for DA (100,000)
Inventory (2.8M – 600K) 2,200,000
7,900,000

The trial balance of Tanjiro Company reflected the following liability account balances on
December 31, 2020:

Accounts Payable 1,900,000

Bonds payable 3,400,000
Premium on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2021 600,000

The deferred tax liability is based on temporary differences that will reverse in 2022.
In Tanjiro’s December 31, 2020 Statement of Financial position, what amount should be
reported as current liabilities?

ANSWER: 3,900,000

SOLUTION

Accounts payable 1,900,000

Dividends payable 500,000
Income tax payable 900,000
Note payable 600,000
Total current liabilities 3,900,000

Nezuko Company had the following liabilities at December 31, 2020:

Accounts payable 550,000

Unsecured note payable, 8%, due July 1, 2021 4,000,000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Senior bonds payable, 7%, due March 31, 2021 5,000,000

What should be reported as total current liabilities?

ANSWER: 9,900,000

SOLUTION

Accounts payable 550,000

Unsecured note payable 4,000,000
Accrued expenses 350,000
Senior bonds payable 5,000,000
9,900,000

An analysis of Tengen Company’s liabilities disclosed the following

Accounts payable, after deducting debit balances in suppliers’ accounts

Amounting to P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers’ accounts 500,000
Stock dividend payable 1,000,000
Claims for increase in wages and allowance by employees of the entity,
Covered in a pending lawsuit 400,000
Estimated expenses in redeeming prize coupons 600,000

How much should be presented as total current liabilities?

ANSWER: 6,700,000

SOLUTION

Accounts payable (4M +100K) 4,100,000

Accrued expenses 1,500,000
Credit balances in customers’ accounts 500,000
Estimated liability for coupons 600,000
6,700,000
Statement of Comprehensive Income
It 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.
A) Comprehensive income
B) Other Comprehensive income
C) Profit or loss
D) Retained earnings
ANSWER: A
It is the total of income less expenses, excluding the components of other comprehensive
income.
A) Comprehensive income
B) Profit of loss
C) Accounting income
D) Economic Income
ANSWER: B
Comprehensive income includes
A) profit of loss only
B) other comprehensive income only
C) Both profit or loss and other comprehensive income
D) Neither profit or loss nor other comprehensive income
ANSWER: C
Other comprehensive income includes all of the following except
A) Unrealized gain on available for sale financial asset
B) Loss from translating the financial statements of a foreign operation
C) Actuarial gain on defined benefit plan that is fully recognized
D) Share premium
ANSWER: D

1. Mars Company reports operating expenses in two categories: distribution and general and
administrative. The adjusted trial balance on December 31, 2020 included the following
expense and loss accounts:

Accounting and legal fees 1,200,000

Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long term investment 300,000
Officers salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000

One-half of the rented premises is occupies by the sales department. What should be reported
as total distribution cost?
SOLUTION
Advertising 1,500,000
Freight out 800,000
Rent (2.2M *1/2) 1,100,000
Sales salaries and commissions 1,400,000
4,800,000

2. the following items were among those that were reported on Lee Company’s income
statement for the year ended December 31, 2020:

Legal and audit fee 1,700,000

Rent for office space 2,400,000
Interest on inventory loan 2,100,000
Loss on abandoned data processing
Equipment used in operations 350,000

The office space is used equally by Lee’s sales and accounting departments. What total amount
should be classified as general and administrative expenses in the income statement?

SOLUTION
Legal and audit fees 1,700,000
Rent (2.4M x ½) 1,200,000
2,900,000

3. The following costs were incurred by Ann Company during the current year:

Accounting and legal fees 250,000

Freight in 1,750,000
Freight out 1,600,000
Officers salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000

What amount should be reported as general and administrative expenses?

SOLUTION
Accounting and legal fees 250,000
Officers’ salaries 1,500,000
Insurance 850,000
2,600,000
4. The following information is available from Mike Company’s accounting records for the
current year:

Purchases 5,300,000
Purchase discounts 100,000
Beginning inventory 1,600,000
Ending inventory 2,150,000
Freight out 400,000

What is the cost of goods sold for the current year?

SOLUTION

Beg. Inventory 1,600,000

Purchases 5,300,000
Purchase discounts 100,000
Goods available for sale 6,800,000
End. Inventory (2,150,000)
COGS 4,650,000

5. The following information is available for Rico Company for the current year:

Disbursements for purchases 5,800,000

Increase in trade accounts payable 500,000
Decrease in merchandise inventory 200,000

What is the cost of goods sold for the current year?

SOLUTION
Disbursement for purchases 5,800,000
Increase in trade accounts payable 500,000
Purchases 6,300,000
Decrease in inventory 200,000
Cost of goods sold 6,500,000

6. The following information is available from the records of Hiligaynon Company for the
current year:

Beginning inventory 400,000

Freight in 300,000
Purchase returns 900,000
Ending inventory 500,000
Selling expenses 1,250,000
Sales discount 250,000

The cost of goods sold is six times the selling expenses.

What is the amount of gross purchases?

SOLUTION
Beg. Inventory 400,000
Gross purchases (SQUEEZE) 8,200,000
Freight in 300,000
Purchase returns (900,000)
GOODS AVAILABLE FOR SALE 8,000,000
End. Inventory (500,000)
Cost of Goods sold (1.25Mx6) 7,500,000

STATEMENT OF FINANCIAL POSITION

1. the general ledger trail balance of Rico Company includes the following accounts on
December 31, 2020:

Inventory, including inventory expected in the ordinary course

Of operations to be sold beyond 12 months amounting to P700,000 1,000,000
Trade receivables 1,200,000
Prepaid insurance 80,000
Listed investment held for trading purpose at fair value 200,000
Financial assets at fair value through other comprehensive income 800,000
Cash 300,000
Deferred tax asset 150,000
Bank overdraft 250,000

What amount should be shown as total current assets on December 31, 2020?

SOLUTION
Inventory 1,000,000
Trade receivable 1,200,000
Prepaid insurance 80,000
Investments held for trading 200,000
Cash 300,000
Total current assets 2,780,000
2. Mark Company’s trial balance reflected the following account balances on December 31,
2020:

Accounts receivable 1,600,000

Financial assets @ FV through Profit or loss 500,000
Financial assets @ amortized cost 1,300,000
Cash 1,100,000
Inventory 3,000,000
Equipment and furniture 2,500,000
Accumulated depreciation 1,500,000
Patent 400,000
Prepaid expenses 100,000
Land held for future business site 1,800,000

In Mark Company’s December 31, 2020 statement of financial position, what amount should be
shown as current assets?

SOLUTION
Accounts receivable 1,600,000
Financial assets @ FV through profit or loss 500,000
Cash 1,100,000
Inventory 3,000,000
Prepaid expenses 100,000
Total current assets 6,300,000

3. the account balances shown below were gathered from Pamela Company’s trial balance on
December 31, 2020. All adjusting entries have been made.

Wages payable 250,000

Cash 200,000
Mortgage payable 1,500,000
Dividends payable 150,000
Prepaid rent 100,000
Inventory 800,000
Sinking fund 500,000
Short term investments 300,000
Investment in subsidiary 2,000,000
Taxes payable 220,000
Accounts payable 240,000
Accounts receivable 350,000

What is the amount that should be reported as current assets in Pamela Company’s statement
of financial position?
SOLUTION
Cash 200,000
Prepaid rent 100,000
Inventory 800,000
Short-term investment 300,000
Accounts receivable 350,000
Total current assets 1,750,000

4. Rice company was incorporated on January 1, 2020, with P5,000,000 from the issuance of
share capital and borrowed funds of P1,500,000. During the first year of operations, net income
was P2,500,000. On December 15, Rice paid a P500,000 cash dividend.

No additional activities affected shareholders’ equity in 2020. On December 31, 2020. Rice’s
liabilities had increased to P1,800,000.

In Rice’s December 31, 2020 statement of financial position, what amount should be reported
as total assets?

SOLUTION

Liabilities 1,800,000
Share capital 5,000,000
Retained earnings (net income of P2.5M less dividends of P500K) 2,000,000
Total liabilities and shareholder’s equity 8,800,000

5. Mirr Company was incorporated on January 1, 2020, with proceeds from the issuance of
P7,500,000 in share capital and borrowed funds of P1,100,000.

During the first year of operations, revenue from sales and consulting amounted to P8,200,000,
and operating costs and expenses totaled P6,400,000. On December 15, 2020, Mirr declared a
P300,000 dividend, payable to shareholders on January 15, 2021.

No additional activities affected shareholders’ equity in 2020. Mirr’s liabilities increased to

P2,000,000 by December 31, 2020.

In Mirr’s December 31, 2020 statement of financial position, what amount should be reported
as total assets?

SOLUTION

Consulting fees 8,200,000

Operating costs and expenses (6,400,000)
Net income 1,800,000
Dividend declared (300,000)
Retained earnings 1,500,000

Liabilities 2,000,000
Share apital 7,500,000
Retained earnings 1,500,000
Total liabilities and shareholders’ equity 11,000,000

6. the trial balance of Mill company included the following account balances at December 31,
2020.

Accounts payable 1,500,000

Bonds payable, due 2021 2,500,000
Discount on bonds payable 300,000
Dividends payable 800,000
Note payable, due 2022 2,000,000

What is the correct amount of current liabilities?

SOLUTION

Accounts payable 1,500,000

Bonds payable, due 2021 2,500,000
Discount on bonds payable (300,000)
Dividends payable 800,000
Total current liabilities 4,500,000

Primary responsibility for the preparation of financial statements in accordance with generally
accepted accounting principles rests with
A) The internal auditors
B) Management
C) The external auditors
D) The board of Directors
ANSWER: B
The most important information about an entity generally shall be disclosed in
A) The body of the financial statements
B) Notes to the financial statements
C) Supplementary statements
D) Schedules
ANSWER: A
The financial statements prepared under GAAP
A) Do not articulate with one another
B) Reflect a single measurement basis which is historical cost.
C) Are not highly precise because many estimates and judgments must be made.
D) Contain a limited number of future projections, such as projected sale.
ANSWER: C
The elements of financial statements shall be measured in
A) Constant pesos
B) Nominal pesos
C) fixed pesos
D) Flexible pesos
ANSWER: B

CONCEPTUAL FRAMEWORK

Which accounting process is the recognition or nonrecognition of business activities as

accountable events.
A) Identifying
B) Measuring
C) Recording
D) Communicating
ANSWER: A
These are the events that affect the entity and in which other entities participate.
A) Internal events
B) External events
C) Current events
D) Past events
ANSWER: B
The communicating process of accounting includes all of the following except
A) Recording
B) Classifying
C) Summarizing
D) Interpreting
ANSWER: D
What is the law regulating the practice of Accountancy in the Philippines?
A) RA No. 9298
B) Ra No. 9198
C) Ra No. 9928
D) RA No. 9892
ANSWER: A
Many accountants are employed in entities in various capacity as accounting staff, chief
accountant or controller. These accountants are said to be engaged in
A) Public Accounting
B) Private Accounting
C) Government Accounting
D) Financial Accounting
ANSWER: B
The primary focus of financial accounting has been on meeting the needs of which of the
following groups?
A) Managers of an entity
B) Present and potential creditors of an entity
C) National and local taxing authorities
D) Independent auditors
ANSWER: B
Financial accounting is the area of accounting that emphasizes reporting to
A) Management
B) Regulatory bodies
C) internal auditors
D) Creditors and investors
ANSWER: D
Managerial accounting is the area of accounting that emphasizes
A) Reporting financial information to external users
B) Reporting to the SEC
C) Combining accounting knowledge with an expertise in data processing
D) Developing accounting information for use within an entity
ANSWER: D
Proper application of accounting principles is most dependent upon the
A) Existence of specific guidelines
B) Oversight of regulatory bodies
C) External audit function
D) Professional judgment of the accountant
ANSWER: D
The singularly unique function performed by Certified Public Accountant is
A) Tax preparation
B) Management advisory services
C) The attest function
D) The preparation of financial statements
ANSWER: C

STATEMENT OF FINANCIAL POSITION

1. On December 31, 2020, Tanjiro Company showed the following current assets:
Cash 500,000
AR 2,500,000
Inventory 2,000,000
Prepaid Expense 100,000
Total current assets 5,100,000

Cash on hand including customers’ postdated check of

P20,000 and employee IOU of P10,000 130,0000
Cash in bank per bank statement (outstanding checks
On December 31, 2020, (P70,000) 370,000
Total Cash 500,000

Customers’ debit balances, net of customers’ deposit of

P50,000 1,900,000
Allowance for DA (150,000)
Sales price of goods invoiced to customers @ 150%
Of cost on December 29, 2020 but delivered on January 5, 2021
And excluded from reported inventory 750,000
Total AR 2,500,000

What is the correct amount of current assets on December 31, 2020?

ANSWER: 4,830,000

SOLUTION

Current assets per book 5,100,000

Outstanding checks (70,000)
Customers’ deposit 50,000
Overstatement of AR (750,000)
Understatement of inventory (750,000/150%) 500,000
Correct amount of CA 4,830,000

2. the Dcember 31, 2020 statement of financial position of Nezuko Company contained the
following current assets:

Cash 3,200,000
AR 2,000,000
Inventory 2,800,000
Deferred charges 200,000
8,200,000

The Accounts Receivable consisted of the following items:

Customer’s accounts 1,420,000
Employees’ account-current 240,000
Advances to subsidiary 260,000
Allowance for uncollectible accounts (120,000)
Claim against shipper for goods lost in transit 200,000
2,000,000

What amount should Nezuko reports as total current assets?

ANSWER: 7,740,000

SOLUTION

Cash 3,200,000
AR 1,420,000
Allowance for uncollectible accounts (120,000)
Receivable from employees 240,000
Claim receivable 200,000
Inventory 2,800,000
Total current Assets 7,740,000

The Advances to subsidiary shall be classified as noncurrent investment. The deferred charges
are considered noncurrent because technically they expire in more than one year from the
end of reporting period.

3. Presented below are account balances and related information on December 31, 2020 for
Sun hyeok Company:

Cash and cash equivalent 3,700,000

AR 1,500,000
Allowance for DA (200,000)
Inventory 2,000,000
Prepaid insurance 300,000
7,300,000

Cash in bank, net of bank overdraft of P300,000

Maintained in a separate bank 1,000,000
Cash set aside by the Board of Directors for the
Purchase of a plant site 2,000,000
Petty Cash 10,000
Cash withheld from wages for income tax of employees 190,000
General Cash 500,000
Total cash and cash equivalents 3,700,000

The accounts receivable balance includes past due account in the amount of P100,000. The
account is deemed uncollectible and should be written off.

The inventory includes gods held on consignment amounting to P150,000 and goods of
P200,000 purchases and received on December 31, 2020. Neither of these items have been
recorded as a purchase.

The prepaid insurance includes cash surrender value of life insurance of P50,000.

What is the adjusted balance of current assets?

ANSWER: 5,400,000

SOLUTION

Current assets per book 7,300,000

Bank overdraft 300,000
Cash set aside for plant site (2,000,000)
Goods held on consignment (150,000)
Cash surrender value (50,000)
Adjusted correct assets 5,400,000

The bank overdraft is not “netted” against the cash in bank but shall be classified as current
liability.

The writeoff of the AR has no effect on current assets.

The cash surrender value is a noncurrent investment.

4. the following data pertain to Cheongsan Company on December 31, 2020:

Trade account payable, including cost of goods received

On consignment of P150,000 1,350,000
Accrued taxes payable 125,000
Customers’ deposit 100,000
Manila Company as guarantor 200,000
Bank overdtaft 55,000
Accrued electric and power bills 60,000
Reserve for contingencies 150,000
How much should be shown as total current liabilities?

ANSWER: 1,540,000

SOLUTION

AP (1,35M-150K) 1,200,000
Accrued taxes payable 125,000
Customers’ deposit 100,000
Bank overdraft 55,000
Accrued electric and power bills 60,000
Total current liabilities 1,540,000

5. The following information about Manchester Company is available on December 31, 2020:

Employee income taxes withheld 900,000

Cash balance at First state bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on
Merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory
Performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at
12%, payable in semiannual installments of P500,000
Due April 1 and October 1 of each year, the last bond to be
Paid on October 1, 2026. Interest is also paid semiannually 5,000,000
Stock dividend payable 2,000,000

What should be reported in the December 31, 2020 statement of financial position as total
current liabilities?

ANSWER: 8,100,000

SOLUTION

Employee income taxes withheld 900,000

Cash overdraft 1,300,000
AR with credit balances 750,000
Estimated waraanty liability 500,000
Estimated damages payable 1,500,000
AP 3,000,000
Accrued interest on bonds payable from October 1
To December 31, 2020 (5M x 12% x 3/12) 150,000
Total current liabilities 8,100,000

The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last
bond will be paid on October 1, 2026, the first bond will be paid on April 1, 2022. Accordingly,
there is no currently maturing bond in 2021.

STATEMENT OF COMPREHENSIVE INCOME

1. The December 31 balances of selected accounts of Romel Company and pertinent

information are shown below:

Inventory, Jan. 1 2,000,000

Purchases 7,500,000
Purchase return and allowances 500,000
Sales return and allowances 750,000
Inventory on December 31 2,800,000
Gross profit rate on net sales 20%

What is the amount of gross sales for the current year?

ANSWER: 8,500,000

SOLUTION

Inventory – Jan. 1 2,000,000

Purchases 7,500,000
Purchase return and allowance (500,000)
Goods available for sale 9,000,000
Inventory, Dec. 31 (2,800,000)
Cost of Goods Sold 6,200,000

Net sales (6.2M / 80%) 7,750,000

Sales return and allowances 750,000
Gross sales 8,500,000

2. The following information was taken from Inosuke Company’s accounting records for the
current year:
Increase in raw materials inventory 150,000
Decrease in finished goods inventory 350,000
Raw materials purchased 4,300,000
Direct labor payroll 2,000,000
Factory overhead 3,000,000
Freight out 450,000

There was no work in process inventory at the beginning or end of the year. What is the cost of
goods sold for the current year?

ANSWER: 9,500,000

Raw materials purchase 4,300,000

Increase in raw materials (150,000)
Raw materials used 4,150,000
Direct labor 2,000,000
Factory overhead 3,000,000
Cost of goods sold manufactured 9,150,000
Decreased in finished goods 350,000
Cost of goods sold 9,500,000

3. The following information was taken from Zenitsu Company’s accounting records for the
current year:

Decrease in raw materials inventory 500,000

Increase in goods in process inventory 800,000
Decrease in finished goods inventory 1,000,000
Raw materials purchased 20,000,000
Direct labor payroll 5,000,000
Factory overhead 4,000,000
Freight out 1,500,000
Freight in 2,300,000

What is the cost of goods sold for the current year?

ANSWER: 32,000,000

SOLUTION

Raw materials purchased 20,000,000

Freight in 2,300,000
Decrease in raw materials 500,000
Raw materials used 22,800,000
Direct labor 5,000,000
Factory overhead 4,000,000
Total manufacturing cost 31,800,000
Increase in goods process (800,000)
Cost of goods manufactured 31,000,000
Decrease in finished goods 1,000,000
Cost of goods sold 32,000,000

4. The operating expenses other than interest expense of Onjo Company for the current year
amount to 40% of cost of sales but only 20% of sales. Interest expense is 5% of Sales. The
amount of purchases is 120% of cost of sales. Ending inventory is twice as much as the
beginning inventory. The income after tax of 30% for the current year is P560,000.

What is the amount of sales for the current year?

ANSWER: 3,200,000

SOLUTION

Income before income tax (560K / 70%) 800,000

Sales 100%
Cost of sales (20% / 40%) (50%)
Operating expenses (20%)
Interest expense (5%)
Income before income tax 25%

Sales (800,000 / 25%) 3,200,000

5. Lord Tengen Company showed net income of P480,000 in its income statement for the
current year. Selling expenses were equal to 15% of sales and also 25% of cost of sales. All other
expenses were 13% of sales. What was the gross profit for the current year?

ANSWER: 1,600,000

SOLUTION

Sales 100%
Cost of Sales (15% / 25%) (60%)
Selling expenses (15%)
Other expenses (13%)
Net income 12%
Sales (480K / 12%) 4,000,000
Cost of sales (60% x 4M) 2,400,000
Gross profit 1,600,000