BALIUAG UNIVERSITY

CPA Review Program

Financial Accounting and Reporting
_____________________________________________________________________________________________
Module: Financial Statements: Statement of Financial Position & Notes to FS LVC

I. Presentation of Financial Statement (IAS 1)

 Objective of financial statements
The objective of general purpose 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. To meet that objective, financial statements provide information about an entity's:
 Assets
 Liabilities
 Equity
 Income and expenses, including gains and losses
 Contributions by and distributions to owners (in their capacity as owners)
 Cash flows.
These information, 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.
 Components of financial statements
 A complete set of financial statements includes:
a. Statement of financial position (balance sheet) at the end of the period
b. Statement of profit or loss and other comprehensive income for the period
c. Statement of changes in equity for the period
d. Statement of cash flows for the period
e. Notes to financial statements
f. Comparative information prescribed by the standard
g. When an entity applies an accounting policy retrospectively or makes a retrospective restatement
of items in its financial statements, or when it reclassifies items in its financial statements (IAS 1.
40A-40D), a statement of financial position as at the beginning of the preceding period.
 An entity may use titles for the statements other than those stated above. All financial statements are
required to be presented with equal prominence.
 An entity is required to present at least two of each of the primary financial statements.

II. Statement of Financial Position

 Definitions of the elements relating to financial position (Conceptual Framework)
1. Asset – A resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
2. Liability – A present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
3. Equity – The residual interest in the assets of the entity after deducting all its liabilities.
 Recognition of assets and liabilities (Conceptual Framework)
 An 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.
 A 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.
 Current and non-current classification
 An entity must normally present a classified statement of financial position, separating current and non-
current assets and liabilities, unless presentation based on liquidity provides information that is reliable.
 In either case, if an asset (liability) category combines amounts that will be received (settled) after 12
months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required
that separates the longer-term amounts from the 12-month amounts.
 Current assets are assets that are:
a. Expected to be realized in the entity's normal operating cycle
b. Held primarily for the purpose of trading
c. Expected to be realized within 12 months after the reporting period
d. Cash and cash equivalents (unless restricted)
e. All other assets are non-current.

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 Current liabilities are those:
a. Expected to be settled within the entity's normal operating cycle
b. Held for purpose of trading
c. Due to be settled within 12 months
d. For which the entity does not have an unconditional right to defer settlement beyond 12 months
(settlement by the issue of equity instruments does not impact classification).
e. Other liabilities are non-current.
 When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the
discretion to do so, the debt is classified as non-current, even if the liability would otherwise be due
within 12 months.
 If a liability has become payable on demand because an entity has breached an undertaking under a long-
term loan agreement on or before the reporting date, the liability is current, even if the lender has
agreed, after the reporting date and before the authorization of the financial statements for issue, not to
demand payment as a consequence of the breach.
 The liability is classified as non-current if the lender agreed by the reporting date to provide a period of
grace ending at least 12 months after the end of the reporting period, within which the entity can rectify
the breach and during which the lender cannot demand immediate repayment.
 Shareholders’ equity
1. Share capital (issued and subscribed)
 Ordinary shares
 Preference shares (convertible preference shares and callable preference shares)
 Subscribed shares (subscription receivables deducted if collectible in more than 12 months)
2. Reserves
 Share premium (Excess over par, donated capital, share warrants outstanding, etc.)
 Other comprehensive income
 Appropriated retained earnings
3. Retained earnings
 Unappropriated retained earnings
 Dividends declared (deduction)
4. Treasury shares (deduction)
 An entity shall disclose the following, either in the statement of financial position or the statement of changes
in equity, or in the notes:
a. For each class of share capital:
i. The number of shares authorized
ii. The number of shares issued and fully paid, and issued but not fully paid;
iii. Par value per share, or that the shares have no par value;
iv. A reconciliation of the number of shares outstanding at the beginning and at the end of the period;
v. The rights, preferences and restrictions attaching to that class, including restrictions on the distribution
of dividends and the repayment of capital;
vi. Shares in the entity held by the entity or by its subsidiaries or associates; and
vii. Shares reserved for issue under options and contracts for the sale of shares, including the terms and
amounts; and
b. A description of the nature and purpose of each reserve within equity.
 Line items in the statement of financial position
(a) Property, plant and equipment
(b) Investment property
(c) Intangible assets
(d) Financial assets (excluding amounts shown under (e), (h), and (i))
(e) Investments accounted for using the equity method
(f) Biological assets
(g) Inventories
(h) Trade and other receivables
(i) Cash and cash equivalents
(j) Assets held for sale
(k) Trade and other payables
(l) Provisions
(m) Financial liabilities (excluding amounts shown under (k) and (l))
(n) Current tax liabilities and current tax assets, as defined in IAS 12
(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12
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(p) Liabilities included in disposal groups
(q) Non-controlling interests, presented within equity
(r) Issued capital and reserves attributable to owners of the parent.
 Illustration of account classification
Requirement: Classify the following accounts as current asset (CA), noncurrent asset (NCA), current liability
(CL), noncurrent liability (NCL), shareholders’ equity (SHE), or others.
 Accounts payable
 Accounts receivable
 Accrued interest expense
 Accrued interest income
 Accumulated depletion
 Accumulated depreciation
 Advances from customers
 Advances to employees
 Allowance for doubtful accounts
 Appropriated retained earnings
 Bank overdraft (with another bank account in same bank)
 Bank overdraft (no other bank account in same bank)
 Bank payable (Due in 1 month, entity has unconditional right to defer settlement for at least 12 months
after reporting period)
 Biological assets
 Bonds payable (Serial bonds, annual installments for 6 years)
 Bonds payable (Term bonds, mature in 4 years)
 Callable preference shares
 Cash in bank
 Cash on hand
 Contingent liability
 Convertible preference shares
 Cost of goods sold
 Customer credit balance
 Deferred revenue
 Deferred tax asset
 Deferred tax liability
 Dividends declared account
 Discount on long term bonds payable
 Donated capital
 Equipment and machineries
 Estimated liability (Premium and warranty)
 Financial asset at amortized cost (Bonds mature in 3 years)
 Financial assets at fair value through other comprehensive income
 Financial assets at fair value through profit and loss
 Finished goods
 Furniture and fixtures
 Goodwill
 Income tax payable
 Investment property
 Land held for sale
 Long-term notes payable
 Long-term notes receivable
 Mortgage payable (Due in 2 months, agreement to refinance for another 2 years completed after
reporting period but before issuance of FS)
 Ordinary share capital
 Other comprehensive income
 Patent
 Preference share capital
 Prepaid expense
 Provision
 Raw materials
 Redeemable preference shares
 Retained earnings
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 Revaluation surplus
 Share premium
 Share warrants outstanding
 Sinking fund
 Subscribed ordinary shares
 Subscription receivable
 Treasury bills (90-day bill)
 Treasury shares
 Wasting asset properties
 Work-in-process goods

III. Notes to Financial Statements

 Notes contain information in addition to that presented in the statement of financial position, statement(s)
of profit or loss and other comprehensive income, statement of changes in equity and statement of cash
flows. Notes provide narrative descriptions or disaggregation of items presented in those statements and
information about items that do not qualify for recognition in those statements.
 Contents of notes to financial statements
 The notes must:
- Present information about the basis of preparation of the financial statements and the specific
accounting policies used;
- Disclose any information required by IFRSs that is not presented elsewhere in the financial
statements; and
- Provide additional information that is not presented elsewhere in the financial statements but is
relevant to an understanding of any of them.
 Presentation of notes to financial statements
IAS 1 suggests that the notes should normally be presented in the following order:
a. A statement of compliance with IFRSs
b. A summary of significant accounting policies applied, including:
 The measurement basis (or bases) used in preparing the financial statements
 Other accounting policies used that are relevant to an understanding of the financial statements
c. Supporting information for items presented on the face of the statement of financial position (balance
sheet), statement(s) of profit or loss and other comprehensive income, statement of changes in
equity and statement of cash flows, in the order in which each statement and each line item is
presented.
d. Other disclosures, including:
 Contingent liabilities (IAS 37) and unrecognized contractual commitments
 Non-financial disclosures, such as the entity's financial risk management objectives and policies
(IFRS 7 Financial Instruments: Disclosures)
 Other disclosures
 Judgments, key assumptions and estimation uncertainty
 Capital disclosures
 Puttable financial instruments classified as equity
 Dividends
 Other information
- The domicile and legal form of the entity, its country of incorporation and the address of its registered
office, description of the nature of operations and principal activities, name of parent and ultimate
parent of the group, and information regarding the length of its life.

IV. Related-Party Disclosure (IAS 24)

 Definition of terms
 Related party – A person or entity that is related to the entity that is preparing its financial statements
(referred to as the 'reporting entity').
 Related party transaction – A transfer of resources, services, or obligations between related parties,
regardless of whether a price is charged.
 Related parties
A. A person or a close member of that person's family is related to a reporting entity if that person:
1. Has control or joint control over the reporting entity
2. Has significant influence over the reporting entity

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3. A member of the key management personnel of the reporting entity or of a parent of the reporting
entity
B. An entity is related to a reporting entity if any of the following conditions applies:
a. The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
b. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member).
c. Both entities are joint ventures of the same third party.
d. One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
e. The entity is a post-employment defined benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a
plan, the sponsoring employers are also related to the reporting entity.
f. The entity is controlled or jointly controlled by a person identified in (A).
g. A person identified in (A.1) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
h. The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.
 Disclosure requirements
1. Relationships between parents and subsidiaries
Regardless of whether there have been transactions between a parent and a subsidiary, an entity must
disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's
parent nor the ultimate controlling party produces financial statements available for public use, the name
of the next most senior parent that does so must also be disclosed.
2. An entity shall disclose key management personnel compensation in total and for each of the following
categories:
a. Short-term employee benefits
b. Post-employment benefits
c. Other long-term benefits
d. Termination benefits
e. Share-based payment.
3. If an entity has had related party transactions during the periods covered by the financial statements, it
shall disclose the nature of the related party relationship as well as information about those transactions
and outstanding balances, including commitments, necessary for users to understand the potential effect
of the relationship on the financial statements.
a. The amount of the transactions
b. The amount of outstanding balances, including terms and conditions and guarantees.
c. Provisions for doubtful debts related to the amount of outstanding balances.
d. The expense recognized during the period in respect of bad or doubtful debts due from related
parties.
 Unrelated parties
The following are deemed not to be related:
1. Two entities simply because they have a director or key manager in common
2. Two venturers who share joint control over a joint venture
3. Providers of finance, trade unions, public utilities, and departments and agencies of a government that
does not control, jointly control or significantly influence the reporting entity, simply by virtue of their
normal dealings with an entity (even though they may affect the freedom of action of an entity or
participate in its decision-making process)
4. A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a
significant volume of business merely by virtue of the resulting economic dependence.

V. Event After the Reporting Period (IAS 10)

 Definition of terms
 Event after the reporting period – An event, which could be favorable or unfavorable, that occurs
between the end of the reporting period and the date that the financial statements are authorized for
issue.
 Adjusting event – An event after the reporting period that provides further evidence of conditions that
existed at the end of the reporting period, including an event that indicates that the going concern
assumption in relation to the whole or part of the enterprise is not appropriate.

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 Non-adjusting event – An event after the reporting period that is indicative of a condition that arose after
the end of the reporting period.
 Going concerns issues arising after end of the reporting period
An entity shall not prepare its financial statements on a going concern basis if management determines after
the end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has
no realistic alternative but to do so.
 Examples of adjusting events after the reporting period
1. The settlement after the reporting period of a court case that confirms that the entity had a present
obligation at the end of the reporting period (IAS 37).
2. The receipt of information after the reporting period indicating that an asset was impaired at the end of
the reporting period, or that the amount of a previously recognized impairment loss for that asset needs
to be adjusted. For example:
a. The bankruptcy of a customer that occurs after the reporting period usually confirms that the
customer was credit-impaired at the end of the reporting period.
b. The sale of inventories after the reporting period may give evidence about their net realizable value at
the end of the reporting period.
3. The determination after the reporting period of the cost of assets purchased, or the proceeds from assets
sold, before the end of the reporting period.
4. The determination after the reporting period of the amount of profit-sharing or bonus payments, if the
entity had a present legal or constructive obligation at the end of the reporting period to make such
payments as a result of events before that date (IAS 19).
5. The discovery of fraud or errors that show that the financial statements are incorrect.
 Examples of non-adjusting events after the reporting period
1. A decline in fair value of investments between the end of the reporting period and the date when the
financial statements are authorized for issue.
2. Dividends declared to holders of equity instruments after the reporting period, the entity shall not
recognize those dividends as a liability at the end of the reporting period.
3. A major business combination after the reporting period or disposing of a major subsidiary (IFRS 3).
4. Announcing a plan to discontinue an operation.
5. Major purchases of assets, classification of assets as held for sale (IFRS 5), other disposals of assets, or
expropriation of major assets by government.
6. The destruction of a major production plant by a fire after the reporting period.
7. Announcing, or commencing the implementation of, a major restructuring.
8. Major ordinary share transactions and potential ordinary share transactions after the reporting period
(IAS 33).
9. Abnormally large changes after the reporting period in asset prices or foreign exchange rates.
10. Changes in tax rates or tax laws enacted or announced after the reporting period that have a significant
effect on current and deferred tax assets and liabilities (IAS 12).
11. Entering into significant commitments or contingent liabilities, for example, by issuing significant
guarantees.
12. Commencing major litigation arising solely out of events that occurred after the reporting period.
 Disclosure requirement
 Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect
the ability of users to make proper evaluations and decisions. The required disclosure is
a. The nature of the event, and
b. An estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be
made.
 A company should update disclosures that relate to conditions that existed at the end of the reporting
period to reflect any new information that it receives after the reporting period about those conditions.
 Companies must disclose the date when the financial statements were authorized for issue and who gave
that authorization. If the enterprise's owners or others have the power to amend the financial statements
after issuance, the enterprise must disclose that fact

 Multiple Choice Questions

On December 31, 20X1, A COMPANY showed the following current assets:
Cash 500,000
Accounts receivable 2,500,000

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Inventory 2,000,000
Prepaid expenses 100,000
Total current assets 5,100,000

Cash on hand including customer postdated check of P20,000 and employee

IOU of P10,000 130,000
Cash in bank per bank statement (outstanding checks on
December 31, 20X1, P70,000) 370,000
Total cash 500,000

Customers’ debit balances, net of customer deposit of P50,000 1,900,000

Allowance for doubtful accounts ( 150,000 )
Sale price of goods invoiced to customers at 150% of cost on December 29, 20X1
but delivered on January 5, 20X2 and excluded from reported inventory 750,000
Total accounts receivable 2,500,000
1. What is the adjusted cash balance?
a. 500,000 c. 430,000
b. 470,000 d. 400,000
2. What is the net realizable value of accounts receivable?
a. 1,970,000 c. 1,800,000
b. 1,820,000 d. 1,950,000
3. What is the adjusted inventory?
a. 2,000,000 c. 2,500,000
b. 2,375,000 d. 2,750,000
4. What total amount of current assets should be reported?
a. 4,900,000 c. 4,780,000
b. 4,830,000 d. 4,630,000
B COMPANY reported the following current assets on December 31, 20X1:
Cash in bank, net of P500,000 bank overdraft in another bank 4,000,000
Accounts receivable 7,500,000
Notes receivable 2,000,000
Note receivable discounted 500,000
Inventory, including P300,000 expected to be sold in the ordinary course
beyond 12 months 4,500,000
Financial assets at FVTPL 1,000,000
Financial assets at FVTOCI 1,500,000
Prepaid expenses, including cash surrender value of P200,000 500,000
Deferred tax assets 2,500,000
Equipment classified as “held for sale” 3,000,000
The accounts receivable included customers’ accounts of P5,000,000, net of customers’ credit balances of
P600,000, allowance for doubtful accounts P500,000, and selling price of unsold goods out on consignment at a
markup of 50% on cost and excluded from ending inventory P3,000,000.
5. What amount should be presented as total current assets on December 31, 20X1?
a. 21,900,000 c. 18,900,000
b. 22,400,000 d. 21,600,000
C COMPANY provided the following data on December 31, 20X1:
Cash 5,000,000
Financial assets at fair value (including long-term investment of P500,000
in ordinary shares of Ayala Company) 2,000,000
Inventories (including goods received on consignment of P200,000) 800,000
Prepaid expenses (including a deposit of P50,000 made on inventories to be
delivered in 18 months) 150,000
Property, plant and equipment (excluding P300,000 of equipment still in use,
but fully depreciated) 10,000,000
Goodwill (based on the estimate of the president) 1,000,000
Total assets 18,950,000

Cash in general checking account 3,500,000

Cash in fund to be used to retire bonds in 20X1 1,000,000
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Cash held to pay value added taxes 500,000
Total cash 5,000,000
6. What total amount of current assets should be reported on December 31, 20X1?
a. 6,250,000 c. 7,200,000
b. 6,200,000 d. 7,250,000
D COMPANY provided the following information on December 31, 20X1:
Accounts payable, net of debit balances of P100,000 in creditors’ accounts 1,900,000
Accrued expenses 500,000
Bonds payable due on December 31, 20X2 3,000,000
Discount on bonds payable 200,000
Deferred tax liability 400,000
Income tax payable 700,000
Cash dividend payable 800,000
Stock dividend payable 300,000
Note payable – 6%, due March 1, 20X2 1,500,000
Note payable – 8%, due October 1, 20X2 1,000,000
The 20X1 financial statements were issued on March 31, 20X2. On March 1, 20X2, the 6% note payable was
refinanced on a long-term basis. Under the loan agreement for the 8% note payable, the entity has the discretion
to refinance the obligation for at least 12 months after December 31, 20X1. The deferred tax liability is based on
temporary differences that will reverse in 20X2. A sinking fund of P3,000,000 was set aside to pay the bonds
payable upon maturity.
7. What amount should be reported as total current liabilities on December 31, 20X1?
a. 8,300,000 c. 9,000,000
b. 9,300,000 d. 5,500,000
E COMPANY provided the following account balances and related information on December 31, 20X1:
Cash and cash equivalents 3,700,000
Accounts receivable 1,500,000
Allowance for doubtful accounts ( 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 included past due account in the amount of P100,000. The account is deemed
uncollectible and should be written off. The inventory included goods held on consignment amounting to
P150,000 and goods of P200,000 purchased and received on December 31, 20X1. Neither of these items have
been recorded as a purchase. The prepaid insurance included cash surrender value of life insurance of P50,000.
8. What amount should be reported as current assets on December 31, 20X1?
a. 5,400,000 c. 5,300,000
b. 5,100,000 d. 5,200,000
F COMPANY reported that remuneration and other payments made to the chief executive officer during the
current year were:
Annual salary 2,000,000
Share options and other share based payments 1,000,000
Contributions to the retirement benefit plan 500,000
Reimbursement for travel expenses for business trips 1,200,000
9. What total amount should be disclosed as “compensation” to key management personnel?
a. 3,500,000 c. 3,000,000
b. 4,700,000 d. 2,500,000
The following trial balance of G COMPANY on December 31, 20X1 has been adjusted except for income tax
expense:
Cash 600,000
Accounts receivable, net of allowance of P100,000 1,650,000
Prepaid taxes 300,000
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Accounts payable ( 140,000 )
Share capital ( 500,000 )
Share premium ( 680,000 )
Retained earnings ( 630,000 )
Foreign currency translation adjustment 400,000
Revenue ( 3,600,000 )
Expenses 2,600,000
During 20X1, estimated tax payment of P300,000 were charged to prepaid taxes. The entity has not yet recorded
income tax expense. There were no differences between financial and taxable income. The rate is 30%.
Included in accounts receivable is P500,000 due from a customer. Ordinary terms granted to this customer
require payment in equal semiannual installmentsP125,000 every April 1 and October 1.
10. In the December 31, 20X1 statement of financial position, what amount should be reported as total current
assets?
a. 2,000,000 c. 2,300,000
b. 2,200,000 d. 2,250,000
11. In the December 31, 20X1 statement of financial position, what amount should be reported as total retained
earnings?
a. 1,680,000 c. 1,330,000
b. 1,200,000 d. 1,630,000

”Learning is not attained by chance, it must be sought for with ardor and diligence.” Abigail Adams

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