FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
1. ASC- accounting is a service activity. Its function is to provide quantitative information primarily financial in
nature that is intended to be useful in making economic decisions.
2. AICPA- accounting is the ART of recording, classifying, summarizing(RCS—communication process)
3. AAA(statement of basic accounting theory)- PROCESS of identifying, measuring, communicating(IMC)
4. Identifying as the analytical component
5. Measuring as the technical component
6. Communicating as the formal component
7. In order to be identifiable, a certain event must be quantifiable or expressed in terms of a unit of measure. It
must have an effect on Assets, Liabilties, OE.
8. External transaction is also known as exchange transaction which involves 2 entities. Example is payment of
salaries to employees.
9. Internal transaction- production and casualty loss(unanticipated losses, act of god)
10. Accounting is the language of business because of the communication process.
11. Classifying- is accomplished by posting to the ledger
12. Summarizing- preparation of FS.
13. Accountant’s primary task is to supply financial information to statement users so that they could make
informed judgment and better decision.
14. Rep. Act 9298- Philippine accountancy act of 2004 regulates the practice of accountancy in the Phil.
15. BOA- body authorized by law to promulgate rules and regulations affecting the practice of the accountancy
profession
16. Certificate of registration shall be issued if the registrant has acquired a minimum of 3 years of meaningful
experience in any areas of public practice including taxation. It will be valid for 3 years, renewable every 3
years upon payment of required fees.
17. Management advisory services- business conduct and operations
18. Controller is the highest accounting officer
19. Accounting is essentially constructive in nature
20. Auditor examines FS to ascertain whether they are in conformity with GAAP.
21. GAAP is a social process.
22. Development of GAAP is formalized initially through the creation of ASC. The accounting standards
promulgated by the ASC constitute the GAAP.
23. SFAS is now known as PAS and PFRS
24. Accounting standards-proper accounting practice. It creates common understanding.
25. FRSC replaces ASC
26. FRSC is the accounting standard setting body created by PRC upon recommendation of BOA to assist the
BOA in carrying out its powers and functions provided under RA 9298. Main function is to esbalish and
improve accounting standards that will be generally accepted in the Phil.
27. FRSC is composed of 15 members with a chairman who had been or is presently a senior accounting
practitioner. 2 members from Public practice, commerce and industry, academe, government.
28. The counterpart of PIC is the IFRIC in UK
29. IASC- improvement, harmonization and worldwide acceptance and observance of accounting standards
30. IASB replaces IASC. It is a global phenomenon intended to bring about great transparency and a higher
degree of comparability in financial reporting; one uniform and globally accepted financial reporting standard
31. Accounting assumptions- serve as the foundation or bedrock of accounting to avoid misunderstanding.
Known as postulates.
32. Accounting/fiscal period- 12months
33. Fiscal period could either be calendar or natural. If calendar, ends on dec. 31. if natural, ends on any month
when the business is at the lowest or experiencing slack season.
34. Monetary Unit has 2 aspects, quantifiability and stability of peso(current replacement cost is ignored).
Sometimes, it is not necessarily valid that peso is stable since there may be instances wherein there is a
FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
considerable gap between historical and current replacement cost. Entity should therefore choose whether cost
model or revaluation model they will apply to their entire class of PPE.
35. Framework for FS is promulgated by the IASB
36. Framework is the underlying theory for the development of accounting standards and revision of previously
issued accounting standards. Assists FRSC, preparers of FS, users and auditors
37. Framework excludes special-purpose report such as prospectuses and tax computation
38. FS largely portray the financial effects of past events and do not necessarily provide nonfinancial
information. It shows the result of the stewardship of management or the accountability of management for the
resources entrusted to it.
39. Management has the primary responsibility for the preparation of FS.
40. Capacity for adaption or financial flexibility– using the entity’s available cash for unexpected requirements
and investment opportunities. It is may be accomplished through raising cash at a short notice through
borrowing, sale of securities, disposal of assets without disrupting normal operations
41. Accounting concepts:
a. Entity theory= A=L+C (income statement)
b. Proprietary= A-L=C (statement of FP)
c. Residual equity= A-L-preference/OS=C
d. Fund Theory= Fund= Cash inflows-cash outflows (custody and administration of funds)
42. Financial reporting= provision of financial information about an entity to external users. Not just financial
statements but also other means of communicating information. It includes non-financial information.
43. Financial reporting objectives:
a. provide information useful in investment, credit, and similar decision
b. cash flow prospects
c. resources and claims to those resources and changes in them.
44. Four principal qualitative characteristics:
a. relevance
b. reliability
c. understandability
d. comparability
45. relevance and reliability relate to content and are primary qualities.
46. understandability and comparability relate to presentation and are secondary characteristics.
47. Relevance is affected by its nature and materiality. It helps users form predictions and confirmations or
revision to their expectation.
48. Ingredients of relevance are:
a. Predictive value
b. feedback value
c. Timeliness
49. Reliability ingredients:
a. Faithful representation-actual effects of transaction should be properly accounted for and reported
b. Substance over form-
c. Neutrality
d. Conservatism or prudence
e. Completeness- Standard of adequate disclosure(notes to FS)
50. Understandability- Users are assumed to have a reasonable knowledge of the economic activities and
accounting and a willingness to study the information with reasonable diligence
51. Accounting constraints:
a. Timeliness
b. Cost-benefit
c. Materiality
d. Balance between relevance and reliability
52. Materiality- doctrine of convenience. Quantitative threshold
FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
53. An example of trade-off between relevance and reliability is when entity reports quoted equity
instruments at
54. . Information is relevant but not reliable. On the other hand, if entity reports an instrument at cost,
information is reliable but may not be relevant.
54. Installment method- revenue is recognized at the point of collection. Revenue is determined by multiplying
the gross profit by amount of collection
55. Immediate recognition of expense- reflects conservatism or prudence. Revenue expenditure
56. Financial performance is determined using 2 approaches:
a. capital maintenance- net income occurs if capital is maintained(single entry)
b. transaction approach- traditional preparation of income statement
57. 2 concepts of capital maintenance:
a. financial capital- based on historical host
b. physical capital-current cost
Cash and cash equivalents
1. Cash not just include currency and coins but also those that are acceptable by bank for deposit or
immediate encashment such as checks, bank drafts and money orders.
2. Cash is measured at face value. Cash in foreign currency is measured at current exchange rate
3. If the financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash
should be written down to estimated realizable value if the amount recoverable is estimated to be lower
than face value
4. excess cash should be invested in revenue-earning investment
5. deposits in foreign investment which are subject to foreign exchange restriction, if material, should be
classified separately among noncurrent assets and the restriction clearly indicated.
6. Details comprising cash and cash equivalents should be disclosed in the notes to financial statements
7. the credit balance in the cash in bank account results from the issuance of checks in excess of the
deposits—overdraft
8. Overdraft is not permitted in the Philippines
9. if entity maintains two or more accounts in one bank and one account results in an overdraft, such
overdraft can be offset against the other bank account with debit balance in order to show, cash, net of
bank overdraft
10. An overdraft can also be offset against the other bank account if the amount is immaterial
11. if the deposit is legally restricted because of a formal compensating balance agreement, the
compensating balance is classified separately as “cash held as compensating balance” under current
assets if the related loan is short term, otherwise, it is classified as noncurrent investment
12. In banking practice, checks become stale if not encashed within 6months from the time of issuance
13. if stale check is immaterial, it is simply accounted for as a miscellaneous income.
Cash
Miscellaneous Income
14. If material and liability is expected to continue, cash is restored and liability is again set up
15. Cash short/over Due from cashier Loss from cash shortage
Cash Cash short/over Cash short/over
16. cash short/over account is a temporary account. When we already know the cause of such shortage or
overage, we then cancel d cash short/over account and replace it with the “real cause”.
17. Imprest system- system of control of cash which requires that all cash receipts should be deposited intact
and all cash disbursement should be made by means of check.
18. In imprest system, payment of expenses requires no formal entries. Petty cashier generally requires a
signed petty cash voucher for such payments and prepares memo entry in the petty cash journal.
19. Petty cash disbursement should be replenished only by means of check and not from undeposited
collection
20. If not replenished, the entry is to state the correct cash fund is:
FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
expenses
petty cash fund
21. Under fluctuating fund system, checks drawn to replenish the fund do not necessarily equal the petty
cash disbursement. Expenses are immediately recorded and PCF fluctuates from to time.
Accounts Receivable
1. Account receivable is an open account not supported by a promissory note. Also known as trade debtors
2. advances to affiliates are usually treated as a long-term investment
3. Creditors’ accounts with debit balances are classified as current assets.
4. Special deposits on contract bids normally are classified as other noncurrent assets
5. Financial assets shall be recognized initially at fair value plus transaction costs that are directly
attributable to the acquisition. Fair value is usually the transaction price , fair value of the consideration
given
6. AR is subsequently measured at net realizable value or estimated recoverable amount
7. assets shall not be carried at above their recoverable amount
8. freight collect means freight charge on the goods shipped is not yet paid. Buyer pays for it
9. freight prepaid is already paid by the seller
10. AR 100,000
Freight-out 5,000
Sales 100,000
Allow.for freight charge 5,000
Cash 93,000
Sales discount 2,000
Allowance for freight charge 5,000
Accounts receivable 100,000
11. Sales return
Allowance for sales return
12. Net method(beyond the discount period):
Cash 100,000
AR 95,000
Sales discount forfeited(income) 5,000
13. Allowance method conforms with matching principle. AR is properly measured at NRV
14. Reversal in Direct write-off:
AR Cash or if discovered in subsequent year: Cash
Bad debts AR Miscellaneous Income
15. Correction of excessive allowance:
Allowance for DA 30T
Doubtful accounts 20T
Miscellaneous income 10T
16. if granting of credit and collection of accounts are under the charge of the sales manager, doubtful
accounts shall be considered as distribution cost. If under an officer, it is administrative expense. In the
absence to the contrary it is admin expense.
Loan receivable
1. Transaction costs that are directly attributable to the loan receivable include direct origination cost.
FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
2. direct origination cost is an origination fee not chargeable against the borrower
3. Loan receivable 5M Cash 331,800 Unearned 100T
Cash 5M Unearned Interest 331,800 Cash 100T
Principal amount 5,000,000
Origination fees received ( 331,800)
Direct origination cost incurred 100,000
4,768,200
*next step is to find the effective interest that would discount the principal amount and future interest
payment to 4,768,200
* the discount on loan receivable is 231,800 to be amortized using effective interest method
Receivable financing
1. Financial flexibility or capability of an entity to raise money out of its receivables
2. Assignment of accounts receivable is transferring some of the rights in AR to a lender called the assignee
in consideration for a loan. It is formal, evidenced by a financing agreement and a promissory note both of
which the assignor assigns.
3. Pledging is general because all AR serve as collateral for the loan.
4. in Nonnotification basis, customers are not informed that that their accounts have been assigned. As a
result, they continue to make payments to the assignor, who in turn remits collection to the assignee. In
notification basis, customers are notified to make their payments directly to the assignee.
5. Assignee lends only a certain percentage of the face value of the accounts assigned because the assigned
accounts may not be fully realized by reason of such factors as sales discount, sales return, and allowances
and uncollectible accounts.]
6. Notification:
Note payable 588,000 NP 800,000
Sales discount 12,000 Cash received (588,000)
Accounts receivable assigned 600,000 Balance 212,000
Interest expense 8,000
Cash 8,000 AR-assigned 1,000,000
Collection (900,000)
Remittance from the bank: Balance 100,000
Cash 85,880
Interest expense(1%x212T) 2,120
NP 212,000
AR-assigned 300,000
AR 100,000
AR-assigned 100,000
7. entity shall disclose its equity in the assigned accounts
AR-assigned 1,000,000
Less: NP 800,000
Equity 200,000
8. factoring is a sale of AR on a without recourse, notification basis. Factor assumes responsibility for
uncollectible factored accounts. In assignment, assignor retains ownership of the accounts assigned.
9. Casual factoring- normal sale of accounts receivable, without other deductions
10. Cash 365,000
Sales disc 10,000
FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
Commission 25,000
Receivable from factor 100,000
Accounts receivable 500,000
*Customer is subsequently allowed a credit of 50,000 for damaged merchandise:
Sales returns and allowance 50,000
Sales discount(2%x50T) 1,000
Receivable from factor 49,000
*final settlement:
Cash 51,000
Receivable from factor 51,000
11. if customer buys goods and uses a credit card, the credit card receipt must be forwarded by the retailer to
the card issuer who will then pay the retailer the appropriate amount minus credit service charge
Accounts receivable- Diners club 200T
Sales 200T
Cash 194,000
Credit card service charge 6,000
AR-diners club 200,000
12. Notes received from officers, employees, shareholders and affiliates shall be designated separately
13. Dishonored notes shall be removed from the notes receivable account and transferred to accounts
receivable at an amount to include, if any, interest and other charges.
Accounts receivable
Notes receivable
Interest Income
14. When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a
bank or other financing company. Payee then becomes an endorser and the bank becomes the endorsee
15. Endorsement may be with recourse which means that the endorser shall pay the endorsee if the maker
dishonors the note. This is the contingent or secondary liability of the endorser; or it could be without
recourse which means that the endorser avoids future liability even if the maker refuses to pay the endorsee
on the date of maturity. In the absence to the contrary, endorsement is assumed to be with recourse.
16. Principal 1,000,000
Interest(1Mx12%x180/360) 60,000
MV(full term of the note) 1,060,000
Term of the note 180
Less: Days expired from july 1 to aug.30 60
Discount period 120days
Discount: (1,060,000 x 15% x 120/360) 53,000
Net proceeds: 1,060,000-53,000= 1,007,000
Principal 1,000,000
Accrued interest(1Mx12%x60/360) 20,000
CV 1,020,000
Cash 1,007,000
Loss on NR discounting 13,000
Notes receivable 1,000,000
FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa
Interest Income 20,000
17. If the discounting is with recourse, the transaction is accounted for as either conditional sale of note
receivable recognizing contingent liability and secured borrowing
a. conditional sale:
Cash 1,007,000
Loss on NR discounting 13,000
Note receivable discounted 1,000,000
Interest Income 20,000
*the note receivable discounted account is deducted from the total note receivable when
preparing the balance sheet with disclosure of contingent liability
*the note is paid by the maker to the first bank
NR discounted 1,000,000
Note receivable 1,000,000
*if the note is dishonored by the maker and the entity pays the first bank the maturity value, plus protest
fee and other bank charges of 40,000
Accounts receivable 1,100,000 NR discounted 1M
Cash 1,100,000 Note receivable 1M
18. if the discounting is treated as secured borrowing, NR is not derecognized but instead an accounting
liability is recorded at an amount equal to the face amount of the NR discounted
Cash 1,007,000
