Intermediate Accounting vol 1 -Reviewer-Compilation PDF

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Chapter 1 Cash and Cash Equivalents Assets – economic resource controlled by the entity as a result of past events. Economic resource – a right that has the potential to produce economic benefits embodied in any of the following ways: a. Used to singly or with other assets in the production of revenues b. Used to acquire other assets, or settle a liability, or distribute to the enterprise owners Nature – a factor that determines which accounting standard is applicable to its recognition and measurement. Financial assets – group of assets evidenced by financial instruments. Nature of Financial Assets According to IAS 32, Financial Instrument – is any contract that gives rise to a financial asset of one entity and a financial liability or equity to another. Holder – financial asset Issuer – financial liability or a component of shareholder equity Financial assets – arises from a contract that entitles the holder to receive cash or another financial asset. It also includes derivatives. Derivative – a financial instrument that meets all of the following characteristics: a. Its value changes in response to change in specified interest rate, commodity price, financial instrument price, foreign exchange rate, price index, credit rating or credit index, or other variables. b. It requires no initial net investment, or initial net investment smaller than that required in similar contracts; and c. It is settled at a future date (ex. Options and warrants that enable holders to acquire equity shares of other entities.) Financial assets and liabilities are within the scope of IFRS 9 Financial Instruments. Recognition of Financial Assets -

Depends on the attributes or relevance and faithful representation. The probability of a flow of economic benefits and existence uncertainty affect the relevance of information IFRS 9 provides that an entity shall recognize a financial asset in its statement of a financial position when and only when the entity becomes a party to the contractual

provisions of the instrument. (the entity recognizing the financial asset has the enforceable right to the inflow of the economic benefits from the instrument)

Cash as a Financial Asset Cash – most significant because of its ability to settle an obligation, acquire another asset, pay operating costs, or provide returns to enterprise owners. (most often the first item listed in the face of financial statements) -

It is used as a medium of exchange. Refers to currency and coins that are in circulation Recognized at face value and must be unrestricted and must be available for use in current operations.

It includes:  

Bills and coins on hand Demand credit instruments (checks, bank drafts, postal money orders and currency demand deposits with banks)

The presentation of the cash item must parallel the intention of the management for which cash is held. Cash funds – during current operations qualify to be reported as cash in the current assets section of the statement of financial position. Examples:      

Payroll fund Working fund Change fund Petty cash fund Interest fund Dividend fund

Cash funds intended for acquisition of non-current assets do not quality to be reported as part of current assets. (plant expansion fund, equipment acquisition fund) Cash funds for settlement of long-term obligations are also classified as non-current. (Sinking fund) unless the long-term obligation or portion becomes due within 12 months after the end of the reporting period. Cash funds set aside for liquidation shall be both classified as current and form part of cash. Cash includes: Cash on hand

Undeposited cash collections Currencies such as bills and coins Customer checks Traveler’s checks Manager’s checks Cashier’s checks Bank drafts Money orders Working fund – cash funds segregated for current use in ordinary operations. Petty cash fund Change fund Payroll fund Dividend fund Tax fund Interest fund Cash in bank – demand deposits Nature and Composition of Cash Equivalents Cash equivalents – highly liquid financial instruments that are so near their maturity and there is insignificant risk of change in value due to interest rates. It matures normally within 3 months or less, from date of acquisition. Temporary investments in equity shares – not included as part of cash equivalents because these equity securities do not have any maturity dates. They are classified either as equity investments at fair value through profit or loss or equity investments at fair value through comprehensive income Redeemable preference shares – that are to be reacquired by issuing corporation at a determined redemption date, are in substance debt instruments, and such, may qualify to be reported as cash equivalents if purchased within three months. Presentation and Measurement of Cash in the Statement of Financial Position -

Cash is generally measured at face value, which is its amortized cost and fair value at the same time. Cash deposits in foreign currency are measured using the exchange rate in effect of the end of the reporting period. If the statements are not prepared for special purpose, it is not necessary to classify cash to distinguish between currencies on hand, cash in banks, or deposits at various locations (details are disclosed on notes)

The following summarizes several noteworthy considerations in reporting cash balance in the statement of financial position: 1. Foreign currency. Cash in foreign currency and deposits in foreign banks. – which are subject to immediate and unrestricted withdrawal, should be translated to Philippine currency using the exchange rate at the end of the reporting period. 2. Cash in closed banks or in banks having financial difficulty or in bankruptcy – should be reclassified as receivable and written down to recoverable amount. 3. Customers’ post dated checks, NSF checks (no sufficient fund checks are those that cannot be covered by the funds in the debtor’s bank account) and IOUS – should be reported as receivables. DAIF – drawn against insufficient funds; DAIF – drawn against unclear deposits 4. Postage stamps and expense advances – prepaid expenses 5. Bank overdraft – reported as a liability. A bank overdraft occurs when a depositor has written checks for a sum greater than the amount in the depositor’s bank account 6. Undelivered or unreleased checks – should be reverted back to cash balance. 7. Company’s postdated checks – reverted back to cash and the corresponding liability shall be recognized 8. Compensating balances – minimum amounts that accompany agrees to maintain as support or collateral for a loan (when not restricted, the amount can be reported as cash) 9. Cash set aside for long-term purpose or for acquisition of a non-current asset – is reported as non-current financial asset Cash Management -

Excessive amount of cash also indicates that the resources are not efficiently managed and represents unproductive assets.

Characteristics of a System of Cash Control: 1. Segregation of duties for handling cash and recording transactions 2. Imprest system – daily deposit of all cash receipts intact to the bank and making disbursements through issuance of checks. 3. Voucher systems 4. Internal audits at irregular intervals 5. Periodic reconciliation of bank statement balance and cash balance in the company’s accounting records. Petty Cash Fund -

Allowance for small expenditures in which issuance of checks will be considered impractical.

Cash short or over -

Nominal account that is debited for shortages And credited for overages in the petty cash fund The debit balance in Cash short and over account should be reported as a miscellaneous expense A credit balance in the account is reported as a misc. revenue Cash shortage resulting from negligence or theft should be charged as receivable if probable of recovery

Reconciliation of Bank Balances A bank statement – monthly report provided by the bank during the month showing: a. b. c. d.

Beginning of the month cash balance Total deposits made by the depositor and other bank credits during the month Total checks paid by the bank and other bank charges during the month End of month cash balance

The bank treats the depositor’s account as a liability. Items that causes differences: 

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  

Deposit in transit or undeposited collections – cash has been added to book records but has not been added to the bank statement (either not received yet). Amounts should be added back to the bank balance. Outstanding checks – checks written and issued to payees, deducted by book cash account but have not yet reflected in bank statement. Amount should be deducted from bank balance. Debit memos – charges to the depositor’s account (NFSs, DAIF, DAUD, bank service charge). Amounts should be deducted to book balance. Credit memos – deposits made by bank to depositors account (proceeds of bank loan, interest earned). Amounts should be added to the cash balance per books. Errors – Amounts are added or deducted to the respective balances depending on the situation.

To compute Deposits in Transit: Deposits in transit, beginning of the month xx Add cash receipts reflected in company records xx (excluding credit memos issued by bank in the previous month but recorded by the depositor only this month) Total xx Less deposits as reflected in bank statement (xx) (excluding credit memorandums from bank statement) Deposits in transit, end of the month xx

To compute Outstanding checks: Outstanding checks, beginning of the month Add checks drawn by the company during the month (excluding debit memos for bank charges last month) Total Less checks paid by the bank during the month (excluding debit memos for bank charges last month) Outstanding checks, end of the month

xx xx xx (xx) xx

Types of Bank Reconciliation Statement 1. Reconciliation of ending balances, where balance per bank and book are reconciled. Otherwise known as single-date bank reconciliation. 2. Reconciliation of beginning cash balances

Chapter 2 Receivables Receivables – represent any legal claim from others for money, goods, or services. This includes: -

Amount collectible from customers and others (arising from sale of merchandise)

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Accrued revenues, interests, commissions, rental, and others

Other items such as loans and advances to officers, employees, and other claims arising from nonrecurring transactions such as calls for subscription receivables and disposal of property Trade receivables – arise form sale of goods or services in the ordinary course of business. Non-trade receivables – arise from other sources other than sale of goods or services in the ordinary course of business. Examples: loans, advances, accrued interest and dividends, deposits to guarantee performance or payment or to cover loss or any damages, subscriptions for the entity’s equity securities,

claims for losses or damages, claims for tax or rebates, claims against common carriers for damaged or lost goods. Classification of Receivables in the Statement of Financial Position Trade receivables – generally classified as current assets. When it extends because of credit terms, it is still classified as current, but disclose the amount or estimate not collectible within 12 months Non-trade receivables – collectible within 12 months are classified as current (regardless of the length of the entity’s normal operating cycle. Non-trade receivables not collectible within 12 months are classified as noncurrent. Initial Recognition Based on IFRS 9, an entity shall recognize a financial asset in its balance sheet when the entity becomes a party to the contractual provision of the instrument Trade receivables are recognized simultaneously to the recognition of related revenue, either from sale of goods or rendering of services Trade receivables are initially recorded at transaction price. Transaction price, as defined by IFRS 15 Revenue from Contracts, is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services. Accounting for Accounts Receivable and Related Revenues Accounts receivable – trade receivables on open accounts, not evidenced by a promissory note (evidenced by invoices, receipts) Trade Discounts -

Also known as volume or quantity discounts

It is used to avoid frequent changes in catalog and to hide the true invoice price from competitors -

Commonly quoted in percentage, series of percentages

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Trade discounts are not recognized for financial accounting purposes

They are deducted from the list price prior to recording the accounts receivable arising from a credit transaction Both accounts receivable and related revenue are always recorded net of trade discounts Cash discounts

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Reductions from the sales price to prompt payment of an account

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They are expressed in terms x/10, n/30

Methods of recognition of the cash discounts: Gross Price Method Both the accounts receivable and sales are initially recorded at the gross price with no accounting recognition for the available cash discount until it is taken. This method lacks conceptual validity, while it is the simplest and most widely used method -

It may not faithfully represent the amount of sales reported

Chapter 4 Investments In Equity Securities CLASSIFICATIONS OF EQUITY INVESTMENTS Equity security -

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Instrument representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed or determinable price  Ordinary shares, preference shares, rights or options to acquire ownership shares  Equity interest evidenced by share certificate  Right to share in earnings, election of directors, subscription for additional shares and share in net assets upon liquidation Provide highest returns to investors Yield/returns are dividends, gains and losses from disposal, appreciation in value

Reasons for investing -

Temporary placements of excess cash; held primarily for sale in the near term, to generate income on short-term price fluctuations Obtain long-term customer, supplier or creditor relationship to secure certain operating or financing arrangements Exercise significant influence or control over the operating policies of another entity

Classification: 1. Trading equity securities (FVPL) 2. Nontrading equity securities (irrevocable choice of FVPL or FVOCI)

3. Investment in associate – participate but not to control financial and operating policy decisions of investee company 4. Investment in subsidiary – power to govern the financial and operating policies of investee entity to obtain benefits from its activities. Need to prepare consolidated FS unless excepted 5. Investment in joint venture – jointly controls operations of another entity through share capital ownership RECOGNITION Initial 

Trading equity securities – FVPL

Fair value; transaction costs are expensed outright Transaction costs – fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, transfer taxes and duties 

Non-Trading equity securities – FVPL or FVOCI (irrevocable choice)

FVOCI - Fair value + transaction costs directly attributable to its acquisition (capitalized as cost)

Subsequent a. FV through profit or loss (FVPL) • Classified as Current Assets • Changes in FV at reporting date recorded in P&L as Unrealized Gains or Losses • Upon Sale, adjust investment to FV. To determine actual gain or loss: compare net proceeds from sale and carrying amount. Gain if net proceeds are bigger than carrying amount. b. FV through other comprehensive income (FVOCI) • for equity instrument not held for trading; make an irrevocable election to present changes in c. Fair value in OCI.

• Changes in FV at reporting date recorded in OCI in Statement of Comprehensive Income• Upon Sale, adjust investment to FV. To determine actual gain or loss: compare net proceeds from sale and carrying amount. Gain if net proceeds are bigger than carrying amount, to be recognized in OCI. as Unrealized Gains or Losses on Equity Investments-OCI. • Cumulative balance of unrealized gains or losses in equity shall remain in equity; can be transferred to Retained Earnings (the difference between the selling price and initial cost of the investment) TRANSACTIONS SUBSEQUENT TO INITIAL RECOGNITION (Share split, dividends, and share right) FROM INVESTOR’S POINT OF VIEW, AS INVESTMENTS IN EQUITY SECURITIES SHARE SPLIT (memo entry only) -

Capital restructure whereby number of shares are changed without capitalizing retained earnings or changing the amount of its legal capital Split up: shares are increased with a reduction in par or stated value of each share Split down (reverse share split) : shares are decreased with an increase in par or stated value. Memo entry indicates change in number of shares and par value At year end, adjust shares to FV

DIVIDENDS (considered as Income) -

Distributions to shareholders proportionate to the number of shares held

Forms: a. Cash – dividends given out in cash on investments b. Liquidating - return of invested capital either in cash or noncash assets, considered partly a return of investment and revenue. c. Share dividends (bonus issue) – issuing entity’s own shares. Shareholder receives additional shares, retains same proportionate equity interest, with reduced market value. d. Property (dividends in kind) – either property or noncash assets; recorded at fair value e. Scrip

THREE DATES a. Date of declaration – dividend payment approved by BOD, recognize revenue or dividend income b. Date of record – when stock and transfer book is closed for registration, determine ownership for entitlement to dividend payments by preparing a list c. Date of payment – release or distribution of dividends Dividend on -

between date of declaration and record, shares carry with them the right to receive dividends. Market price of a share includes the amount of dividends. If shares are sold, there are two financial assets involved: investment in shares and dividend receivable. Upon sale, if accrued dividend is specifically included in sale price, recognize dividend income; remainder of sales price is gain or loss on sale of investment. Treat purchaser of investments as parallel entries.

Ex-dividend -

between date of record and payment, shares can be sold but original shareholder has the right to receive dividends on payment date. Market price no longer include the amount of dividend. CASH DIVDENDS - If dividends declared are payable in next period, adjust accrual thru a receivable - Upon receipt, cancel the accrued receivable LIQUIDATING DIVDENDS -

Return of invested capital either in cash or noncash assets, normally when the corporation is dissolved and liquidated. or taken from investee’s earnings prior to the acquisition of the shares by the investor; considered by the original seller in setting the selling price of the shares. Dividends are normally given out as partly income and partly return of capital; credit to both income and investment account. At reporting date, adjusted to fair value.

SHARE DIVIDENDS (BONUS ISSUE) -

issuing entity’s own shares of the same class. record thru memorandum entry. Original cost is the same, total shares increase, therefore cost per share decreases. At reporting date, adjust to fair value

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If shares of another class (special bonus issue) considered as property dividends. record at fair value and credit to dividend income At reporting date, adjust to fair value

PROPERTY DIVIDENDS (dividends in kind) -

In noncash assets; recorded at fair val...