CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS
BATCH 97

BULLET REVIEW
1. Current assets
Bank overdraft should not be “netted” against cash in bank, unless the same bank.
The bank overdraft is reported as current liability.
Customers’ credit balances and customers’ deposits are not “netted” against accounts receivable but
should be classified as current liability
Selling price of goods out on consignment should not be included in AR
Note receivable discounted should be deducted from total notes receivable
Held for trading or at FVPL - current and Financial asset at amortized cost and financial asset at FVOCI
or “available for sale” financial asset - noncurrent
Prepaid expenses - current and deferred charges - noncurrent
2. Current liabilities
Debit balances in creditors’ accounts are not “netted” against accounts payable but should be classified
as current asset.
NP due within 12 months refinanced on or before end of reporting period - noncurrent
NP due within 12 months refinanced after the end of reporting period - current
NP due within 12 months and the entity has the right to defer settlement at the end of the reporting
period for at least twelve months after the end of reporting period. - noncurrent
3. OCI reclassified to profit or loss – translation gain or loss, derivatives as cash flow hedge and debt
investment at FVOCI
OCI reclassified to retained earnings – revaluation surplus, remeasurements of defined benefit plan,
equity investment at FVOCI and change in the fair value attributable to credit risk of a liability
designated at FVPL
4. Noncurrent asset held for sale – lower between carrying amount and fair value less cost of disposal.
Noncurrent asset held for sale reclassified to PPE – lower between carrying amount assuming not
classified as held for sale and recoverable amount.
Discontinued operation - Single amount comprising operating income or loss, gain or loss from disposal
of assets, termination cost, impairment loss on assets and other expenses directly attributable to
the discontinuance.
5. Change in accounting estimate – change in useful life, residual value and depreciation method
Change in accounting policy – change in inventory method, cost recovery to percentage of completion,
cost model to revaluation model, cost to fair value model for investment property, change to new policy
as required by new PFRS
6. Reportable segment
Segment internal and external revenue is 10% or more of total internal and external revenue of
all segments
Segment profit or loss is 10% or more of the greater between total profit of all profitable segments and
total loss of unprofitable segment
Segment assets are 10% or more of the total assets of all segments.
Overall size test – The total external revenue of reportable segments must be at least 75% of the total
external revenue of all operating segments.
7. Interim reporting
Allocate real property taxes, year-end bonuses, depreciation, insurance, major repairs and other
expenses that benefit the entire year. Not allocate gain or loss on disposal of asset, discontinued
operation, advertising, inventory writedown or reversal
8. Cash – coins and currency, petty cash, checking or demand deposit, customer checks, personal checks,
manager checks, certified checks, money order, traveler checks
Undelivered company checks and postdated company checks should be restored to cash. By debiting
cash and crediting accounts payable.
Cash fund for the payment of liability due within one year – current and included in cash and cash
equivalents
Cash fund for the acquisition of noncurrent asset even if to be made within one year – noncurrent
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9. Cash equivalents – treasury bills, money market and time deposit with maturity of three months or less
from the date of purchase.
If the problem is silent, treasury bills, money market and time deposit are assumed to be
cash equivalents.
Treasury bonds are not included in cash equivalents.
10. Bank reconciliation
Balance per book – add credit memos, deduct debit memos and add or deduct book errors
Balance per bank - add deposit in transit , deduct outstanding checks and add or deduct bank errors
Certified checks are no longer outstanding.
11. Accounts receivable – beginning balance plus credit sales minus collections, sales discounts, sales returns
and allowances and writeoff.
Recovery of accounts – ignore in computing accounts receivable, unless included in collections in which
case deduct from collections.
Aging – required allowance
Percentage of accounts receivable - required allowance
Percentage of sales – doubtful accounts expense
Allowance for doubtful accounts - Allowance beginning plus recovery plus doubtful accounts expense
minus writeoff equals allowance ending.
12. Impairment of loan - Carrying amount of loan receivable minus present value of cash inflows using
the original effective rate.
Carrying amount includes principal and accrued interest recorded
13. Assignment of accounts receivable
Amount of loan minus finance charge or commission equals net proceeds
Factoring of accounts receivable
Accounts receivable minus finance charge, holdback and interest equals net proceeds.
If interest is based on weighted average to maturity, use 365 days.
Note receivable discounting
Principal plus interest equals maturity value minus discount equals net proceeds
Discount equals maturity value times discount rate times discount period
Carrying amount of note receivable minus net proceeds equals gain or loss on discounting
Carrying amount of NR equals principal plus accrued interest
If the discounting with recourse is accounted for as secured borrowing, the loss on discounting is charged
to interest expense.
14. Inventory
FOB shipping point or FOB seller – included in inventory of buyer
FOB destination or FOB buyer – included in inventory of seller
Goods out on consignment are included in inventory and goods held on consignment are excluded
Goods covered by bill of lading and trust receipt accepted by buyer - included in inventory
FIFO periodic and FIFO perpetual – same amount
Weighted average – periodic and Moving average – perpetual
NRV equals estimated selling price minus estimated cost to complete and cost of disposal
Allowance method or loss method – The ending inventory is recorded at cost and the loss on writedown
or reversal of writedown is recognized separately.
Direct method or cost of goods sold method – The ending inventory is recorded at the lower between
cost and NRV and the loss on writedown or gain on reversal of writedown is not recognized separately.
Same amount of cost of goods sold under either allowance method and direct method.
15. Gross profit method
Goods available for sale minus cost of goods sold equals ending inventory
Cost of goods sold equals net sales times cost ratio if gross profit rate is based on sales
Cost of goods equals net sales divided by sales ratio if gross profit rate is based on cost.
Net sales equals gross sales minus sales return only or “sales return and allowances”
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16. Retail method
Cost ratio equals GAS at cost divided by GAS at selling price
Conservative or conventional or LCNRV – Add markup and ignore markdown in computing GAS at
selling price
Average approach – Add markup and deduct markdown in computing GAS at selling price
GAS at selling price minus net sales, employee discounts, shoplifting, shrinkage and normal
shortage equals ending inventory at selling price
Abnormal shortage is deducted at cost and at retail to get GAS at cost and at selling price.
Net sales equals gross sales minus sales returns only or “sales returns and allowances”
Ignore sales discount and sales allowances in computing net sales
Ending inventory at selling price times cost ratio equals ending inventory at cost
17. Biological asset – measured at fair value less cost of disposal.
Gain from change in fair value due to growth or price change minus loss from change in fair value due to
price change minus decrease in fair value due to harvest equals net gain from biological asset
Agricultural produce growing on bearer plant is measured at fair value less cost of disposal
Agricultural produce harvested is measured at fair value less cost of disposal at the point of harvest.
Fair value of harvest is initial cost of inventory accounted for as gain from agricultural produce.
Bearer animals are classified as biological asset
Bearer plants are classified as PPE
Animals related to recreational activities are classified as PPE
18. Measurement of equity investments
a. Held for trading – at FVPL
b. Not held for trading – as a rule, at FVPL
c. Not held for trading – at FVOCI by irrevocable election
d. Investment in unquoted equity instrument – at cost
e. Investment in associate – equity method of accounting
Measurement of debt investments
a. Held for trading – at FVPL
b. Held for collection of contractual cash flows – at amortized cost
c. Held for collection of contractual cash flows – at FVPL by irrevocable designation or fair value
option.
d. Held for collection of contractual cash flows and for sale – at FVOCI
e. Held for collection of contractual cash flows and for sale – at FVPL by irrevocable designation or
fair value option
Only debt investments (except those under the fair value option) are reclassified into another
category. Equity investments are not reclassified.
Transaction costs are expensed for financial asset held for trading or at FVPL and capitalized for
financial asset at FVOCI and financial asset at amortized cost
19. Effective interest method
Interest received equals face amount times nominal rate
Interest income equals carrying amount at beginning times effective rate.
The difference between interest received and interest income equals discount or premium amortization
Discount amortization increases carrying amount and interest income
Premium amortization decreases carrying amount and interest income
The amount of amortization is increasing, whether discount or premium.
20. Investment in associate
Carrying amount equals acquisition cost plus share in net income of investee and excess fair value
minus share in net loss of investee, share in cash dividend and amortization of excess of cost.
Excess of cost attributable to goodwill and land is not amortized. However, the excess attributable to
land is deducted from investment income upon disposal of the land
Excess of cost attributable to inventory is deducted from investment income upon sale of inventory.
Investment income equals share in net income of investee plus excess fair value minus amortization of
excess of cost.

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Investment in associate in stages
Fair value of old interest plus cost of new interest equals total cost of investment
minus carrying amount of net assets acquired equals excess of cost
21. Investment property
Land or building for rental or capital appreciation
Land held for undetermined use, building under construction for use as investment property
Land and building leased by parent to the subsidiary under an operating lease – investment property for
separate FS and PPE for consolidated FS
Investment property is initially measured at cost plus transaction cost and directly attributable cost such as
legal fees and property taxes
Equipment and other movable property for rental - PPE
Cost model – subject to depreciation
Fair value model – No depreciation but any changes in fair value are included in profit or loss
Fair value of investment property shall not be adjusted for transaction cost.
Lift, elevator and air-conditioning unit are integral part of building and are generally included in fair value
of building.
If an office is based on a furnished basis, the fair value of the furniture is included in the fair value of the
furnished office.
Unearned or accrued rent income is not included in fair value.
22. Property, plant and equipment
On account – Invoice price less discount whether taken or not taken
On installment – Cash price or present value of future payments
Issuance of shares – FV of asset, FV of shares and par value of shares in the order of priority
Issuance of bonds payable – FV of bonds payable, FV of asset and face amount of bonds payable in the
order of priority
Exchange with commercial substance – FV of asset given plus cash payment on the part of payor or
minus cash received on the part of recipient.
Exchange without commercial substance – Carrying amount of asset given plus cash payment on the
part of payor or minus cash received on the part of recipient. No gain or loss on exchange is recognized.
23. Government grant
Grant related to income - match with future costs. However if the costs are already incurred, the grant
is outright income.
Grant related to depreciable asset - over the life of the asset and in proportion to depreciation.
The grant may be recognized as deferred income or as deduction from the cost of the asset.
Any repayment of grant is recognized as loss to the extent of the excess of the payment over the balance
of the deferred income.
24. Land – cost of demolition less proceeds from salvage to prepare the land for the intended use other than
construction of new building, legal fees, title search and insurance, cost of relocating squatters,
special assessment, property tax in arrears assumed, survey, clearing and landfill, mortgage assumed.
Option money is capitalized if land is acquired. Otherwise, the option money is expensed
PIC Interpretation - The cost of demolishing the old building net of salvage proceeds to make room for
the construction of a new building is capitalized as cost of new building
Land improvements – sidewalks, street, pavements, parking lot, driveway, safety lighting, cost of
landscaping, new fence
Building – Architect fee, plan and specifications, permit, insurance during construction, excavation, safety
fence during construction and removal of safety fence, temporary building for workers, temporary
building for tools and materials.
Machinery – Installation, testing, freight, insurance while in transit, safety device, safety platform,
estimated dismantling cost required by law or contract, site preparation, nonrefundable purchase
taxes
Refundable purchase taxes, such as VAT are not capitalized.
25. Specific borrowing – Capitalizable interest is equal to actual interest incurred during construction
period minus interest income on the temporary investment of the borrowing.
General borrowing – Weighted expenditures times average interest rate equals capitalizable interest but
cannot exceed actual interest incurred. If expenditures are incurred evenly during the year, the
average is equal to the total expenditures divided 2.
Interest income on investment of the general borrowing is ignored.
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26. Depreciation – straight line, production method, SYD and double declining balance
Depletion – Depletable amount equals acquisition cost plus exploration cost, development cost and
present value of estimated restoration cost required by law or contract minus land value or residual value.
Total depletion during the year – Total production times depletion rate per unit
Depletion included in cost of goods sold – Units sold times depletion rate per unit
Depreciation of mining property straight line if the useful life of the equipment is shorter than the life
of the wasting asset.
Output method if the useful life of the wasting asset is shorter than the life of the equipment
27. Revaluation surplus equals revalued amount minus carrying amount. Revalued amount equals fair value
or depreciated replacement cost (sound value). The revaluation surplus is recognized net of tax and
realized through retained earnings over the remaining life of the asset.
28. Impairment loss is the excess of carrying amount over recoverable amount.
Recoverable amount is the higher between fair value less cost of disposal and value in use.
Reversal of impairment loss – The increased carrying amount of the impaired asset shall not exceed the
carrying amount that would have been recognized had no impairment loss been recognized in prior years.
29. Patent – Over the shorter between legal life of 20 years and useful life
Trademark is not amortized but tested for impairment at least annually.
Goodwill is not amortized but tested for impairment at least annually.
Research is an expense, Development is an expense, However, if the project has achieved technical
feasibility or economic viability, any subsequent development cost is capitalized.
Organization cost is an expense.
Intangible asset with finite life is subject to amortization and tested for impairment when there is an
indication of impairment at the end of reporting period.
Intangible asset with indefinite life is not amortized but tested for impairment at least annually and
when there is an indication of impairment during the year.
30. Premium liability - Cost of premium plus cost of distribution minus remittance from customer
equals premium expense. Total to be redeemed minus redeemed equals the premium liability.
Warranty liability - The number of units sold times the warranty cost per unit equals the
warranty expense minus the payment equals warranty liability.
Free product coupon – The stand alone selling price is equal to the selling price of the free product
adjusted by expected redemption.
Discount coupon - The stand alone selling price of the discount coupon is equal to the amount of discount
on future purchases adjusted by expected redemption.
Rebate coupon - The stand alone selling price of rebate coupon is equal to the amount of discount on the
product sold during the year adjusted by expected redemption.
Breakage is the value of the expected nonredemption of gift certificates
Breakage revenue - is equal to the amount of breakage multiplied by the fraction whose numerator is the
value of gift certificates redeemed and whose denominator is the total value of gift certificates to be
redeemed.
31. Bonds payable
Bond issue costs include promotion cost, engraving and printing cost, underwriter commission, legal fees
and fees paid to accountants for registration.
The amount of bond issue cost is added to discount on bonds payable or deducted from premium on
bonds payable under the effective interest method.
Interest expense equals carrying amount times effective rate
Interest paid equals face amount times nominal rate.
The difference between interest expense and interest paid is the discount or premium amortization.
The amortization of discount increases interest expense and carrying amount of bonds payable
The amortization of premium decreases interest expense and carrying amount of bonds payable.
32. Compound instruments
Bonds payable issued with share warrants - Total issue price of bonds payable with warrants minus
market value of bonds payable without warrants equals share premium
Convertible bonds payable - Total issue price of convertible bonds payable minus market value of
bonds payable without conversion privilege equals share premium

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33. Lessee accounting

All leases shall be accounted for as finance lease under the new standard. The lessee is required to
recognize a right of use asset and a lease liability.
The lessee may apply the operating lease model for short-term lease and low value lease. Short-term
lease is 12 months or less. Low value lease is based on the value of asset when new regardless of the
asset being leased.
The cost of right of use asset comprises:
a. Present value of lease payments or lease liability
b. Payment to lessor, such as lease bonus, minus any lease incentive received
c. Initial direct cost
d. Present value of estimated cost of restoring the underlying asset as required by contract
The lease liability comprises:
a. Annual rental
b. Purchase option that is reasonably certain
c. Residual value guarantee
d. Termination penalty if the lease term reflects the termination option

34. Lessor accounting

Finance lease on the part of the lessor has four criteria, namely transfer of title to lessee, purchase option
that is reasonably certain, 75% of useful life and 90% of fair value. Any of the four must be met.
The lease is classified as operating lease if all of the four criteria are not met.

35. Operating lease for lessor

Net rent income of lessor equals annual rent and amortization of lease bonus minus depreciation of
underlying asset, property taxes, insurance and amortization of finder fee or initial direct cost over
the lease term

36. Sales type lease – lessor

Gross investment equals gross rentals plus residual value whether guaranteed or unguaranteed.
However if the title to the asset is transferred to the lessee, the residual value is ignored.
Net investment equals present value of gross rentals and present value of residual value.
Gross investment minus net investment equals unearned interest income.
The net investment is the amount of sales recognized in sales type lease. Net investment minus cost of
asset and initial direct cost paid by lessor equals gross income.

37. Direct financing lease – lessor

Gross investment – same as sales type lease
Net investment equals cost of asset plus initial direct cost
Gross investment minus net investment equals unearned interest income

38. Sale and leaseback

The seller becomes a seller-lessee and the buyer, a buyer-lessor.
The seller-lessee is required to recognize a right of use asset and any gain or loss on right transferred.
The cost of right use asset is equal to the carrying amount of the asset multiplied by a fraction whose
numerator is the lease liability and whose denominator is the fair value of the asset.
Any gain or loss is recognized based on the right transferred by the seller-lessee to the buyer-
lessor. The right transferred is equal to the fair value of the asset minus the lease liability.
The gain or loss to be recognized is equal to the total gain or loss on sale multiplied by a fraction whose
numerator is the right transferred and whose denominator is the fair value of the asset.
If the sale price is above fair value of the asset, the difference is accounted for as additional financing.
If the sale price is below fair value, the difference is accounted for as prepayment of rental.

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39. Asset swap – Under IFRS, the difference between the liability and the carrying amount of the asset is the
gain or loss on extinguishment.
Caution - USA GAAP on asset swap
Gain or loss on debt restructure – difference between the liability and fair value of asset.
Gain or loss on exchange – difference between fair value and carrying amount of asset.
Equity swap – fair value of shares, fair value of liability and par value of shares in the order of priority.
The difference between the fair value of the shares or the fair value of the liability and the carrying
amount of liability is the gain or loss extinguishment presented as a separate line item.
The excess of the fair value of shares or the fair value of liability over the par value of shares equals share
premium
Substantial modification of terms – The gain or loss on modification is at least 10% of the old liability.
The new liability is measured at fair value or present value using the prevailing market interest rate.
The difference between the old liability and the present value of the new liability is recognized as gain or
loss on extinguishment. Any arrangement fee paid is included in the gain or loss on extinguishment.
Nonsubstantial modification of terms – The gain or loss on modification is less than 10% of the old
liability.
The new liability is measured at present value using the original effective rate.
The difference between the old liability and the present value of the new liability is accounted for as gain
or loss on modification. However, any arrangement fee paid is included in the measurement of the new
liability and not part of the gain or loss or modification.
40. Current tax expense equals taxable income times current tax rate.
Total tax expense equals financial income subject to tax times. The financial income subject to tax must
exclude permanent differences.
Deferred tax liability equals future taxable amount times future enacted tax rate.
Deferred tax asset equals future deductible amount times future enacted tax rate.
Future taxable temporary differences result to higher financial income in the current year.
Future deductible temporary differences result to higher taxable income in the current year.
41. Service cost comprises current service cost, past service cost and gain or loss or plan settlement.
Net interest equals interest expense on PBO at the beginning minus interest income on fair value of plan
assets at the beginning plus interest expense on the beginning effect of asset ceiling. The same discount
rate must be used.
Employee benefit expense equals service cost plus net interest expense or minus net interest income
Remeasurements include actuarial gain or loss on PBO, the difference between actual return on plan
assets and interest income, and any change in the effect of asset ceiling net of interest on the effect of
asset ceiling at the beginning.
Defined benefit cost equals the employee benefit expense plus the net remeasurement loss or minus the
net remeasurement gain.
If the defined benefit cost is more than contribution, the difference is accrued benefit cost
If the contribution is more than defined benefit cost the difference is prepaid benefit cost.
PBO equals beginning balance plus current service cost, past service cost, interest expense on PBO
and actuarial loss (increase in PBO) minus benefits paid, present value of benefit obligations settled
in advance and actuarial gain (decrease in PBO)
FVPA equals beginning balance plus contribution and actual return on plan assets minus benefits paid
and payment of benefit obligations settled in advance
If the PBO is more than FVPA, the difference is accrued benefit cost or pension liability.
If the FVPA is more than PBO, the difference is prepaid benefit cost or pension asset.
42. Shareholders’ equity
Authorized minus unissued equals issued share capital plus subscribed share capital less subscription
receivable, plus share premium and retained earnings unappropriated and appropriated minus treasury
shares at cost equals shareholders’ equity.
Contributed capital or paid in capital equals issued share capital plus subscribed share capital minus
subscription receivable plus share premium, excluding retained earnings
Note that treasury shares should not be deducted in computing contributed capital.

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43. Retained earnings
Share dividend of 20% or more is charged to retained earnings at par or stated value.
Share dividend of less than 20% is charged to retained earnings at fair value on the date of declaration
or par or stated value, whichever is higher.
Property dividend is charged to retained earnings at fair value of the property on the date of declaration,
at year-end and the date of settlement. The property to be distributed is measured at year-end at the
lower between carrying amount and fair value less cost to distribute.
On the date of settlement, the difference between the dividend payable and the carrying amount of the
property is gain or loss on distribution of property dividend.
Items directly affecting unappropriated retained earnings include prior period errors, net income or
loss, dividends declared or paid, changes in accounting policy, realization of some OCI items and
appropriated retained earnings.
44. Share options
Fair value of share options on the date of grant is recognized as total compensation. The total
compensation is allocated over the vesting period. If the share options vest immediately, the total
compensation is recognized immediately.
Intrinsic value of share options is measured at every year-end until the date of settlement
45. Share appreciation rights - The liability for the compensation is equal to the excess of the market price
of the share over a predetermined price. Such liability is measured at every year-end until settlement.
46. Book value per preference and ordinary share
Preference share equity equals preference shares outstanding plus liquidation premium and undeclared
preference dividends. If cumulative, all dividends in arrears are included. If noncumulative, only
current year dividend is included.
Ordinary share equity equals total shareholders’ equity minus preference share equity.
47. Basic earnings per share
Net income available to ordinary shareholders divided by average ordinary shares outstanding
If cumulative, the annual preference dividend is deducted from net income regardless of declaration.
If noncumulative, the annual preference dividend is deducted only when declared.
48. Diluted earnings per share - Adjusted net income divided by ordinary shares outstanding plus potential
ordinary shares.
The adjusted net income is equal to the net income per book plus interest expense on bonds, net of
tax. The annual preference dividend is no longer deducted from net income.
Potential ordinary shares
Ordinary shares into which preference shares are convertible
Ordinary shares into which bonds are convertible
Ordinary shares covered by share options minus assumed treasury shares.
The number of assumed treasury shares is equal to the proceeds from the assumed exercise of share
options divided by the average market price of the share.
The option price must be lower than the average market price
Assumed issued shares less treasury shares covered by written put options.
Number of assumed issued shares is equal to the payment required to satisfy the written put option contract
divided by the average market price. The exercise price must be higher than the average market price.
49. Cash and accrual basis
Gross sales – Cash sales plus credit sales. Credit sales equal trade receivables ending plus collections,
writeoff, sales discounts, sales returns and allowance minus trade receivable beginning
Gross purchases – Cash purchases plus purchases on account. Purchases on account equal trade payables
ending plus payments of trade payables, purchase return, allowances and discount minus trade payables
beginning.
50. Operating activities are the principal revenue activities and generally result from transactions and events
that enter into the determination of net income or loss.
Investing activities are the acquisition and disposal of long-term assets or nonoperating assets such as
property, plant and equipment, intangible assets and investments excluding trading investments and
cash equivalents.
Financing activities result from transactions and events affecting shareholders’ equity and nontrade
liabilities END
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