PHILIPPIANS 4:13

PREPARATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

- Structured representation of the financial position and financial performance of an entity.

GENERAL FEATURES

Fair presentation and compliance with PFRS

- Financial statements shall present fairly the financial position, financial performance and cash flows of an
entity.
- Fair presentation requires the faithful representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses set out in the Conceptual Framework for Financial Reporting.
- An entity achieves a fair presentation by compliance with applicable IFRSs.
- In PFRS, Prepare FS with significant judgement and estimate
- A fair presentation also requires an entity:
 to select and apply accounting policies
 (purpose) to present information that provides relevant, reliable, comparable and
understandable information
 to provide additional disclosure necessary for the users to understand the entity’s financial
statements
- An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used
or by notes or explanatory material.

GOUING CONCERN
- means that the accounting entity is viewed as continuing in operation indefinitely in the absence of evidence
to the contrary.
- RULE
 An entity shall prepare financial statements on a going concern basis
- EXCEPTION
 unless management either intends to liquidate the entity or to cease trading, or has no realistic
alternative but to do so.
- NOTE
 An entity preparing PFRS financial statements is presumed to be a going concern.
- REQUIRED DISCLOSURE
 When management is aware, in making its assessment, of material uncertainties related to
events or conditions that may cast significant doubt upon the entity’s ability to continue as a
going concern, the entity shall disclose those uncertainties.
- FACTORS TO CONSIDER FOR US TO KNOW THAT THERE ARE MATERIAL UNCERTAINTIES
 Available information about future, which is at least 12 months
 history of profitable operations and ready access to financial resources
 factors relating to current and expected profitability
 debt repayment schedules
 potential sources of replacement financing
- NOTE
 When an entity does not prepare financial statements on a going concern basis, it shall disclose
that fact, together with the basis on which it prepared the financial statements and the reason
why the entity is not regarded as a going concern.
 Such financial statements are not prepared in accordance with PFRS.

ACCRUAL BASIS
- An entity shall prepare its financial statements, “except for cash flow information”, using the accrual basis
of accounting
- An entity recognizes items as assets, liabilities, equity, income and expenses (the elements of financial
statements) when they satisfy the definitions and recognition criteria for those elements in the Conceptual
Framework.

MATERIALITY AND AGGREGATION

- Should be presented separately:
 An entity shall present separately each material class of similar items.
 An entity shall present separately items of a dissimilar nature or function unless they are
immaterial.
- Items that may be aggregated
 If a line item is not individually material, it is aggregated with other items either in those
statements or in the notes.
- NOTE
 A separate disclosure may be warranted, unless the resulting disclosure is not material.

OFFSETTING
- RULE
 An entity shall not offset assets and liabilities or income and expenses,
- EXCEPTION
 Unless required or permitted by an IFRS.
- NOTE:
 Offsetting detracts from the ability of users both to understand the transactions, other events and
conditions that have occurred and to assess the entity’s future cash flows.
- EXAMPLES OF ALLOWED OFFSETTING
 Gains and losses on the disposal of non-current assets
 Net expenditure related to a provision and reimbursed under a contractual arrangement with a
third party e.g., supplier’s warranty agreement
 Gains and losses arising from a group of similar transactions e.g., foreign exchange gains and
losses or gains and losses arising on financial instruments held for trading, unless material
- NOTE
 Measuring assets net of valuation allowances—for example, obsolescence allowances on
inventories and doubtful debts allowances on receivables—is not offsetting, (but a contra
account)
FREQUENCY OF REPORTING
- An entity shall present a complete set of financial statements (including comparative information) at least
annually.
- Required disclosure when presenting longer or shorter than one year:
 the reason for using a longer or shorter period (change in calendar year)
 the fact that amounts presented in the financial statements are not entirely comparable.

COMPARATIVE INFORMATION
- FS should be presented with comparative information
- MINIMUM COMPARATIVE INFORMATION
 for all amounts reported in the current period’s financial statements (FACE OF FS)
 for narrative and descriptive information if it is relevant to understanding the current period’s
financial statements ( NOTES ON THE FS)
- A third statement of financial position (THIRD BALANCE SHEET) is required when an entity
 Applies an accounting policy retrospectively (ex: FIFO- Weighted Average, Changed Standards)
 Makes retrospective restatement of items in the financial statements
 Reclassifies items in the financial statements

NOTE: Not required to prepare- Third Income Statement; Required- third balance sheet

- Three statements of financial position as at (included periods in Third Balance Sheet)

 the end of the current period; (Dec31, 2020)
 the end of the preceding period; (Dec 31,2019)
 the beginning of the preceding period. (January 1, 2019)

- NOTE: The related notes to the third statement of financial position are not required to be disclosed. (for
example: as of January 1, 2019, beginning period of the preceding year)

- Required disclosure for reclassification

 the nature of the reclassification;
 the amount of each item or class of items that is reclassified; and
 the reason for the reclassification.

CONSISTENCY
- An entity shall retain the presentation and classification of items in the financial statements from one period
to the next.
- Change is allowed under the following circumstances:
 it is apparent, following a significant change in the nature of the entity’s operations or a review
of its financial statements, that another presentation or classification would be more
appropriate (appropriateness)
 an IFRS requires a change in presentation
LIMITATIONS OF THE FINANCIAL STATEMENTS

Use of different measurement bases

- Elements recognized in financial statements are quantified in monetary terms. Consideration of the
qualitative characteristics of useful financial information and of the cost constraint is likely to result in the
selection of different measurement bases for different assets, liabilities, income and expenses.

Inflationary effects
- If the inflation rate is relatively high, the amounts reported in the financial statements will appear inordinately
low since under the cost model, the assets are not adjusted for inflation.
- Hence, the amounts reflected in the financial statements are mixture of pesos with different levels of
purchasing power. ( FS do not provide valuation of company, at the same manner purchasing power in
relation to inflation not reflected to FS)

Measurement uncertainty
- In some cases, the level of uncertainty involved in estimating a measure of an asset or liability may be so
high that it may be questionable whether the estimate would provide a sufficiently faithful representation of
that asset or liability and of any resulting income, expenses or changes in equity. ( judgement)

Not always comparable across companies

- because we have bank, real estate, manufacturing, merchandising, and industries that applies different
accounting policy
- Different companies may apply different accounting policies and use different accounting periods.

Non-financial information is not reported

- Financial statements may report high net income but fail to indicate its degrading effect to the environment.

COMPLETE SET OF FINANCIAL STATEMENT

- A statement financial position at the end of the period

- A statement of profit or loss and other comprehensive income for the period
- A statement of changes in equity for the period
- A statement of cash flows for the period
- Notes, compromising significant accounting policies and other explanatory information
- Comparative information in respect of the preceding period

STATEMENT OF FINANCIAL POSITION

- presents the assets, liabilities, and equity
- An entity shall present current and non-current assets, and current and non-current liabilities. ( there’s no
order in presentation)
- Except when a presentation based on liquidity provides information that is reliable and more relevant.
NORMAL OPERATING CYCLE

- The time between the acquisition of assets for processing and their realization cash or cash equivalents.

NOTE: When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months.

OPERATING CYCLE VS CASH CONVERSION CYCLE

- Operating Cycle (used in determining whether the asset is current or non-current)

 measures the time it takes a company to convert inventory into cash
 Days of Inventory + Days of Account Receivables
- Cash Conversion Cycle
 is the time it takes to convert inventory to cash and pay bills without incurring penalties
 Days of Inventory + Days of Account Receivables – Days Payables Outstanding

CURRENT ASSETS

- An entity shall classify an asset as current when:

 it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle
 it holds the asset primarily for the purpose of trading
 it expects to realize the asset within twelve months after the reporting period
 the asset is cash or cash equivalent (as defined in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period

EXAMPLES OF CURRENT ASSETS

LINE ITEMS UNDER CURRENT ASSETS

- Cash
 Unless otherwise described, presumed to be unrestricted
- Trade Receivables
 Expected to be realized in the entity’s normal operating cycle
- Non-Trade Receivables collectible within twelve months
 e.g., dividends receivable, interest receivable, and advances to officers due currently
 Expected to be realized within twelve months after the reporting period
- Inventories
 Expected to be sold in the entity’s normal operating cycle
- Financial Assets at Fair Value through Profit or Loss (Trading Equity and Debt Securities)
 Held primarily for the purpose of being traded
- Prepaid Expenses
 Expected to be consumed in the entity’s normal operating cycle

EXAMPLE OF NON-CURRENT ASSETS

- Property, Plant and Equipment

 Land, building, equipment, furniture and fixtures, tools, if used in the normal operations of the
entity or if intended to be used in the operations of the entity in the future
- Investment Property
 Land and or building that are held for appreciation in value, for rental to others or for an
undetermined future use
 - Intangible Assets
 Patents, Franchise, Trademarks, customer list, which provide economic benefit and rights to the
entity for a period of more than twelve months
- Long-Term Financial assets
 Long-term advances to officers and key employees, other non-trade receivables collectible after
twelve months

EXAMPLE PROBLEM

ZXC CORPORATION has the following assets as of Dec 31,2020

CURRENT NON-CURRENT

 Cash (of which P25,000 is earmarked for the acquisition of equipment)

P490,000 465,000 25,000

 Investment of equity Securities held for immediate trading (including

P200,000 fair value of shares of ZXC corp. intended to be sold in 2020,

purchased for 190,000)

P380,000 180,000

Note: 200,000 is treasury share, should be in equity

 Accounts Receivable, net ( including P500,000 due from an officer, no specific

Due date P1,250,000 750,000 500,000

 Non- Trade notes Receivables (due in equal semi-annual installments

of P50,000 every March 1 and September 1)

P300,000 100,000 200,000

Note: Only those notes that are collectible within 12 months will be classify as CA

(50,000 in march and 50,000 in September)

 Merchandise inventory P900,000 900,000

 Prepaid Expenses P80,000 80,000
 Plant and Equipment, net P3,750,000 3,750,000

TOTAL P2,475,000 P4,475,000

CURRENT LIABILITIES

- It expects to settle the liability in its normal operating cycle

- It holds the liability primarily for the purpose of trading
- The liability is due to be settled within twelve months after the reporting period
- The entity does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period
EXAMPLES

- Trade Payables
 Expected to be settled in the entity’s normal operating cycle
- Accrued expenses
 Expected to be settled in the entity’s normal operating cycle
- Dividends Payable
 Expected to be settled within twelve months after the reporting period
- Unearned revenues
 Expected to be settled in the entity’s normal operating cycle
- Long-term notes payable, due within twelve months, refinancing is completed after the reporting date
 The entity does not have an unconditional right to postpone settlement of the obligation for at
least twelve months after the reporting period

NON-CURRENT LIABILITIES

- Long term notes payable that are due beyond 12 months from the end of the reporting period
- Bonds payable that are due beyond twelve months after the reporting period
- Long-term notes payable that are due within twelve months after the reporting period, but which terms is
extended on a long-term basis and negotiation has been competed before the end of the reporting period.

Reclassification to Current Liabilities

- An entity classifies its financial liabilities as current when they are due to be settled within twelve months
after the end of the reporting period, even if:
 The original term was for a period longer than twelve months; and
 An agreement to refinance, or to reschedule payments, on a long-term basis is completed after
the reporting period and before the financial statements are authorized for issue.

RULES ON LONG-TERM DEBT

- CURRENT
 Long-Term debt (or the portion of it) falling due within one year even if the original term was for
a period longer than twelve months.
 An agreement to refinance, or to reschedule payments, on a long-term basis is completed AFTER
the reporting period and before the financial statements are authorized for issue.
 If the refinancing or rolling over is not at the discretion of the entity, the obligation is classified
as a current liability
 When an enterprise violates a debt covenant that results to the debt being due and demandable

Even if the lender has agreed AFTER the reporting period not to demand payment as a
consequence of the breach

NOTE: Long-term basis- beyond 12 months from the reporting date; short-term basis- within
12 months from the reporting date)

- NON-CURRENT
 Long-term portion of obligations
 Agreement to refinance or to reschedule payments on a long term basis is completed ON OR
BEFORE the reporting period
  If the entity has the discretion to refinance, or to roll over the obligation for at least twelve
months after the end of the reporting period under an existing loan facility, it classifies the
obligation as non-current, even if it would be due within a shorter period.

The entity has unconditional right under the existing loan agreement to defer payment for at
least twelve months after the end of the reporting period.

 If the creditor agrees not to demand payment and this agreement has been reached on or before
the end of the reporting period.

The lender agreed to provide grace period at least twelve months after the reporting period

REQUIRED DISCLOSURE

- In respect of loans classified as current liabilities, if the following events occur between the end of the
reporting period and the date the financial statements are authorized for issue, those events are disclosed as
non-adjusting events
 refinancing on a long-term basis;
 rectification of a breach of a long-term loan arrangement; and
 the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement
ending at least twelve months after the reporting period.

SAMPLE PROBLEMS

1. OPL Company had the following liabilities as of December 31, 2020:

CURRENT

 Trade accounts payable, net of debit balances

totaling P65,000 in suppliers accounts ( Excess payment to supplier) P1,125,000 1,125,000
+ 65,000

 Accrued expenses 136,000 136,000

 Interest payable 96,000 96,000
 Income tax payable 150,000 150,000
 Mortgage payable due in equal annual installments
until October 31, 2025 750,000 150,000
divide by no. of periods)
 Share dividends declared but not yet issued 300,000 -

( only transfer RE to Capital stock, include if it is cash dividend)

 Claims for the unclaimed wages by employees of the company

covered in a pending lawsuit (not considered to be probable) 250,000 -
(only disclosure)

How much is OPL’s total current liabilities of OPL Company as of December 31, 2020? = P1,722,000

2. SDF had the following items which may be reported as either current or noncurrent liability:
 On December 31, 2019, Pen declared a cash dividend of P2.50
per share to shareholders of record on December 31. The dividend
is payable on January 15, 2020. Pen has issued 1,000,000 ordinary
 shares, of which 50,000 shares are held in the treasury.
(950,000 are outstanding) 950,000 x 2.50 = 2,375,000

 Also, on December 31, Pen declared a 10% bonus issue to

shareholders of record on January 15, 2020. The dividends will
be distributed on January 31, 2020. Pen’s ordinary shares have (Stock dividend)
a par value of P10 per share and a fair value of P38 per share.

 On December 31, bonds payable of P10 million are outstanding.

The bonds pay 12% interest every September 30 and mature
in installments of P2,500,000 every September 30, beginning
September 30, 2020. 2,500,000+10Mx12% x 3/12 = 2,800,000

 On December 31, 2018, customer advances were P12 million

During 2019, Pen collected P30 million of customer advances
and advances of P25 million were earned. 12M + 30M – 25M = 17,000,000

 At December 31, 2019, retained earnings appropriated for

future inventory losses amounted to P1.5 million. (appropriation) ( not included)

TOTAL = P 22,175,000

EQUITY

- residual interest in the assets of the entity after deducting all of the liabilities.
- Equity/Net asset = total assets minus total liabilities

SAMPLE PROBLEM

Way Company’s adjusted trial balance at December 31, 2020 includes the following:

Ordinary share capital, P5 par + P360, 000

Share premium + 480, 000

Treasury shares, at cost (deduction to the shareholder’s equity) - 30, 000

Cumulative net unrealized loss on equity securities at fair value through other comprehensive income - 12, 000

Retained appropriated for contingencies + 90, 000

Unappropriated retained earnings + 120, 000

Total Shareholder’s Equity P1, 008,000

FORMS OF THE STATEMENT OF FINANACIAL POSITION

NOTE: PAS 1 does not prescribe a uniform format or order of the presentation of the elements on the statement of financial
position.

- Account form
 Looks like a T account, where assets are listed on the left side of the statement while liabilities
and equity are listed on the right side. (landscape)
- Report form
 Presents the assets, liabilities, and equity in a continuous format. Liabilities are presented after
total assets and equity accounts are listed after the liabilities section. (portrait)
- Financial position form
 Emphasizes working capital of the firm.
 net assets are equal to the equity.
 Presented in vertical form, the current liabilities are deducted from current assets to derive
working capital. Non-current assets are then added, and non-current liabilities are deducted,
leaving a residual amount as equity, or net assets.

STATEMENT OF COMPREHENSIVE INCOME

Comprehensive income includes

- PROFIT OR LOSS - the total income less expenses excluding the components of other comprehensive income.
PROFIT LOSS LINE ITEMS
 revenue, presenting separately interest revenue calculated using the effective interest method
and insurance revenue
 gains and losses arising from the derecognition of financial assets measured at amortized cost;
 insurance service expenses from contracts issued within the scope of IFRS 17
 income or expenses from reinsurance contracts held
 finance costs
 impairment losses (including reversals of impairment losses or impairment gains) determined in
accordance with Section 5.5 of IFRS 9
 insurance finance income or expenses from contracts issued within the scope of IFRS 17 (see IFRS
17)
 finance income or expenses from reinsurance contracts held
 share of the profit or loss of associates and joint ventures accounted for using the equity method
 if a financial asset is reclassified out of the amortized cost measurement category so that it is
measured at fair value through profit or loss, any gain or loss arising from a difference between
the previous amortized cost of the financial asset and its fair value at the reclassification date (as
defined in IFRS 9)
 if a financial asset is reclassified out of the fair value through other comprehensive income
measurement category so that it is measured at fair value through profit or loss, any cumulative
gain or loss previously recognized in other comprehensive income that is reclassified to profit or
loss;
 tax expense
 a single amount for the total of discontinued operations
 - OTHER COMPREHENSIVE INCOME
Income comprises items of income and expenses including reclassification adjustments that are not
included in Profit and Loss as required by a standard or interpretation.

NOTE: All items put in other comprehensive income supposedly will be recycle, then will presented in profit and loss ,
except when the standard will not permit the recycling

TWO TYPES:

- those that are reclassified to profit or loss

 Unrealized gain or loss on debt investments measured at fair value through other comprehensive
income
 Unrealized gain or loss from derivative contracts designated as cash flow hedge
 Translation gains and losses of foreign operations
- those that are reclassified to Retained Earnings (no recycling)
 Unrealized gain or loss on equity investments measured at fair value through other
comprehensive income
 Change in Revaluation Surplus
 Re- measurement gains and losses for defined benefit plans
 Change in fair value arising from credit risk for financial liabilities measured at fair value through
profit or loss (hedging instruments)
 Gains and losses from translation of financial statements of foreign corporations

REQUIRED DISCLOSURE

- An entity shall disclose the following items in the statement of comprehensive income as allocations of profit
or loss for the period:
 Profit or loss for the period attributable to Minority interest and Owners of the parent.
 Total comprehensive income for the period attributable to Minority interest and Owners of the
parent.

FORMS OF PRESENTATION

- An entity shall present all items of income and expense recognized in a period:
 In a single statement of comprehensive income, or
 In two statements: a statement displaying components of profit or loss (separate income
statement) and a second statement beginning with profit or loss and displaying components of
other comprehensive income (statement of comprehensive income).

PRESENTATION OF EXPENSE

- Function of Expense
 The traditional and common form of income statement
 Also known as cost of sales method or multiple-step income statement
 Classifies expenses as : Cost of sales, Selling expenses , General or administrative expenses , Other
expenses
- Nature of Expense
 Expenses are aggregated according to their nature and not allocated among various functions
within the entity
 e.g., depreciation, purchases of materials, transport costs, employee benefits and advertising
costs
COST OF GOODS SOLD

- Cost of inventory sold during the period.

Perpetual Inventory System

- Records cost of goods sold at the time of the sale

Periodic Inventory System.

- Determined at the end of the period

Beginning Inventory Pxxx

Add: Purchase xxx

Freight In xxx

Total Pxxx

Less:

PR & A Pxxx

Purchase Discounts xxx xxx

Net Purchase xxx

Cost of Goods Available for Sale Pxxx

Less: Ending Inventory xxx

Cost of Goods Sold Pxxx

NOTE: When your ending inventory increases, it means that not all of your purchases we’re consumed

When your inventory increases, profit also increases

When your Inventory increases, your cost of goods sold decreases

SAMPLE PROBLEM

What is L’s cost of goods sold for 2020?

Increase in raw materials inventory (CGS decreases) - P15,000

Decrease in finished goods inventory (CGS increases) + 35,000

Raw material purchases + 430,000

Direct labor payroll + 200,000

Factory Overhead + 300,000

Freight out (do not include, it is a selling expense) 45,000

Increase in work in process inventory (CGS decreases) - 20,000

Cost of Goods Sold P930,000

SELLING EXPENSES

- Expenses directly related to sales effort such as

 advertising and promotions,
 salesmen’s salaries and commissions,
 delivery expenses,
 shipping supplies and
 depreciation of delivery equipment and store equipment

GENERAL EXPENSES (support function)

- Those incurred in the administration and general operations of the business such as
 officers and office salaries,
 bad debts expenses,
 Office supplies used
 Expenses of account and credit and collection departments
 Taxes
 Depreciation of office equipment

SAMPLE PROBLEM

Compute total selling expense and general expense for the year.

• Accounting and legal fees-P120,000;

• Advertising-P150,000;

• Freight-out-P80,000;

• Interest expense-P70,000;

• Loss on sales of equity investments at fair value through profit or loss-P30,000;

• Officers’ salaries-P225,000;

• Rent Expene-P220,000;

• Sales salaries and commission-P140,000.

One-half of the rented premises is occupied by the sales department.

SELLING EXPENSE

SOLUTION:

Advertising P 150,000

Freight-Out 80,000

Rent Expense (divide by 2) 110,000

Sales and Salaries Commission 140,000 P480, 000

Compute total general expense for the year.

Legal and audit fees - P170,000

Rent expense - P240,000; (divide by 2)

Interest expense - P210,000;

Loss on sale of equipment - P35,000;

The office space is used equally by Aria’s sales and accounting departments.

SOLUTION: 170,000 + 120,000 = P290, 000

OTHER EXPENSES (items not included in selling and general)

- Expenses and losses incurred by the entity that are not appropriately classified as cost of sales, selling
expenses or general and administrative expenses are categorizes as other expenses.
 Loss on sale of operating assets
 Write-down of inventories and losses from catastrophes

FINANCE COST

- Should be presented as a separate line item in profit or loss.

- include expenditures relating to borrowings such as
 Interest expense (paid and accrued)
 Discounts lost on merchandise purchases
 Discounts lost on purchases of other non-current assets
 Amortization of discounts on long-term debts
 Other costs ancillary to borrowing

STATEMENT OF CHANGES IN EQUITY

- Shows the events and transactions that took place during a reporting period that affect equity

- COMPONENTS
 Comprehensive income for the period
 For each component of equity, the effects of retrospective application or retrospective
restatement recognized in accordance with PAS 8
 For each component of equity, a reconciliation between the carrying amount at the beginning
and the end of the period

RECONCILIATION

- separately (as a minimum) disclosing changes resulting from:

 profit or loss;
 other comprehensive income; and
 transactions with owners in their capacity as owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result in a
loss of control.
 STATEMENT OF CASH FLOWS
- Provides users of financial statements with a basis to assess the ability of the entity to generate cash and
cash equivalents and the needs of the entity to utilize those cash flows.
- The statement of cash flows presents information on the inflows and outflows of cash and cash equivalent
classified into
 operating activities,
 investing activities, and
 financing activities

CASH EQUIVALENT

- Short-term highly liquid investments that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of change in value.
- Has a short maturity of three months or less from the date of acquisition. (Ex: time deposit ,1 month)

OPERATING ACTIVITIES

- Cash flows from operating activities are primarily derived from the principal revenue-producing activities of
the entity.
 cash receipts from the sale of goods and the rendering of services;
 cash receipts from royalties, fees, commissions and other revenue;
 cash payments to suppliers for goods and services;
 payments to and on behalf of employees;
 cash payments or refunds of income taxes unless they can be specifically identified with financing
and investing activities; and
 cash receipts and payments from contracts held for dealing or trading purposes

PRESENTATION OF CASH FLOWS

- DIRECT METHOD
 Major classes of gross cash receipts and gross cash payments are disclosed.

Receipts and payments may be obtained either

1. From the accounting records of the entity

2. By adjusting sales, cost of sales, and other item for

 changes during the period in inventories and operating receivables and payables;
 other non-cash items;
 other items for which the cash effects are investing or financing cash flows

SAMPLE PROBLEM

Cash received from customers + P870, 000 Taxes paid - 110,000

Cash received for rent + 10,000 Gain on sale of equipment 30,000 (do not include)

Cash paid to suppliers and employees - 510,000 NET CASH FLOW OF O.A = P 260,000
OTHER FORMULA For Calculation of Operating Activities

 AR, beg + Net Sales – Cash Receipts from Customers (or Write off) = AR, end
 Customer Advances, beg + Cash receipts from customers - Net Sales= Customers Advances
 Net Sales - Accounts Receivable, end + Accounts Receivable, beg - Write-off - Customer Advances, beg +
Customer Advances, end = Cash Received

 Inventory, beg + Purchase – Cost of Sales =Inventory , End

 Accounts Payable, beg + Purchase – Cash Paid to Suppliers= Accounts Payable, End
 Cost of Sales - Accounts Payable, end + Accounts Payable, beg – Inventory, beg + Inventory, end = Cash paid
for purchases

 Prepaid Expense, beg + Cash paid - Operating Expense= Prepaid expense, end
 Accrued Expense, beg + Operating Expense - Cash Paid = Accrued expense, end
 Insurance Expense - Prepaid Insurance, beg +Prepaid Insurance, end = Cash Paid for Insurance

 Prepaid Expense, beg + Cash paid – Operating Expenses= Prepaid Expense, End
 Accrued expense, beg + Operating Expense – Cash Paid= Accrued Expense, End
 Insurance expense- Wages Payable, end + Wages Payable, beg= Cash Paid for wages

NOTE: We can just squeeze pero kung mas malito e yung highlighted formula nalang daw po gamitin .

SAMPLE PROBLEM

The following was taken from the 2019 financial statement of Tulip Company.

Accounts receivable: January 1 – P216,000; December 31 – P304,000

Cash sales and credit sales, P4,380,000

Bad debts expense – P10,000 (no accounts receivable were written off or recovered during the year)

What is the amount of cash collected from customers in 2019?

SOLUTION

 AR, beg + Net sales – AR, end= Cash receipts

 P 216,000 + 4,380,000 – 304,000 = P 4,292,000

INDIRECT METHOD (from profit and loss down to operating activities)

 Profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or
accruals of past or future operating cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.

Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the
effects of:
  changes during the period in inventories and operating receivables and payables;
 non-cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency
gains and losses, and undistributed profits of associates;
 all other items for which the cash effects are investing or financing cash flows.

FORMULA

Income before Income Tax

+ Depreciation, amortization, and other noncash expenses

- All increases in trade noncash current assets

+ All decreases in trade noncash current assets

+ All increases in trade current liabilities

- All decreases in trade current liabilities

- Gain on disposal of property

+ Loss on disposal of property

NOTE :

If the non- cash current assets increase, there’s opposite effect in cash

If the payable changes, there’s direct effect in cash

SAMPLE PROBLEM
Changes in current asset and current liability accounts
Profit from Operations P 910,000 during 2020 were as follows:

Gain on Sale Equipment (inverse effect) (40,000) Accounts receivable – P60, 000 increase

Depreciation Expense (inverse effect) 70,000 Merchandise inventory - P50, 000 increase

Loss on sale of securities (Inverse) 50,000 Accounts Payable – P90, 000 decrease

990,000 Salaries and wages payable – P30, 000 increase

Interest payable – P5, 000 increase
AR, increase (60,000)
Income tax payable – P25, 000 decrease
Merchandise Inventory, Increase (50,000)

Accounts Payable, decrease (90,000)

Interest expense 30,000 – 5,000 increase
Salaries Payable, increase 30,000
Income tax payable 264,000 + 25,000
P 820,000

Interest Paid 25,000

IInterest expensei
Income Taxes Paid 289,000

Cash from Operations P 506,000

INVESTING ACTIVITIES (Direct method in presentation)

- The cash flows derived from the acquisition and disposal of long-term assets and other investment not
included in cash equivalents.
 cash payments to acquire property, plant and equipment, intangibles and other long-term assets.
These payments include those relating to capitalized development costs and self-constructed
property, plant and equipment;
 cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
 cash receipts from sales of (payments to acquire ) equity or debt instruments of other entities and
interests in joint ventures (other than payments for those instruments considered to be cash
equivalents or those held for dealing or trading purposes);
 cash advances and loans made to other parties (other than advances and loans made by a financial
institution);
 cash receipts from the repayment of advances and loans made to other parties (other than
advances and loans of a financial institution);
 cash receipts from (payments for) futures contracts, forward contracts, option contracts and
swap contracts except when the contracts are held for dealing or trading purposes, or the
payments

SAMPLE PROBLEM

Dahlia Corporation’s transactions for the year ended December 31, 2019 included the following:

Purchase real estate for + P550,000 cash which was borrowed from a bank

Sold investment securities for (P500,000)

Paid dividends of P600,000

Issued 500 ordinary shares for P250,000 cash

Purchased machinery and equipment for + P125,000 cash

Paid P450,000 toward a bank loan

NOTE: yung mga nakahighlight lang po yung kasama sa investing act

Dahlia’s net cash used in investing activities for 2019 were

P 550,000 – 500,000 + 125,000 = P175,000

FINANCING ACTIVITIES (Direct method in presentation)

- include cash transactions affecting non-trade liabilities, and shareholders’ equity

 cash proceeds from issuing shares or other equity instruments;
 cash payments to owners to acquire or redeem the entity’s shares;
 cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or
long-term borrowings;
 cash repayments of amounts borrowed; and
 cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
SAMPLE PROBLEM

Dahlia Corporation’s transactions for the year ended December 31, 2019 included the following:

Purchase real estate for + P550,000 cash which was borrowed from a bank

Sold investment securities for (P500,000)

Paid dividends of ( P600,000)

Issued 500 ordinary shares for P250,000 cash

Purchased machinery and equipment for + P125,000 cash

Paid (P450,000) toward a bank loan

NOTE: yung mga nakahighlight lang po yung kasama sa financing act

Dahlia’s net cash used financing activities for 2019 were

P 550,000 – 600,000 + 250,000 – 450,000= P250,000

 Interest and Dividends

Cash flows from interest and dividends received and paid shall each be disclosed separately.

Received Paid

Interest Operating (or Investing, alternative) Operating (or Financing, alternative)

Dividends Operating (or Investing, alt) Financing (or Operating, alt)

TAXES ON INCOME

- Shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be
specifically identified with financing and investing activities.

NON- CASH TRANSACTIONS

- Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded
from a statement of cash flows.

NOTE: all non-cash transactions are not presented in Statement of Cash flows, FALSE

FOREIGN CURRENCY CASH FLOWS

- Unrealized gains and losses arising from changes in foreign currency exchange rate are not cash flows.
- However, the effect of exchange changes on cash and cash equivalents held or due in a foreign currency is
reported in the statement of cash flows in order to reconcile cash and cash equivalent at the beginning and
end of the reporting period.
- EXAMPLES OF NON-CASH TRANSACTION NOT REPORTED IN STATEMENT OF CASH FLOWS
 the acquisition of assets either by assuming directly related liabilities or by means of a lease;
 the acquisition of an entity by means of an equity issue; and
 The conversion of debt to equity.
NOTES TO THE FINANCIAL STATEMENTS

- Present information about the basis of preparation of the financial statements and the specific accounting
policies used;
- Disclose any information required by PFRSs that is not presented on the face of the statement of financial
position, income statement, statement of changes in equity, or statement of cash flows
- Provide additional information that is not presented on the face of the statement of financial position, income
statement, statement of changes in equity, or statement of cash flows that is deemed relevant to an
understanding of any of them.

NOTE: An entity shall, as far as practicable, present notes in a systematic manner, considering consider the effect on the
understandability and comparability of its financial statements.

An entity shall cross-reference each item in the statements of financial position and in the statement(s) of profit or loss and
other comprehensive income, and in the statements of changes in equity and of cash flows to any related information in
the notes

ORDER OF PRESENTATION OF NOTES

Notes are normally presented in the following order:

- A statement of compliance with PFRSs

- A summary of significant accounting policies applied
- Supporting information or computation
- Other disclosures

DISCLOSURE order

1. Corporate Matters
1.1 Incorporations and operations

Basis:

 IDENTIFICATION OF THE FINANCIAL STATEMENTS

- An entity shall clearly identify the financial statements and distinguish them from other information in the
same published document.
- An entity shall display the following information prominently ( front)
 the name of the reporting entity
 whether the financial statements are of an individual entity or a group of entities;
 the date of the end of the reporting period or the period covered by the set of financial
statements or notes;
 the presentation currency
 the level of rounding used in presenting amounts in the financial statements.
 STATEMENT OF COMPLIANCE
- An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of
such compliance in the notes

2. Summary of Significant Accounting Policies

- 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
2.1 Basis of Preparation of FS:
a. Statement of Compliance with PFRS

DISCLOSURE OF JUDGEMENTS

- An entity must disclose, in the summary of significant accounting policies or other notes, the judgments, apart
from those involving estimations, that management has made in the process of applying the entity's
accounting policies that have the most significant effect on the amounts recognized in the financial
statements.

SOURCES OF ESTIMATIONS UNCERTAINTY

- An entity shall disclose information about the assumptions it makes about the future, and other major
sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

SUPPORTING INFORMATION

- If the details of the composition of items presented on the face of financial statements are relevant to the
users of the financial statements, the schedules showing the composition of the items are disclosed in the
notes to the financial statements.

Hierarchy in the Formation of Accounting Policies

- In the absence of an IFRS that specifically applies to a transaction, other event or condition, management
shall use its judgement in developing and applying an accounting policy

- Accounting policy that results in information that is:

 relevant to the economic decision-making needs of users; and

 reliable, in that the financial statements:
 represent faithfully the financial position, financial performance and cash flows of the entity;
 reflect the economic substance of transactions, other events and conditions, and not merely the
legal form;
 are neutral, i.e., free from bias;
 are prudent; and
 are complete in all material respects

In making the judgement described above, management shall refer to, and consider the applicability of, the following
sources in descending order:

 the requirements in IFRSs dealing with similar and related issues;

 the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the
Conceptual Framework for Financial Reporting (Conceptual Framework).
Function of the Securities and Exchange Commissions (SEC)

- the national government regulatory agency charged with supervision over the corporate sector, the capital
market participants, and the securities and investment instruments market, and the protection of the
investing public.

NOTE: The Commission’s jurisdiction over all cases enumerated under Section 5 of PD 902-A has been transferred to the
Courts of general jurisdiction or the appropriate Regional Trial Court.

Reporting Entities

Assets Liabilities

Large and/or publicly accountable entities > P350 M > P250 M Full PFRS/IFRS

Medium-sized entities > P100M – P350M > P100M – P250M PFRS

Small entities P3M - P100M P3M - P100M PFRS

Micro entities < P3M < P3M Income tax Reporting

REPORTING ENTITIES

Large and/or Publicly Accountable Entities (holder of secondary license)

- Bank, insurance companies, those who have franchise
- those with total assets of more than P350 million or total liabilities of more than P250 million.
- Public entities are those that meet any of the following criteria:
 Holders of secondary licenses issues by regulatory agencies
 Required to file financial statements under Part II of SRC Rule 68
 In the process of filing their financial statements for the purpose of issuing any class of instrument
in a public market
 Imbued with public interest as the SEC may consider in the future

Medium-Sized Entities
- Total assets of more than P100 million to P350 million or total liabilities of more than P100 million to P250
million. If the entity is a parent company, the said amounts shall be based on the consolidated figures.
- Not required to file financial statements under Part II of SRC Rule 68
- Not in the process of filing their financial statements for the purpose of issuing any class of instrument in a
public market
- Not holders of secondary licenses issues by regulatory agencies

Small Entities:
- Total assets of between P3 million to P100 million or total liabilities between P3 million to P100 million. If
the entity is a parent company, the said amounts shall be based on the consolidated figures.
- Are not required to file financial statements under Part II of SRC Rule 68
- Are not in the process of filing their financial statements for the purpose of issuing any class of instruments
in a public market
- Are not holders of secondary licenses issues by regulatory agencies

Micro Entities
- Total assets and liabilities are below P3 million
- Are not required to file financial statements under Part II of SRC Rule 68
- Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in
a public market
- Are not holders of secondary licenses issues by regulatory agencies