Le st AND ACCRUAL BASIS qION 58-1 Qe cash basis and accrual basis. xP? 8 (gwik 58-2 aN Cash basis Accrual basis Cash sates plus collections Cash sales plus sales on salts from customers account > Cash purchases plus payments Cash purchases pl parchasés to trade creditors purchases on acount than sales Amounts received are considered Amounts earned are Ancome her as income regardless of when considered as income earned regardless of when received it 1 Amounts paid are treated as Amounts incurred are treated Expenses, In 8 expenses regardless of when ‘as expenses regardless of when incurred paid sation Depreciation is provided Depreciation is provided Depeec normally normally : Bad debts No bad debts are recorded Doubiful accounts are treated because trade reccivables are “as bad debts not recognized QUESTION 58-2 What is the formula in the computation of sales under accrual basis? ANSWER 58-2 Cash sales xXx Sales on account: . Trade accounts and notes receivable, end _ xx Collection of trade accounts and notes receivable xX Sales returns, allowances and discounts xX ‘Accounts and notes receivable written off xx Trade notes receivable discounted, (notes receivable directly credited) xX xX Less: Trade accounts and notes receivable, Oe beginning Total sales — accrual basis » *UESTION 58-8 : 4 Be + is the formula in the computation of Purchases at i accrual basis? ey ANSWER 58-3 ashore . archases on account: Parchasr® jocunts and notes payable, end = Payment of trade accounts and notes payable 3 pazehese returns, allowances and discounts ee Total = coal grade accounta and notes payable, beginning xx 4, ‘Total purchases ~ accrual basis = x QUESTION 58-4 What is the formula in the computation of “income other sales’ and “expenses” under accrual basis? ANSWER 58-4 Computation of income other than sales Income rectived cash basis xx i: ferred income — beginning ‘Accrued income -ending u Tes: Deferred a : {income-ending Accrued income — beginning re xx Income for the current year - accrual bas: aaerT Computation of expenses = Expenses paid ~cash basis i Prepaid expenses - beginning te ee Accrued expenses —ending a Less: Prepaid expenses—ending x . i. sActrued ing x 7 expenses — beginning x zx 3E xpenses~ accrual basis xx zB {cael gw geferred income and accrued income R 58-5 sek sarned income INT ince ied but ol yet earned eed income is pdere “iready ned, 4 income is a liability a be 5 safer ree income and unearned Smeerest examples fey : eet . pet .d income, ginning is added by ‘i pe defen the preceding year and earned in the current oor 4 income — ending is deducted b. oe deferré in the current ecause this is phe, ‘advance in mnt year and to be paves, in year. earned only minext Year jp the ne alread: , ‘me is income already earned but not ipocrued inCOT as a receivable and therefore ane ec0e Te accrued interest receivable, srample® Sr acerued royalties receivable faceted seta a jneome — beginning s deducted because this is already fred as income in the preceding year although it is scoff only in the current year come ending is added because thisis already earned seed neerryeat and to be received nest year ee QUESTION 58-6 gaplain prepaid expenses and accrued expenses. ANSWER 58-6 . q care expenses paid in advarice but not yet incurred Pew aseets Fixamples are prepaid insuraioe, prepaid taxes, prepaid rent, prepaid interest ant prepaid salaries. id ~ beginning is added because this is paid in toonteling year and only expensed in the current year. Prepaid expense ‘- ending is deducted because this is paid in ePeurrett year and to be expensed next year : Accrued expenses are already incurred but not yet paid ‘and therefore are’ liabilities. Examples are accrued salaries payable, accruedinteret payable and accrued rental payable. | Accrued — beginning is deducted because this is incurred Be ere se tetttenh only paid in te CHPEnS IN fecruea ~ ending is added because thie isi oe current year and ote ‘paid next year.QUESTION 58-7 Multiple choice (IAA) 1. Under IFRS pasis of accounting is accepted. a. The cash bevorded in the period the even; ee rf : Fee afore is Tower under the cash basis tha 4. All of the choices are correct. tS Occup, nN accrual 2 Accrual accounting adheres to which of the followingy a. Matching principle _ b. Historical cost principle $ : ¢. Matching principle and historical cost principle 4. Neither matching principle nor historical cost 3. Which statement does not describe a deferral? a. Deferral of revenue occurs when cash is received and. recognized in financial income. b. Deferral typically results in the recognition of a liability or prepaid expense. ©. Cash collected in advance of services being rendered, d. Cash paid up front for a one-year insurance policy. 4. Under accrual, a deferral is a transaction that impacts a. Cash and the income statement at the same time b. The income statement before impacting cash ¢. Cash before impacting the income statement a ua statement of financial position before-impacting 5. Which statement is true about accrual and cash basis? 8.” Under accrual, if the earni i ee te arene nee ot male . Under ish basis, if cash has been collected, revenue oe, i ieeotded regardless of earning process, * Rnder cash basis, revenue is recognized when the a, ctivable is intilly recorded, ‘ of these Statements are true. 6 gisbur’ yr the accrual basis of accounting, gements may 2 ,de, coincide with, or foll # Feyenue and expenses are nee Period in which ip, Presede oF coincide with but never flow the period i which revenue and expenses are recognized not Goineide with or follow but never precede the period c. Oflich revenue and expenses are recneran ty Peviod in 4. Only coincide with the period in which revenue and + Gxpenses are recognized. Which statement regarding accrual versus cash basis of - Hecounting is true? e cash basis is appropriaté for some smaller entities. b Ape Gash basis is Less Useful in predicting the taney * and amounts of future cash flows. ‘Application of the cash basis results in an income statement reporting revenue and expenses, 4. The cash basis requires a complete set of records, Une cash receipts and e 8, Under cash basis of accounting ‘a, Revenue is recorded when earned. b. Accounts receivable. should be recognized. ¢. Depreciation of an asset having an economic life of more than one year is not recognized. a. The matching principle is ignored. 9, Total net income over the life of an entity is . Higher under cash basis than under accrual basis b. Lower under cash basis than under aocrual basis cc. The same under the cash basis and accrual basis 4. Not susceptible to measurement 10. Under cash basis, revenue is recorded a. When earned and realized. b. When earned and realizable. c. When earned. 4. When realized. ANSWER 58-7 9 0¢ a Bebe EP seer 2 ad 5 - aoe 6. achoice (AICPA Adapteg ) net income for the « ‘increased when, ee : ; mi nd in the prior year that i ts receivable than it expense in the cu enses at the alee ie beginning of year. curren, nt for eash at a gain in the cur 5 nt year, an entity used the cas veurrent year-end, the cout eet basis. entity cannot determine re e® af supplies inventory. the st of the inability to determine beginni on the accrual basis net income ent basis owners’ equity? Owners’ equity No effect Overstated No effect Overstated the financial statements from Both supplies inventory and neome, how should these ed from accrual basis net ared to the accrual basis of A 4 eee ‘anderstates income by the net aang, the cash baggunting period of ace during the sgh accounts receivable and acer . ‘aed expenses but not of ay cxpeaiee . Neither accounts receivable nor of aie & Accounts receivable but not of accrued wo 5, The inventory and accounts payable balances increased, Thala these increases be added to or deducted from Baymento to suppliers t0 arrive a cost of goods —. the current ye Increase in Increase in jnventory accounts payable a. Added Deducted p, Added Added c. Deducted Deducted 4, Deducted Added ANSWER 58-8aqussmion #9 Multiple choice (AICPA Adanteg, a three-year insurance policy exp, 1, The prem 4 was paid in total on January, eine . ber Shap ixmonth operating cycle,the 2 eas Y sported asacurrent asset on December myer a vould be for » 20% a. Gmonths b, 12months c. 18 months a. 24 months 2. The premium on a three-year insurance policy expirin, December 31, 2024 was paid in total on January 1, oa The orginal payment was initially debited to a pre 2, asset account. The appropriate adjusting entry had ee seeorded on December 81, 2022. The balance in the prepaid aseet account on December 31, 2022 should be pe a. Zero 'b. ‘The same as it would have been if the original ae payment had been debited initially to an expense account é Ee same as the original payment |. Higher than if the original ent had b it initially to an expense cut ee The ' eae on a three-year insurance policy expiring on peomber 31, 2024 was paid in total on January 1, 2022.1f riginal payment was recorded as a prepaid asset, how would total during mae and shareholders’ equity be affected & Total woul ett Wd decrease and shareholders’ eas ‘ae : © Both total assets shareholders’ equity would decreas? @. Neither nt? and shareholders’ equity would increas shareholders’ equity would chane? ra veces sajum on a four-year insttance policy expir THe Sh 2025 was pai in tal on eee Cae ¥ payment was recorded as a prepaid asset, the ce O18 ON repaid asset on December 31, 2023 would be vi er than the balance on December 31, 2022 Lovter than the balance on December 31,2024 The same as the balance ‘on December 31, 2024 The same aS the original payment peor «the beginning of the cuyrent year, an entity signed a a ‘ar contget enabling it to use & patented manufacturing years beginning in the current yar. ‘A royalty is payable ar each product ‘produced, subject to a minimum annual foo. Any royalties in excess of the minimum will be paid sally. On the contract date, the entity prepaid a sum eal to two years’ minimum annual fees. In the current oe ly minimum fees were incurred. The royalty onl vepayment shall be reported in the current year-end financial statement as ‘a. An expense only >. Acurrent asset and an expense ¢. Acurrent asset and noncurrent asset d. A noncurrent asset ANSWER 58-9 seeCHAPTER 60 sf. ‘ATEMEN T OF CASH FLOWS QUESTION 60-1 Define @ statement of cash flows. ANSWER 60-1 A statement of cash flows is a basic component of the financial statements which summarizes the operating, investing and financing activities of an entity. The primary purpose of a statement of cash flows is to provide relevant information about cash receipts and cash payments of an entity during a period. QUESTION 60-2 Explain cash equivalents. ANSWER 60-2 Cash equivalents are short-term highly liquid investments that are,readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. PAS 7, paragraph 7, provides that an investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition. Cash equivalents usually include three-month BSP treasury bill, three-month time deposit and three-month money market instrument or commercial paper. Equity investments cannot qualify as cash equivalents because shares do not have @ maturity value. 709Explain the treatment of ban’ TE Staten, cash flows. ANSWER 60-3 Bonk overdrafis whi jntegral part of umstances, bank overdrafts are iret ft ers Mreash and cash equivalents, ‘Acharacteristic of such banking arrangement is thay ¢, falance often fluctuates from being positive to ove : Inthe Philippines, bank overdrafts generally are not oo ch are repayable on deman,) fl ‘an entity's cash management, Day includes led day he be an awa "Mitte QUESTION 60-4 Explain operating activities. ANSWER 60-4 Operating activities are the cash flows deri ting sash flows derived primar the principal revenue producing activities of the entitn from Gaprating scriis generally result from the cash effects of . 2 on tons and othe events that enter into the determination : = = an sale of goods and rendering of servives Go — rental and other revenue ieee pliers fer goods and services selling, administrative and other expenses Cash reel Teceipts Premiums aafnd ca8h payments of an insurance entity 8, annuities and other policy benefits Cash Cash payments identified with fon, 284s of income taxes unless specifcll! financing and investing actives Cash flows arias or trading seeutigrc™ the Purchase and sale of dealiné Cash ad vances ‘ndloans made by a financial institut” Sao ee uP” investing activities. Ba? ER 60-5 activities are the cash flows derived, 7 4 ses al of long-term or MORO pEreR NE eg ton arrester ie oti include i sing assets include investments, nara, taneile aseets and other noneurest pan and é : . ments to acquire property, i " Capaites and other Jong-term ty, Plant and equipment, rece m_ sale of property, plant i Cash 2202s on ae tormaieet nd eotipment, angiiyments ‘0 aoquire equity or debt instrum Cash povities and interest in joint venture cai oe Gash receipts from sale of equity or debt instruments of other entities and interest in joint venture other eMtvances and loans to other parties other than Gdoances and loans m al institution advances spta fom repayment of advances and loans made to other parties §,ch payments for futures contract, forward contract, option a contract and swap contract h. Cash receipts from futures contract, forward contract, option and swap contract QUESTION 60-6 Explain financing activities. ANSWER 60-6 Financing activities are the cash flows derived capital and borrowings of the entity. Financing activitie ses are the cash flows that result from transactions between the entity and its owners (equity financing) and between - entity and its creditors (debt ait a simple guide, financing activities include the cash tamale ‘Involving nontrade liabilities and equity. © Cash receipts from issuing ordinary and preference © ares Gosh Eira ‘onern t a or redeem ‘the entity's snares, t for treasury shares o Gaatreesor example; Peg debentures loans, Tote, bonds, mortgages and other short or long term ‘borrowings 4. Cash payments for amounts pwee © Cash payments for finance lease liability b me ae from equity a b60-7 QuESTION : . int of interest paid and interest rece; ved alain toate 60-7 aragraph 39, provides that interest pai Pas ed ae Tassified as operating cash Flows a2 inte ter into the determination of net income. Cage rN iy Alternatively, interest paid may be classifi Aiergatve os a cost of obtaining financial L°2g z cn st received may be classified as investin a because it is a return on investment. B Cash foy For a financial institution, interest paid and are lassified as operating cash flow Interest reesngy ash fows from interest paid and interest recs Ceetifed in a consistent manner from period to anne shal be operating, investing or financing activities. 38 ether QUESTION 60-8 Explain treatment af dividend paid arid dividend received. ANSWER 60-8 PAS it as, reser 4, provides that dividend paid s classified be Seana use it is a cost of obtaining financial coho, ively, dividend paid may be classified as operating Serine assist users to determine the ability of y dividends out of operating cash flow. PAS.7, paray classifon no er2bh 33, provides that divid ' deepen lend received - fee roe cat flaw because it enters into the me. nd received may be classified ** itis a return on investment a psTION oO significant noncash tra sot ont ae eash flows? insactions reported in the ta gwER 60-9 aph 43, provides that investing and fina cing aragr’ pAS 7. pero ot do not require use of cash or cash tht from the statement of cash flows, Se ncash transactions shall be disclosed els soca nvements eter i the ne faangld maison Grin a separate schedule. ts of noncash transactions pxamples quisition of oneurTent ane herby asunig di Aca liability or by means Se eee acquisition of noncurrent asset by means of issuing share ». Aemtal or bonds payable ee aversion of debt to equity, je to share capital race share to ordinary share - Co for example conversion of bonds payabl Conversion of prefere! QUESTION 60-10 Explain direct method of detes operating activities. ANSWER 60-10 An entity shall report cither the direct methi The direct method sows ia detail or eats BeOS classes of gross cash receipts and gross cash payments. The cash receipt re aed oe by oe th th Pe cash Bh cash receipts an ihe serene Pron the not cas flow from operating, activities. In essence, the direct metho statement. mining the net cash flow from cash flows from operating ectivites ain ‘od or indirect yd is the “cash pasis” income 3sme and expense associated with inves, 4 g d of presenting the net cash f gine with accrual basis net moome justments to convert the accrual may be used in adjusting th ash basis net income are: noneash current assets are deducted € noncash current assets are added liabilities are added back to a pstIon 60-12 Multiple choice (PAS 7) imary purpose of a stateme L Pe Be relevant information about °F cash flows is to 4. Differences between net income and associated cash ipts and disbursements ‘An entity’s ability to generate positive net cash i e flows c fe) fine cot Hart sand cash disbursements of an entity . = eee ability to meet cash operating needs 4, Cash receipts from royalties and commissions are a, Cash outflows for operating activities E. Cash inflows from operating activities ©. Cash inflows from investing activities a. Cash outflows for financing activities Cash flows arising from trading securities are a. Classified as operating activities B. Classified as investing activities c. Classified as financing activities 4. Not reported in the cash flow statement 2 s Cash payments to acquire equity instruments are a. Cash outflows for financing activities b. Cash inflows from investing activities Cash outflows for investing activities a. Cash inflows from financing activities a Cash receipts from issuing shares ar? 8. Cash inflows from investing activitie® b.. Cash outflows for investing activi 6 ; Cash inflows from financing activitie® 4. Cash outflows for financing ectivites m5areholders are classif lows for investing activities b Cash inflows from investing activities 5 Ceeh inflows from financing activities & Gach outflows for Gnaneing activities Cash ou 4. Interest received and dividend received may be class alternatively 28 cash flow from a, Operating activities b. Investing activities ¢. Financing activities d. Revenue activities 9, Bunk overdvafts that are repayable on demand and the balance often fluctuates from positive to overdrawn sha be classified as a. Operating activities b. Investing activities ¢. Financing activities 4. Component of cash and cash equivalents 10, Cash advances and loans : ' usually classified ag made by a financial institution te a, Operating activities Investing activities ‘inancing activities Com, ponent of cash and cash equivalents c ANSWER 60-12 le 3. wb ; ; Boe 7d 9 4 7 6a 8. »b 10. * x srt g0-13 Multiple choice (IFRS) wv’ 1 a a jeemable preference shares due in 60 . RedeemaliSus due for repayment in 90 ee p. Tetty investments overdraft we classified as cash ond cash equivalents, except Ba §, a bank «oh classification of the cash flow arising fy 4. which, classe earthquake disaster setlement ‘ral be wet ‘appropriate? Under IFRS, an entity can report finance costs in the : flows statement of cash a. In operating activities & Hither in operating activities or financing activities ¢. In financing activities : & Tn investing activities or financing activites | Under IFRS, the dividend received from share investments can be classified as a. Either an operating activity or a financing activity &: Either an operating activity or investing activity ¢. Only as an investing activity 4. Only an operating activity 5, Cash advances and loans from bank overdraft should reported in the statement of cash flows 95 a. Operating acti b. Investing activities c. Financing activities 4. Other significant noncash activities ANSWER 60-13 tus 2a 3. b nTer esnson 604 4 multiple choice (AICPA Aq, Qu) 5 E jn from sale of equipment for cas} i vow cash using the indirect remy, Beater ‘ 4) hod? vag activities a8 a reduction Of the « a a ash ing, from ating activities 08 & cash outflow 2 In operating activities as a deduction from ing, i In operating activities as an Addition to income? f machinery b row should a loss on sale of ery be pres > Eetement of cash flows using indirect method? . a, Adeduetion from net income b, An addition to net income ¢. An inflow and outflow of cash 4. An outflow of cash ted i, 4, Ina statement of cash flows using indirect cperating activities, an inerease in inventory is ‘a. Outflow of cash b. Inflow and outflow of cash c. Addition to net income . Deduction from net income 4, Supplemental disclosures required only when the salement of can Howe is prepared using the indiet © A schedule reconciling net income with net cash fos , Som parting ctivites Be interest and taxes. ¢ Amounts deducted for depreciation and amortiah it noncash investing and financing activities a aish of the following should not. be disclosed!" te S cash flows using the indirect method! i; interest aia © Caah fe Paid 4. Da Pet share ® Paid on preference shares veo tement of cash flows, which of the followi oul «14st a6 ach Now fom Ssancng aise ie payment t0 retire mortgage note ® Joterest payment on mortgage note b. Didend payment §, Payment t retire mortgage note and dividend payment sgatement of cash flows, dopreciatin is treated ent Net income because deprecation : Mijustment Js. direct source of cash Reduces income ‘but does not involve cash outflow ». Fsduces net ineome and involves an inflow of cash ¢. Is an inflow of cash for replacement of asset gina statement of cash flows using indirect method, a » Jecrease in prepaid expenses is a. Reported as an outflow and inflow of cash i Reported as an outflow of cash ¢, Deducted from net inocme d. Added to net income 6, Dividends received from an equity investee should be presented in the statement of cash flows as a. Deduction from cash flows from operating activities b. Addition to cash flows from investing activities c. Addition to cash flows from operating activities d. Deduction from cash flows from investing activities 10, What is the treatment of a three-month treasury bill? a. Not reported b. An outflow for financing activities . An outflow for lending activities 4. An outflow for investing activities ANSWER 60-14 TG epimg ied gatas OS ales Me 2s 4b wd as oe. neQUESTION 60-15 Multiple choice (AICPA Adaptea, statement of cash flows, if used equipment is 1. Ing ff amount shown a8 a cash flow from ‘nell ata gain, the Jquals the carrying amount of the equipmect™® a. Plus the gain b. Plus the gain and less the amount of tax c. Plus both the gain and the amount of tax d. With no addition or subtraction 2. Ina statement of cash flows, if used equipment i Joss, the amount shown as’a cash inflow Sonn eect activities equals the carrying amount of the equipment a. Less the loss and the amount of tax b. Less both the loss and the amount of tax c, Less the loss d. With no addition or subtraction 3. An entity’s wages payable increased. Under direct ‘method, abo cach paid far wages would be a. Salary expense plus beginning wa; ble b, Salary expense plus the increase in wages payable ° ¢. Salary expense less the increase in wages payable d. The same as salary expense 4. Anentity’s accounts receivable decreased. a L. In the of cash flow, the cash collected from eustqmers would be, a. Sales revenue plus beginnin Sales 1g accounts receivable & Seles revenue plus the decrease in accounts receivable 7 e decres in a g, alee revenue less the decrease in accounts rosivabl 5. Hew tical an entity report the effect of the finance lease Etatement of rap anancing activities section of the pee aa inflow equal to the present value of future lease Aroution s paneipal and interest payment ‘An outflow otc fo the principal and interest payment lenge equal to the principal payment only Payment should not be reported pes 720 ee es ee 6 ae Sperating or investing cash flow oe oe ntverost received 8 Dividend received Davos paid. specifically identified with i Dividend paid g and collecting loans are ssifie om, exceed as investing 4, Makint nverncing activities 4 Fmuidity activities g, Which is presented under cash flows from investing activities? a. Employee costs b. Property revaluation c, Redemption.of debentures §. Development costs capitalized in the period 9. Noricash investing and financing activities are ted only if the direct method is used. i Reported ay if the indirect method is used. ¢, Disclosed in a note or separate schedule accompanying ‘the statement of cash flows. d. Not reported. 10, An entity purchased a building and paid partly io equity shares aE partly in debentures, The transaction shall be treated as which of the following? a. The purchase of col Sees 2 i shares and debent fil b ‘The purchase of the building is investing. ant issuance of shares and debenture® ee a c. The transaction disclosed ony — a. ‘The transaction shall be ignored s investing and the is financing. ANSWER 60-15 a gre ha Be 5c i a 10. © we 4b 6 4 : TaESTION 60-16 Multiple choice (IAA) Qui cash flows usi tatement of cash flows using the ing, 1 When eperine tization ‘of patent is reported acti, mi ash flows from investing activite, a. Increase in Wash flows from investing activiticg i a cash flows from operating activities, 4. Reduction 9 cash flows from operating activities aring a statement of cash flows using the di ‘ Vey amortization of goodwill is © dire, a. An increase in cash flows from operating activities b. A reduction in cash flows from operating activities ¢. Disclosed as a noncash transaction. . Not reported in the statement of cash flows, 4, The amortization of bond discount related to long-term debt is presented in statement of cash flows prepared as a. Inflow and outflow of cash b. Outflow of cash c. Deduction from net income d. Addition to net income 4 mu amortization of a bond premium related to long-term debt is presented in statement of cash flows as a. A positive adjustment to net inci ome . b Cash outfow from investing activities. g; Gach outflow from financing activities. |. A negative adjustment to net income. 5. Which statem stems ws eh mth of Prewmsn a. The indirect be ae mbna starts with income before ta. ©: The drsy mated is also the reconciliation method a oor af eto is more consistent with the prim 4 Allothene satemere of cash flows. 722 a er indirect method, cash flows from o, g. Und perating Uniwities ‘are always equal to accrual accountin, e calculated as the differer 1g income, eae stoulated b: mee between revenue and Can be Y appropriatel: © ‘rom ately addin ducting net income the g to or see in tes, A Can be ca. ene . DY appropriate a. Can Meg from net income those ately adding to or statement that affect cash. income der indirect method, how should an’ 1, Under indireny transaction be prevented? |S 4, As an inflow under financing acvtvities {t should be ignored as it is an unrealized gai b. Tt Should be disclosed in notes Dan Hi §. Asa deduction from net income 4, Which of the following ig not disclosed in the statement of Whichiows prepared under the direct method? ‘a. The major classes of gross cash receipts and gross cash ayments. b. The amount of income taxes paid. b. pnecconeiliation of net income to net cash flow from operations. : a. Qesconciliation of ending retained earnings to net cash: flow from operations. 9. The statement of cash flows reports all, except a. The net change in cash for the period. £; ‘The cash Hows from operations during the period O The free cach flow generated during the period a. Investing transactions. 10. Free caish flow is calculated as net cash operating activities less a. Capital expenditures b. Dividends and depreciation. ¢. Capital expenditures and divi jends. a. Capital expenditures and depreciation provided by ANSWER 60-16 a . 6 le 3. a 5c wd aes wa aa 6c 8d . m3(HAP LER 06 pooK VALUE PER SHARE QussTION 56-1 Explain book value per share, ANSWER 56-1 Book value per share is the amount that would be pai reference share and ordinary share assuming eee liquidated and the amount available to shareholders is exactly the same amount reported as shareholders’ equity. If there is only one class of share capital, the fo r vale pet share is total shareholders’ equity Paterna) ce outs ng. : Where there are two-classes of share capital, it is necessary to apportion the shareholders’ equity between the qrederencs' shane and ordinary share. The book value per ordinary share is equal to total ordinary shareholders’ equity divided by total ordinary shares outstanding. The book value per preference share is equal to total preference shareholders’ equity divided by total preference shares outstanding. Preference shareholders’ equity comprises: a. Preference shares outstanding equal to the total par value or stated value . Liquidation premium equal to the excess of liquidation price of preference share over the par or stated value ¢.. Preference dividends in arrears The ordinary shareholders’ equity is simply after deducting the preference shareholder: toital shareholders’ equity. fee the residual amount 3° equity from the -Explain 1000" ANSWER 66-2 . -jion value is the amount which the The Uguidaton recive upon liquidation of the 2referene, prefdation value may be more than the par or states vakothe of liquidation value, the preference In the aby an amount equal to the par or stated are holdeny . if there is a deficit, the preference shareh However, Mprorata basis with the ordinary sharehouae® Would QUESTION 56-3 Explain call price of a preference share. ANSWER 56-3 The call price is the amount paid to Rreference share! redemption of preference share fe corporation. luring the lifeteces. ‘The call price or redemption ice is ij computation” © "edemption price is ignored for book value QUESTION 56-4 Explain preference as to dividends and preference as to assets, ANSWER 56-4 ‘The term Preference as ae to dividends doe reference shareholders have an absolute right te diveheade Prefere ivi ; at * aso dividends simp j means that if dividends are ivic i i diigeta Sts before the ordinary sharshidee ae cat's ary shareholders are paid a In the absence of _ @ reference as to da, {tatement, the preference share he term preferen, - shareholders a the io assets means that the preference “oe ee Ot any liquidation sot to receive an amount equal to par ation in addition to dayton haTeholdings inthe event ividends in arrears. ee @™ x noncumulative, cumulative, gel? Big preference share, Pipe P ANSWER 56-5 umulative preference share is one on which the ri 1. Anoneive dividends is forfeited in Tight to ends are not declared. Sny one year in which nonparticipating and the absence of specific designation, preference share i Beumed to be noncumulative and nonparticipating. ie cumulative preference share is one on which a . A Goolared dividends accumulate each year until paid. ‘The cumulative preference share is entitled to all dividends in arrears. . A nonparticipating preference share is one that is entitled 3. heoeive only the dividends equal to the fixed preference rate. 4. A participating preference share is one which is entitled to reosive Evidenda in excess of the basic or fixed dividend rate. Participating preference share may be fully participating with ordinary share on a prorata basis or participating only to a certain amount or percentage. QUESTION 56-6 What is the treatment of dividends in arrears on cumulative Preference share in the statement of financial position? ANSWER 56-6 The point to remember is that there is.no ability until the sboard of directors has declared a dividend. ference share are Dividends in arrears on cumulative pitt ee, disclosed only ‘in the notes to financial statement , ir » dividends in arrears However, no disclosure is required for dividen the preference share is noncumu"QUESTION 56-7 Multiple choice (AA) owing shareholder right, (HAPTER 57 1, Which of the follow ihe anced in an issue of preferenms®) 8 n, Sharan ‘commonly € ‘a. The right-to vote for the board > the Be eae re broperionel sneer The receive a fu st The Fi te eer other claosen of feet beg sARNINGS PER SHARE 4. The right to vote righ on major corporate issue, ““Pital, QuESTION 7-1 2, Preference shares participate ratably wi ® Shareholders in any profit Seen eath the ora a al prescribed preference rate. ion beyong at Explain earnings per oe a Cumulative feature . b. Participating feature ANSWER 57-1 5 eae feature ‘qhe term earnings per shar jeomable feature Tae ed by a sharel Sa ee on oe cae ee - 6 a return on investment. o iv crdiney ke share would . ‘The js the amount of income attrib opposed rebeldere? most ‘Thus, the BPS i ‘ uutable to each ordinary : Cen holders? likely be share. Thu information pertains only to ordinary share bl it is not : 3 Caliabe itis not necogsary for proference share because there is a elcome : _ wr such share rticipa presentation ofearni ji 4. Noncumulative ordinary shares or Se ea —— for entities whose ete Preference dividends in and fr entities that are in the procss anes are publicly odes f Are not ms ai ‘ad Bl Eon arrears z ie ordinary shares in the public seountioe market. oiek . In Set a ae fore any other cash dividends can b other ore 2 uublic entities are required to present earnings Are paid as liabilit . : Paid to preference “Pent paid. However, nonpublic entitis 7 ace i , nonpublic entities yt raged 5. How sho PAYment ot ee ce Hf sufficient funds topreen earuings pet share. er ee 4 ry dividend, An enti be td cumulative ae ieee tiny Aa Present me the fice of the, income statement : seatieit oe basic and a ’per share for income or loss from f: Note disclosure arrears eae Sees peteace it chitoholde As enti reports a discontinued operation shall disclose ad ment Coe cat : the basic and diluted emounts pt share for the discontinued Tnsrease , ee notes te thie s rere cal og face of the income statement or it, the * ities : When an entity presents both consolidated financial 2. re ments and separate financial statements, isclosures - od ‘ ee ha need be presented only on the basis of the ; at formation.QUESTION 57-2 What is the formula for computing basic earnings ,,. hans ANSWER 57-2 ‘The basic earnings per share is computed by diviai The basi ere ordinory shares outsianding. dividing 4, ne The earnings should be the net income aft. annual preference dividend. et deducting i ‘The annual cumulative preference dividend is ded tet income, whether such dividend is declared or g't°%4 fron ‘The annual noncumulative preference divi od. from net income only when declared. end is ded hicted Ifthere is a significant change in the . i outstanding during the year, the ioe ghted a dinary ordinary shares outstanding during th souls as denominator. QUESTION 57-8 Explain the effect of Sebel etet of repurchase or 76 ANSWER 57-3 shares un fe period should by co! demption of preference PAS 33, pan i hwtchooad Cae i Provides that preference shares may be i eee tender offer to the holders” share] Sab nsideration paid to th ference representa » Ss canyying amount of the preference shares stra lo eine er preference shareholders and 2 € excess am deducteit Moun! or loss on re deducted from net ineo, 1 repurchase or redemption is incor er i oho I ae wi ae sill {0 ordinary shareholders Paragr rther provi " amount of reference aden that any excess of the carrying isthe preference shares’ ott the consideration paid 10 Aree le t0 ordinary ohvy’, cdded in calculating income shareholders, 10 net nae 229 Bain on’ F erst income avail repurchase mputing basie earnings pes £2 Ordinary theraal is gtl0N 57-4 0 determination of weighted average shares, WR 57-4 mination of weighted average 1 pools peter f re usually included in the weighted number of shi shares ote consideration is receivabli eae = the date considera le which is usually edinary shares in exchange for cash are included when & cash is receivable. Ordinary shares issiied as a result of the conversion of a Gebt instrument to ordinary shares are included from the date of conversion or date when interest ceases to accrue. «. Ordinary, shares issued in place of interest or principal Gr other financial instruments are included from the date when interest ceases to accrue. 4. Ordinary shares issued in exchange for the settlement of a Kability of the entity are included from the settlement date. Ordinary shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognized. Ordinary shares issued for the rendering of services to the entity are included as the services are rendered. g. Ordinary shares issued as part of the purchase consideration of a business combination are included in shares from the date of the weighted average number of the acquisition. h. Ordinary shares issued upon the conversion of a mandatory convertible instrument are included 1% the calculation of basic earnings pet share from the date the contract is entered into. shares or partly paid a ibed ordinary I shes TERS. oun EDS to the extent that the shares are entitled to participate in dividends. Under Philippine jurisdiction, aubecrived shares are entitled to participate fully in di .QUESTION 57-5 Define a potential ordinary share. "ANSWER 67-5 tial ordinary share is « financial instr ‘Pts that may entitle the holder to ordinator oy, arecthe Inother words, apotential ordinary share is a financial that represents future issuance of ordinary sharga "ne, preference share and Share oil bo on The tial ordinary shar . major ips pte res Gre con, warrant. QUESTION 57-6 Explain dilution and antidilution. ANSWER 57-6 Dilution oris inelusic Seen in case, are dilutive. hares On the other hand, antiditution arises when the inclusion of sion of ferns basic les per share. basic earnings per sha fincas, the potential ordinary shan ntidituti ary shares Sadia ana tereace ae, shares are considered as QUESTION 57-7 - Explain diluted cata rings © ANSWER 57-7 din computing dilutes er share. ‘ordinary share sete Shar options tad . Warrants are exercised. agers ‘hares cutstanding are increased with sic earnings per share. iby : “Preferednce share is converted into quastION 57.8 in the inclusion of “convertible bond payable” and rtible preference shares” in the computation of diluted share. pla Honvertible earnings Pe! ANSWER 57-8 js a convertible bond payable, the bond payable i if themed to bo converted into ordinary shares, dingly, the net income is adjusted by adding back the interest eoune. on the bond payable, net of tax. . : mber of ordinary shares outstanding is increased by the Jamber of ordinary shares that would have been fasted toon Smnversion of the bond payable. If there are convertible preference shares, the preference shares are assumed to be converted into ordinary shares. ‘Accordingly, the net income is not reduced anymore by the amount of preference dividend. ‘The number of ordinary shares outstanding is increased by the number of ordiriary shares that would have been issued upon conversion of the preference shares. QUESTION 57-9 Explain the inclusion of share options and warrants in the computation of diluted earnings per share. ANSWER 57-9 Options and warrants are included in the computation of luted earnings per share only when dilutive. Options and warrants are dilutive when the exercise, Price is less than the average market price of the. Options and warrants are included in the EPS.computation through the treasury share method. a. The options and warrants are assumed to be exercised at the haginning of current year or at the date when issued. b. The proceeds from the options and warrants are used in acqutring treasury shares at the averse market price. . ntial ordinary shares is equal to the option. & The number of polentirned treasury shares acquired. ‘or option share.QUESTION 57-10 aplain written put options. ANSWER 57-10 sien put options are contracts that require the ony, ite Pm oun ondnary shares at specified the enti O definite period. ioe Written put options are actually contracts to acquin Weiten put reifed price during a definite period, a It is assumed that sufficient ordinary shay 3 issued at the average market price. FES will be © treasury, bh The proceeds from the issue are used to b: Thsary shores covered by the written put optoee’t ¢. ‘Thedifference between the number of ordinary ihewed and the number of ordinary shares remesiud repromts the potential ordinary shares tobe toed calculation of diluted earnings per share. n QUESTION 57-11 Explain contingent ordinary shares. ANSWER 57-11 file ono carb shares axe ordinary shares issuable for Specified conditions in'a contingent share agreement. Inada i unas Phares ore treated as outatanding and ‘earnings per share if the Cuditine te: diluted Contingent ordinary of basic earnii shares are included in the calculation satisfied "e* Pet share from the date the condition is Contingent ordinary of diluted earni, shares are incl i i rnings luded in the computation period or from the dats cfare fom the beginning of the ss contingent share agreement question 57-12 jain the test for dilution of potential ordinary share idering whether potenti n compidering tive, ebeh teste Oran shares are Thutive oe or series of potential ailvary shares ehall be, considered separately or ordisidwolly, rather than in the aggregate. hhe dilution of the basic earni jn order to maximize 1 \e basic earnings per peach issue is considered in se shative to the least dilutive. miuence from the most tential ordinary shares shall be ranked based The Fibution in terms of incremental EP! oon mThe potential ordinary share with the lowest incremental EPS is sanked first. PS ‘The options and warrants are dilutive if the option price or The cize price is lower than the average market price ‘The options and warrants are the most dilutive because Options and warrants have no impact on net income, ‘Thus, the options and warrants are ranked first in computing diluted earnings per sbare. The contribution of the preference share to net income ie the amount of preference dividend that is avoided because of the conversion. The incremental EPS for convertible preference share equal to the amount of annual preference dividend divided by the number of ordinary shares into which the preference share is convertible. If this incremental EPS is lower than the basic EPS, the convertible preference share is probably, dilutive. If this {ncremental HPS is higher than the basic EPS, the preference share is antidilutive. ° The contribution of the bond payable to net incor is the amount of interest expense that is Folded because of the conversion. The incremental EPS for the convertible bond payable is equal to the interest expense, net of tox divided | by the mie of ordinary shares into which the payable ts cont ae is i B than the basic EPS, the AE thin incremental ES ie is'grabebl Gilutive. IF ehis incremental EPS Se hugher than the basic PS, the convertible bond payable is antidilutive.QUESTION 57-18 Mult 1. BPS disclosures are Te a. Entities shares aie ities >. Be public market. ¢. All entities d. Entities wh shares are pI process oF i ————— Tl quired for ordinaty shares and potenti erably traded Hal ortingny Parein the process of issuing ordinary . are, jose ordinary shares and potentia} 9); wublicly traded and entities that ay. |!" uing ordinary shares in public mia] 8 the 2, EPS disclosures are a. Required for all public and nonpublic entities b. Required for public entities and encourag nonpublic entities oe ¢. Encouraged for public entities and requ nonpublic entities oS d. Encouraged for all entities 3, When an entity issues both consolidated and a. “bh ©, a. separate i statements, the EPS information is require: a. For both sets of financial statements © Only fr conan Sense 3 at ancial sté 4. Only for separate financial ctatomente Gees Earnings per share shall be computed on the basis of |. The number ae of shares outstanding at the end of the yest 'age of the number of shares outstanding during the Year regardless of the extent of fluctuations +» Aweighted - average of the nuniber of shares outstanding during the eat except that minor fluctuations in the 5. Earnings except a be umber The mms may be disregarded ares outstanding at the middle of vea" Per share shall be reported for all of the followins, mputing basic earnings per share, if a ne are cumulative, the amount that should eee a ‘adjustment to the numerator is the — ference dividends in arrears fe Preference dividends paid during the year . Hnual preference dividend § ‘annual ordinary dividend in computing basic earnings per share, the amount of } Meference dividends on noncumulative preference Phares should be Deducted from net income whether declared or not, f Deducted from net income only when declared b. ‘Added to net income only when declared 8. In computing basic earnings per share, the full amount of the required preference dividends on cumulative preference shares for the period should be a. Ignored b, Deducted from net income only when declared ¢. Deducted from net income whether declared or not d. Added.to net income whether declared or not 9. In computing basic loss per share, the annual preference dividend on cumulative pi ‘shares should be a. Ignored b. Deducted from the net loss whether declared or not ¢. Added to the net loss whether declared or not d. Added to the net loss only when declared 10. In the computation of weighted average number of shares when there is a share split, the additional shares are a. Weighted by the number of days outstanding Byes eied Py the number of months outstanding, ©. Considered outstanding of the beginning cf ie Yor d. Considered outstanding at the beginning year reported ANSWER 57-13 Dy 9G na ub ®e ae ao 10. d 2% b 4 ¢. QUESTION 57-14 Multiple choice (IFRS) culated befor, s per share shall be cal before 1 Darien of the following? a. Preference dividend for the period b. Ordinary dividend ¢. Taxation d. Minority interest 2, Ifa bonus issue occurs between the year-end and «) that the financial statements are authorized 5." a. The EPS for both the current and the previous ,.. adjusted b. The EPS for the current year only is adjusted c. No adjustment is made to EPS : d. Diluted BPS only is adjusted » Jearend and the Gate that the Bnancey authorized for issue ‘ a Tee EPS br both the current and the previous ver a & Neadusument i mals eon # austen 4. Diluted EPS only is adjusted. 4. The weighted average numb i e er of shares outstandin, in the period forall periods should be adjusted for a i Any change in the pubes of ordinary shares without a change in resource: b. Any prior period adj adjust & Any ew issue of shares for cash, nvertible instruments settled in cash. 5. Which figure for earni ion i Ss for earnings does EPS information use? Net incom | e attributable to ordinary equity holders Preference {nome before eqnureholders of the parent et income ate ating operations the parent utable to ordinary equity holders of Ree p von an entity Hastes & share spit 6 is ‘s EPS previous year's EPS is not adjusted f a. The Previous year’s EPS is adjusted for the raven & Gnly-a note of the effect on the previous year's BPS ig + made. i Only the diluted EPS for the previous year is adjusted. 1, ordini are in! ‘The beginning of the accounting period. b. The date of acquisition. b the end of the accounting period. §, The midpoint of the accounting year. snares which are issued to settle a liability are included 8. SharrpS calculation from in a. Date of the contract for services 2 Halfway through the rendering of services > The completion of services & ‘The settlement date ary shares issued as part of a business q ary fia in the EPS ealeulation frome 9, Shares which are to be issued upon the conversion of a mandatorily convertible instrument are included in the caleulation of basic earnings per share from a. The date of the contract for the shares b. Halfway through the period c. The date of conversion d. The issue of the share certificate 10. Under IFRS, where ordinary shares are issued but not paid, the ordinary shares are treated in EPS f id ordinary shares. a. In the same way as fully paid o ithe extent that the b. Asa fraction of an ordinary share to the extent shares are entitled to participate in dividends. c. In the same way as warrants or options d. Are ignored. ANSWER 57-14 lb ae 5. d dia. 363 ad 0b waQUESTION 57-15 Multiple choice (PAS 33) ion of diluted EPS assumes that ch, : CE a eed anil that the proceeds were used, tin, ordinary shares as an investment t Buetetthae shares ¢. Buy treasury shares d. Increase net income 2, Options and warrants are dilutive if . The exercise price is lower than the average bh The exercise price is higher than the average matt Price, The exercise price i equal to the average manifot d. The option shares represent 20% of ordinary shana’® 8, When applying the treasury share method {; EES, the market price ofthe ordinary shane wor{ted assumed acquisition of treasury shares is the {° the f. Matkt pric at the end ofthe year b. Average market price during the yea @ Market price at the beginning of the vear 4. Average market price over a two-year seriod 4. In applying the treasury share method of « i 2 —— ‘earnings per share, when is it appropriate to we o Average market price of ordinary share during ‘he year as the assumed repurchase price? a. Always b. When the avera exercise price © Never 4. When the average ‘exercise price ge market price is higher than the market price is lower than the QuEsTION 57-16 Multiple choice (IFRS) the following must be disck 1 an eiare, except ery Forecast earnings per share for the foll $. Instruments that could potentially dilute baste en, 8 er share in the future but not included in the diluted EPs because they.are antidilutive in the cont period ¢. The weighted average number of ordinary shares unt, 4. The earnings figures used in calculating EES ; 9, Dilution of EPS is defined as a. Decrease in earnings per share when any financial instrument is converted to any form of share capital. b. Decrease in share capital. c. Decrease in earnings per share when convertible instruments are converted to ordinary shares 4. Decrease in earnings per share when share capital is converted to debt capital. 3. Ifa share option is converted on March 31 a. The potential ordinary shares are included in diluted EPS up to March 31, and in basic EPS from the date converted to the year-end, both weighted accordingly. b. ‘The ordinary shares are not included in diluted El ¢ The ordinary shares are not included in basic EPS, d. The effects of the share option are included only in previous year’s EPS calculation. 4. In calculating whether potential ordinary shares are dilutive, the income figure used as the control number is a. Net income including discontinued. operations b. Income from continuing operations ¢. Income before tax including discontinued operations d. Retained earnings for the year after dividends 5. The nature of diluted earnings per share involving share options can be described as «din relation to earnings ‘ical becat ings are historical 7 Beet erase Seite an enttys valuation ¢. Proforma because it indicates potential changes in a. Brotecma, Because it indicates potential changes in earnings. ANSWER 57-16 la 2 ¢ 3QUESTION 677 Multiple choice (IAA) 1, Antidilutive securities included in the computation of 4j, : Lee share but not basic earnings erty bh, Ave those whose inclusion in earnings per computation would cause basic earnings per sh... SRoced diluted earnings per share. Include share options and warrants whose ), price is less than the average market price, 1°" 4. Should be disregarded in all EPS computations & 2, The purpose of diluted earnings per share is to a. Provide a comparison figure for debt holders b. Indicate earnings shareholders shall receive in periods : c. Distinguish between entities with a complex d. Show the maximum possible dilution of earnings 3. What is the justification underlying the ardinaay shates in a1 EPS computation? or Poets a. Form over substance ms Substance aver fora . Form and substance consi Aom and substance considered equally 4. In calculating diluted earni earni ich of th flowing should not be ee Pet share, which of the a. The weighted outstanding . The amo ch ee dividends declared on cumulative ¢. The amoun ae shar wtotnt of cash dividends declared on ordinary d. The number of assumed conve ge number of ordinary shares ordinary shares resulti int sulting from the of bonds payable outstanding 6 a Which statement is correct in relation to EPS? If preference share is outstanding, divi on me in calculating EPS ae EPS can never be negative. If income from continuing operations is less than zero, potentially dilutive securities are antidilutive. : 4. All issues convertible to ordinary shares must be included in the calculation of diluted EPS ‘An entity already has calculated the basic earnings per “hare. In determining diluted earnings per share, the annual dividend on convertible cumulative preference share which is dilutive should be a. Added back to the numerator of basic EPS whether declared-or not. b. ©. . p. Deducted from the numerator of basic EPS only if declared. c. Added back to the numerator of basic EPS only if declared. d. Deducted from the numerator of basic EPS whether declared or not. In determining diluted earnings per share, dividends on nonconvertible cumulative preference shares should be a. Disregarded b. Added back to net income whether declared or not c. Deducted from net income only if declared d. Deducted from net income whether declared or not ‘The “if converted” method of computing earnings per share assumes conversion of convertible bonds payable at a. Beginning of the earliest period reported or at time of i iter. b. ean ot earliest period reported regardless of ted regatdless of the time of issuance. ' c. Middle of the earliest period repo! ,d regardless of the d. Ending of the earliest period reporte time of issuance9, In determining exp! payable should be a. db. c d. diluted earnings per share, ing ense, net of income tax, on dilutive conve rib et "aq k to weighted average shares outsta, » i share. tanding me for diluted earning, Pey Added bac! for diluted earnings per Added back to net inco share. Deducted from share. Deducted from weighted average shares outstandin g for diluted earnings per share. net income for diluted earnings ; er 10, When dilutive convertible bonds are the only potentiaj ordinary shares a. b. c. Diluted EPS will be geater if the bonds are actual} converted than not converted. y Diluted EPS will be smaller if the bonds are actuall converted than not converted. i Diluted EPS will be the same whether or not the bonds are converted. ee ANSWER 57-17 ld eae 2d 1a 3. b aes 4c 528 Be le