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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019

BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1


ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

AUDITING THEORY

I. Topic(s):
Overview of Auditing, Attestation and Assurance

II. Learning Objectives:


1. Describe auditing and explain why it is important.
2. Explain the unique characteristics of the auditing profession.
3. Understand management’s incentive to misstate financial statements.
4. Explain the role of the auditor in the corporate governance process.
5. Understand Framework of Philippine Accounting Standards
6. Understand Assurance Engagements
7. Understand objective and general principles governing an audit of financial statements

III. Rundown
Description of Auditing and Its Importance
What is the auditing process? For society, what purpose does it serve? What role does
auditing play in corporate governance? Why is the process so important? As we begin
the study of auditing, these are key questions to answer. Unless we understand the
unique role that auditing performs in our society for contemporary business and the
public, we will not appreciate the significance of the various auditing standards as we
discuss principles, rules, and professional practice.

Auditing is the process of reviewing the financial information prepared by the


management of a company (the financial statements and the footnotes) to determine
that it conforms to a particular standard (the applicable financial reporting framework).
The person who conducts the assessment follows a set of standards (generally
accepted auditing standards). The person completing the assessment is not an
employee of the company but works for an accounting firm that is associated with the
company only by being hired to perform an audit (a firm that is independent from the
company). The individual doing the assessment is hired to verify the fairness and
completeness of the decisions recorded by the firm so that outsiders have accurate
information to make decisions. The outsiders may be bankers, current or potential
stockholders, or regulatory bodies (outsiders to company management). The accountants
making the assessment provide a valuable, indeed, a crucial, service. Without
such an assessment, outsiders would be forced to rely solely on the information the
firm provided. Even without deliberately misleading outsiders, the firm’s executives
are likely to be more optimistic about the firm’s status than an outsider might be.
Would you lend money to a company or buy its stock based solely on management’s
optimistic picture of the firm’s performance? Would you trust financial reports that
use an “optimistic viewpoint” to report all information without any independent
checks or review?

The relationship of the audit firm to the client can be described in the framework of
a principal-agent relationship. The principals in this relationship are the shareholders
of the company. The agent is management. A principal-agent relationship exists because
the owners of the company (the principals) are not involved in the daily management
of the company. They hire an agent (management) to run the company for them and to
make daily decisions for the company. This means that the owners of the company (the
principals) are removed from its daily operations and that management has more knowledge
about the daily operations than the owners. The owners (the principals) would like
management (the agent) to report correctly what its members know, so the principal
hires an auditor to increase the likelihood of correct reporting. Knowing that an auditor
will assess the financial statements, management is more likely to prepare them in
accordance with the accounting standards because it is the auditor’s job to determine
that management has complied with this requirement. Outsiders benefit when the
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

owners hire an auditor to protect their interests in the company because the information
available to outsiders is more likely to correspond to financial accounting standards.

The corporate governance process should protect outsiders from misstated financial
statements. Auditors perform an important job in corporate governance because their
role as trained professionals who are independent from the firm is unique in the corporate
governance process. Because auditors are independent, they are in a perfect position
to provide an opinion on whether the financial statements that management presents
have been prepared according to an applicable financial reporting framework. Outsiders
might reasonably trust such an opinion from an independent professional but would not
trust such an opinion from a person who was not independent. The review of the independent
auditor is not necessarily a pessimistic assessment, but it will likely be a less
optimistic assessment than that of management because an outsider without any relationship
(ownership, financial, employment) to the company issued it. The auditor will
present a relatively unbiased picture of the firm’s compliance or noncompliance with
the applicable financial reporting framework.

The capital markets system in the Philippines and the rest of the world rely on
accurate information. If auditors fail to perform their job, outsiders are hurt because
they make decisions about the companies based on information disclosed, and if the
information is wrong, the decision is likely to be wrong. For example, bankers may lend
money when they shouldn’t or may lend at a lower interest rate than appropriate if they
had known the correct information. Investors may fail to sell stock or buy stock in companies
that they wouldn’t if they had information that fairly presented the firm’s financial
position.

If the auditors fail to do their job, no one else does it. The financial statements for
public companies are filed with the

Securities and Exchange Commission (SEC), but neither organization


conducts audits of the information (unless to review the statements). The financial
statements for private companies are simply given to the owners and are not reviewed
by any outside source. For all practical purposes, “the buck stops” with the auditors, so
if they fail to do their job, their failure has serious implications for the decisions made
by outsiders.

Unique Characteristics of the Auditing Profession


The auditing profession offers a wide range of employment opportunities for new
accountants. Most accounting firms offer client services in three areas: auditing, tax,
and consulting. A new accountant might be hired to work in any of these areas. This
book describes the job of an accountant working in the audit area. Even in the audit
area, the accountant may work for a variety of clients including private or public companies,
clients in banking, insurance, manufacturing, technology, retail, health care, or
government. Individuals working in the audit area may also spend most of their time
providing internal audit services to clients rather than working as an external auditor.
Working in any of the areas in an accounting firm may be one of the most demanding
jobs you will ever have, but it is also one of the most interesting, exciting experiences
and a great way to prepare yourself to work in the corporate business world. Working as
a certified public accountant (CPA) will greatly expand your career opportunities if you
choose to leave public accounting for other fields.

Accounting firms are structured as partnerships.


This means that someone in the accounting firm has personal liability for the firm’s
decisions (this differs from the corporate form of organization in which no one has personal
liability for the firm’s decisions). There are four large accounting firms in the Philippines (the
“big
four”) – SGV & Co., Isla Lipana, KPMG, and Delloite.
Auditors work in many places in addition to accounting firms. There are government
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

auditors, tax auditors and internal auditors


working in corporations. As an auditor, you have a wide range of places in which you
might work. You can also choose large or small companies in each of these categories as
your employer. You might work for a large public accounting firm or a small local
accounting firm.

We often speak of auditors providing audit and assurance services. This means that
auditors provide several services. They provide the audit function, which involves having
the auditor assess whether the financial statements are presented in accordance with
the applicable financial reporting framework. This book focuses on the audit function
of auditors. Auditors also provide services that do not involve the review of a complete
set of financial statements or the issue of an opinion on the financial statements. For
example, each year SGV & Co. certifies the winners of the Ms. Earth Beauty Pageant.

In this case, an auditor provides an assurance service, not an audit service. The
public have more confidence in the process that determines
the winners when an outside, independent source is involved in preparing the information.
The other services provided by an auditing firm (that are not tax or consulting) are
referred to as attest services. For these services, the auditor typically attests or authenticates
the accuracy of some type of information. The attestation standards provide the
auditor guidance for such services. Some of the services that fall under attestation standards
are reports on (1) descriptions of systems of internal controls, (2) compliance
with statutory, regulatory, and contractual requirements, and (3) investment performance
statistics. An opinion is not issued as a result of attestation services. Instead, the
auditor issues a signed report containing the information requested by the outside party.

What would your life be like working in a public accounting firm? Exciting certainly,
occasionally tedious, and sometimes stressful because of deadlines and the constant
pressure to finish an audit, a tax return, or a consulting engagement by the deadline
and within the hours allowed for the job. A unique aspect of this profession is its promotion
policy. Accountants are typically promoted every year to assume new and increased
responsibilities. The profession relies on the constant influx of new employees (staff
accountants) at the lower levels to perform many of the daily auditing tasks. Fewer managers
and partners are needed at the upper levels to review the work of the lower level
staff. You will seldom be bored, and you will constantly be challenged. If these factors
sound appealing to you, then by all means consider joining this group of professionals
who are responsible to outsiders for information used in the business world to make
important decisions about companies.
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unlawful.
SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

Management’s Incentive to Misstate Financial Statements


To be a good auditor, it is important that you understand management’s incentive to
misstate financial statements. If you understand how management gains by misstating
certain transactions, it is easier to plan your audit to devote an increased amount of time
to transactions that are more likely to be wrong than other transactions. The areas in
which management is more likely to misstate transactions are riskier for the auditor
because failing to correct the misstatements may lead to issuing a clean audit opinion
on financial statements that are materially misstated. This would give outsiders the view
that the financial statements are presented fairly in accordance with the applicable
financial reporting framework when they are not.

Management of public companies typically prefers higher net income to lower net
income. Net income can be increased by either reducing expense or increasing revenue.
Various methods, for example, recording fictitious revenue will increase net income,
allowing the company to report higher net income; failing to record expenses at the end
of the year will also increase net income. Growth in revenue is also an important factor
for many companies. In this situation, managers try to show that revenue has increased
from the previous year even if net income has not. The desired outcome in many businesses
is for revenue and possibly net income to increase at a rate at least equal to the
prior year’s increase, and if possible, more than the previous year’s rate. Outsiders, particularly
stockholders, expect this level of growth, and if companies fail to meet these
targets, their stock price may drop as investors sell their stock and invest in other companies
that can meet the growth level desired.
The principal reason to misstate financial statements is to keep the company’s stock
price from falling. Investors react unfavorably when companies report lower revenue or
net income numbers from the previous year. Stock analysts from investment firms provide
advice on company stocks. These analysts generate expectations for quarterly
earnings per share for the companies they follow. If a company fails to meet these earnings
targets, even by $0.01, their stock price is likely to fall. A falling stock price is
generally bad for a company and often for the management of a company because managers
frequently have stock options in the firm in their compensation packages or own
shares of their company’s stock in their investment portfolios. A falling stock price hurts
the firm and often its management. If at all possible, it is to be avoided.
How can a company avoid a falling stock price? If revenue has not increased and net
income is lower this year than the prior year, one way to prevent a drop in the stock price
is to misstate the financial statements. It is the auditor’s job to gather sufficient appropriate
evidence and to assess with professional skepticism the decisions that management
made in preparing the financial statements. Before issuing a clean opinion on the
client’s financial statements, the auditor should be sure that the evidence gathered during
the audit supports the assessment that the financial statements are prepared using an
applicable financial reporting framework.
The incentives for misstatement in the financial statements for private companies
may completely differ from the incentives in a public company. Private companies’ management
may prefer lower net income to higher net income because it reduces their tax
burden, so it improves their cash flow. Or they may prefer higher net income because
they need to show growth in earnings to gain a bank loan. Understanding the incentives
of the company to misstate the financial statements is an important part of the audit
process. It is crucial for the auditor to identify the financial statement accounts with the
most potential for misstatement and to design audit procedures to determine that the
accounts are fairly presented according to the applicable financial reporting framework.

The Role of the Auditor in the Corporate Governance Process


Today’s auditors play a crucial role in business and society. A consequence of recent
audit failures includes the loss of public reputation for the accounting profession. Along
with the awareness of recent business scandals, you should realize that the accounting
profession is reforming itself. This is good news. Public scrutiny of the profession
prompts auditors to become more careful and efficient in their fundamental tasks in
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

their daily work. The value of clear and accurate financial disclosure and the auditor’s
responsibility to outside users of financial statements to provide financial information
consistent with accounting regulations have never been more important than in today’s
business environment.
Auditors exercise a strong bargaining position with management. The high financial
and social costs of failed audits reflect both public interest and business necessity. Recognition
of the crucial place of the audit for users of financial statements serves notice
that accounting firms cannot merely use the audit process as “a loss leader” marketing
device to gain lucrative management consulting fees from their clients. The public
value of the audit cannot be too highly emphasized. The negative impact of failed
audits—loss of public confidence and investors’ trust—is apparent to observers of the
profession.
Recent world accounting scandals have demonstrated the vulnerability of firms and the high cost
of
audit failures. In 2002, Arthur Andersen’s (world’s no. 1 auditing firm in 2002) audit failure, its
legal battles, and the loss of
public reputation forced it out of business. This may not have been in the public’s best
interest or fair to the firm’s many partners, but Arthur Andersen’s damaged reputation
and a felony conviction related to its Enron audit led inevitably to the firm’s undoing.
Accounting firms do not sell a product; they produce a service. They have nothing to
offer except the quality of the service they provide and their image of integrity. Once a
firm’s reputation is destroyed, its professionals have little to offer clients. In 2002, in the
aftermath of the Enron scandal, would you have wanted to issue stock with Arthur
Andersen’s name on your financial statements?

With the many changes in the profession, you will face the challenge of learning new
rules and performing new internal control tests. Federal and state regulators and interested
outsiders will watch auditors as they perform their professional duties. Attention
will be focused on the auditors’ responsibility to determine whether the financial statements
present fairly the financial position of the firm and the results of its operations.
The auditors are expected to approach an audit with an independent mind and to
recognize that they are hired to protect the interests of outsiders. As an auditing student,
you must understand the importance of presenting unbiased information to these outsiders,
and you must avoid conflicts of interest and even the appearance of such conflicts
as you perform your job. This is an exciting and challenging time to enter the
profession.

IV. Recommended References:


1. Text Book - Auditing Theory latest Edition by Salosagcol
2. Philippine Standards on Auditing Compilation
3. Text Book – Assurance Principle by Cabrera
4. Text Book Auditing & Assurance Services - David Ricchiute
5. Internet

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unlawful.
SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

MANAGEMENT ADVISORY SERVICES

MAS 01: MANAGERIAL ACCOUNTING AND COST CONCEPTS


Key Terms and Concepts to Know

Major Management Activities


 Planning- formulating long and short-term plans
 Directing and Motivating- implementing plans
 Controlling- measuring performance; comparing actual to planned performance

Manufacturing or Product Costs


 Direct Costs can be easily and conveniently traced to the finished product:
 Direct Materials includes material costs which are an integral part of the finished product
 Direct Labor includes labor costs used to make the finished product
 Indirect Costs- cannot be easily and conveniently traced to specified cost objects:
 Manufacturing Overhead includes all costs of manufacturing except direct materials and direct
labor; i.e., only those costs associated with operating the factory are included in manufacturing
overhead.
 Prime Costs are direct materials + direct labor
 Conversion Costs are direct labor +manufacturing overhead

Nonmanufacturing or Period Costs


 Period costs, generally named Selling and Administrative Costs, consist of all other costs not
included in product costs. Period costs are expensed in the period incurred.

Cost Classifications for Predicting Cost Behavior


 In addition to classifying costs by function (manufacturing vs. non- manufacturing), costs may be
classified by how they behave in total when the activity level changes:

In total Per unit


Variable cost Varies directly The same
Fixed cost The same Varies inversely
Mixed cost Varies Varies (often
inversely

 The relevant range is the range of activity levels throughout which the assumptions for cost
behavior are valid. Outside the relevant range, total fixed costs may change and/or variable costs
per unit may change.

Cost Classifications on the Balance Sheet


 Manufacturing companies have three inventory accounts which appear as current assets on the
balance sheet: Raw Materials, Work in Process, Finished Goods. These accounts replace
Merchandise Inventory which is used in a retailing company.
 Finished goods account is most similar to the merchandise inventory account because it contains
the value of goods to be sold to customers. However, the purchases added to merchandise
inventory are replaced by the cost of goods manufactured when dealing with a manufacturing
rather than a retailing company because the goods to be sold are manufactured, not purchased.
 Rather than purchasing inventory to sell, manufacturing companies purchase raw materials which
will be used to produce finished goods.

Cost Classifications on the Income Statement


• Certain activities in these accounts appear on the Income Statement as Cost of Goods Sold or
Cost of Goods Manufactured, a component of Cost of Goods Sold.

Analyzing General Ledger Account Activity: All general ledger accounts have four basic components:
• beginning balance

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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

• Additions or inflows
• Withdrawals or outflows
• ending balance

Since inventory is a current asset account with a normal debit balance, the basic equation for all
inventory accounts is:
• Beginning balance + Additions = Ending balance + Withdrawals
OR
• Beginning balance + Additions - Withdrawals = Ending balance
• OR
• Beginning balance + Additions - Ending balance = Withdrawals
• OR
• Withdrawals + Ending balance - Beginning balance = Additions
• OR
• Withdrawals + Ending balance – Additions = Beginning balance

Managerial and Financial Accounting Contrasted

Example #1
The finished goods inventory of company XYZ on May 1 was P 40,000. During May, P100,000 of
completed goods was added. The balance on May 31 was P30,000. Determine the value of goods sold
from the finished goods inventory during May.

Solution #1
Beginning balance P40,000
+Cost of goods manufactured 100,000
=Goods available 140,000
Deduct: Ending inventory 30,000
=Cost of goods sold during May P110,000

Flow of Costs Through Inventory Accounts

• Raw materials inventory may contain both direct materials and indirect materials waiting to be
used
• Work-in-process inventory is the “manufacturing” or “production” account because this account
accumulates direct materials used and the addition of conversion costs (direct
• labor and overhead costs incurred) to complete the manufacturing process.
• After the goods have been manufactured, the Cost of Goods Manufactured is transferred from
work-in-process inventory to finished goods inventory.
• The cost of completed or finished goods remains in finished goods inventory until the goods are
sold, at which time the cost of goods is transferred from finished goods
inventory to cost of goods sold.

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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

Raw materials Work in process Finished Goods Cost of Goods Sold


Debit Credit Debit Credit Debit Credit Debit Credit
Beg. Beg. Beg. Balance Beg.
Balance Direct Balance Balance
Materials Cost of Cost of
+Purchases (DM) +DM goods Cost of goods
Usage usage manufactured goods sold Cost of
+Direct manufactured goods
Labor sold
usage
+Factory
Overhead
incurred

Ending Ending Ending Ending


balance balance balance balance

Schedule of Cost of Goods Sold

• In Financial Accounting, cost of goods sold was based on merchandise inventory which was
purchased and then to customers.
• For manufacturing companies, the finished goods inventory account replaces the merchandise
inventory account.
• Rather than being purchased, finished goods are the end-product of the manufacturing process
and are transferred into the finished goods account from the work-in-process inventory account.

Example #2A:
The Tartan Company has provided the following financial information for last year.

Raw materials inventory, January 1 P20,000


Work in process inventory, January 1 40,000
Finished goods inventory, January 1 70,000
Direct labor incurred 110,000
Raw materials purchases 80,000
Finished goods inventory, December 31 30,000
Raw materials inventory, December 31 10,000
Rent expense, factory 50,000
Indirect labor expense 20,000
Depreciation expense, factory 10,000
Utilities expense, factory 10,000
Prepaid insurance 38,000
Work in process inventory, December 31 60,000

Note: all balances are normal balances

Required: Prepare a schedule of cost of goods sold.

Solution #2A:
Schedule of Cost of Goods Sold

Beginning finished goods inventory P70,000


Add: Cost of goods manufactured 270,000
Goods available for sale 340,000
Deduct: Ending finished goods inventory 30,000
Cost of goods sold P310,00

Schedule of Cost of Goods Manufactured

• The value of the goods transferred from work-in-process to finished goods is called Cost of
Goods Manufactured.
• Work in process and raw materials accounts are used to determine cost of goods manufactured
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

Example #2B:
Using the data in Example 2A, prepare a cost of goods manufactured schedule.

Solution #2B:
Schedule of Cost of Goods Manufactured

Beginning raw materials inventory P20,000


Add: Purchases of raw materials 80,000
Raw materials available for use 100,000
Deduct: Ending raw materials inventory 10,000
Raw (direct) materials used production P90,000
Direct labor 110,000
Manufacturing overhead:
Rent, factory 50,000
Indirect labor 20,000
Depreciation, factory 10,000
Utilities, factory 10,000
Total manufacturing overhead cost 90,000
Total manufacturing cost 290,000
Add: Beginning work in process inventory 40,000
330,000
Deduct: Ending work in process inventory 60,000
Cost of goods manufactured P270,000

Cost Classifications for Decision Making


• Differential Costs and Revenues differ among alternatives
• Opportunity Costs are the potential benefits given up by making a decision
• Sunk Cost is a cost previously incurred; it cannot be changed by a present or future decision

Example #3
Classify the following costs according to the cost terms.
1. Wood used for making tables.
2. Wages of the assembly workers in a furniture factory.
3. Salary of the factory supervisor.
4. Electricity to run factory equipment.
5. Janitorial salaries.
6. Rent on a factory building.
7. Plastic parts used to make toys.
8. Glue used to make toys.
9. Lubricants on production machines.

Solution #3
Cost Behavior To Units of Production
Variable Fixed Direct Indirect

1. X X
2. X X
3. X X
4. X X
5. X X
6. X X
7. X X

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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

8. X X*
9. X X

* These materials would usually be considered indirect. They are insignificant in amount and it would not
be cost-effective to trace them to individual products.

“If you really want to do something, you will find a way. If you don’t, you’ll find an excuse”- Jim
Rohn

--END--

V. Recommended References:
1. Managerial Accounting by Garrison
2. Managerial Accounting by Kieso Weyganth
3. Managerial Accounting by local authors

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This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

THEORY OF ACCOUNTS

I. Topic(s):
Conceptual Framework of Accounting

II. Learning Objectives:


Understand conceptual framework of accounting

III. Rundown
Please read the latest textbook version of “Financial Accounting Volume 1” by Valix
And other accounting authors about the conceptual framework of accounting.

First Level: Basic Objective

The objective of financial reporting is the foundation of the Framework. The objective of
general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and
other creditors in making decisions in their capacity as capital providers.

An implicit assumption is that users need reasonable knowledge of business and


financial accounting matters to understand the information contained in financial
statements. This means that financial statement preparers assume a level of
competence on the part of users, which impacts the way and the extent to which
companies present information.

Second Level: Fundamental Concepts

The fundamental qualities that make accounting information useful for decision making
are relevance and faithful representation.

a. Relevance: Accounting information is relevant if it is capable of making a


difference in a decision. Financial information is capable of making a difference
when it has predictive value, confirmatory value, or both.
b. Faithful Representation: Means that the numbers and descriptions contained
in the financial statements match what really existed or happened. To be a
faithful representation, information must be complete, neutral, and free of
material error.

(1) Completeness: The financial statements include all the information that is
necessary for faithful representation of the economic phenomena that it
purports to represent.
(2) Neutrality: Information is neutral if it is unbiased, i.e., it is not presented in
a manner that favors one set of interested parties over another.
(3) Free from error: Does not mean total freedom from error. It means that
the information presented is as accurate as possible, given any estimates
are based on the best information available at the time.

The enhancing qualities are complementary to the fundamental qualitative


characteristics. They include comparability, verifiability, timeliness, and
understandability.

a. Comparability: Information that is measured and reported in a similar manner


for different companies is considered comparable. It enables users to identify
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

the real similarities and differences in economic events between companies.


Consistency is present when a company applies the same accounting
treatment to similar events, from period to period.

b. Verifiability: Occurs when independent measurers, using the same methods,


obtain similar results.

c. Timeliness: Means having information available to decision-makers before it


loses its capacity to influence decisions.

d. Understandability: Is the quality of information that lets reasonably informed


users to see the connection between their decisions and the information
contained in the financial statements. Understandability is enhanced when
information is classified, characterized, and presented clearly and concisely.

Elements of the financial statements


The first group describes amounts of resources and claims to resources at a moment in
time. The second group describes transactions, events and circumstances that affect a
company during a period time.

a. Resources and claims to resources at a moment in time.

(1) Asset: A resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.

(2) Liability: A present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.

(3) Equity: The residual interest in the assets of the entity after deducting all
its liabilities.
b. Transactions, events, and circumstances that affect a company during a period
of time.

(1) Income: Increases in economic benefits during the accounting period in


the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions
from equity participants.

(2) Expenses: Decreases in economic benefits during the accounting period


in the form of outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to distributions to
equity participants.

Third Level: Recognition, Measurement, and Disclosure Concepts

In the practice of financial accounting, certain basic assumptions are important to an


understanding of the manner in which information is presented. The following five
basic assumptions underlie the financial accounting structure.

a. Economic Entity Assumption: Means that economic activity can be identified


with a particular unit of accountability. In other words, a company keeps its
activity separate and distinct from its owners and any other business unit.

b. Going Concern Assumption: In the absence of information to the contrary, a


company is assumed to have a long live. The legitimacy of the cost principle is
dependent upon the going concern assumption.

c.
Monetary Unit Assumption: Money is the common denominator of economic
activity and provides an appropriate basis for accounting measurement and
analysis. The monetary unit is assumed to remain relatively stable over the
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years in terms of purchasing power. Therefore, this assumption disregards any


inflation or deflation in the economy in which the company operates.

d. Periodicity Assumption: The life of a company can be divided into artificial


time periods for the purpose of providing periodic reports on the economic
activities of the company.

e. Accrual Basis of Accounting: Transactions that change a company’s


financial statements are recorded in the periods in which the events occur. The
cash basis of accounting is prohibited under IFRS because it violates both the
revenue recognition principle and the expense recognition principle.

The basic principles of accounting are used to record and report assets, liabilities,
equity, revenues, and expenses. The four basic principles of accounting are:

a. Measurement Principles: We currently have two acceptable measurement


principles: cost and fair value. Choosing which principle to follow generally
reflects the trade off between relevance and faithful representation.

(1) Cost Principle: IFRS requires many assets and liabilities be reported at
their acquisition price, or cost, sometimes referred to as historical cost. It
is thought to be a faithful representation of the amount paid for a given
item. Many users favor the cost principle because it is verifiable.
(2) Fair Value: Is a market based measure. At acquisition historical cost and
fair value are identical. In subsequent periods, as market and economic
conditions change, the two diverge. It is felt that where fair value
information is available, it provides more relevant information about the
expected future cash flows related to an asset or liability.

b. Revenue Recognition Principle: Revenue is recognized (1) when realized or


realizable and (2) when earned. Recognition at the time of sale provides a
uniform and reasonable test. Certain variations in the revenue recognition
principle include: certain long-term construction contracts, end-of-
production recognition, and recognition upon receipt of cash.

c. Expense Recognition Principle: Recognition of expenses is related to net


changes in assets and earning revenues. The expense recognition principle is
implemented in accordance with the definition of expense by matching efforts
(expenses) with accomplishment (revenues). Some costs are difficult to
associate with revenues and must be allocated to expense based on a
“rational and systematic” policy. Product costs are expense when the units
they are attached to are sold. Period costs are expense as incurred.

d. Full Disclosure Principle: Financial statements should include sufficient


information to permit a knowledgeable user to make an informed decision
about the financial condition of the company in question. Users can find
information (1) within the main body of the financial statements, (2) in the
notes to those statements, or (3) as supplementary information.

In providing information with the qualitative characteristics that make it useful,


companies, must consider two overriding factors that limit the reporting: the cost-
benefit relationship and materiality.

a. Cost-Benefit Relationship: This constraint relates to the notion that the


benefits to be derived from providing certain accounting information should
exceed the costs of providing that information. The difficulty in cost-benefit
analysis is that the costs and especially the benefits are not always evident or
measurable.
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b. Materiality: In the application of basic accounting theory, an amount may be


considered less important because of its size in comparison with revenues and
expenses, assets and liabilities, or net income. Deciding when an amount is
material in relation to other amounts is a matter of judgment and professional
expertise. Companies must consider both quantitative and qualitative factors in
determining whether an item is material.

A CONCEPTUAL FRAMEWORK FOR FINANCIAL


REPORTING

A CONCEPTUAL FRAMEWORK FOR FINANCIAL


REPORTING (with details)

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A HIERARCHY OF ACCOUNTING QUALITIES

ELEMENTS OF FINANCIAL STATEMENTS

VI. Recommended Reference(s):


Latest Edition - Financial Accounting 1 by Conrado Valix
Foreign authored books

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BUSINESS LAW

IV. Topic(s):
Law on Business Transactions - Obligations

V. Learning Objectives:
1. To learn about the sources of obligation and their concepts
2. To learn kinds of obligations in general and under Civil Code
3. To learn specific circumstances affecting obligation in general
4. To learn duties of an obligor to give, to do and not to do
5. To learn extinguishment of obligation

VI. Rundown
Please read the latest textbook version of “Obligation and Contract” by Hector S. De Leon or by
Suarez

VII. Recommended Reference(s):


Latest Edition - “Obligation and Contract” by Hector S. De Leon
Latest Edition - “Obligation and Contract” by Suarez
Civil Code

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ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

ONLINE ASSESSMENTS
Reminders:
1. Should be submitted using excel format on or before January 15, 2020 exclusively to
saintvincentdeferrercollege@yahoo.com
2. Answers should follow below format for easy checking
a. Mutiple Choice
Multiple
Choice AT TOA MAS BL
1 a a b a
2 c a a a
3 a a b a
4 c a a a
5 a a b a
6 c
7 a
8 a
9 c
10 a

b. True or False
True or
False AT TOA MAS BL
1 True False True False
2 True False True False
3 True False True False
4 True False True False
5 True False
6 True False
7 True False
8 True False
9 True False
10 True False

c. Identification
True or
False AT TOA MAS BL
Management
1 PSA GAAP Accounting Obligatio
2 AASC
3
4
5
6
7
8
9
10

d. Problem Solving
– must write/type the solution and answer.
e. Fill in the blanks
– must write the question and answer

3. Excell file should have a file name which consists of surname, first name and part
number (Example: SantosHectorPart1, DelaCruzJuanPart1, etc.)

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4. Failure to follow instruction 1,2 and 3 will automatically get zero score from this
edition of online assessment
5. Not all the answer in the online assessments can be found here, so it’s your
responsibility to read, read, read and read other resources such as text books etc.

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QUESTIONS:
(Multiple Choice & Identification)
Auditing Theory
1. The single feature that most clearly distinguishes
auditing, attestation, and assurance is
a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPA’s approach to the service.

2. The primary goal of the CPA in performing the attest


function is to
a. Detect fraud.
b. Examine individual transactions so that the auditor
may certify as to their validity.
c. Determine whether the client's assertions are fairly
stated.
d. Assure the consistent application of correct
accounting procedures.

3. Internal auditing often extends beyond examinations


leading to the expression of an opinion on the fairness of
financial presentation and includes audits of efficiency,
effectiveness, and
a. Internal control.
b. Evaluation.
c. Accuracy.
d. Compliance.

4. Which of the following best describes the operational


audit?
a. It requires the constant review by internal auditors
of the administrative controls as they relate to
operations of the company.
b. It concentrates on implementing financial and
accounting control in a newly organized company.
c. It attempts and is designed to verify the fair
presentation of a company's results of operations.
d. It concentrates on seeking out aspects of operations
in which waste would be reduced by the introduction
of controls.

5. The auditor's judgment concerning the overall fairness of


the presentation of financial position, results of
operations, and changes in financial position is applied
within the framework of
a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

6. Which of the following is not considered an assertion as


formulated by the Auditing Standards Board?
a. Valuation or allocation.
b. Mathematical accuracy.
c. Rights and obligations.
d. Presentation and disclosure.
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7. Which of the following is not a distinguishing feature of


risk-based auditing?
a. Identifying areas posing the highest risk of financial
statement errors.
b. Analysis of internal control.
c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas
presenting the highest risk of financial statement
errors.

8. To maximize independence, the director of internal


auditing should report to the
a. Audit committee.
b. Controller.
c. Chief financial officer.
d. Director of information systems.

9. The auditor communicates the results of his or her work


through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

10. The best description of the scope of internal auditing is


that it encompasses
a. Primarily operational auditing.
b. Both financial and operational auditing.
c. Primarily the safeguarding of assets and verifying the
existence of such assets.
d. Primarily financial auditing.

Management Advisory Services

A. Fill in the blanks


Black Company has provided the following information regarding activity in the
inventory and expense accounts during the year:

Raw Materials Work in Finished Goods Cost of goods


process Sold
Balance Jan1 P100 P0 P2,700 P0
Additions 4,200 (7) 13,300 6,000
Withdrawals (1) (6) (4) (2)
Balance Dec31 P800 P0 (5) (3)

Required: Determine the missing information

B. True / False Questions

1. Managerial accounting must follow GAAP.


True False

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2. Financial accounting reports to those inside the organization.


True False

3. Managerial accounting emphasizes decisions affecting the future.


True False

4. Manufacturing costs are product costs.


True False

5. Period costs include direct materials, direct labor and manufacturing overhead.
True False

6. Period costs are expensed in the period incurred.


True False

7. Direct materials and direct labor are also called prime costs.
True False

8. Conversion costs are manufacturing costs.


True False

9. Sales commissions are a product cost.


True False

10. Manufacturing companies have one inventory account.


True False

11. Variable costs per unit remain constant.


True False

12. Fixed costs vary in total.


True False

13. A direct cost cannot be easily traced to a cost object.


True False

14. A cost that differs between two alternatives is a sunk cost.


True False

15. A common cost is a type of indirect cost.


True False
16. Selling and administrative expenses are included in the schedule of cost of
goods manufactured.
True False

17. Factory rent is part of manufacturing overhead.


True False

18. Depreciation on administrative office’s equipment is a product cost.


True False

19. Finished goods inventory consists of units completed that have not been sold to a
customer.
True False

20. Raw materials can be direct or indirect.


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True False

Multiple Choice Questions

1. Which of the following is not a characteristic of managerial accounting:


a) Emphasizes decisions affecting the future
b) Mandatory for external reports
c) Need not follow GAAP
d) Reports to those inside the organization

2. Which of the following is not a manufacturing cost:


a) Direct materials
b) Manufacturing overhead
c) Administrative costs
d) Direct labor

3. How many classes of inventory accounts do manufacturing companies have:


a) One
b) Three
c) Two
d) Four

4. Costs that are taken directly to the income statement as expenses in the period in
which they are incurred are:
a) Product costs
b) Prime costs
c) Sunk costs
d) Period costs

5. The potential benefit given up when one alternative is selected over another is a:
a) Prime cost
b) Sunk cost
c) Opportunity cost
d) Direct cost

6. A direct cost is one which:


a) Is not worth the effort of tracing to a specific cost object
b) Remains constant no matter the activity level
c) Can be easily and conveniently traced to a specific cost object
d) Always sunk
7. At production level of 2000 units a cost is P20,000; at production level of 4500
units the same cost is P45,000. This is an example of a:
a) Variable cost
b) Direct cost
c) Fixed cost
d) Sunk cost

8. Which of the following is an example of a fixed cost in a manufacturing


company:
a) The cost of raw materials
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b) The cost of electricity for running machines


c) Wages of assembly line workers
d) Depreciation on factory equipment

9. Mary works at a convenience store and is paid P400 a week. She considers
enrolling in a college to earn a degree. She thinks she will have to quit her job if she goes
to college. The wages that she will lose if she chooses college are:
a) Sunk cost
b) Opportunity cost
c) Indirect cost
d) Prime cost

10. Which cost is not relevant to the decision whether to purchase a new chocolate
dipping machine or continue using the old one:
a) The cost of the new machine
b) Lower maintenance costs for the new machine
c) The cost of the old machine
d) Additional training required for operating the new machine

11. At the end of June XYZ company had the following balances:
Direct materials used P30,000
Direct labor 18,000
Factory rent 7,000
Indirect materials 5,000
Salary of production supervisor 4,000
Advertising costs 12,000
Rent on administrative office 3,500
Depreciation on factory equipment 6,100

The total manufacturing cost was:


a) P85,600
b) P70,100
c) P48,000
d) P68,600

12. Company ABC had the following balances for the month of April: Finished goods,
April 1 P45,000
Cost of goods manufactured 20,000
Finished goods, April 30 14,000
The cost of goods sold for April is:
a) P 51,000
b) P 20,000
c) P34,000
d) P 65,000

13. Conversion costs consist of:


a) Direct materials and direct labor
b) Direct materials and manufacturing overhead
c) Manufacturing and nonmanufacturing costs
d) Direct labor and manufacturing overhead
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14. A cost that goes into Work in Process inventory and then into the Finished Goods
inventory before appearing on the income statement as cost of goods sold is a:
a) Period cost
b) Fixed cost
c) Opportunity cost
d) Product cost

15. Fixed cost:


a) Remains the same per unit
b) Decreases per unit as the activity level rises
c) Increases per unit as the activity level rises
d) Varies in total

16. The following information was taken from company XYZ’s records for the current
month. Raw materials used in production P 35,000 (P25,000 direct, P10,000 indirect);
direct labor costs incurred P20,000; selling expenses P5,000; insurance on factory
P4,000; administrative salaries P12,000; Rent P15,000 (80% factory,
20% administrative offices). The total inventoriable costs for the current month were:

a) P88,000
b) P61,000
c) P71,000
d) P74,000

17. Period costs are reported:


a) On the balance sheet
b) On the income statement
c) As part of the schedule of cost of goods manufactured
d) When the related products are sold

18. Commissions paid to salespersons (P10 per unit sold) are:


a) Fixed cost
b) Variable cost
c) Sunk cost
d) Differential cost

19. Which of the following statements is true:


a) Product costs are expensed as incurred.
b) Selling costs are considered sunk costs.
c) Manufacturing overhead is a prime cost.
d) Product costs are sometimes called inventoriable costs.

20. An increase in cost between two alternatives is a:


a) Direct cost
b) Sunk cost
c) Incremental cost
d) Period cost

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Theory of Accounts

1. The overriding criterion by which accounting information can be judged is that of


a. usefulness for decision making.
b. freedom from bias.
c. timeliness.
d. comparability.

2. Which of the following is a fundamental quality of useful accounting information?


a. Comparability.
b. Relevance.
c. Consistency.
d. Materiality.

3. Which of the following is a fundamental quality of useful accounting information?


a. Conservatism.
b. Comparability.
c. Faithful representation.
d. Consistency.

4. What is meant by comparability when discussing financial accounting information?


a. Information has predictive or feedback value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across companies.
d. Information is timely.

5. What is meant by consistency when discussing financial accounting information?


a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.

6. Which of the following is an ingredient of relevance?


a. Completeness.
b. Representational faithfulness.
c. Neutrality.
d. Predictive value.

7. Which of the following is an ingredient of faithful representation?


a. Predictive value.
b. Timeliness.
c. Neutrality.
d. Feedback value.
8. Changing the method of inventory valuation should be reported in the financial
statements under what qualitative characteristic of accounting information?
a. Understandability.
b. Verifiability.
c. Timeliness.
d. Comparability.

9. Company A issuing its annual financial reports within one month of the end of the year is
an example of which enhancing quality of accounting information?
a. Neutrality.
b. Timeliness.
c. Predictive value.
d. Representational faithfulness.

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10. What is the quality of information that enables users to better forecast future operations?
a. Reliability.
b. Materiality.
c. Comparability.
d. Relevance.
11. Which of the following ingredients of fundamental qualities is part of faithful
representation?
a. Neutrality.
b. Productive value.
c. Confirmatory value.
d. Timeliness.
12. Decision makers vary widely in the types of decisions they make, the methods of
decision making they employ, the information they already possess or can obtain from
other sources, and their ability to process information. Consequently, for information to
be useful there must be a linkage between these users and the decisions they make. This
link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.

13. The two fundamental qualities that make accounting information useful for decision
making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and faithful representation.
d. reliability and comparability.

14. Accounting information is considered to be relevant when it


a. can be depended on to represent the economic conditions and events that it is
intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

15. The quality of information that gives assurance that it is reasonably free of error and bias
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.
16. Financial information does not demonstrate consistency when
a. firms in the same industry use different accounting methods to account for the same
type of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the value of the
measuring unit.
d. none of these.

17. When information about two different enterprises has been prepared and presented in a
similar manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency.
d. none of these.

Business Law
1. Obligation is a juridical necessity to give, to do or not to do
Right is the power which a person has to demand from another prestation

a. True, True b. True, False c. False, True d. False, False


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2. Fortuitous event is any event which can be forseen and inevitable.


Generally, may an action for future negligence be waived?

a. True, True b. True, False c. False, True d. False, False

3. Resolutory obligation is the fulfillment of which will give rise to obligation


Potestative condition is a suspensive condition which depends upon the sole will of the
debtor

a. True, True b. True, False c. False, True d. False, False

4. Facultative obligation is one where only one prestation has been agreed upon but the
obligor may render another substitution.
Generally, may the debtor pay anyone of the solidary creditors?

a. True, True b. True, False c. False, True d. False, False

5. Merger in the person of the principal debtor or creditor do not extinguishes the principal
obligation.
In law, payment and performance are synonymous.
a. True, True b. True, False c. False, True d. False, False

6. The following are kinds of negligence except one.


a. Culpa Aquilana
b. Quasi-delict
c. Culpa criminal
d. Culpa contractual
7.Obligation that bounds only one party to perform obligation, one debtor and one creditor
a. Individual
b. Accessory
c. Legal
d. Unilateral

8.TRUE or FALSE. Negligence is the voluntary execution of a wrongful act, or a willfull


omission knowing and intending the effects which naturally and necessarily arise from such act
or omission.

9.Events which could not be foreseen or which though foreseen were inevitable.

10.Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has
been no stipulation to the contrary. Which of the following are not an exception?
a. Not transmissible by law
b. Not transmissible by their very nature
c. Presumptions are rebuttable by evidence.
d. There is a stipulation of the parties that they are not transmissible

27
Copyright of Prof. Hector U. Santos Jr., CPA, MBA
This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 1
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

28
Copyright of Prof. Hector U. Santos Jr., CPA, MBA
This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.

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