CHAPTER 11 Example of cash flows from Operating
Activities:
STATEMENT OF CASH FLOWS
- The statement of cash flows provides
relevant information about cash
receipts and cash payments of an
entity during a period.
CASH AND CASH EQUIVALENTS
Are short-term highly liquid
investments that are readily
convertible to known amount of cash
and which are subject to an
insignificant risk of change in value.
(the investment must acquired three months
or less before the date of maturity)
CASH
- Is the money in the form of
currency.
Example of Cash equivalents:
1. Three-month commercial paper
2. Three-month treasury bill
3. Short-term government bonds
*In short, cash and cash equivalents mean the
cash and those assets which are immediately
convertible to cash.
CLASSIFICATION OF CASH FLOWS
 Operating activities
 Investing activities
 Financing activities
OPERATING ACTIVITIES
- Are cash flows derived primarily from
the principal revenue producing
activities of entity.
1. Cash receipts od sales of good and
rendering services.
2. Cash receipts from Royalties, rental
fees, commission and other revenue.
3. Cash payments to suppliers for goods
and services.
4. Cash payments for selling
administrative and other expenses.
5. Cash receipts and payment for
securities held for trading.
Trading securities cash flows arising from
purchase and sales of dealing or trading
securities are classified as operating activities.
*In short, operating activities include cash
activities related to net income.
INVESTING ACTIVITIES
- Are cash flows derived from the
acquisition and disposal of long-
term assets and other investments
not included in cash equivalent.
Example of cash flows from Investing
Activities:
1. Cash payments to acquire property,
plants and equipment, intangible and
other long-term assets.
2. Cash receipts from sales of property,
plant and equipment, and intangible
and other long-term asset.
3. Cash payments to acquire equity or
debt instruments of other entities
(current and long- term investments.)
4. Cash advances and loans to other
parties other than advances and loans
made by financial institution
5. Cash receipts from repayment of
advances and loans made to other
parties.
*In short, investing activities are cash
activities related to noncurrent assets or long-
term assets.
FINANCING ACTIVITIES
- Are the cash flow derived from the
equity capital and borrowings of
the entity.
Example of cash flow from Financing
Activities:
1. ordinary and preference shares
2. Cash payments to acquire treasury
shares
3. Cash receipts from issuing debentures,
loans, notes, bonds, mortgage and
other short a long-term borrowings
4. Cash payments for amounts borrowed
5. Cash payments by a lessee for the
reduction of the outstanding principal
lease liability.
*In short, financing activities include cash
activities related to noncurrent liabilities and
owner’s equity.
NONCASH TRANSACTION
- Investing or financing transaction that
does not affect or do not require the
use of cash and cash equivalent shall
be excluded from the statement of
cash flows.
- Transactions shall be disclosed
elsewhere in the financial statement
either in the notes to financial or in a
separate schedule.
Noncash transaction are disclosed separately:
1. Acquisition of asset by assuming
directly related liability
2. Acquisition of asset by issuing share
capital
3. Acquisition of asset by issuing bonds
payable
4. Conversion of bonds payable into
share capital
5. Conversion of preference share into
ordinary shares
INTEREST
Interest paid and interest received shall be
classified as operating cash flows because they
enter into the determination of net income or
loss.
Alternatively, interest paid may be classified as
financing cash flow because it is cost of
obtaining financial resources.
Alternatively, interest received may be
classified as investing cash flow because it is a
return on investment.
DIVDENDS
Dividend received shall be classified as
operating cash flow because it enters into the
determination of net income.
Alternatively, dividend received may be
classified as investing cash flow because it is a
return on investment.
Dividend paid shall be classified as
financing cash flow because it is a cost of
obtaining financial resources.
Alternatively, dividend paid may be classified
as operating cash flow in order to assist users
to determine the ability of the entity to pay
dividends out of operating cash flows.
INCOME TAXES
- Income taxes shall be separately
disclosed as ash flows from operating
activities unless they can be
specifically identified with investing
and financing activities.
 CHAPTER 12
ACCOUNTING POLICIES
- Specific principles, bases,
conventions, rules and practices
applied by an entity in preparing
and presenting financial
statements.
- The entity shall select and apply the
same accounting policies each period
in order to achieve comparability of
financial statements to identify trends
in the financial position, performance
and cash flows of entity.
In other words, accounting policies is essential
for a proper understanding if the information
contained in the financial statements.
Changes in accounting policy
A change in accounting policy shall be made
only when:
a. Required by an accounting
standard.
b. The change will result in more
relevant and faithfully represented
information about the financial
position, financial performance
and cash flows of the entity.
Examples of Changes in Accounting policy:
1. Change in method of inventory
pricing from the FIFO to weighted
average method.
2. Change in the method of accounting
for long-term construction contract
from cost recovery method percentage
of completion method.
3. The initial adoption of policy to carry
assets at revalued amount is a change
in accounting policy to be dealt with
as revaluation.
4. Change from cost model to fair value
model in measuring investment
property.
5. Change to a new policy resolving from
the requirement of a new PFRS.
How to report a change in accounting policy:
 A change in accounting policy
required by a standard or an
interpretation shall be applied in
accordance with the transitional
provisions therein.
 If the standard or interpretation
contains no transitional provisions or
if an accounting policy is changed
voluntarily the change shall be applied
retrospectively or retroactively.
RETROSPECTIVE APPLICATION
- Means that any resulting adjustments
from the change in accounting policy
shall be recorder as an adjustment to
the opening balance of retained
earnings.
- The amount of the adjustment is
determined as of the beginning of the year
of change.
- If comparative information is presented,
the financial statements of the prior
period presented shall be restated to
conform with the new accounting
policy.
ABSENCE OF ACCOUNTING
STANDARD
- Provides the absence of an accounting
standard that specifically applies to a
transaction or event, management
shall use judgement in selecting and
applying an accounting policy that
results in information that is relevant
to the economic decision-making
needs of users and faithfully
represented.
Hierarchy of guidance which management
may use when selecting accounting policies in
such circumstances:
a. Requirements of current standards
dealing with similar matters
 b. Definition, recognition criteria and
measurement concepts of assets,
liabilities, income, and expenses in the
conceptual framework of financial
reporting.
c. Most recent pronouncements of other
standards-setting bodies that use a
similar Conceptual Framework, other
accounting literature and accepted
industry practices.
a. The period of change if the change
affects that period only.
b. The period of change and future
periods if the change affects both.
A change in accounting estimate shall not be
accounted for by restating amounts reported
in financial statements of prior periods.
PRIOR PERIOD ERRORS

ACCOUNTING ESTIMATE - Omissions and misstatements in the

financial statements for one or more
- A change in accounting estimate is a periods arising from a failure to use or
normal recurring correction or misuse of reliable information.
adjustment of an asset or liability
which is the natural result of the use How to treat prior period errors
of an estimate. - Prior periods errors shall be corrected
- By very nature, the revision of the retrospectively by adjusting the
estimate does not relate to prior opening balances of retained
periods and is not a correction of error. earnings and affected assets and
- In such a case, the change is treated as liabilities.
a change in accounting estimate, with - If comparative statements are
appropriate disclosure. presented, the financial statements of
the prior period shall be restored so as
Examples of accounting estimate: to reflect the retroactive application of
the prior periods errors as a
Estimation involves judgements based retrospective restatement.
on the latest available and reliable
information.
Estimation may be required the following:
a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value and
expected pattern of consumption of
benefit of depreciable asset.
d. Warranty cost
e. Fair value of asset and liability

How to report change in accounting estimate:

The effect of a change in accounting
estimate shall be recognized currently and
prospectively by including it in income or
loss of:
 CHAPTER 13
EVENTS AFTER THE REPORTING
PERIOD
- Defines events after the reporting
period as those events, whether
favorable or unfavorable, that occur
between the end of reporting
period and the date on which the
financial statements are authorized
for issue.
- Events after the reporting period are
also known as subsequent events.
- such events that may require either
adjustment or disclosure.
Example of Nonadjusting Events:
1. Business combination after the
reporting period.
2. Plan to discontinue an operation.
3. Major purchase and disposal of asset
or expropriation of major asset by
government.
4. Destruction of a major production
plant by a fire after the reporting
period.
5. Major ordinary share transactions and
potential ordinary share transactions
after the reporting period.

Types of events after the reporting period

Financial Statements Authorized for Issue
a. Adjusting events after the reporting
period are those that provide evidence - Are authorized for the issue when the
of conditions that exist at the end of board of directors reviews the
reporting period. financial statements and authorizes
b. Nonadjusting events after the them issue.
reporting period are those that and - In such cases, the financial statements
indicative of conditions that arise after are authorized for issue on the date
the end of reporting period. of issue by the board of directors
and not on the date when
Examples of Adjusting Events: shareholders approve the financial
1. Settlement after the reporting period of a statements.
court case because it confirms that the
entity already had a present obligation
at the end of reporting period.
2. Bankruptcy of a customer which
occurs after the reporting period.
3. Sale of inventories after the reporting
period may give evidence about the
net realizable value at reporting date.
4. The determination after the reporting
period of the cost of asset purchased
or the proceeds from asset sold before
the end of reporting period.
5. The determination after the reporting
period of the profit sharing or bonus
payment if the entity has the present
obligation at the end of reporting
period to make such payment.
CHAPTER 14 Measurement of Recognition
PROPERTY, PLANT AND -An item of property, plant and equipment
EQUIPMENT that qualifies for recognition as an asset shall
be measured at cost.
-Property, plant and equipment are tangible
assets that are held for use in production or -Cost is the amount of cash or cash
supply of goods or services, for rental to equivalent paid and the fair value of the other
others, or for administrative purposes, and are consideration given to acquire an asset at the
expected to used during more than one time of acquisition of construction.
period.
Elements of Cost
a. The property, plant and
equipment are tangible assets. The cost of an item of property, plant and
b. The property, plant and equipment
equipment are used in business, a. Purchase price, including import
meaning used in production or duties and nonrefundable purchase
supply of goods or services for taxes, after deducting trade discounts
rental purposes and for and rebates.
administrative purposes. b. Cost directly attributable to bringing
c. The property, plant and the asset to the location and condition
equipment are expected to be used necessary for it to be capable of
over a period of more than one operating in the manner intended by
year. management.
c. Initial estimate of the cost of
dismantling and removing the item
Example of Property, Plant and Equipment: and restoring the site on which it is
located for which an entity has present
a. Land obligation
b. Building
c. Machinery
d. Ship DIRECTLY ATTRIBUTABLE COSTS
e. Motor vehicle
f. Furniture and fixtures Examples of Directly Attributable Costs that
g. Office equipment qualify for recognition include:
h. Patters, molds and dies a. Cost of employee benefit arising
i. Tools directly from the construction or
acquisition of the item of property,
Recognition of Property, Plant and plant and equipment.
Equipment: b. Cost of site preparation
c. Initial delivery and handling cost
a. It is probable that future economic d. Installation and assembly cost
benefits associated with the asset will e. Professional fee
flow to the entity. f. Cost of testing whether the asset is
b. The cost of the asset can be measured functioning properly.
reliably.
COST NOT QUALIFYING FOR
RECOGNITION
Examples of costs that are expensed rather
than recognized as element of cost of
property, plant and equipment are:
a. Cost of opening a new facility
b. Cost of introducing a new product or
service, including cost of advertising
and promotion
c. Cost of conducting business in a new
location or with a new class of
customer, including cost of staff
training
d. Administration and other general
overhead cost
e. Cost incurred while an item capable of
operating the manner intended by
management has yet to be brought
into use or is operated at less than full
capacity
f. Initial operating loss
g. Cost of relocating or reorganizing part
or all of an entity’s operations.
MEASUREMENT AFTER
RECOGNITION
After initial recognition, an entity shall choose
either the cost model or the revaluation model
as the accounting policy for property, plant
and equipment.
The entity shall apply such accounting policy
to an entire class of property, plant and
equipment.
The cost model means that property, plant
and equipment are carried at cost less any
accumulated depreciation and any
accumulated impairment loss.
The Revaluation Model means that
property, plant and equipment are carried at
revalued carrying amount.
The revalued carrying amount is the fair value
at the date of revaluation less any subsequent
accumulated depreciation and subsequent
accumulated impairment loss.
Acquisition on a cash basis
The cost of an item of property plant and
equipment is the cash price equivalent at the
recognition date.
COST OF ASSET ACQUIRED ON A
CASH BASIS = CASH PAID + DIRECTLY
ATTRIBUTABLE COST (such as freight,
installation cost and other cost necessary in
bringing the asset to the location and
condition for the intended use).
Acquisition on account
When an asset is acquired on account subject
to a cash discount,
COST OF ASSET = INVOICE -
DISCOUNT
regardless of whether the discount is taken or
not.
*Cash discount s are generally considered as
reduction of cost and not as income.
Acquisition on Installment Basis
If an asset is offered at a cash price at an
installment price and is purchased at the
installment price, the asset shall be recorded at
a cash price.
The excess of the installment price over the
cash price is treated as an interest to be
amortized over the credit period.
Issuance of Share Capital
Philippine GAAP provides that if shares are
issued for consideration other than actual
cash, the proceeds shall be measured by the
fair value of the consideration received.
Accordingly, where a property is acquired
through the issuance of share capital, the
property shall be measured at an amount
equal to the following in the order of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share
capital
Issuance of bonds payable
PFRS 9, paragraph 5.1.1, provides the asset
acquired by issuing bonds payable is measured
in the following order.
a. Fair value of bonds payable
b. Fair value of asset received
c. Face amount of bonds payable
Exchange
PAS 16, paragraph 24, provides that the cost
of an item of property, plant and equipment
acquired in exchange for a nonmonetary asset
or a combination of monetary and
nonmonetary asset is measured at fair value
plus any cash payment.
However, the exchange is recognized at
carrying amount if the exchange transaction
lacks commercial substance.
Definition of commercial substance
Commercial substance is a new notion and is
defined as the event or transaction causing the
cash flows of the entity to change significantly
by reason of the exchange.
An exchange transaction has commercial
substance when the cash flows of the asset
received differ significantly from the cash
flows of the asset transferred.
Construction
The cost of self-constructed asset of property,
plant and equipment includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental
overhead specifically identifiable or
traceable to the construction.
PAS 16, paragraph 22
Derecognition
Means that the cost of the property, plant and
equipment together with the related
accumulated depreciation shall be removed
from the statement of financial position.
PAS 16, paragraph 67, provides that the
carrying amount of an item of property, plant
and equipment shall be derecognized on
disposal or when no future economic benefits
are expected from the use or disposal.
The gain or loss from the derecognition of an
item of property, plant and equipment shall be
included in the profit or loss.
Gains shall not be included in revenue but
treated as other income.
The gain or loss arising from the
derecognition of an item of property, plant
and equipment shall be included in profit or
loss.
Gains shall not be included in revenue but
treated as other income.
GAIN OR LOSS arising from the
derecognition of an item of property, plant
and equipment = NET DISPOSAL
PROCEEDS - CARRYING AMOUNT OF
THE ITEM.
Fully depreciated property
Property is fully depreciated when..
Carrying amount = zero (0)
or
Carrying amount = residual value
The asset account and the related accumulated
depreciation account are closed and the
residual value is set up in separate account.
The cost of fully depreciated asset remaining
in service and the related accumulated
depreciation ordinarily shall not be removed
from the accounts.
Concept of Depreciation
Depreciation is defined as the systematic
allocation of depreciable account of an asset
over the useful life.
Objective of Depreciation
To have period benefiting from the use of an
asset bear unequitable share of the asset cost
Depreciation in the financial statements
Depreciation is an expense.
Depreciation may be part of the cost of goods
manufactured or an operating expense.
The depreciation charge for each period must
be recognized as expense unless it is included
in the carrying amount of another asset.
Depreciation Period
The depreciable amount of an asset shall be
allocated on a systematic basis over the useful
life.
Depreciation of an asset begins when it is
available for use.
Depreciation ceases when the asset is
derecognized.
Depreciation does not cease when the asset
becomes idle temporarily.
Factors of depreciation
1. Depreciable amount
-cost of an asset or other amount
substituted for cost less than the
residual value.
2. Residual value
-is the estimated net amount currently
obtainable if the asset is at the end of
the useful life.
3. Useful life
-is either the period over which an
asset is expected to be available for
use by the entity, or the number of
production or similar units expected
to be obtained from the asset by the
entity.
Depreciation method
Shall reflect the pattern in which the future
economic benefits from the asset are expected
to be consumed by the entity.
Shall be reviewed at least every year end
1. Straight line method
-is a constant charge over the useful
life of the asset.
-is adopted when the principal cause
of depreciation is passage of time.
-considers depreciation as a function
rather than as function of usage.
2. Production method
-also known as output method,
assumes that depreciation is more a
function of use rather than passage of
time.
-is expressed in rate per unit of output
or per hour of usage.
-is adopted if the principal cause of
production is usage.
3. Diminishing balance or accelerated
balance
-provide higher depreciation in the
earlier years and lower depreciation in
the later years of the useful life of the
asset.
-results in a decreasing depreciation
charge over the useful life.
-include sum of years’ digits method
and double declining method.