ACCCOB 2 REVIEWER
(PFRS) – comprised of different standards
Chapter 1: Introduction to Financial
Accounting
What is accounting?
- Accounting is the art of recording,
classifying, and summarizing in a
significant manner and in terms of
money, transactions and events that
are, in part of at least, of a financial
character, and interpreting the
results thereof.
Users of financial information
 2 major groups
 Internal – use financial
information to help them decide
on transactions and directions to
take by the entity [Ex:
management]
 External – need an entity’s
financial information for other
purposes [Ex: investors, lenders,
government]
Management accounting VS Financial
accounting
 Management accounting
- produce reports and provide
information to be circulated inside
the company.
- More flexible
 Financial accounting
- Produce general purpose financial
statements for these external users
- Needs the financial statement
preparers to follow the guidelines,
conventions, and framework set.
[the framework used in the PH is the
Philippine Financial Reporting
Standards (PFRS)]
Philippine Financial Reporting Standards
and interpretations that lay out the
guidelines and principles that need to
follow in the presentation of the items
shown in the financial statements, as well
as their disclosures.
Why should standards and guidelines be
set?
 The standards help to minimize if
not eliminate the occurrence of
information asymmetry [PFRS allows
the financial statement users get the
information they need from the
entity without asking them for it.]
 comparability
Conceptual Framework for Financial
Reporting
- Has been developed so that the
financial reporting standards are
applicable to a range of accounting
models and concepts of capital and
capital maintenance
- Sets the overarching principles that
are seen in the other PFRS
According to the conceptual framework, the
characteristics of useful financial
information are:
 Relevance – information is relevant
if it is being used in the decision-
making process and if it can make a
difference in the decisions made by
user.
 Faithful representation – requires a
piece of information to be complete,
neutral, and free from material error
and if it purports what it says it is.
And the enhancing characteristics of
financial information are:
  Comparability – qualitative
characteristic that enables users to
identify and understand similarities
in, and difference among items.
Information becomes useful if it can
be compared to other entities with
similar information.
 Verifiability – assures users that
information faithfully represents the
economic phenomena it purports to
represent.
 Timeliness – having information
available to decision makers in time.
This is the reason why companies
don’t produce financial statements
once a year only.
 Understandability – classified,
characterized, and presented clearly
and concisely.
Underlying assumption
- According to the conceptual
framework, financial statements are
prepared under an assumption that
an entity is a going concern [an
assumption that the entity is not
going to liquidate or will be forced
to do sometime in the foreseeable
future.]
Financial Statements
- Are a structured representation of
the financial position and financial
performance of an entity.
A complete set of financial statement
comprises of:
 statement of financial position
o shows the entity’s assets,
liabilities, and equity
o previously called balance
sheet
o proves that the assets are
equal to the sum of the
liabilities and equity
 statement of profit or loss and
other comprehensive income
o Presents the entity’s profit or
loss, total comprehensive
income, and comprehensive
income for the period
o Other comprehensive
income comprises items of
income and expense that are
not recognized in profit or
loss
 statement of changes in equity
o Shows the changes in the
entity’s net assets [total
comprehensive income,
issuance and repurchase of
shares, declaration of
dividends]
 statement of cash flows
o shows how the entity was
able to handle its cash
 Notes
o According to PAS 1, contain
information in addition to
that presented in the other
financial statements
Elements of the financial statements
 Financial position
 3 elements of financial position
o Assets – resource controlled
by the entity
o Liabilities – present
obligation of the entity
o Equity – entity’s assets after
deducting its liabilities
 Performance
 2 classifications of performance
o Income – increases in
economic benefits
o Expenses – decreases in
economic benefits
Chapter 2: Cash and Cash Equivalents
What is cash?
- Cash is a financial asset. It gives the
entity the right to purchase financial
assets of another entity, like stocks
and bonds. Cash is also a medium of
exchange [you can use it to buy
something]
Conditions for cash to be considered as
such
 Readily available
 Acceptable for deposit at face value
 Restricted for the payment of
current obligation or used in current
operation is still considered as cash
[only except for once labeled as
restricted for withdrawal]
3 categories of cash
 Cash on hand – loose coins and
currencies, checks on hand,
manager’s check, traveler’s check,
cashier’s check, and bank drafts
 Cash in bank – savings and checking
account
 Cash set aside for current use –
include (but are not limited to) petty
cash fund, payroll fund, travel fund,
interest fund, dividend fund, tax
fund
Reporting cash in the financial statement
 First item in the current assets
section
 Cash in local currency is reported at
face value, cash in foreign currency
is reported at its closing rate
What is cash equivalent?
- According to PAS 7, this is short-
term, highly liquid investments that
are readily convertible to known
amounts of cash.
- Investments that have a maturity
date of 90 days or less
- Ex: 90-day time deposits, time
deposits purchased 3 months prior,
treasury bills, commercial papers,
certificate of deposits, money
market placements
Other notes
 Compensating balances – minimum
balance that should be maintained
in the bank account. It is included in
an entity’s cash balance
 Stale checks – checks that have not
been presented to the bank for
encashment six months after the
date stated on it. It is not part of the
cash balance
 NSF check – a check becomes NSF or
‘no sufficient fund’ when the check
does not have enough fund to pay
the amount. It is not part of the cash
balance
 Cash set aside for acquisition of
non-current assets – when an entity
sets aside cash for the acquisition of
PPE or any other non-current assets,
it is not part of cash and cash
equivalents
Chapter 3: Receivables
What is a receivable?
- Receivables are a financial asset that
represent a contractual right to
receive cash or other financial from
another asset
- Presented in the current assets
under trade and other receivables
Types of receivables
 Claims receivable – any amount
expected to receive from an
insurance company for any claims in
your insurance policy
 Interest receivable – amount
recognized for interest accrued or
earned but not yet received
 Advances to affiliate – any payment
given in advance to such parties,
which are expected to be received in
the future.
Initial and Subsequent Recognition
 Accounts receivable – sales
recognized by the entity; recorded
at face value [According to PFRS 9]
 Short-term receivables – expected
to be realized within a year;
recorded at face value; recorded at
net realizable value at the end of the
period
 Long-term receivables – discounted;
recorded at present value
Derecognition
According to PFRS 9, receivables are
derecognized when (1) the contractual
rights to the cash flow expire and (2) the
entity transfers the receivable, and the
transfer qualifies for derecognition.
Net realizable value
According to PFRS 9, you may measure bad
debts by (1) specific identification or (2)
creating categories like the number of days
they are due
Notes receivable
- A written promise to pay a certain
sum of money at a specific future
date
- Supported by a document
- Can be long-term
- Interest bearing
- Recognition is same as accounts
receivable [face value for short-term
notes and present value for long-
term notes]
 Effective interest rate – rate used in
the market to determine the value
of a note. It is used to determine the
present value of a note
 Noninterest-bearing note – zero
nominal rate
Trade receivables
- Non-interest bearing
- Settlement term of 30 to 180 days
Accounts receivable turnover
- Used to quantify a company’s
effectiveness in collecting its
receivable
net credit sales
accounts receivable turnover =
average accounts receivable
Average collection period
- The number of days that an entity
can collect from its credit customers
360
average collection period=
accounts receivable turnover
Chapter 4: Investments in equity and debt FVOCI, should be recognized directly
instruments to equity or retained earnings.

What is a financial instrument? Investment in associate

- According to PAS 32, a financial - An investment will be classified as
instrument is any contract that gives investment in associate once the
rise to a financial asset of one entity investor owns enough shares in the
and a financial liability or equity company such that it can exercise
instrument of another entity significant influence over the
- It allows the holder to exercise investee company already
financial flexibility [being able to - The financial reporting standard is
take advantage of other based on PAS 28, not PFRS 9
opportunities to earn from one’s - When the investee company
extra resources] declares a dividend, the amount
- A financial asset may be classified as received, by the investor from its
current or non-current asset. It may investee is now a deduction in the
also be presented at fair value or investment’s carrying amount, as
amortized cost opposed to recognizing it as an
- According to PFRS 9, a financial asset income for the other 2
may be measured at fair value classifications.
through profit or loss, fair value
through other comprehensive Debt instruments
income, or at amortized cost - May be measured at FVPL, FVCI, or
amortized cost.
Equity instruments
- May be measured at fair value
through profit or loss [FVPL] or at
fair value through other
comprehensive income [FVOCI]
- Upon recognition and end of each
reporting period, both instruments
should be recorded at fair value
- Transaction costs should not be
classified under FVPL, but should be
capitalized or included when it is
under FVOCI
- Changes in the fair value of FVPL are
recognized in the profit or loss while
changes in the fair value of FVOCI
are recognized in the statement of
other comprehensive income
- Upon derecognition, FVPL’s carrying
amount shall be recognized in the
statement of profit or loss while in
Chapter 5: Inventories
What are inventories?
- Primary source of revenue for
merchandising and manufacturing
companies
- Assets items held for sale
- PAS 2 provides guidance for
determining the cost of inventories
and for subsequently recognizing an
expense
Classification of inventory
 For merchandising firms
 Merchandise inventory – grocery
[groceries], office supply store
[paper, pens, folders, etc.]
 For manufacturing firms
 Raw materials inventory – cost
of materials held for
manufacturing
 Work in process inventory – cost
for partially completed item [raw
materials, labor, overhead]
 Finished goods inventory – items
completed but not yet sold. To
customers
Inventory record systems
 Perpetual inventory system
o Cost of purchases and sales
are directly recorded in the
inventory account (asset
account)
o Cost of goods sold, and cost
of sales are increased
 Periodic inventory system
o Inventory account is updated
at the end of an accounting
period
o Cost of purchases are
recorded in purchases
account (expense account)
o For goods returned and
allowance granted, purchase
returns and allowances are
recorded.
Items to be included in inventory
 Goods in transit
 Types of F.O.B
o F.O.B shipping point – buyer
is responsible for paying
freight costs [recorded as
freight in]. Once goods are in
the shipping point, it should
be included in the inventory
of the buyer
o F.O.B destination – seller is
responsible for freight costs
[recorded as freight out].
While in transit, it should still
be included in the seller’s
inventory until it reaches the
shipping point.
 Consigned goods
 Consignment is a trading
arrangement in which a seller send
goods to a reseller who pays the
seller only when the goods are sold.
Goods out on consignment remain
in the property of the consignor [the
company that delivered the goods]
Costs included in inventory
According to PAS 2, costs should include all:
- Costs of purchase (including taxes,
transport, and handling) net of trade
discounts received
- Costs of conversion (including fixed
and variable manufacturing
overheads) and
- Other costs incurred in bringing the
inventories to their present location
and condition
  Cash discounts
Two accounting methods for cash
discounts:
o Gross method – records an
invoice at full price without
regard to any cash discounts
offered. The purchase
discount reduces the cost of
inventory purchased
o Net method – the purchase is
recorded with cash discount.
This purchase discount lost
account is presented as other
expense in the income
statement
 Product and period costs
o Product costs – costs that are
incurred to create a product
that is intended for sale to
customers [recorded in
inventory account]
o Period costs – any costs a
company incurs indirectly
related to the production
process [recorded in expense
account]
 Variable VS Absorption costing
o Variable (or direct) costing –
a costing method which
excludes the overhead from
the product-cost production
o Absorption costing – includes
all costs related to
production and
manufacturing
Cost flow assumption
Cost flow assumptions prescribed by PAS 2:
 Specific identification - you can
physically identify which specific
items are purchased and then sold,
so the cost flow moves with the
actual item sold
 Average cost - per-unit cost of
production determined from the
weighted average cost
o Moving-average method
(perpetual system) – requires
computation of a new
average after each purchase
o Weighted-average method
(periodic system) – average
cost is determined only once
at the end of the period
 First-in, first-out (FIFO) – items that
are purchased or produced are sold
first
Lower of cost and net realizable value
- inventory should be reported at the
lower of its cost or the amount at
which it can be sold due to price
level changes and damaged goods
Inventory turnover ratio
- measures the number of times on
average a company sells inventory
during a period; measures the
liquidity of the inventory
cost of goods sold
inventory turnover=
ave . inventory
Average days to sell inventory
- measures the average number of
days sales for which a company has
inventory on hand
365 days
ave . days ¿ sell inventory=
inventory turnover ratio

Chapter 6: Plant assets and natural
resources
What is property, plant, and equipment
(PPE)?
- Tangible assets of the company
- Necessary in day-to-day operations
- For administrative purposes or
rental to others
- PAS 16 prescribes the accounting
disclosures for PPE
- Ex: land, building, machinery, ship,
aircraft, motor vehicle, furniture and
fixtures, office equipment, patterns,
molds, and dies, tools, leasehold
improvement, book plates
- PPE subject to depreciation:
buildings, equipment, machinery,
furniture and fixtures, land
improvements
- Measured at cost
- Recognized as an asset
Characteristics of PPE
- Use in operations and not for sale
- Long-term in nature and usually
depreciated
- Possess physical substance (tangible
in nature)
Components of cost of PPE
 Cost of PPE – purchase price, import
duties, non-refundable purchase
taxes
 Direct attributable cost of bringing
the asset to working condition
 Initial estimate of the costs of
dismantling and removing the item
and restoring
According to PAS 16, the ff. are directly
attributable costs:
 Costs of employee benefits arising
from construction or acquisition of
PPE
 Costs of site preparation
 Initial delivery and handling costs
 Installation and assembly costs
 Cost of testing
 Professional fees
According to PAS 16, the ff. are examples of
costs that are not part of PPE costs:
 Costs of opening a new facility
 Costs of introducing a new product
or service
 Costs of conducting a business in a
new location
 Administration and other general
overhead costs
The ff. is not to be capitalized:
 Interest on debt incurred
 Cost of training employees
 Annual property taxes
 Expenditures that result from
accident
 VAT
Different modes of acquiring plants assets
 Lump-sum (basket) purchase –
acquisition of two or more assets for
a lump-sum cost using their relative
fair market values
 Deferred payment or purchase on
account – purchaser issues a note
payable for the amount due and
pays it in several installments
Depreciation
- All assets, except land, decrease its
value and usefulness due to passage
of time. Depreciation is the
allocation of an asset’s cost to
 expense; also called a non-cash
expense
- Depreciation begins when an asset is
available for use
- Accumulated depreciation is the
total cost allocated to depreciation
since it was used
Kinds of depreciation
 Physical depreciation – physical
wear and tear of an asset
 Functional or economic
depreciation – market conditions
that cause an asset to become
obsolete [Ex: outdated tech]
Factors of depreciation
 Depreciable base/cost – cost – est.
residual value
 Scrap/residual/salvage value –
amount to be recovered when the
asset is retired
 Estimated useful life – expected
economic or useful life
Methods of depreciation
 Straight-line method – the value of
an asset is reduced evenly over time
cost−scrap value
depreciation=
life∈ years
 Activity method – bases
depreciation on usage
o Working hours method
depreciation= ( depreciable cost
life ∈hrs ) x actual hours
o Output or production
method
depreciation= (
depreciable cost
life ∈units )
x output
 Decreasing charge or accelerated
method – high depreciation during
early years and low in the later years
o Sum-of-the-years’ digits
method
depreciation=depreciable cost x (remaining life
S )
S=
[ n ( n+1 ) ]
2
o Double declining balance
method
depreciation=declining book value x 2 x straight−line rate
What are natural resources?
- Also known as wasting assets
- Produced by nature
Cost of natural resources
 Acquisition cost
 Exploration and evaluation costs
 Development costs
 Restoration costs
Depletion
- Systematic allocation of the cost or
other basic value of a wasting asset
over the period the natural resource
is extracted or produces
Factors of depletion
 Depletion base
 Salvage value
 Estimated useful life
Depletion expense computation
total cost−salvage value
depletion cost per unit=
total estimated units

Chapter 7: Intangible assets
What are intangible assets?
- Identifiable non-monetary assets
- Does not possess physical substance
- PAS 38 prescribes the accounting
treatment intangible assets
- Ex: patent, software, database,
trademark, video, audiovisual
material, customer lists, mortgage
servicing rights, licensing, import
quotas, franchise agreements
backlogs, contractual and non-
contractual relationships
 Artistic-related intangibles –
copyrights, literary works, pictures,
photographs, videos
 Contract-related intangibles –
franchise, license or permit,
broadcast rights
 Technology-related intangibles –
patented technology, trade secrets

3 key attributes of an intangible asset

 Identifiability – an intangible asset is
identifiable when it is separable, or
it arises from contractual or other
legal rights
 Control – the entity has power to
obtain the future economic benefits
flowing from the underlying
resource
 future economic benefits – revenue
from the sale of products or services

Measurement
Initial cost recognitions of intangible assets:
 purchase price [includes import
duties and non-refundable purchase
taxes]
 directly attributable costs [includes
costs of employee benefits,
professional fee, cost of testing]

Categories of intangible assets

 Marketing-related intangibles –
trademark/trade name, masthead,
internet domain names
 Customer-related intangibles –
customer lists, order and production

Chapter 8: Liabilities
What are liabilities?
- Present obligations of the entity
- Three essential characteristics: (1)
entails settlement by probable
future transfer or use of cash, goods,
or services, (2) unavoidable, (3) the
obligation has already occurred
- Classified as current (short-term) or
non-current (long-term)
Current liabilities
- Obligations whose liquidation is
reasonably expected to require use
of existing resources or the creation
of other current liabilities.
- Reported at their maturity value
Determinable liabilities
 Accounts payable – obligations
owed to other for goods, supplies,
and services purchased
 Notes payable – written promises to
pay a certain sum of money on a
specified date. Short-term notes
payable may be interest-bearing or
zero-interest bearing
 Accrued liabilities – expenses
already incurred but have not been
paid.
 Dividends payable – cash or
property dividend becomes a
liability when it is declared as such
 Unearned revenues – happens when
the company receives cash in
advance of the performance or
service
Provisions
- Liabilities of uncertain timing or
amount. The existence is certain, but
it can only be specified by a specific
person to whom payment will be
made
 Product warranties – a promise
made by seller to a buyer to make
good on a deficiency of quality,
quantity, or performance in a
product
 Premiums and coupons
Contingent liabilities
- Possible obligations whose existence
will be confirmed by uncertain
events that are not wholly within
the control of the entity. [Ex:
pending litigations, pending claims
or assessments, guarantee of
indebtedness of others]
Noncurrent liabilities
- Obligations maturing beyond one
year
- Normally requires a formal
agreement between parties
Long-term liabilities include:
 Bonds payable – obligation of the
issuing corporation to pay a sum of
money at a maturity date plus
periodic interest. Bonds are debt
instruments of the issuing
corporation used to borrow funds
from the public or investors
Types of bonds
o Secured bond – issued with
assets as collateral for the
bonds
o Unsecured or debenture
bond – no collateral backing
o Term bond – matures at a
single specific date
o Serial bond – principal is
repaid in regular installments
over the maturity period
 o Registered bond – issued in
the name of the owner
o Bearer or coupon bond –
unregistered bond
o Convertible bond – can be
converted into ordinary
shares at the bondholder’s
option
o Callable bond – subject to
retirement at a stated
amount prior to maturity
the risk that the company may be
unable to pay its maturing debt
total debt
debt ¿ total assets=
total assets
 Times interest earned – a higher
percentage means that the company
presents less of a risk to investors
and creditors in terms of insolvency
EBIT
¿ interest earned =
interest expense

Bond issuance
- Terms of bond are set out in a legal
document called bond indenture
[summarizes the rights of the
bondholders and the obligations of
the issuing entity]. After bond
indenture, bond certificate is made
[provides information such as the
name of the issuer, face value,
contractual interest rate and
maturity date]

Discounts and Premiums

- Recorded at the time bonds are sold
- Amortized
- Unamortized premiums and
discount are reported with the
bonds payable account

Analysis of liabilities
 Working capital – excess of current
assets over current liabilities which
is a measure of liquidity
working capital=current assets−current liabilities
 Current ratio – can be used to
compare the liquidity of different
sized companies
current assets
current ratio=
current liabilities
 Debt to total assets ratio – the
higher the percentage, the greater

Chapter 9: Corporations – organization and
share capital transactions
What is a corporation?
“A corporation is an artificial being created
by operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or
incident to its existence.” (Sec. 2, Revised
Corporation Code of the Philippines)
Characteristics of a corporation
 Separate legal entity – a corporate is
viewed as a separate and distinct
person from its owners
 Unlimited life – a corporation shall
have a perpetual existence unless
provided otherwise in their articles
of incorporation (Sec. 11, RA 11232)
 Corporate powers and capacity
 Limited liability – all unsettled
obligations will not extend to the
personal assets of the shareholders
 Shareholders ownership and
shareholders
 Trust fund doctrine
Classes of corporation
 Stock corporations – capital is
divided in to shares of stock and
profits earned are authorized to be
distributed to its owners in the form
of dividend
 Non-stock corporations – profit is
not available for distribution as
dividend
 Public corporations – formed to
carry-out functions and purpose of
the government
 Private corporations – aimed to
achieve commercial and private
purposes
 Ecclesiastical corporations – formed
for spiritual purposes or religion
 Lay corporations – for charitable
purposes
 Close corporations – limited for
private individuals, generally
members of the family
 Open corporations – open to the
public and listed on PSE
 Domestic corporations – formed and
incorporated under Philippine laws
 Foreign corporations - formed and
incorporated under foreign laws
 Holding corporations – limited only
to investing managing corporations
of other corporations
 Subsidiary corporations – parent or
holding corporation
 De jure corporations – existing in
fact and in law
 De facto corporations – existing in
fact and not in law
Components of corporation
 Corporators – people composed of
the corporation
 Shareholders – corporators of stock
corporation
 Members - corporators of non-stock
corporation
 Incorporators – founders
 Subscribers – agreed to pay and
acquire shares of stock
 Promoters – bring about the
formation and organization of
corporation
 Underwriters – investment bankers
who help the corporation
Classes of share capital
 Ordinary share capital – basic shares
of the corporation
  Preference share capital – has a
preference or priority over the
ordinary shares. Which are classified
as:
o Preference as to asset
o Preference as to dividend –
two classifications: (1)
cumulative preference share
[entitled to receive dividend
in arrears] and (2)
participating preference
share [entitled to dividend
more than the fixed dividend
rate]

Authorized share capital

The total number of shares the the
corporation can issue or sell to shareholders
to generate capital for business

Subscribed share capital

Any capital raised through subscribed
shares

Types of consideration in issuance of share

capital
 Cash – issuance transaction is
measured at face value
 Non-cash asset – issuance
transaction is measured at fair value
of the non-cash asset
 Liability - issuance transaction is
measured at fair value of the liability