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Questions and Answers
What is the nature of financial assets?
What is the nature of financial assets?
Cash equivalents have a maturity date of normally within 3 months or less from the date of acquisition.
Cash equivalents have a maturity date of normally within 3 months or less from the date of acquisition.
True
Cash is generally measured at _____ value in the statement of financial position.
Cash is generally measured at _____ value in the statement of financial position.
face
What is the function of the imprest system in cash management?
What is the function of the imprest system in cash management?
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What is the formula for determining the theoretical or parity value of a share right?
What is the formula for determining the theoretical or parity value of a share right?
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What date marks the expiration of share rights?
What date marks the expiration of share rights?
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Shares and their related share rights can be sold separately.
Shares and their related share rights can be sold separately.
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Equity investments are initially recognized at _____ value.
Equity investments are initially recognized at _____ value.
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Match the following investment classifications with their characteristics:
Match the following investment classifications with their characteristics:
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What are the four categories into which dividends or receipts of dividends can be subdivided?
What are the four categories into which dividends or receipts of dividends can be subdivided?
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Which date involves preparing a list of who will receive dividends?
Which date involves preparing a list of who will receive dividends?
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Cash dividends may be used when issuers have too much cash available to issue a cash dividend.
Cash dividends may be used when issuers have too much cash available to issue a cash dividend.
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Liquidating dividends deduct the numbers of shares held by the _____?
Liquidating dividends deduct the numbers of shares held by the _____?
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Match the type of dividend with its description:
Match the type of dividend with its description:
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How are non-trade receivables collectible within 12 months classified?
How are non-trade receivables collectible within 12 months classified?
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What are trade discounts primarily intended for?
What are trade discounts primarily intended for?
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Cash discounts are recognized for financial accounting purposes.
Cash discounts are recognized for financial accounting purposes.
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What reductions are given for prompt payment of an account? Cash discounts are reductions from the sales price to prompt payment of an account.
What reductions are given for prompt payment of an account? Cash discounts are reductions from the sales price to prompt payment of an account.
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Match the types of dividends with their descriptions:
Match the types of dividends with their descriptions:
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How many years is the minimum period of protection for patents?
How many years is the minimum period of protection for patents?
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How many years of protection does Copyright offer after the death of the author?
How many years of protection does Copyright offer after the death of the author?
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Which of the following does a Service Mark do?
Which of the following does a Service Mark do?
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Amortization of Intangible Assets always starts when the asset is acquired.
Amortization of Intangible Assets always starts when the asset is acquired.
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An intangible asset is recognized at Fair Value (FV) by referencing an _________ market.
An intangible asset is recognized at Fair Value (FV) by referencing an _________ market.
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What is the definition of investment property according to IAS/PAS 40?
What is the definition of investment property according to IAS/PAS 40?
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Investment property can be used in the production or supply of goods and services.
Investment property can be used in the production or supply of goods and services.
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What happens if a property is comprised of both an investment property element and a property, plant, and equipment (PPE) element used in operations?
What happens if a property is comprised of both an investment property element and a property, plant, and equipment (PPE) element used in operations?
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When is an investment property recognized? It is recognized when it is probable that the future economic benefits associated with the investment property will flow to the entity and the cost of the investment property can be __________ measured.
When is an investment property recognized? It is recognized when it is probable that the future economic benefits associated with the investment property will flow to the entity and the cost of the investment property can be __________ measured.
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What is the treatment for internally generated software costs?
What is the treatment for internally generated software costs?
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How are website development costs recorded?
How are website development costs recorded?
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Goodwill is amortized over time.
Goodwill is amortized over time.
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When biological asset is purchased, it is initially measured at Fair Value less ____________.
When biological asset is purchased, it is initially measured at Fair Value less ____________.
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Match the following:
A) Biological Transformation
B) Harvest
C) Growth
D) Production
Match the following: A) Biological Transformation B) Harvest C) Growth D) Production
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Study Notes
Chapter 1: Cash and Cash Equivalents
- Assets: economic resources controlled by an entity as a result of past events
- Financial assets: group of assets evidenced by financial instruments
- Arise from a contract that entitles the holder to receive cash or another financial asset
- Include derivatives
- Cash: most significant financial asset due to its ability to settle obligations, acquire assets, pay operating costs, or provide returns to owners
- Recognized at face value, must be unrestricted and available for use in current operations
- Includes bills, coins, demand credit instruments, and cash funds
- Cash funds: qualify to be reported as cash in the current assets section of the statement of financial position
- Examples: payroll fund, working fund, change fund, petty cash fund, interest fund, and dividend fund
- Cash equivalents: highly liquid financial instruments with insignificant risk of change in value due to interest rates
- Matures normally within 3 months or less from the date of acquisition
- Examples: temporary investments in debt securities, commercial paper, and treasury bills
Chapter 2: Receivables
- Receivables: represent any legal claim from others for money, goods, or services
- Include amounts collectible from customers and others, accrued revenues, and other items
- Trade receivables: arise from the sale of goods or services in the ordinary course of business
- Classified as current assets, regardless of the length of the entity's normal operating cycle
- Non-trade receivables: arise from other sources, such as loans and advances, accrued interest, and dividends
- Classified as current or non-current assets, depending on the expected collection period
- Initial recognition: based on IFRS 9, recognize a financial asset in the balance sheet when the entity becomes a party to the contractual provision of the instrument
- Accounting for accounts receivable and related revenues:
- Trade discounts: deducted from the list price prior to recording the accounts receivable
- Cash discounts: reductions from the sales price to prompt payment of an account
Chapter 4: Investments in Equity Securities
- Equity security: an instrument representing ownership shares and rights, warrants, or options to acquire or dispose of ownership shares
- Provides highest returns to investors
- Yield/returns: dividends, gains, and losses from disposal, and appreciation in value
- Reasons for investing:
- Temporary placements of excess cash
- Obtain long-term customer, supplier, or creditor relationship
- Exercise significant influence or control over the operating policies of another entity
- Classification:
- Trading equity securities (FVPL)
- Non-trading equity securities (FVPL or FVOCI, irrevocable choice)
- Investment in associate (participate but not control financial and operating policy decisions)
- Investment in subsidiary (power to govern the financial and operating policies of the investee entity)
- Investment in joint venture (jointly controls operations of another entity through share capital ownership)
- Recognition:
- Initial recognition: at fair value, with transaction costs expensed outright (FVPL) or capitalized as cost (FVOCI)
- Subsequent recognition: changes in fair value at the reporting date recorded in profit or loss (FVPL) or other comprehensive income (FVOCI)
- Transactions subsequent to initial recognition:
- Share split: memo entry only, with no effect on the financial statements
- Dividends: considered as income, with three dates: date of declaration, date of record, and date of payment### Dividends
- There are four types of dividends:
- Cash dividend
- Bonus issue or stock dividend
- Property dividend
- Scrip dividend (new shares of an issuer's stock instead of a dividend)
Cash Dividends
- Received when declared by the board of directors
- Important dates:
- Date of declaration
- Date of record (determines who receives the dividend)
- Date of payment (distributes the dividend to shareholders)
- Journal entries:
- Received cash dividend: Debit Cash, Credit Dividend Revenue
- Received cash dividend on the next period: Debit Dividend Receivable, Credit Dividend Revenue
Bonus Issue or Share Dividend
- Issuance of additional shares of the same class
- No journal entry, just a memorandum entry
- Example: Original 1,000 shares at $120 each = $120,000, receive 200 additional shares due to 20% bonus issue, new carrying amount per share = $120,000 / 1,200 = $100
Property Dividends
- Dividends distributable as investee's non-cash assets
- Journal entry: Debit Equity Investments, Credit Dividend Revenue
Scrip Dividends
- New shares of an issuer's stock instead of a dividend
- Accounting treatment:
- Debit Retained Earnings, Credit Notes Payable to Stockholders (at declaration)
- Debit Notes Payable to Stockholders, Debit Interest Expense, Credit Cash (at payment)
Share Rights
- Legal right granted to shareholders to subscribe for new shares
- Valuable because the price at which new shares are sold is generally below the prevailing market price
- Considered as securities held for trading and measured at fair value
- Investor may sell rights, use rights to purchase additional shares, or allow the rights to lapse
Investment in Associate
- Purchase of equity shares of another entity to exert significant influence
- Definition:
- Significant influence: power to participate in financial and operating policy decisions
- Associate: entity over which the investor has significant influence
- Accounting method:
- Equity method: based on economic relationship between investor and investee
- Initial investment at cost, subsequent carrying amount increased by share of profit and loss of investee
- Classification:
- Financial assets at fair value through profit or loss (FVPL)
- Financial assets at fair value through other comprehensive income (FVOCI)
- Financial assets at amortized cost
Discontinuance of Equity Method
-
Use fair value at FVPL, FVOCI, or cost
-
Difference between carrying amount and fair value of retained investment in profit or loss
-
Difference between net proceeds from disposal and carrying amount of investment in profit or loss### Share Warrant
-
A share warrant is a right that gives the holder the option to purchase a share at a specified price
-
An investor receives share rights without any cost
-
An investor can:
- Sell the rights
- Use the rights to purchase additional shares
- Allow the rights to lapse
Memorandum Entry and Journal Entries
- Initially, share rights are recorded as a memorandum entry because they do not have a known fair value
- Exercise price or subscription price for the share is important to note
- Journal entries are made for the exercise of the right, sold rights, and lapsed rights
- Theoretical fair value of share rights can be used when the actual fair value is not available
Investments in Unquoted Equity Instruments
- All investments in equity instruments in associates, joint ventures, and subsidiaries should be measured at fair value
- If there is insufficient information to measure at fair value, cost can be used, except when the cost does not represent the fair value
- Significant changes in the investee's performance, market, economy, or internal matters can affect the fair value
Financial Statement Presentation
- Financial assets measured at fair value through profit or loss (FVPL) are presented as current assets
- Financial assets measured at fair value through other comprehensive income (FVOCI) are presented as non-current assets
Impairment of Equity Investments
- Equity investments measured at fair value are not tested for impairment, as fair value is already considered
- Investments in associates and joint ventures are accounted for using the equity method
Associate and Joint Venture
- An associate is an entity over which the investor has significant influence
- A joint venture is an arrangement where the parties have rights to the net assets of the arrangement
- Significant influence is the power to participate in the financial and operating policy decisions of the investee
- Evidence of significant influence includes representation on the board of directors, participation in policy-making, material transactions, and more
Equity Method
- Investment in an associate or joint venture is initially recognized at purchase price plus transaction costs
- Share in the profit of the investee is recognized after the date of acquisition
- If the fair value is greater than the carrying amount, the excess is amortized as an adjustment to the investment account
- Undervalued inventory, goodwill, and other excesses are accounted for accordingly
Disposal of Investment in Associate
- When an investor disposes of an investment, the difference between the net disposal proceeds and the carrying value is recognized as a gain or loss
- The carrying value is determined using the equity method
Reclassification of Equity Securities
- Reclassification from investment in associate to investment at fair value or vice versa is done when significant influence is gained or lost
- The fair value of the retained investment is determined, and the gain or loss is recognized in profit or loss
Investment Property
- Investment property is land or a building (or part of a building) held to earn rentals or capital appreciation
- It is not used in production, supply, or administrative purposes, or for sale in the ordinary course of business
- Property held for future use as owner-occupied property, or property occupied by employees, is not considered investment property
Initial Recognition and Subsequent Measurement
- Investment property is recognized when probable that future economic benefits will flow to the entity and the cost can be reliably measured
- Initial recognition is at cost, including transaction costs
- Subsequent measurement can be done using the fair value model or the cost model
- If the fair value model is used, gains or losses are recognized in profit or loss
- If the cost model is used, the property is measured at cost minus accumulated depreciation and impairment losses
Transfers to and from Other Classification
- Transfers are made when there is a change in use, such as commencement of owner-occupation or development with a view to sale
- The fair value is the cost in its new classification
- The difference between the fair value and its carrying amount is recognized as a revaluation surplus or loss
Presentation on the Statement of Financial Position
- Investment property is separately shown as a line item on the face of the statement of financial position
- It is presented as a non-current asset
Derecognition
- Investment property is derecognized on disposal or when it is withdrawn from use and no future economic benefits are expected
- The difference between the net disposal proceeds and the carrying amount is recognized as a gain or loss
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Description
Learn about the concept of assets, economic resources, and their recognition in accounting. Understand how cash and cash equivalents are categorized and utilized in business operations.
