Accounting for Financial Instruments and Inventories
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Questions and Answers

The definition of inventories under PAS 2 states three types of inventories.

True (A)

Goods in transit purchased FOB destination are included in the inventories of the buyer.

False (B)

An increase in inventory always has a corresponding increase in accounts payable.

False (B)

Under the FIFO cost formula, Big Co.'s cost of goods sold for the period is P3.

<p>True (A)</p> Signup and view all the answers

Under the Average cost formula, Big Co.'s ending inventory is P3.

<p>False (B)</p> Signup and view all the answers

Amortized cost financial assets are initially measured at fair value.

<p>False (B)</p> Signup and view all the answers

The term 'financial instrument' encompasses only assets that are considered 'investments.'

<p>False (B)</p> Signup and view all the answers

Investment in equity securities can be measured at amortized cost.

<p>True (A)</p> Signup and view all the answers

Investments in ordinary shares can be classified as financial assets measured at amortized cost.

<p>True (A)</p> Signup and view all the answers

Unrealized gains and losses on investments in equity securities measured at FVOCI are recognized in the income statement.

<p>False (B)</p> Signup and view all the answers

Subsequent changes in the fair value of a financial asset measured at amortized cost are normally ignored.

<p>True (A)</p> Signup and view all the answers

Entity A shall classify debt securities either as FVOCI or as FVPL if held under a 'hold to collect and sell' business model.

<p>True (A)</p> Signup and view all the answers

The effective interest rate on bonds acquired at a discount must be higher than the stated rate.

<p>True (A)</p> Signup and view all the answers

All financial assets are initially measured at fair value plus transaction cost according to PFRS 9.

<p>True (A)</p> Signup and view all the answers

Discount or premium amortization is unnecessary if investments in bonds are measured at FVOCI.

<p>True (A)</p> Signup and view all the answers

The income earned by a sinking fund forms part of the sinking fund balance.

<p>True (A)</p> Signup and view all the answers

A long-term fund is always established in relation to the origination of a long-term liability.

<p>False (B)</p> Signup and view all the answers

Appropriation of retained earnings is made only in conjunction to a legal requirement.

<p>False (B)</p> Signup and view all the answers

The increase in cash surrender value is accounted for as income.

<p>False (B)</p> Signup and view all the answers

Cash dividends received on a life insurance, in which the accounting for cash surrender applies, are accounted for as a reduction in the investment account rather than income.

<p>True (A)</p> Signup and view all the answers

If Triniville Co. commits to purchase a financial asset on Day 1 and the transaction settles on Day 4, using trade date accounting, the financial asset will be initially recognized on Day 4.

<p>False (B)</p> Signup and view all the answers

A change in management's intention for holding particular financial assets would trigger the reclassification of financial assets between the measurement categories of PFRS 9.

<p>True (A)</p> Signup and view all the answers

Not all debt-type financial assets can be reclassified; some other asset types can also be reclassified when an entity changes its business model for managing financial assets.

<p>True (A)</p> Signup and view all the answers

Shares are said to be selling ex-dividend after the date of declaration and before the date of record.

<p>True (A)</p> Signup and view all the answers

If an investee's shares were selling at P10 before the issuance of stock rights and declined to P8 immediately after, the value per stock right must be approximately P2.

<p>False (B)</p> Signup and view all the answers

An increase in prices would result in the recognition of a gain in a 'short' futures contract.

<p>False (B)</p> Signup and view all the answers

If the market price exceeds the strike price in a put option contract, the option is said to be in the money.

<p>True (A)</p> Signup and view all the answers

The maximum amount of loss in an option contract that is not designated as a hedging instrument is equal to the acquisition cost of the option.

<p>True (A)</p> Signup and view all the answers

Dogs Co. pays a deposit to the broker when entering a futures contract, and this deposit forms part of the carrying amount of the derivative instrument.

<p>True (A)</p> Signup and view all the answers

Entity Y enters into a forward contract and receives a net cash payment of P1,000 when the spot rate increases to P3.00.

<p>True (A)</p> Signup and view all the answers

Flashcards

Inventory under PAS 2 Types

PAS 2, the accounting standard for inventories, does not specify three types. It generally focuses on recognizing, measuring, and valuing inventories for financial reporting purposes.

Goods in transit (FOB destination)

Goods sent but not yet received (FOB destination) are not included in the buyer's inventory. Ownership transfers when the goods arrive at their destination.

Consigned goods

Consigned goods are held by a party but not owned by them. The consignor retains ownership until sold by the consignee.

FIFO Cost formula

FIFO (First-In, First-Out) assumes the first units purchased are the first ones sold.

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Inventory Net Realizable Value

Lower of Cost or Net Realizable Value (LCNRV). If net realizable value is less than cost, inventory is written down.

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Financial Instruments Classification

Financial instruments encompass various assets like shares, loans, and bonds.

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Investment in Equity Securities, Measurement

Investments in shares can be measured at amortized cost, or fair value methods.

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FVOCI vs. FVPL Classification

Debt securities held for collection or sales are categorized as either FVOCI or FVPL.

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Financial Asset Measurement

Initially, all financial assets are measured at their fair value plus transaction costs.

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Unrealized Gains/Losses, FVOCI

Unrealized gains or losses on investments measured using FVOCI are reported in equity.

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Sinking fund income

Income earned by a sinking fund is part of the sinking fund balance.

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Long-term fund origination

A long-term fund is often linked to the creation of a long-term liability.

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Retained earnings appropriation

Retained earnings are set aside, often due to legal requirements.

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Cash surrender value increase

Increased cash surrender value is considered income.

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Cash dividends on life insurance

Cash dividends from life insurance, if cash surrender applies, will reduce the investment account rather than creating income.

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Amortized cost financial assets initial measurement

Amortized cost financial assets are not initially measured at fair value.

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Investments in ordinary shares and amortized cost.

Investments in ordinary shares can sometimes be classified as financial assets measured at amortized cost.

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Subsequent fair value changes, amortized cost.

Subsequent changes in the fair value of a financial asset measured at amortized cost are usually ignored.

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Investments in term bonds and discount

The amortized cost of an investment in term bonds that is acquired at a discount decreases each year.

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Amortized cost vs FVOCI and same profit or loss effect?

Whether an investment in debt securities is measured at amortized cost or FVOCI, the total effect of the investment on profit or loss is generally the same.

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Financial asset transaction accounting

The principles for recognizing and measuring financial assets in accounting (trade date vs. settlement date accounting)

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Reclassification of financial assets

Re-categorizing financial assets (e.g., from amortized cost to FVOCI) when the business model of their management changes

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Impairment accounting (PFRS 9)

Accounting method for recognizing losses on financial assets (regardless of measurement category)

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Reclassification adjustment to profit/loss

Changes in profit or loss resulting from re-categorizing financial assets

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Ex-dividend shares

Shares where dividend amounts do not apply

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Short futures contract gain

An increase in prices does not result in a gain for the holder of a short futures contract. Instead, it leads to a loss because they are obligated to sell the underlying asset at a lower price than the current market price.

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In-the-money put option

A put option is considered 'in the money' when the market price of the underlying asset is lower than the strike price. This gives the option holder the right to sell the asset at a higher price than the current market price.

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Maximum option loss

The maximum loss an option holder can incur is limited to the price they paid for the option. This is because they have the right, but not the obligation, to exercise the option.

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Futures contract deposit

The initial deposit paid to a broker when entering into a futures contract forms part of the derivative instrument's carrying amount on the balance sheet.

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Option contract payment

The amount paid for an option contract also becomes part of the derivative instrument's carrying amount on the balance sheet.

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