Podcast
Questions and Answers
What is contained in a subsidiary ledger?
What is contained in a subsidiary ledger?
- Inventory reports
- Supporting details of general ledger accounts (correct)
- Calculations for tax returns
- Summary of the financial statements
Which of the following is NOT classified as an adjusting journal entry?
Which of the following is NOT classified as an adjusting journal entry?
- Estimates
- Deferrals
- Expenditures (correct)
- Accruals
What is recorded as an accrued expense?
What is recorded as an accrued expense?
- Unearned income
- Depreciation expense
- Prepaid rent
- Salaries payable (correct)
What is the main purpose of preparing an adjusted trial balance?
What is the main purpose of preparing an adjusted trial balance?
What does a total debit greater than total credits under the income statement column indicate?
What does a total debit greater than total credits under the income statement column indicate?
In the preparation of a post-closing trial balance, which accounts are included?
In the preparation of a post-closing trial balance, which accounts are included?
Which of the following actions involves closing drawings/dividend accounts?
Which of the following actions involves closing drawings/dividend accounts?
What is the output of preparing a worksheet?
What is the output of preparing a worksheet?
What is the main purpose of reversing entries in accounting?
What is the main purpose of reversing entries in accounting?
Which of the following financial statements is NOT included in the preparation of financial statements?
Which of the following financial statements is NOT included in the preparation of financial statements?
What is the primary role of the FSRSC in the Philippines?
What is the primary role of the FSRSC in the Philippines?
Which organization succeeded the International Accounting Standards Council (IASC)?
Which organization succeeded the International Accounting Standards Council (IASC)?
What must happen before a standard can be approved by the FSRSC?
What must happen before a standard can be approved by the FSRSC?
Which method is used for recording deferred income?
Which method is used for recording deferred income?
What does cash and cash equivalents refer to in accounting?
What does cash and cash equivalents refer to in accounting?
What is the first step in the standard setting process by the FSRSC?
What is the first step in the standard setting process by the FSRSC?
What is the primary purpose of performing inventory estimation methods?
What is the primary purpose of performing inventory estimation methods?
Which of the following is true concerning noncancellable purchase commitments?
Which of the following is true concerning noncancellable purchase commitments?
What is the implication of net realizable value being calculated for finished goods?
What is the implication of net realizable value being calculated for finished goods?
When can gains from inventory losses be recovered under the principle of conservatism?
When can gains from inventory losses be recovered under the principle of conservatism?
What does the Gross Profit Method assume regarding Gross Profit Ratio (GPR)?
What does the Gross Profit Method assume regarding Gross Profit Ratio (GPR)?
What is a distinguishing factor of cancellable purchase commitments?
What is a distinguishing factor of cancellable purchase commitments?
What costs are deducted when calculating the net realizable value of raw materials?
What costs are deducted when calculating the net realizable value of raw materials?
Why is inventory impairment considered only for finished goods?
Why is inventory impairment considered only for finished goods?
What is considered a loss in the derecognition of receivables?
What is considered a loss in the derecognition of receivables?
Which of the following is NOT included in the cost of inventories according to IAS 2?
Which of the following is NOT included in the cost of inventories according to IAS 2?
How should long-term receivables be presented in financial statements?
How should long-term receivables be presented in financial statements?
What occurs during the write-down process for inventories?
What occurs during the write-down process for inventories?
What type of risk must be disclosed regarding receivables?
What type of risk must be disclosed regarding receivables?
Which of the following is included in the measurement of inventories under IAS 2?
Which of the following is included in the measurement of inventories under IAS 2?
What must be estimated when measuring inventories for net realizable value?
What must be estimated when measuring inventories for net realizable value?
In the initial measurement of inventories, which of the following is excluded?
In the initial measurement of inventories, which of the following is excluded?
What does the retail method help to measure in the retail industry?
What does the retail method help to measure in the retail industry?
Which of the following types of investments represents a creditor relationship?
Which of the following types of investments represents a creditor relationship?
Which factor is NOT included in the estimation of net sales?
Which factor is NOT included in the estimation of net sales?
Which feature is commonly associated with debt securities?
Which feature is commonly associated with debt securities?
What determines whether a security is classified as equity or debt?
What determines whether a security is classified as equity or debt?
In the context of inventory, which of the following does NOT decrease the physical flow of inventories?
In the context of inventory, which of the following does NOT decrease the physical flow of inventories?
What is included under equity investments?
What is included under equity investments?
Which of the following best describes 'COGAS'?
Which of the following best describes 'COGAS'?
Which of the following is an example of a debt security?
Which of the following is an example of a debt security?
What is the significance of the cost-to-retail ratio in inventory estimation?
What is the significance of the cost-to-retail ratio in inventory estimation?
Study Notes
Reversing Entries
- A step in the preparation of financial statements that simplifies the recording of certain transactions
- Used when an adjustment entered in a previous period increases an asset account on the SFP, such as accrued expenses, prepaid expenses, accrued income, deferred income, and depreciations
- For example, an entry for prepaid expenses would be reversed because it would increase an asset account; the original debit would be reversed to create a credit
Closing the Books
- Process of preparing the financial statements
- The standard of uniformity requires that all temporary accounts are brought to zero at the end of the period
- Nominal accounts are closed to the income summary account
- The steps in the closing process are:
- First, close all income accounts
- Second, close all expense accounts
- Third, close the balance of the IS account to the drawing/dividends accounts
- Fourth, close the drawing/dividends account to the equity account
The Standard (IFRS and GAAP)
- PFRS are guiding principles, not laws
- Paragraphs and pronouncements in bold and plain have equal authority
- Bold pronouncements dictate principles, while plain text provides supporting principles
- The FSRSC is currently the setting body in the Philippines
- The FSRSC’s main function is to prepare interpretations of PFRS for approval by PIC
- The IASB is the successor of the IASC
- The chairman and members of the IASB are appointed by the PRC upon BOA and the APO
- The standard-setting process includes:
- Consideration of IASB pronouncements
- Formulation of a task force to advise the FRSC
- Issuance for comment on exposure drafts
- Consideration of all comments received within the comment period
- Approval of a standard or an interpretation by a majority of FSRSC members
Cash and Cash Equivalents
- Refers to money, readily available for unrestricted use
- Used as a medium of exchange
- Consists of cash on hand and undeposited collections
- Undeposited collections include both currencies and deposits
Inventory Estimation Methods
- Used to estimate the value of inventory when a physical count is impossible
- Reasons for using inventory estimation methods include:
- Preparing interim financial statements
- Proving the accuracy and reasonableness of a physical count
- Estimating inventory lost in a disaster (e.g., fire)
- Some common methods include:
- Gross Profit Method: Assumes that the gross profit ratio remains relatively consistent across periods
- Retail Method: Used for the large quantities of rapidly changing goods that are commonly found in the retail industry
Investment in Equity Securities
- Represents a share in a company's ownership
- Includes common stock, preferred stock, rights, and options to acquire shares
- The substance of a security is more important than its legal form in classifying it as equity or debt
Debt Securities
- Represents a creditor relationship with an entity
- Features include:
- Maturity Value
- Interest Payments
- Date of Maturity
- Includes:
- Corporate bonds
- BSP Treasury shares
- Government securities
- Commercial papers
- Redeemable preference shares
- The substance of a security, not its legal form or structure, determines whether it will be classified as equity or debt
Valuation Adjustments
- Adjusting journal entries are used to adjust accounts to reflect the correct balances at the end of the period
- Adjusting journal entries can be classified into:
- Accruals: Reflects the actual amount of expense or income that has accrued during the period even if it has not yet been paid or received
- Deferrals: Reflects the actual amount of expense or income that has been paid but not recorded for the period
- Estimates: Reflects the estimated expenses or income that are likely to be incurred during the period. such as depreciation or bad debts
Worksheet/Adjusted Trial Balance
- Used for preparing the adjusted trial balance before preparing the financial statements
- Includes the adjusted account balances and helps to ensure that the accounts are in balance
- The worksheet is a 10-column document, but it is not a formal accounting record
- The worksheet's output is the adjusted trial balance
Inventory (IAS 2)
- Includes:
- Goods held for sale in the ordinary course of business
- Goods in the process of production for such sale
- Materials and supplies
- Initial Measurement:
- Include all costs associated with getting the inventory ready for sale
- Costs incurred in the acquisition, conversion, and other costs directly related to bringing the inventory to its present location and condition are included
- Costs not included in the cost of inventory include:
- Abnormal waste
- Selling costs
- Administrative costs
- Storage costs
- Subsequent Measurement (Lower of Cost and Net Realizable Value - LCNRV):
- Inventory is recorded at the lower of its cost or its net realizable value
- NRV is the estimated selling price less the estimated costs of completion, disposal, and other costs to make the sale
- Write-downs:
- A loss is recognized when the cost of an item exceeds its NRV. This loss can be direct or indirect
- Direct Loss: Recognized when the cost exceeds NRV.
- Indirect Loss: Recognized separately, creating an allowance and a separate loss on inventory
Purchase Commitments
- Follow the conservatism principle and NRV recognition
- Accounts payable is fixed, but purchases can go down but never go above the contract terms.
- Gains can be recovered up to the extent of a loss.
- Purchase commitments can be cancellable or noncancellable:
- Cancellable Purchase Commitments: Can be canceled, no journal entries are needed
- Noncancellable Purchase Commitments: Entity is obligated to perform the Purchase Commitment
Derecognition of Trade Receivables
- A trade receivable is derecognized when:
- Contractual rights to receive cash expires
- The financial asset is transferred, and the company is no longer responsible for the transfer
- Gain or loss = Net proceeds – Book value
Presentation of Receivables
- Presented as one line item for Trade and Other Receivables under current assets
- Long-term receivables are reported as Long-term investments or non-current assets
Disclosures for Receivables
- Nature of receivables
- Credit risk exposures
- Information regarding interest rate risk exposures
- Receivable financing terms and conditions
- Fair values, interest income, accrued interest, and impairment losses
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Description
This quiz covers the essential concepts of reversing entries and the process of closing the books in accounting. It explains how reversing entries simplify financial statement preparation and outlines the steps necessary for closing temporary accounts. Test your understanding of these crucial accounting procedures.