Financial Rehabilitation and Insolvency Act PDF

17. Investments in associates must be tested for impairment if the entity uses a. The cost model or the equity method b. The cost model or the fair value model c. The equity method or the fair value model...

17. Investments in associates must be tested for impairment if the entity uses a. The cost model or the equity method b. The cost model or the fair value model c. The equity method or the fair value model d. The cost model, equity method or fair value model 18. Which of the following is specifically required to be reported as line item for an SME but not under full PFRS? a. Financial assets c. Non-current assets held for sale b. Investment in joint venture d. Property, plant and equipment 19. All of the following are considered line item in the statement of financial position of an SME except a. Provisions c. Non-controlling interest b. Revaluation surplus d. Equity attributable to the owners of parent 20. Which is not considered as Other Comprehensive Income (OCI) for SMEs? a. Some actuarial gains and losses b. Some foreign exchange translation gains and losses c. Some changes in fair values of hedging instruments d. Some gains and losses on FVOCI securities 21. Which method is used by SMEs in recognizing revenue from rendering services? a. Accrual method c. Installment method b. Cost recovery method d. Percentage-of-completion method 22. Which of the following cannot be accounted for by SMEs under the cost model? a. Intangible assets c. Investment in associates b. Investment property d. Property, plant and equipment 23. Which of the following is not considered a “basic” financial instrument for SMEs? a. Bonds and loans payable c. Commercial paper and bills b. Cash and bank accounts d. Options and warrants 24. Which of the following is not considered as “other” financial instrument for SMEs? a. Derivatives b. Hedging instruments c. Investments in convertible and puttable shares d. Investments in non-convertible and non-puttable shares PROBLEMS 1. An SME provided the following data on December 31, 2021: Cash 26,000 Bank loan, payable in 2024 and 50,000 pre-payable without penalty Accounts receivable 530,000 Trade payables 430,000 Prepayments 60,000 Interest payable 2,000 Inventories 60,000 Current tax liability 270,000 Investment in associate 110,000 Provision for warranty 4,000 Property, plant and equipment 3,250,000 Employee benefit obligation (current portion, P4,000) 10,000 Accumulated depreciation and Finance lease liability (current 44,000 impairment 700,000 portion, P20,000) Software – net of amortization Share capital 30,000 and impairment 10,000 Deferred tax asset 4,000 Retained earnings 2,430,000 Bank overdraft 80,000 Compute the following: 1. Current assets 4. Noncurrent liabilities 2. Noncurrent assets 6. Shareholders’ equity 3. Current liabilities 2. An SME provided the following data for 2021: Sales 6,700,000 This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 244  Royalty revenue 120,000 Cost of goods sold 5,100,000 Dividend received from an associate – cost model 25,000 Gain on disposal of property 60,000 Distribution costs 175,000 Administrative expenses (including amortization of goodwill of P2,000) 810,000 Research and development cost (5 years) 70,000 Foreign exchange loss on trade payables 30,000 Interest on bank loan and overdraft 20,000 Interest on finance lease 5,000 Current tax expense 270,000 Deferred tax benefit 10,000 Retained earnings - January 1 2,100,000 Dividends 150,000 Question 1: What is the profit for year ended December 31, 2021? a. P435,000 c. P437,000 b. P410,000 d. P695,000 Question 2: What is the retained earnings balance on December 31, 2021? a. P2,535,000 c. P2,387,000 b. P2,385,000 d. P2,441,000 3. An SME prepared the following post-closing trial balance on December 31, 2021. Property, plant and equipment 2,300,000 Intangible assets 850,000 Investment in associate 1,100,000 Deferred tax asset 40,000 Inventory 500,000 Trade receivables 600,000 Cash on hand 1,150,000 Investment in non-puttable ordinary shares – listed 550,000 Investment in nonconvertible and non-puttable preference shares – unlisted 500,000 Investment in term bonds 400,000 Demand deposit in bank 200,000 Loan receivable from employee – fixed term 10,000 Loan receivable from associate – on demand 300,000 Bank loans 1,100,000 Other long-term employee benefits 250,000 Obligation under finance leases 400,000 Trade payables 550,000 Warranty obligation 20,000 Rent payable 10,000 Interest payable 20,000 Current tax liability 210,000 Bank overdraft-on demand 40,000 Share capital 4,000,000 Retained earnings 1,900,000 Question 1: What is the total amount of basic financial assets? a. P4,810,000 c. P3,750,000 b. P3,710,000 d. P3,160,000 Question 2: What is the total amount of basic financial liabilities? a. P2,330,000 c. P1,720,000 b. P2,120,000 d. P1,930,000 This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 245  BASIC ACCOUNTING CONCEPTS AND PROCESS ▪ The following are a broad classification of kinds of accounts: STEPS IN THE ACCOUNTING CYCLE ✓ Real account – also called as permanent ▪ There are nine (9) basic steps in the accounting cycle, accounts. These accounts are not closed and which includes two (2) phases known as recording carryover to the next accounting period. (ex. (steps 1 to 3) and summarizing (steps 4 to 9). Cash, AR and PPE). 1. Analyzing and recording transactions. ✓ Nominal account – also called as temporary 2. Journalizing transactions. capital accounts. These accounts are closed at 3. Posting transactions to the ledger. the end of the accounting period. (ex. Sales and 4. Preparing an unadjusted trial balance. expenses). 5. Preparing adjusting entries. 6. Preparing an adjusted trial balance. ✓ Mixed account – a combination of real and 7. Preparing financial statements. nominal accounts. (ex. Prepaid expenses). 8. Preparing closing entries. 9. Preparing post-closing trial balance. ✓ Reciprocal account – has a counterpart in another book within the entity or in another ledger or another entity. RECORDING PHASE ✓ Other accounts as necessary. ▪ Analyzing the transaction (Business Document) - this is where the accountant gathers information and ▪ Posting - It is the process of transferring data from the determines the impact of the transactions on the journal to the appropriate accounts in the general ledger financial position. and subsidiary ledger. This process classifies all accounts that were recorded in the journals. ▪ Journalizing – the process of recording the transactions in the appropriate journals. A journal is a Kinds of ledgers chronological record of transactions also known as the Book of Original Entry. ✓ General ledger – includes all the accounts appearing on the financial statements. ▪ Although all transactions could be recorded in the General Journal, it is more efficient to use special ✓ Subsidiary ledgers – affords additional detail journals in recording a large number of like in support of certain general ledger transactions. accounts. Special journals that enterprises usually use are: SUMMARIZING PHASE ✓ Sales Journal – only sales of merchandise on account. ▪ Preparing the unadjusted trial balance – a list of general ledger accounts with their respective debit or ✓ Cash receipts journal – all types of cash receipts. credit balance. The purpose of the unadjusted trial balance is to provide evidence that the total debits ✓ Purchase journal – records all purchases on are equal to the total credits and prepares the account. accounts for adjustments. ✓ Cash disbursement journal – all payments of ▪ Preparing adjusting entries – to record accruals, cash. expiration of prepayments and deferrals, estimations and other events not signaled by source documents. Adjusting entries are made at the end of each Type of journal entries according to form: accounting period. ▪ Simple journal entry – one which contains a single o The concepts involved behind adjusting debit and a single credit element. entries are Accrual, Matching of Costs against Revenue and Accounting Period. ▪ Compound journal entry – one which has two or more debit and credit elements. ▪ Prepayments and Deferrals – the cash flow precedes the revenue or the expense recognition. Accounts ▪ Accruals – income or expense recognition precedes the cash flow. ▪ Used as storage units of accounting information and used to summarize changes in assets, liabilities and ✓ Accrued Income – income earned but not yet equity including income and expenses. received. ✓ Accrued expenses – expenses incurred but not yet paid. This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 246  ▪ Estimates – Adjusting entries that do not involve cash flows. Deferred or Unearned Revenue: ✓ Doubtful accounts – the expense to be matched Liability Method Income Method against credit sales. Cash xx Cash xx ✓ Depreciation - allocation of the cost of fixed Unearned Income (liab.) xx Income xx assets as expense over its useful life. Adjustment: ▪ Ending inventory - an adjustment to set up the year-end physical count of the inventory. This only applies if the Unearned Income xx Income xx Periodic Inventory System is used. Income xx Unearned Income (liab.) xx ▪ Preparing the financial statements – the most important part of the summarizing phase, this is where The purpose of reversing entries is a matter of the processed information is communicated to external convenience for accruals and consistency for the users. adjustments in the following year for prepaid expenses and deferred income when the income statement Basic financial statements: method was used to record the cash flow. ✓ Statement of Financial Position. Once again, reversing entries will only apply to the following but remember that they are not necessary ✓ Income Statement or a Statement of and only optional: Comprehensive Income. ✓ Accrued income. ✓ Statement of Changes in Equity. ✓ Accrued expense. ✓ Statement of Cash Flows. ✓ Prepaid expense, only if the expense method ✓ Notes and Disclosures. was used in recording the payment. ▪ Preparing the closing entries – recorded and posted for ✓ Unearned income, only if the income the purpose of closing all nominal or temporary method was used in recording the collection. accounts to the income summary account and the income or loss afterwards shall be closed to the capital - - END - - or retained earnings account. ▪ Preparing the post-closing trial balance – a listing of general ledger accounts and their balances after closing entries have been made. The post-closing trial balance is the same with the year- end statement of financial position. The only difference is that valuation accounts like allowances for assets are found in the credit side instead of being deducted from the related asset account. ▪ Preparing reversing entries – the last and optional step in the accounting cycle. Reversing entries are made at the beginning of the new accounting period to reverse certain adjusting entries from the succeeding accounting period. Prepaid Expenses: Asset Method Expense Method Prepaid expense (asset) xx Expense xx Cash xx Cash xx Adjustment: Expense xx Prepaid expense (asset) xx Prepaid expense xx Expense xx This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 247  BASIC ACCOUNTING CONCEPTS AND PROCESS 1. The basic purpose of accounting is a. To measure periodic income of the economic entity b. To provide quantitative financial information about a business enterprise that is useful in making rational economic decision c. To provide information that the creditors of an economic entity can use in deciding whether to make additional loans to the entity d. To provide information that the managers of an economic entity need to control its operations 2. Financial accounting can be broadly defined as the area of accounting that prepares a. General purpose financial statements to be used by parties internal to the business enterprise only b. Financial statements to be used by investors only c. General purpose financial statements to be used by parties both internal and external to the business enterprise d. Financial statements to be used primarily by management 3. The basic components of the financial statements do not include a. Statement of Financial Position c. Statement of Cash Flows b. Statement of Comprehensive Income d. Statement of Cost of Goods Sold 4. What is the objective of financial statements? a. To prepare comparable, relevant, reliable and understandable information to investors and creditors b. To prepare financial statements in accordance with all applicable Standards and Interpretations c. To prepare a statement of financial position, an income statement, a statement of cash flows and a statement of changes in equity d. To provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions 5. It is an independent private sector body with the objective of achieving uniformity in the accounting principles which are used by business enterprises for financial reporting around the world a. International Accounting Standards Committee b. International Federation of Accountants c. Financial Accounting Standards Council d. Securities and Exchange Commission 6. The highest accounting standard-setting authority in the Philippines is a. Accounting Standards Committee c. Financial Accounting Standards Board b. PICPA d. Financial Reporting Standards Council 7. It is the body authorized by law to promulgate rules and regulations affecting the practice of accountancy in the Philippines a. PICPA c. Board of Accountancy b. ASC d. PRC 8. They encompass the conventions, rules, and procedures necessary to define what the accepted accounting practices are a. Generally accepted accounting principles c. Qualitative characteristics b. Accounting assumptions d. Recognition principles 9. The GAAP in the Philippines are now known as a. SFAS c. PFRS b. PAS d. Both PAS & PFRS 10. Philippine Financial Reporting Standards (PFRS) include all of the following, except a. Philippine Financial Reporting Standards equivalent to IFRS issued by IASB b. Philippine Accounting Standards equivalent to IAS issued by IASC c. Philippine Interpretations equivalent to IFRIC and SIC Interpretations, and Interpretations developed by PIC d. Framework for the Preparation and Presentation of Financial Statements 11. The purpose of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) is to This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 248