Revised Conceptual Framework for Financial Accounting PDF

# Revised Conceptual Framework for Financial Accounting ## Overview - Purpose: to serve as a guide in developing future PFRS and as a guide in resolving accounting issues not directly addressed by existing PFRSs. - Authoritative Status: - It is not a PFRS and does not define any instruction fo...

# Revised Conceptual Framework for Financial Accounting ## Overview - Purpose: to serve as a guide in developing future PFRS and as a guide in resolving accounting issues not directly addressed by existing PFRSs. - Authoritative Status: - It is not a PFRS and does not define any instruction for measurement or disclosure - Conflict the PFRS must prevail ## Part 1. Introduction ### Conceptual Framework - Purpose: - underlying theory or foundation for the development or/and revision of accounting standards - contains concepts of General-Purpose Financial Reporting and summary of terms and concepts that underlie the preparation of financial statements - Purpose: 1. Assist the IASB in the development of existing and future policies 2. Assist the Financial Statements prepares in the development of consistent accounting policies 3. Assist all parties in understanding and interpreting the standards. - Not an accounting standard. The hierarchy goes: 1. PFRS specific to the transactions 2. PFRS dealing with similar matters 3. Conceptual Framework and Accounting Standards 4. Most recent pronouncements ## Part 2. Objective of General-Purpose Financial Reporting - This forms the foundation of conceptual framework; the “why” of accounting. | Users | Other Users | |---|---| | Primary | | | Existing potential investors | Lenders and other creditors | Employees | Customers | Government agencies | Suppliers | General public | ### Limitations: 1. do not and cannot provide all information; 2. are not designed to provide/show the value of the entity; 3. cannot accommodate every request of information; and 4. based on estimates and judgements rather than exact. ## Part 3. Qualitative Characteristics of Useful Financial Information - Qualities or attributes that make financial accounting information useful. | Qualitative | Fundamental | Enhancing | |---|---|---| | Relevance | Predictive confirmatory | Verifiability | | Faithful Representation | Completeness | Comparability | | | Neutrality | Understandability | | | Free from error | Timeliness | ### Fundamental Characteristics: - relate to the content (or substance) of FI; these are the characteristics that make financial information useful to users. 1. **Relevance** – refers to the capacity of the information to affect a decision. - **Predictive value** – if the information can be used as an input to predict future outcomes - **Confirmatory value** – if it provides feedback about previous valuations. 2. **Faithful Representation** – descriptions and figures in the reports should match what really existed (or happened). a. **Completeness** – all information necessary for a user to understand must be included and clearly stated in the reports - **Neutrality** – being neutral or fair. Prudence is the exercise of care and caution when dealing with uncertainties in the measurement process. - **Free from Error** - This means there are no errors or omissions. ### Enhancing Characteristics: - are intended to increase the usefulness of FI. 1. **Verifiability** - if it is supported by evidence; implies consensus. 2. **Comparability** - information is measured and reported in a similar fashion across entities. **Consistency** - information is measured and reported in a similar fashion across points in time. 3. **Understandability** – information should be presented in a form that users understand. 4. **Timeliness** - having the information available to users in time. ## Part 4. Financial Reporting and Reporting Entity - **Objective of Financial Statements**: provide information about an entity's A, L & E, Income and Expenses that are useful to users. - **Reporting Period** – span of time which transactions are accounted for. - **Reporting Entity** – main entity required or chooses to prepare FSs. | Reporting Entity | | |---|---| | Sole proprietorship, Partnership & Corporation | Parent Company | | Parent and Subsidiaries | Two or more entities | ### Types of Financial Statements: - **Consolidated Financial Statements** - when comprises both the parents and subsidiaries - **Unconsolidated FS** - when reporting party is parent company alone - **Combined FS** - prepared by two or more entities that are not linked by a P/S relationship ## Part 5. Elements of Financial Statements - **Elements of Financial Position** - ALOE - **Elements of Financial Performance** - Income/Expenses ## Part 6. Recognition and Derecognition - **Recognition** – process of capturing an item for inclusion in the Financial Statements that meets the definition of one of its elements and would provide useful information; Expense recognition includes Cause and Effect (COGS), Systematic and Rational allocation (DepEx) & immediate recognition (Direct write-off method). - **Derecognition** - removal of all or part of a recognized asset or liability from the SFP. 1. Asset loses control 2. Liability is no longer present obligation. ## Part 7. Measurement - **Measurement** is the process of quantifying the elements recognized in the FS. 1. **Historical Cost** – entry price; (a) Asset + TC and (b) Liability – TC 2. **Current Value** – using updated information to reflect conditions at the measurement date. - **Fair Value** - price that would be received to sell an asset or paid to transfer a liability - **Value in Use (asset) or fulfillment value (liability)** - **Value in Use** – PV of CF derived from the use of an asset - **Fulfillment Value** – PV of cash obliged to transfer to fulfill liability - Both do not include TC since they are based on cash flows - **Current cost** - Cost of an equivalent asset at the measurement date + TC (asset) - Consideration that would be received for an equivalent liability at the measurement date – TC (liability) ## Part 8. Presentation And Disclosure - **Classification** – sorting of ALOE based on shared or similar characteristics - **Offsetting** is generally not allowed - **Income & Expenses** are classified in P/L or OCI - **Aggregation** – adding together of ALOE + IE that have similar or shared characteristics and are included in the same classification ## Part 9. Concepts of Capital and Capital Maintenance | Concepts of Capital | Definition | |---|---| | **Financial** | Invested money or purchasing power; net assets or equity; historical cost | | **Physical** | Regarded as entity's productive capacity based on units of output per day. | | Concepts of Capital Maintenance | Definition | |---|---| | **Financial** | Profit is earned only if Net Assets, Beg < Net Assets, End, excluding contributions and distributions. Does not require the particular use of measurement. | | **Physical** | Profit is earned only if productive capacity, beg < productive capacity, end, excluding contributions and distributions. Requires the use of the current cost basis of measurement. | ## Basic Accounting Concepts and Process - **Accounting** - Service activity - To provide quantitative financial information about economic entities that is useful in decisions; language of business. ### Accounting Process and Cycle 1. **Documenting Transactions** - Accountable events – if it could affect the elements of FS, then journalized - External events (exchange and non-reciprocal transfer). - Internal events - happen without any other entity involved. 2. **Journalizing Transactions** - **General Journal**: chronological list of transactions and other events expressed in terms of debit and credits. - **Posting**: process of transferring info from journal to GJ. - Analyze the effects of transactions in debits and credits 3. **Posting to Ledger** - **Ledger** - accumulates the effect of during a period; to know the ending balance of each account - **Subsidiary ledger** - contains the supporting details or breakdown of the general ledger account 4. **Preparation of unadjusted Trial balance** - To determine of debits and credits - All accounts from the General Ledger will be transferred to the trial balance - It aids in locating errors in posting | Error | Description | |---|---| | Transplacement error | | | Transposition Error | | | Mixed Error | Misposting | | Omission error | | 5. **Preparation of Adjusting Journal Entries** - To bring the accounts up to date of an accrual basis - Affects at least one real account and one nominal account ### Three classes of accounts: 1. **Real accounts** - permanent or balance sheet accounts; carried from one accounting period to another. 2. **Nominal accounts** - temporary or income statement accounts; they are closed at the end of every accounting period. 3. **Mixed accounts** - they have the nature of both real and nominal accounts and are subject to adjustments; prepaid expensed and unearned income. ### Classification of Adjusting Journal Entries | Classification | Description | |---|---| | Accruals | Accrued expense Accrued income | | Deferrals | Prepaid expense Unearned income | | Estimates | Depreciation Doubtful accounts | | Setting up ending inventory | | 6. **Preparation of Worksheet / Adjusted Trial Balance** - Pertains to 10-column sheet; not part of the formal accounting records - Output: Adjusted Trial Balance ### Under the IS column in the worksheet: - Total Debits > Total Credits | Net Loss Total - Debits < Total Credits | Net Income ### Under the BS column in the worksheet: - Total Debits > Total Credits | Net Income - Total Debits < Total Credits□ Net Loss 7. **Preparation of Financial Statements** - SFP, SCI, SCE, SCF and Notes to FS - Based on standard of uniformity 8. **Journalizing and posting of CE** - To bring temporary accounts to zero - nominal accounts will be closed to income summary account - Close all income accounts - Close all expense accounts 9. **Preparation of post-closing Trial Balance** - Real accounts only; optional step 10. **Reversing Entries** - Optional step; simplifies recording of certain transactions. - Is made if an adjustment previously entered increases a SFP account. ## The Standard (IFRS and GAAP) - PFRS are guiding principles rather than laws - Paragraphs and pronouncements in bold and plain wordings have equal authority; those in bold dictate principles, and those in plain txt are supporting principles - FSRSC - current setting body in the Philippines; the successor to the Accounting Standards Council (ASC). The FRSC’s main function is to prepare interpretations of PFRS for approval by the Philippine Interpretations Committee (PIC). - IASB is the successor of the International Accounting Standards Council (IASC). - The chairman and the members are appointed by the PRC upon BOA and the APO. ### The Standard setting processes 1. Consideration OF IASB pronouncements 2. Formulation of a task force to advise the FRSC 3. Issuance for comment an exposure draft. 4. Consideration of all comments received within the comment period 5. Approval of a standard or an interpretation by a majority of FSRSC members. ## Cash and Cash Equivalents ### Overview: 1. refers to money, readily available/unrestricted use 2. used as medium of exchange 3. includes money and other negotiables ### Measurement of cash: - Face Value ### Considerations in accounting for cash: - **In general**: - **Part of Cash**: unrestricted and immediately available for use in the current operations such as - for payment of OPEX - for payment of CL - for acquisition of CA - **Other NCA**: for use other than current operations. | Cash | Description | |---|---| | **On Hand** | Undeposited collections – currencies and deposits | | **In Bank** | Working fund – cash set aside for short-term demand. Can be withdrawn upon demand | | Cash | Part of Cash | |---|---| | Payroll account | Received: not part of cash | | Post-dated check | Received: not part of cash | | Issued: part of cash | | Undelivered/Unreleased check | Reverted to cash | | Stale company checks (6mos) | Received – not part | | NSF/DAIF/DAUD issued | Delivered – reverted to cash | | Cash in foreign currency | Reverted to cash | | Cash in Foreign Currency | Cash @spot rate | | Componsating balance | (refer to the diagram) | | Employees' PDC | (refer to the diagram) | | Cash in closed banks | Receivables | | NSF/DAIF/Drawn against uncleared deposits | Receivables | | IOUs/advances from employees | Receivables | | Preferred Redemption Fund | GR: Investments | | | XPN: CA if currently redeemable | | Cash | Description | |---|---| | Unrestricted | Included as part of current asset | | Restricted | Not part of Cash | | | Related to Short-term loan | | | Related to Long-term loan | | | Non-current asset | | Compensating balance | | | Bank overdraft (Negative balance in bank) | | | Postage stamps and expense advances | | | Unused credit line | | | Cryptocurrencies | Cash set aside for LT | | | (contingency fund, insurance fund, appropriation for PPE) | | PS redemption fund / Sinking Fund | | | Not legally restricted = unrestricted | Part of liability | | | Supplies Expense/Prepayments | | | Disclosed only | | | Investments, inventories, IA | | | Non-current Asset | | | Depends on the classification of related liability | ## Cash Equivalents - These are short-term and highly liquid investments that are readily convertible into cash and so near maturity. - All investments that are acquired three (3) months or less before their maturity can only qualify as part of CE. | Part of CE | Description | |---|---| | Three-month time deposit | | | Three-month money market instrument or commercial papers | | | Three-month treasury bills | | | Not part of CE | Description | |---|---| | Short term Investment/CA | Not acquired within 3 months but with 1 year maturity | | Share investments | | | Treasury bonds | | | Equity securities | Not acquired within 3 months but beyond 1 year maturity | | | Long-term Investment/NCA | ## Bank Reconciliation - A process of matching the cash balance per company’s books with the company’s cash balance per bank; usually prepared monthly. | Account | Description | |---|---| | Reported (adjusted cash balance) | Cash balance per company’s books XX | | | Company’s cash balance per bank XX | | Bank reconciling items | | | Deposit in Transit | XX | | Outstanding Checks | (XX) | | Bank Errors | XX | | Book reconciling items | | | Bank credit memo | XX (XX) | | Bank debit memo | XX (XX) | | Book Errors | XX | | Adjusted (or reconciled balances) | XX | | Account | Description | |---|---| | Deposit in Transit, beginning | XX | | Add: Book receipts (debits) | XX | | Less: Credit memos last month | (xx) | | Less: Bank receipts (credits) | XX | | Less: Credit memos this month | (xx) | | Deposit in Transit, ending | XX | | Account | Description | |---|---| | Outstanding Checks, beginning | XX | | Add: Book disbursements (credits) | XX | | Less: Debit memos last month | (xx) | | Less: Bank disbursements (debits) | XX | | Less: Debit memos this month | (xx) | | Outstandig Checks, ending | XX | - DIT – sent by depositor but the bank is yet to recognize. - OC – disbursed by depositor but is yet to be reflected in the bank. - Certified check - no longer outstanding; should be deducted from total OC. - Bank errors recorded twice, not recorded or incorrect - Bank Credit memo added by the bank but not yet added by the book. (e.g bank loans, interest, collections) - Bank Debit memo deducted by bank but not by book. (e.g NSF, DAIF or DAUD) - Book Errors – recorded twice, not recorded or incorrect ## Petty Cash Fund - A type of cash fund set aside to cover relatively small expenditures. - Expenses are not recorded until the fund is replenished or it is already the reporting date, whichever comes earlier. | Account | Value | |---|---| | Establishment of PCF: | | | PCF | XX | | CIB | XX | | Account | Value | |---|---| | Replenishment of PCF: | | | Expenses | XX | | CIB | XX | ### Computations related to PCF: 1. **PCF overage/shortage** - PCF per count - Less: PCF per accountability - PCF Overage (Shortage) - Per count > Per accountability □ PCF overage (debit Cash S/O) - Per count < Per accountability □ PCF shortage (cr Cash S/O) 2. **Formula to compute the PCF per count:** - Coins and currencies (cash items) - Add: PCF Vouchers (NCI) - Replenished Check - IOUs or advances to employees (NCI) - Employee's NSF Check - PCF per count 3. **Amount of PCF ending balance** - Coins and currencies - Add: Replenishment Check - PCF, End ## Receivables ### Overview: - **Accounts receivable** - are open accounts from sale of goods and services; customer’s accounts, trade debtors - **Definition** - Financial asset that represents a contractual right to receive cash - **Initial** - at transaction price - **Subsequent** - at net realizable value (net of allow. and impairment) | Classification | Description | |---|---| | Trade | From sale of goods | | Non-trade | From other sources | | Time Frame | Description | |---|---| | 12 month of less | CURRENT | | 12 month or more | CURRENT | | 12 month or more | NON-CURRENT | ### Classification: - either current or non-current ### Presentation: - **AR** - @ NRV - **DAE** - part of administrative Expense ### Cash discounts: 1. **Gross method** – discount is not yet deducted from invoice; CD is only recognized when taken. 2. **Net method** - recorded net of the highest discount; CD not taken is credited to SD forfeited. 3. **Allowance method** – AR is recorded at gross while sales are recorded at net of discount. | Contractual Terms | Should pay the freight | Actually paid freight | Treatment | |---|---|---|---| | FOB Shipping point, Freight prepaid | Buyer | Seller | Plus receivables | | FOB Shipping point, Freight Collect | Seller | Buyer | No adjustment | | FOB Destination, Freight Prepaid | Buyer | Seller | No adjustment | | FOB Destination, Freight Collect | Seller | Buyer | Minus receivables | ### Non-trade receivables: - **Advances to officers, directors, SH or employees** - CA if within 12 months - NCA if beyond - **Advances to affiliates** - GR: NCA - > 12m - deduction to SHE - < 12m - CA - **Subscription Receivable** - GR: NCA - **Special deposits** - GR: NCA - **Advances to suppliers** - CA - **Supplier's debit balance** - CA - **Accrued income** - CA - **Claims Receivable** - CA | Accounts | Value | |---|---| | Receivable, gross | XX | | ADA | (xx) | | SD | (xx) | | Freight | (xx) | | SRA | XX | ## Special Sales Consideration | Transaction | Description | |---|---| | Bill and Hold arrangement | Sold upon issuance of the bill/invoice | | Layaway sales | Goods are delivered upon final installment, sold in installments | | Goods shipped awaiting instructions | Sold upon completion of installments and inspections | | Sales on approval | Sold upon formal acceptance | | Sales to distributors | Treated as consigned out to the buyer-consignee | | Sales partially paid in advance | | | Subscription sales | Sales is recognized over a straight-line basis | | Installment sales | Sold upon completion of delivery. | | Credit card sales | Exclusive of interest, recognize sale upon delivery of goods | | | Sold upon purchase by buyer | ## Notes Receivable - customer accounts supported by formal promises to pay. - Initially measured at Fair Value plus DACs. ### Dishonored notes: - a promissory note that is not paid at maturity; should be transferred from notes to accounts receivable account. It shall include: - **Face amount** - **Interest** - **Other fees and charges** | Account | Description | |---|---| | | | | | | | | | | Initial Meas | | | Subsequent | | | Int. income | | | Int. rec | | | Interest-bearing | Non-interest bearing | |---|---| | S=E | S ≠ E | | | | | Face | PV | | Out. FA | AC | | Face x SIR | CV = EIR | | Face x SIR | Face x SIR | | Account | Description | |---|---| | | | | | | | | | | | | | | | | | | | | | ## Loans Receivable - a financial asset arising from a loan granted by a financial institution. | Account | Value | |---|---| | Principal Amount | XX | | Less: Origination Fees received | (xx) | | Add: Direct Origination Cost | (xx) | | Initial Measurement of LR | XX | | Account | Value | |---|---| | To record the origination fees received: | | | Cash | XX | | Unearned Int. Inc | XX | | To record payment of DOC: | | | Unearned Int. Inc | XX | | Cash | XX | <h3>Impairment of Loans Receivable</h3> - an entity shall recognize a loss allowance for expected credit loss on financial asset measured at amortized cost. | Account | Value | |---|---| | Debt instrument at AC | XX | | Equity instrument at FVPL | | | Debt instrument at FVOCI | | | Debt instrument at FVPL | | | CA of long-term receivable | XX | | Less: PV of expected future CF | XX | | Impairment loss | XX | #### Stage 1 - DI that has not declined significantly since recognition. - No significant increase in credit risk. #### Stage 2 - No objective evidence of impairment - Int Income is still based on CA #### Stage 3 - There is already objective evidence of impairment | Account | Value | |---|---| | Carrying amount of loan | XX | | PV of ECL | (xx) | | Expected lifetime credit loss | XX| | Multiply by probability | x% | | Impairment loss | XX | | Account | Value | |---|---| | Carrying amount of loan | XX | | PV of ECL | (xx) | | Expected lifetime credit loss | XX | | Multiply by probability | x% | | Required loss allowance | XX | | Already recognized | (xx) | | Impairment loss | XX | | Account | Value | |---|---| | Carrying amount of loan | XX | | PV of ECL | (xx) | | Expected lifetime credit loss | XX | | Already recognized | (xx) | | Impairment loss | XX | ### Objective Evidence of Impairment 1. Significant financial difficulty of the issuer or obligor 2. Breach of contract, such as a default or delinquency in interest or principal payments 3. The lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider 4. High probability that the borrower will enter bankruptcy or other financial reorganization 5. Measurable decrease in the estimated future cash flows from the financial asset ## Receivable Financing (IFRS 9) - Overview: the capability of an entity to generate cash out of its receivables. | Activity | Description | |---|---| | Secured Borrowing | | | Pledging of AR | | | Assignment of AR | | | Factoring of AR | | | Discounting of AR | | ### Factoring of Accounts Receivable - sale of accounts receivable to a factor. | | Description | |---|---| | Factoring with recourse | Company is not liable in case the customer fails to pay; outright sale of AR | | Factoring without recourse | Company guarantees payment in the event the customer fails to pay; no GL is recognized. | | Account | Value | |---|---| | Proceeds | | | FV of AR | XX | | Less: Service Fee | (xx) | | Less: Factor's Holdback | (xx) | | Less: Interest expense | (xx) | | G/L on factoring | XX | | Account | Value | |---|---| | G/L on factoring | | | SP (NP + Holdback) | XX | | Less: CA of AR | (xx) | | G/L on factoring | XX | ### Pledging/Hypothecating of Accounts Receivable - Collateral only; memo entry but requires disclosure. - Not derecognized, not separated to AR. Discount is amortized and charged to interest expense. ### Assignment of Accounts Receivable - Loanable amount is % of AR. - Bank service charge & commission is collected. - also known as specific assignment - Assigned AR are presented in SFP as regular receivables. - However, the equity in the assigned is disclosed in the notes. | Account | Value | |---|---| | Proceeds | | | FV of loan | XX | | Less: BSC and Comm | (xx) | | Net proceeds | XX | | Account | Value | |---|---| | Equity | | | CA of AR | XX | | Less: CA or LP | (xx) | | Equity on assigned | XX | ## Discounting Of Accounts Receivable | Type of Negotiation | Description | |---|---| | Without recourse basis | G/L is recognized | | | Conditional sale | | | | | With recourse basis | Contingent liability is disclosed; G/L is recognized | | | Secured borrowing | | | | Liability is recognized; no GL is recognized (int.exp instead of GL) | ### Discounting without Recourse Basis - Holder is not liable in case the maker fails to pay. The note is essentially sold and derecognized. | Account | Value | |---|---| | Proceeds | | | MV (Principal + Total Interest) | XX | | Discount (MV x DR x DP) | (xx) | | Net Proceeds | XX | ### Discounting with Recourse Basis - Holder is held liable. | Account | Value | |---|---| | Equity | | | SP (net proceeds) | XX | | CA of NR | (xx) | | G/L on discounting | XX | ### Derecognition of Receivables - Contractual right to receive cash expires - The entity transfers the financial asset ceding its control to some other entity - Gain or Loss = Net proceeds – Book Value ### Presentation - Presented as one line-item as Trade and Other Receivables under current assets - Long-term receivables are reported as Long-term investments and or other non-current assets ### Disclosures - Nature of receivables - Credit risk exposures without taking into account any collaterals - Information regarding interest rate risk exposures - Receivable financing as to the nature, the terms/conditions/fair values - Interest income, accrued interest, and impairment losses. ## Inventories (IAS 2) ### Overview: - (a) are held for sale in the ordinary course of business - (b) in process of production for such sale - (c) materials and supplies (RM, WIP & FGI) ### Cost inclusions | Account | Description | |---|---| | Purchase price | | | Import duties and taxes | | | Transport | | | Conversion & other DACs | | ### Cost Exclusions | Account | Description | |---|---| | Abnormal waste | | | Selling costs | | | Admin costs | | | Storage costs | | - Inventory Inclusions: all goods which the entity has title in it. ### Subsequent Measurement: LCNRV | Account | Value | |---|---| | Estimate SP | XX | | Estimated cost of disposal | (xx) | | Estimated cost to complete | (xx) | | Net Realizable Value | XX | ### Write-down: - Cost > NRV - **Direct** - loss is already included in LCNRV - **Indirect** - loss is separately recognized (allowance) ### Reversal: - allowed up to write-down balance. Gain on allowance (under allowance only) ## Inventory Systems - **Period Inventory Systems** - Physical count is required - Low price, large quantities - Uses purchase-related accounts - **Perpetual Inventory Systems** - Physical count not required - High price, low quantities - Do not use purchase accounts ### Cost Formulas | Item | Method | System | |---|---|---| | Items are not interchangeable | Specific Identification method | | | Items are interchangeable | First in, First out method | Periodic system | | | Average method | Perpetual system | | | | Weighted average | | | | Moving average | ## Accounting for Discounts <start_of_image> Trades | Description | |---|---| | Trade | For bulk purposes | | Cash | For prompt payment | | Gross | Discounts are recorded if taken | | Net | Net of CD, discount not taken is loss. Theoretically correct | ## Special Considerations 1. **Goods in Transit** - **FOB shipping point** - Buyer shoulders the freight and the ownership of the goods is transferred to the buyer upon possession of the shipping carrier; essentially the same with FOB SP. - **FOB Destination** - Buyer shoulders the freight charges; essentially the same with FOB SP. - **Free Along Side (FAS)** - Seller is responsible for the freight charges and the risks until the goods are unloaded at the point of destination. - **Cost, Insurance, Freight (CIF)** - Buyer - **Ex-ship** - Seller 2. **Consigned goods** - Remains to the entity - included 3. **Goods in the hand of agent** - Remains to the entity - included 4. **Held by customer for trial/approval** - Remains to the entity - included 5. **Bill-and-hold arrangement** - Remains possession - included until not billed 5. **Segregated goods** - **Special order** - With customer specifications - excluded - **Customarily manufactured goods** - Physically segregated – included until delivered 6. **Installment sales** - Included until fully paid 7. **Good sold with buyback** - Product financing arrangement, included in transferor 8. **Good under layway sale** - Goods are not transferred unless fully paid 9. **Goods sold with refund** - Right to rescind the purchase of goods - excluded ## Subsequent Measurement – at LCnrv - also termed as impairment of inventory; done on a per item basis. | Account | Value | |---|---| | **Inventories** | | | Net Realizable Value | XX | | Less: Historical cost | (xx) | | Loss on inventory WD | XX | | Account | Value | |---|---| | **Finished Goods** | | | Estimated SP | XX | | Less: Cost to Sell | (xx) | | Net Realizable Value | XX | | Account | Value | |---|---| | **Work-in-process** | | | Estimated SP | XX | | Less: Cost to complete | (xx) | | Less: Cost to Sell | (xx) | | Net Realizable Value | XX | | Account | Description | |---|---| | **Raw Materials** | Impaired only if FG is impaired; NRV = current replacement cost | ## Purchase Commitments - follows the Principle of Conservatism, and NRV recognition. Accounts Payable is Fixed, Purchases can go down, but never go above the contract terms. Upon incurrence of loss, Gains can be recovered up to the extent of the loss only. | Commitments | Description | |---|---| | Cancellable PC | Can simply cancel; no provision nor journal entries. Disclose the ff: future loss, can be estimated and material amount. | | Noncancellable PC | Entity is obligated to perform. There is a loss on purchase commitment. | ## Inventory Estimation Methods - When physical count is impossible to perform, inventory estimation methods may be performed. Done for the reasons: | Reason | Description | |---|---| | Interim financial statements | Necessary to prove the correctness and reasonableness of such count by making an estimate | | The inventory is destroyed by fire and inventory is required for insurance purposes. | | ### Gross Profit Method - assumes that the GPR remains approximately the same from period to period. | Account | Value | |---|---| | COGS | XX | | GPR | XX | | Net Sales | XX | | Sales | XX | | Sales Return | XX | | Net Sales | XX | - Sales Allowances and Sales Discount are not included since these do not decrease the physical flow of inventories. | Account | Value | |---|---| | Estimated cost of inventory on hand | XX | | Inventory on physical count | XX | | Inventory shortage/(overage) | XX | ### Retail Method - used in the retail industry for measuring large quantities of inventories with rapidly changing items. | Account | Value | |---|---| | Beginning Inventory | t XX | | Purchases | XX | | Freight In | XX | | Purchase returns | (xx) | | Purchase allowances | (xx) | | Purchase discounts | (xx) | | Department Transfer-In | XX | | Department Transfer-Out | (xx) | | Stolen/Abnormal spoilage | XX | | Net Mark-up | XX | | COGAS – LCNRV/Conservative | XX | | Net Markdown | (xx) | | COGAS – Average | XX | | Beginning Inventory | (xx) | | COGAS - FIFO | XX | | Account | Value | |---|---| | Retail | | | XX | | XX | | (xx) | | XX | | | | XX | | (xx) | | XX | | XX | | XX | | (xx) | | XX | | (xx) | | XX | | XX | | XX | | Account | Value | |---|---| | Cost rate | | | | | | LCNRV/Conservative | XX | | Average | XX | | FIFO | XX | | | | | | x% | | | x% | | | x% | | Estimated Ending Inventory at retail | XX | | x cost-to-retail ratio | | | Estimated cost of ending inventory | XX | | | | | Gross Sales | XX | | Sales Return | (xx) | | Employee Discount | (xx) | | Normal spoilage | XX | | COGAS at