Pract 1 Review

8/13/2019 Pract 1 Review

1/28

PRACTICAL ACCOUNTING

Part 1


2/28

INVENTORIES


3/28

Inventory Valuation Inventories shall be measured at the lower

of cost and net realizable value.

Cost of inventories includes

Cost of purchase

Cost of conversion

Other cost incurred in bringing the inventories

to their present location and condition


4/28

Cost of inventories shall be determined by:

First-in; First-out

Weighted Average

Example:

The records of Sassy Company showed the following information:

Units Unit Cost Total Cost

January 1 Beginning 10,000 P 50 P 500,000

26 Sale 6,000April 15 Purchases 15,000 60 900,000

July 31 Sale 18,000

October 1 Purchase 25,000 65 1,625,000

December 31 Sale 15,000

Required:Compute the cost of the ending inventory and cost of sales

a. FIFOperiodic

b. FIFOperpetual

c. Weighted Average

d. Moving Average


5/28

FIFO PERIODIC

Total Purchases - 50,000 units

Total Sales - 39,000 units

Ending inventory - 11,000 units x P65 = P 715,000========

FIFO PERPETUAL

In Out Balance

Beginning 10,000 50 500,000 10,000 50 500,000Sale 6,000 50 300000 4,000 50 200,000

Purchase 15,000 60 900,000 4,000 50 200,000

15,000 60 900,000

Sale 4,000 50 200,000

14,000 60 840,000 1,000 60 60,000Purchase 25,000 65 1,625,000 1,000 60 60,000

25,000 65 1,625,000

Sale 1,000 60 60,000

14,000 65 910,000 11,000 65 715,000


6/28

Weighted Average

Total Costs = P 3,025,000

Total Units Purchases 50,000

Unit Cost = P60.50

Inventory End = 11,000 units x P60.50 = P 665,500Cost of Sales:

Inventory, beginning P 500,000

Add: Purchases 2,525,000

Total Available for Sales P3,025,000

Less: Inventory, end 665,500

Cost of Sales P2,359,500

=========

WEIGHTED AVERAGE

In Out Balance

Beginning 10,000 50 500,000 10,000 50 500,000

Sale 6,000 50 300,000 4,000 50 200,000

Purchase 15,000 60 900,000 19,000 57.89 1,100,000

Sale 18,000 57.89 1,042,020

Purchase 25,000 65 1,625,000 26,000 64.73 1,682,980

15,000 64.73 970,950 11,000 64.73 712,030

COST OF SALES 39,000 2,312,970


7/28

Biological Assets

Biological assets are living animals and living plants.

Agricultural produce is the harvested product of an entitys biologicalassets.

Harvest is the detachment of produce from a biological asset or the

cessation of a biological assets life processes.

Biological transformation results from the following types of outcome:

1. Assets changes through:

a. Growthan increase in quantity or improvement in quality

of an animal or plant.

b. Degenerationan decrease in quantity or deterioration inquality of an animal or plant.

c. Procreationcreation of additional living animal or plant.


8/28

Recognition

An entity shall recognize a biological asset or agricultural produce

when:a. The entity controls the asset as a result of past events.

b. It is probable that future economic benefits associated with

the asset will flow to the entity.

c. The fair value or cost of the asset can be measured reliably.

Measurement

A biological asset shall be measured on initial recognition and at the

end of each reporting period at fair value less cost to sell.


9/28

Inventory Estimation Two procedures for approximating the value of inventory:

Gross profit methoduse to estimate the value of inventory from

accounting records without taking physical count. The cost of sales is computed by using any of the following procedures:

Net sales multiplies by cost ratiowhen the gross profit is based on

sales

Net sales divided by sales ratiowhen the gross profit rate is based on

cost.

Net sales minus the amount of gross profit

Retail inventory methodis employed by department stores,

supermarkets and other retail concerns where there is a wide

variety of goods.

Basic formula

Goods available for sale at retail or selling price P xxxxLess: Net sales (Gross sales minus sales return only) xxxx

Ending inventory at selling price P xxxx

Multiply by cost ratio xx

Ending inventory at cost P xxxx

======

Formula for the cost ratio is:

Cost ratio = Goods available for sale at cost/ Goods available for sale at selling price


10/28

Approaches using retail method:

a. Conservative or conventional approach or lower of cost or market

approachincludes net mark up and excludes net markdown in

determining the cost ratio in order to arrive a conservative cost.

b. Average cost approachincludes both net mark up and net

markdown in determining cost ratio.

c. FIFO retail approachis similar to the average cost approach in

that it considers both net markup and net markdown in arriving at

the goods available for sale at retail to serve as basis in computing

the cost ratio except that the beginning inventory is not included.


11/28

INVESTMENTS


12/28

Financial Asset at Fair value Investments are assets held by entity for the accretion of wealth

through distribution such as interest, royalties, dividends and rentals,

for capital appreciation or for other benefits to the investing entity,such as those obtained through training relationships.

Investments are classifies as:

Current Assets - these investments are expected to be realized within twelve

months after the end of the reporting period

Non Current assetsare investments intended to be held for more than one

year or are not expected to be realized within twelve months after the end of the

reporting period.


13/28

Financial instrument is any contract that gives rise to a financial

assets of one entity and financial liability or an equity instrument of

another entity.

Classification of financial assets

Financial assets at fair value

Financial assets at amortized cost

Equity security encompasses any instrument representingownership shares and right, warrants or options to acquire or

dispose of ownership shares at a fixed or determinable price.

Debt security is any security that represents creditor relationship

with an entity.


14/28

Financial assets measured at fair value:

Financial assets held for trading or known as trading securities. It is measured

at fair value through profit or loss as required by the standard.

Financial assets that are designated on initial recognition as at fair value throughprofit or loss. It is measured at fair value through profit or loss by designation.

Example: Investments in bonds and other debt instruments.

All other investments in quoted equity instruments. It is measured at fair value

through profit or loss by consequence.

Financial assets held for trading: It is acquired principally for the purpose of selling or repurchasing it in the near

term

On initial recognition, it is part of a portfolio identified financial assets that are

managed together and for which there is evidence of a recent actual pattern of

short-term profit taking.

It is a derivative, except for derivative that is financial guarantee contract or adesignated and an effective hedging instrument.


15/28

Financial asset is recognized initially at fair value. As a rule,

transaction costs that are directly attributable to the acquisition of

financial asset shall be capitalized as cost of the financial asset.

But if the financial asset is held for trading is measured at fair value

through profit or loss, transaction costs are expensed outright

Gains and losses on financial assets measured at fair value and arenot part of a hedging relationship shall be presented in profit or loss.

Unrealized gains and losses on financial assets held for trading and

other financial assets measured at fair value are reported in the

income statement.


16/28

Investment in equity instrument that is not held for trading provides

that at initial recognition, an entity may make an irrevocable election

to present in other comprehensive income subsequent changes in

fair value of an investment.

Equity instrument held for trading subsequent changes in fair value

are always included in profit and loss.


17/28


18/28

All investment in equity instruments and contract to hose

instruments must be measured at fair value.

Sale of equity securities Derecognition of financial asset, the difference between the consideration

received and carrying amount of the financial asset shall be recognized in profit

or loss.

When equity securities are of the same class acquired on different dates at

different cost, the entity shall determine the cost of securities sold using either

the FIFO or average cost approach.

Dividends

Share split

Special assessments


19/28

Investment in Associate Intercorporate share investment is the purchase of equity securities

one entity by another entity.

It is a case of one entity investing in another entity through the acquisition ofshare capital.

An entity may purchase enough shares of another entity in order to exert

significant influence or control over the financial and operating policies of the

investee entity.

Significant influence is the power to participate in the financial and

operating policy decisions of the investee but not control or joint

control over those policies.

Guidance for the assessment of significant influence If the investor holds directly or indirectly through subsidiaries, less than 20% of the

voting power of the investee, it is presumed that the investor does not have significantinfluence, unless such influence can be clearly demonstrated.

If it is less than 20%, it is presumed that the investor does not have significant influence

unless such influence can be clearly demonstrated.


20/28

Potential voting rights

Loss of significant influence

Equity method is based on the economic relationship between the

investor and the investee. The investor and investee are viewed as

single economic unit, therefore they are one and the same.

Under the equity method, the investment is initially recorded at cost but it is

subsequently increased by the net income of the investee and decreased by the

net loss and dividend payments of the investee. The investor has a significant influence but does not have control over the

investee, the investee is said to be an associate or associated company.

If the investment is in preference shares the equity method is not appropriate since

it has no voting power.

Investment in ordinary shares is described as investment in associate but if the

investor has a control over the investee, the investor is known as the parent andthe investee is known as the subsidiary and the investment in ordinary shares is

described as investment in subsidiary.


21/28

Accounting using equity method.

Upon purchaseInvestment in associate xxx

Cash xxx

Recognition of share in net incomeInvestment in associate xxx

Investment income xxx

Declaration of stock dividendsMemo entry

Declaration cash dividendsCash xxx

Investment in associate


22/28

Excess of cost over carrying amount

If the investor pays more than the carrying amount of

the net assets, the excess is attributed to the

following:

Undervaluation of the investees assets, such as building,

land and inventory.

If excess is attributable to depreciable assets, it is amortized over theremaining life of the depreciable assets

If the excess is attributable to land, it is not amortized since land is non

depreciable.

If the excess is attributable to inventory, the amount is expensed when

the inventory is already sold.

Goodwill Formula

Acquisition cost xxx

Less: Carrying amount of net assets acquired xxx

Excess of cost over carrying amount xxx


23/28

Financial Asset at Amortized Cost Financial shall be measured at amortized cost if both of the following

conditions are met:

The business model is to hold the financial asset in order to collect contractual cashflows on specified dates.

The contractual cash flows are solely payments of principal and interest.

Financial assets at amortized cost are classified as non current assets.

Example: Investment in bonds and other debt instruments.

Classification of bonds Trading securities

Financial assets at amortized cost

Initial measurement

Bond investment are recognized initially at fair value plus transaction costs that are

directly attributable to acquisitions

Subsequent measurement

Trading bond investments are measured at fair value through profit or loss

Bond investments are classified as financial assets measured at amortized cost using

the effective interest method.

Acquisition of bonds

Amortization of bonds


24/28

Investment Property

Investment Property is defined as property (land or building) held by

a owner or by the lessee under a finance lease to earn rentals or for

capital appreciation or both..

The property held by an owner or by the lessee under a finance

lease for use in the production of supply of goods or services, or for

administrative purposes is known as owner-occupied property.

Recognition

Investment property shall be recognized as an asset when and only when It is probable that the future economic benefits that are associated with the investment property will

flow to the entity

The cost of the investment property ca be measured reliably.

Initial measurement

Investment property shall be measured initially at cost including transaction cost

Subsequent measurement

A entity shall choose either of the following models Fair value modelthe investment property is carried at fair value. Any changes in fair value are

included in the net income or loss of the period in which they arise, and shown in the income

statement.

Cost modelthe investment property is carried at cost less any accumulated depreciation and any

accumulated impairment losses. Fair value of the investment shall be disclosed/


25/28

Fund and Other Investments

Fund is defined as cash and other assets set aside for a specific

purpose either by reason of the action of management or by virtue ofa contract or legal requirements.

Fund may current or non current depending of its purpose.

Measurement of Fund

Long term fund established to ser aside cash and other assets to accomplish

specific objectives shall be carried at the amount of cash plus the cost of

securities adjusted for discount or premium amortization, and other assets in the

fund.

Sinking fund

Sinking fund is a fund set aside for the liquidation of long term debt more

particularly long term bonds payable.

Sinking fund contribution Voluntary

mandatory

Accounting: Fund under the administration of the entity

Fund under the administration of a trustee


26/28

Derivatives Derivative is a financial instrument that derives its value from the

movement in commodity price, foreign exchange rate and interest rateon an underlying asset or financial instrument

Trading in derivatives has been likened to a wild frontier where

adventure and danger are constant companion. Potential huge gains

and losses may arise from their settlement.

Purpose of derivatives. Entities use derivative financial instrument to manage financial risk. Financial risk

originates from sources such as change in commodity price, change in cash flows

and foreign exposure

Types of financial risk

Price riskthe uncertainty about the future price of an asset

Credit riskthe uncertainty over whether a counterparty or the party on the other

side of the contract will honor the terms of the contract.

Interest rate riskthe uncertainty about future interest rate and their impact on

cash.


27/28

Characteristics of derivative

The value of the derivative changes in response to the change in an underlying

variable such as a specified interest rate, commodity price, foreign exchange rate,

price index and other variables.

The derivative requires either no initial net investment or an initial net investment that

is smaller than would be required for other types of contracts that have a similar

response to changes in market factors.

The derivative is readily settled at a future date by a net cash payment.

Hedging

Hedging means designating one or more hedging instruments so that their changes in

fair value or cash flows is an offset, in whole or in part to the change in fair value orcash flows of hedged item

Three types of hedging Fair value hedge

Cash flow hedge

Hedge of a net investment in a foreign currency.

Hedging instrument is the derivative whose fair value or cash flows would be

expected to offset changes in the fair value or cash flows of the hedged item.

Hedged item is an asset, liability, firm commitment, highly probable forecast

transaction or net investment in a foreign operation

Measurement of derivatives

The entity shall be recognize and measure all derivatives as either assets or liabilities

at fair value. Both fair value and notional shall be fully disclosed. A gain or loss is

recognized where there is a change in the fair value.


28/28

Cash flow hedge is a derivative that offsets in whole or in part the

variability in cash flows from a probable forecast transactions

Fair value hedge is a derivative that offsets I whole or in part the

change in the fair value of an asset or a liability.

Examples of derivatives

Interest rate swapa contract whereby two parties agree to exchange cash flows

for future interest payments based on a contract of loan

Forward contracta commitment to purchase or sell a specified commodity on a

future date at a specified time. Future contracta contract to purchase or sell a specified commodity at some

future date at a specified price.

Optiona contract that gives the holder the right to purchase or sell an asset at a

specified price during a definite period at some future time.

Foreign currency forward contractthe loan or obligation is expressed in foreigh

currency.

Pract 1 Review

Documents

Transcript of Pract 1 Review