CONCEPTUAL FRAMEWORK AND ● The board of accountancy is the body

ACCOUNTING STANDARD REVIEWER authorized by law to promulgate rules and

regulation affecting the practice of the
CHAPTER 1:The Accountancy Profession Accountancy profession of the Philippines.
● Single practitioners and partnerships for the
● Accounting is the art of recording, classifying practice of public accountancy shall be
and summarizing in a significant manner and registered certified public accountants in the
in terms of money, transactions and events Philippines. The Securities and Exchange
which are in part at least of a financial Commission shall not register any
character and interpreting the results thereof. corporation organized for the practice of public
● Identifying in accounting means a process of accountancy.
recognition or nonrecognition of business ● A certificate of accreditation shall be
activities as accountable events issued to certified public accountants in public
● Not all business activities are accountable. An practice ONLY upon showing in accordance
event is accountable or quantifiable when with the rules and regulations promulgated by
it has an effect on assets, liability and equity. the Board of Accountancy and approved by the
● External transactions or exchange Professional Regulation Commission that such
transactions are those economic events registrant has acquired a minimum of three
involving one entity and another entity while years of meaningful experience in any of the
Internal transactions a re economic events areas of public practice including taxation.
involving the entity only. ● CPAs generally practice their profession in
● Measuring in accounting means a process of three main areas, namely: Public
assigning of peso amounts to the accountable accounting, Private accounting, ang
economic transaction and events. Government accounting..
● Communicating is the process of preparing ● Public accountants usually offer three kinds
and distributing accounting reports to of services, da namely auditing, taxation and
potential users of accounting information. management advisory services.
● Communicating process is the reason why ● Auditing or external auditing is the
accounting has been called the "universal examination of financial statements by
language of business" because identifying and independent certified public accountant for the
measuring are pointless if the information purpose of expressing an opinion as to the
contained in the accounting records cannot be fairness with which the financial statements
communicated in some form to potential users. are prepared. Taxation service includes the
● Journalizing is the process of systematically preparation of annual income tax returns and
maintaining a record of all economic business determination of tax consequences of certain
transactions after they have been identified proposed business endeavors. Management
and measured. Classifying is the sorting or advisory services have become increasingly
grouping of similar and interrelated economic important in recent years although audit and
transactions into their respective classes. tax services are undoubtedly the mainstay of
Summarizing is the preparation of financial public accountants
statements. ● Major objective of the private accountant is
● The overall objective of accounting is to to assist management in planning and
provide quantitative financial information controlling the entity's operations
about a business useful to statement users ● The focus of Government accounting is the
particularly owners and creditors in making custody and administration of public funds.
economic decisions. ● Continuing professional development is
● An accountant's primary task is to supply the acquisition of advanced knowledge, skill
financial information so that the statement and proficiency. Continuing professional
users could make informed judgment and development raises and enhances the technical
better decisions. skill and competence of the Certified Public
● Republic Act no. 9298 is the law regulating Accountant.
the practice of accountancy in the Philippines.
● The CPD credit units refer to the CPD credit their worldwide acceptance and
hours required for the renewal of CPA license observance.
and accreditation of a CPA to practice the ● To work generally for the improvement
accountancy profession every three years. 120 and harmonization of regulations,
CPD credit units are required for accreditation accounting standards and procedures
of a CPA to practice accountancy profession. relating to the presentation of financial
● A CPA shall be permanently exempted from statements
CPD requirements upon reaching the age of 65 ● The International Accounting Standards
years. However, this exemption applied only to Board or IASB now replaces the
the renewal of CPA license and not for the International Accounting Standards
purpose of accreditation to practice the Committee or IASC
accountancy profession. ● The IASB publishes standards in a series of
● The work of an Auditor begins when the work pronouncements called International Financial
of the accountant ends. Reporting Standards or IFRSAt present, the
● Bookkeeping is a procedural element of FRSC has adopted in their entirety all
accounting as arithmetic is a procedural International Accounting Standards and
element of mathematics. International Financial Reporting Standards.
● Accountancy refers to the profession of ● The move toward IFRS is essential to achieve
accounting practice. Accounting is used in the goal of one uniform and globally accepted
reference only to a particular field of financial reporting standardsPhilippine
accountancy such as public accounting, private Financial Reporting Standards which
accounting and government accounting. correspond to International Financial
● Managerial accounting is the area of Reporting Standards.
accounting that emphasizes developing ● The Philippine Financial Reporting
accounting information for use within an Standards are numbered the same as their
entity. counterpart in International Financial
● Generally accepted accounting Reporting Standards.
principles (GAAP) represent the rules, a. Philippine Accounting Standards which
procedures, practice and standards followed in correspond to International Accounting
the preparation and presentation of financial Standards.
statements. b. The Philippine Accounting Standards are
● The overall purpose of accounting numbered the same as their counterpart in
standards is to identify proper accounting International Accounting Standards.
practices for the preparation and presentation c. Philippine Interpretations which correspond
of financial statements. to Interpretations of the IFRIC and
● The Financial Reporting Standards Interpretations developed by the Philippine
Council (FRSC) is the accounting standard Interpretations Committee.
setting body created by the Professional
Regulation Commission upon recommendation CHAPTER 2: Conceptual Framework
of the Board of Accountancy to assist the Board (Objective of financial reporting)
of Accountancy in carrying out its powers and
functions provided under R.A. Act No. 9298. ● The Conceptual Framework for Financial
The main function is to establish and improve Reporting is a complete, comprehensive and
accounting standards that will be generally single document promulgated by the
accepted in the Philippines. International Accounting Standards Board. It
● Objectives of International Accounting is a summary of the terms and concepts that
Standard Committee (IASC) underlie the preparation and presentation of
financial statements for external users. It
● To formulate and publish in the public describes the concepts for general purpose
interest accounting standards to be financial reporting. It is an attempt to provide
observed in the presentation of an overall theoretical foundation for
financial statements and to promote accounting. It is intended to guide standard
 setters, preparers and users of financial ● The overall objective of financial reporting is to
information in the preparation and provide financial information about the
presentation of statements. It is the underlying reporting entity that is useful to existing and
theory for the development of accounting potential investors, lenders and other creditor
standards and Revision of previously issued ir making decisions about providing resources
accounting standards. to the entity.
● Purposes of Conceptual Framework ● Financial reports include not only financial
a. To assist the FRSC in developing accounting statements but also other information such as
standards and reviewing existing standards financial highlights, summary of important
b. To assist preparers of financial statements in financial figures, analysis of financial
applying accounting standards and in dealing statements and significant ratios.
with issues not yet covered by GAAP. ● Specifically, the Conceptual Framework for
c. To assist the FRSC in the review and Financial Reporting states the following
adoption of International Financial Reporting objectives of financial reporting
Standards a. To provide information useful in making
d. To assist users of financial statements in decisions about providing resources to the
interpreting the information contained in the entity.
financial statements b. To provide information useful in assessing
e. To assist auditors in forming an opinion as the cash flow prospects of the entity.
to whether financial statements conform with c. To provide information about entity
Philippine GAAP resources, claims and changes in resources and
f. To provide information to those interested in claims.
the work of the FRSC in the formulation of ● Liquidity is the availability of cash in the near
PERS future to cover currently maturing obligations
● The authoritative status of Conceptual while Solvency is the availability of cash over a
Framework is that In the absence of a standard long term to meet financial commitments when
or an interpretation that specifically applies to they fall due.
a transaction, management shall consider the ● Changes in economic resources and claims
applicability of the Conceptual Framework in result from financial performance and from
developing and applying an accounting policy other events or transactions, such as issuing
that results in information that is relevant and debt or equity instruments. The financial
reliable performance of an entity comprises revenue,
● The primary users of financial information are expenses and net income or loss for a period of
the parties to whom general purpose financial time.
reports are primarily directed such as Existing ● Accrual accounting depicts the effects of
and potential investor, lenders, and other transaction and other events and
creditors circumstances on an entity's economic
● Other users are so called because they are resources and claims in the periods in which
parties that may find the general purpose those effects occur even if the resulting cash
financial reports useful but the reports are not receipts and payments occur in a different
directed to them primarily such as employees, period.
customers, Government and their agencies, ● Accounting assumptions are the basic notions
and Public. or fundamental premises on which the
● Scope of Conceptual Framework accounting process is based. Accounting
a. Objective of financial reporting assumptions are also known postulates.
b. Qualitative characteristic of useful financial ● Under this accounting entity assumption, the
information entity is separate from the owners, managers,
c. Definition, recognition and measurement of and employees who constitute the entity.
the elements from which financial statements ● The monetary unit assumption has two
are constructed aspects, namely quantifiable and stability of
d. Concepts of capital and capital maintenance the peso.
CHAPTER 3: Conceptual Framework influence the economic decisions that primary
(Qualitative characteristics) users of general purpose financial statements
make on the basis of those statements which
● Qualitative characteristics are the qualities or provide financial information about a specific
attributes that make financial accounting reporting entity.
information useful to the users. ● Ingredients of faithful representation;
● The fundamental qualitative characteristics Completeness, Neutrality, and free from error.
relate to the content or substance of financial ● Completeness requires that relevant
information. information should be presented in a way that
● The fundamental qualitative characteristics are facilitates understanding and avoids erroneous
relevance and faithful representation. implication. A complete depiction includes all
● The most efficient and effective process of information necessary for a user to understand
applying the piation fundamental qualitative the phenomenon or transaction being depicted,
characteristics would usually be: including all necessary description and
First, identify an economic phenomenon or explanation.
transaction that has the potential to be useful. ● Completeness is the result of the standard of
Second, identify the type of information about adequate disclosure or principle of full
the phenomenon or transaction that would be disclosure. The standard of adequate disclosure
most relevant and can be faithfully represented means that all significant and relevant
Third, determine whether the information is information leading to the preparation of
available financial statements shall be clearly reported
● In the simplest terms, relevance is the capacity ● A neutral depiction is without bias in the
of the information to influence a decision. preparation a presentation of financial
● Financial information is capable of making a information. A neutral depiction is not slanted,
difference in a decision if it has predictive value weighted, emphasized de-emphasized or
and confirmatory value. otherwise manipulated to increase the
● Financial information has predictive value if it probability that financial information will be
can be used as an input to processes employed received favorably or unfavorably by users.
by users to predict future outcome. Financial ● Prudence is the exercise of care and caution
information has predictive valor when it can when dealing ific with the uncertainties in the
help users increase the likelihood of correctly measurement process such that assets or
or accurately predicting or forecasting outcome income are not overstated and liabilities or
of events. expenses are not understated
● Financial information has confirmatory value if ● Conservatism means that when alternatives
it provides feedback about previous exist, the the finam olternative which has the
evaluations. Financial information has least effect on equity should be chosen. In the
confirmatory value when it enables users simplest words, conservatism means "in case of
confirm or correct earlier expectations. doubt, described record any loss and do not
● Materiality is a practical rule in accounting record any gain."
which dictates that strict adherence to GAAP is ● Free from error means there are no errors or
not required when the items are not significant omissions in the description of the
enough to affect the evaluation, decision and phenomenon or transaction.
fairness of the financial statements. ● Measurement uncertainty arises when
● In other words, materiality is a sub quality of monetary amounts financial reports cannot be
relevance based on the nature or magnitude or observed directly and mus instead be
both of the items to which the information estimated. Measurement uncertainty can affect
relates. faithful representation if the level of
● Materiality of an item depends on relative size uncertainty in providing an estimate is high.
rather than absolute size. What is material for ● Substance over form is not considered a
one entity may be immaterial for another separate component of faithful representation
● Information is material if omitting, misstating because it would be redundant. Faithful
or obscuring it could reasonably be expected to representation inherently represents the
 substance of an economic phenomenon or to measure and becomes matter of professional
transaction rather than merely representing judgment.
the legal form. ● Direct verification means verifying an amount
● The enhancing qualitative characteristics relate or other representation through direct
to the presentation or form of the financial observation, for example, by counting cash.
information. The enhancing qualitative Indirect verification means checking the inputs
characteristics are intended t increase the to a model, formula or other technique and
usefulness of the financial information that is recalculating the inputs using the same
relevant and faithfully represented. methodology.
● The enhancing qualitative characteristics are
comparability understandability, verifiability Chapter 4: Conceptual Framework (Financial
and timeliness. statements and reporting entity underlying
● Comparability means the ability to bring assumptions)
together for the purpose of noting points of
likeness and difference. Comparability is the ● Financial statements provide information
enhancing qualitative characterist that enables about economic resources of the reporting
users to identify and understand similaritie entity, claims against the entity and changes in
and dissimilarities among items. the economic resources and claims
● Comparability within an entity is the quality of ● The reporting period is the period when
information that allows comparisons within a financial statements are prepared for general
single entity through time or from one purpose financial reporting.
accounting period to the next. ● A reporting entity is an entity that is required
● Comparability between and across entities is or chooses to prepare financial statements.
the quality of information that allows ● Consolidated financial statements provide
comparisons between two or more entities information abou the assets, liabilities, equity,
engaged in the same industry. income and expenses of both the parent and its
● In a broad sense, consistency refers to the use subsidiaries as a single reporting entity
of the same method for the same item, either ● Unconsolidated financial statements are
from period to period within an entity or in a designed to provide information about the
single period accross entities. parent's assets, liabilities, income and expenses
● consistency is the uniform application of and not about those of the subsidiaries
accounting method from period to period ● Combined financial statements provide
within an entity. On the other hand, financial information about the assets,
comparability is the uniform application of liabilities, equity, income and expenses a two
accounting method between and across entities or more entities not linked with parent and
in the same industry subsidiar relationship
● Understandability requires that financial ● Accounting assumptions or accounting
information mu be comprehensible or postulates are the basic notions or
intelligible if it is to be most useful. fundamental premises on which the accounting
● Verifiability means that different process is based
knowledgeable and independent observers ● The going concern or continuity assumption
could reach consensus, although not means that in the absence of evidence to the
necessarily complete agreement, that a contrary, the accounting entity is viewed as
particular depiction is a faithful representation continuing in operation indefinitely
● Timeliness means that financial information ● The time period assumption requires that the
must be available or communicated early indefinite life of an entity is subdivided into
enough when a decision is to be made accounting periods which are usually of equal
● Cost is a pervasive constraint on the length for the purpose of preparing financial
information that can b provided by financial reports on financial position, performance and
reporting cash flows.
● Assessing whether the cost of reporting ● A calendar year is a twelve-month period that
outweighs or fall short of the benefit is difficult ends on December 31. A natural business year
 is a twelve-month period that ends on any c. The obligation is a present obligation that
month when the business is at the lowest or exists as a result of past event, This means that
experiencing slack season. a liability is not recognized until it is incurred.
● The monetary unit assumption has two ● An obligation is a duty or responsibility that an
aspects, namely quantifiability and stability of entity has no practical ability to avoid.
the peso. Obligations can either be legal or constructive.
● The quantifiability aspect means that the ● Obligations may be legally enforceable as a
assets, liabilities, equity, income and expenses consequence of a binding contract or statutory
should be stated in terms of a unit of measure requirement.
which is the peso in the Philippines. ● Constructive obligations arise from normal
● The stability of the peso assumption means business practice, custom and a desire to
that the purchasing power of the peso is stable maintain good business relations or act in an
or constant and that its instability is equitable manner.
insignificant and therefore may be ignored. ● Income is defined as increases in assets or
decreases in liabilities that result in increases
Chapter 5: Conceptual Framework (Elements in equity, other than those relating to
of financial statements) contributions from equity holders.
● Income encompasses both revenue and gains.
● elements of financial statements refer to the ● Revenue arises in the course of the ordinary
quantitative information reported in the regular activities and is referred to by variety of
statement of financial position of income different names including sales fees, interest,
statement. dividends, royalties and rent.
● The elements directly related to the ● Expense is defined as decreases in assets or
measurement of financial position are: a. Asset increases in habilities that result in decreases
b. Liability c. Equity in equity, other than those relating to
● The elements directly related to the distributions to equity holders.
measurement of financial performance are: a. ● Expenses encompass losses as well as those
Income b. Expense expenses that arise in the course of the
● Asset is defined as a present economic resource ordinary regular activities.
controlled by the entity as a result of past ● Losses do not arise in the course of the
events. ordinary regular activities and include losses
● Essential characteristics of asset: resulting from disasters.
a. The asset is a present economic resource.
b. The economic resource is a right that has the Chapter 6: Conceptual Framework
potential to produce economic benefits. (Recognition and measurements)
c. The economic resource is controlled by the
entity as a rest of past events. ● The Revised Conceptual Framework defines
● An economic resource is a right that has the recognition as the process of capturing for
potential to produce economic benefits. inclusion in the financial statements an item
● An entity controls an asset if it has the present that meets the definition of an asset, liability,
ability to direc the use of the asset and obtain equity, income or expense.
the economic benefits that flow from it ● Only items that meet the definition of an asset,
● Liability is defined as present obligation of an a liability or equity are recognized in the
entity to transfer an economic resource as a statement of financial position.
result of past events. ● Only items that meet the definition of income
● Essential characteristics of liability or expense are recognized in the statement of
a. The entity has an obligation. The entity liable financial performance.
must be identified. However, it is not necessary ● Derecognition is defined as the removal of all
that the payee or the entity to whom the or part of recognized asset or liability from the
obligation is owed be identified. statement of financial position
b. The obligation is to transfer an economic ● The basic principle of income recognition is
resource. that income shall be recognized when earned.
 ● The matching principle has three applications, representation of an entity's assets, liabilities,
namely: income and expenses.
a. Cause and effect association ● Classification is the sorting of assets, liabilities,
b. Systematic and rational allocation equity, income and expenses on the basis of
c. Immediate recognition shared or similar characteristics. Classifying
● Under the cause and effect association, the dissimilar assets, liabilities, equity, income and
expense is recognized when the revenue is expenses can obscure relevant information,
already recognized. reduce understandability and comparability
● Under systematic and rational allocation, some and may not provide a faithful representation
costs are expensed by simply allocating them of financial information.
over the periods benefited. ● Income and expenses are classified as
● Under Immediate recognition, the cost components of profit loss and components of
incurred is expensed outright because of other comprehensive income.
uncertainty of future economic benefits or ● The income statement or statement of profit or
difficulty of reliably associating certain costs loss is the primary source of information about
with future revenue. an entity's financial performance for the
● Measurement is defined as quantifying in reporting period.
monetary terms the clemente in the financial ● Aggregation is the adding together of assets,
statements. The Revised Conceptual liabilities, equity income and expenses that
Framework mentions two categories: a. have similar or share characteristics and are
Historical cost b. Current value included in the same classification
● The historical cost or original acquisition cost ● The capital maintenance approach means that
of an asset is the cost incurred in acquiring or net income occurs only after the capital used
creating the asset comprising the consideration from the beginning of the period is maintained.
paid plus transaction cost. ● Shareholders invest in entity to earn a return
● Fair value of an asset is the price that would be on capital or an amount in excess of their
received to sell an asset in an orderly original investment. While return of capital is
transaction between market participants at an erosion of the capital invested in the entity.
measurement date. ● Financial capital is the monetary amount of the
● Value in use is the present value of the cash net assets contributed by shareholders and the
flows that an entity expects to derive from the amount of the increase in net assets resulting
use of an asset and from the ultimate disposal. from earnings retained by the entity.
● Fulfillment value is the present value of cash ● Under the financial capital concept, net income
that an entity expects to transfer in paying or occurs when the nominal amount of the net
settling a liability. assets at the end of the year exceeds the
● Current cost of an asset is the cost of an nominal amount of the net assets at the
equivalent asset at the measurement date beginning of the period, after excluding
comprising the consideration paid and distributions to and contributions by owners
transaction cost. during the period.
● In selecting a measurement basis for an asset ● Physical capital is the quantitative measure of
or a liability and for the related income and the physical productive capacity to produce
expense, it is necessary to consider the nature goods and services.
of the information that the measurement basis ● Under the physical capital concept, net income
will produce. occurs when the physical productive capital of
the entity at the end of the year exceeds the
Chapter 7: Conceptual Framework physical productive capital at the beginning of
(Presentation and disclosure Concepts of the period, also after excluding distributions to
Capital) and contributions from owners during the
period.
● Effective communication of information in
financial statements makes the information Chapter 8: Presentation of Financial
more relevant and contributes to a faithful Statements (Statement of Financial Position)
 b. The entity holds the liability primarily for
● Financial statements are the means by which the purpose of trading.
the information accumulated and processed in c. The liability is due to be settled within twelve
financial accounting i periodically months after the reporting period.
communicated to the users. d. The entity does not have a right to defer
● A complete set of financial statements settlement of the liability for at least twelve
comprises following components: months after the reporting period.
1. Statement of financial position ● PAS 1, paragraph 69, provides that all liabilities
2. Income statement not classified as current are classified as
3. Statement of comprehensive income noncurrent.
4. Statement of changes in equity. a. Noncurrent portion of long-term debt
5. Statement of cash flows b. Finance lease liability
6. Notes, comprising a summary of significant c. Deferred tax liability
account accounting policies and other d. Long-term obligations to company officers e.
explanatory notes. Long-term deferred revenue
● The objective of financial statements is to ● A liability which is due to be settled within
provide information about the financial twelve months after the reporting period is
position, financial performance and cash flows classified as current, even if:
of an entity that is useful to a wide range of a. The original term was for a period longer
users in making economic decisions. than twelve months.
● Financial statements shall be presented at least b. An agreement to refinance or to reschedule
annually. payment on a long-term basis is completed
● A statement of financial position is a formal after the reporting period and before the
statement showing the three elements financial statements are authorized for issue.
comprising financial position, namely assets, ● Covenants are actually restrictions on the
liabilities and equity. borrower as to undertaking further borrowings,
● PAS 1, paragraph 66, provides that an entity paying dividends, maintaining specified level
shall classify asset as current when: of working capital and so forth. Under these
a. The asset is cash or cash equivalent unless covenants, if certain conditions relating to the
the assets are restricted to settle a liability for borrower's financial situation are breached, the
more than twelve months after the reporting liability becomes payable on demand.
period. ● Equity is the residual interest in the assets of
b. The entity holds the asset primarily for the the entity after deducting all of its liabilities.
purpose of trading. Simply equity means "net assets'' or total
c. The entity expects to realize the asset within assets minus liabilities.
twelve months after the reporting period. ● Shareholders' equity is the residual interest of
d. The entity expects to realize the asset or owner's net assets of a corporation measured
intends to sel or consume it within the entity's by the excess assets over liabilities.
normal operating cycle. ● Notes to financial statements provide narrative
● What is not included in the definition of curren description or disaggregation of items
assets is deemed excluded. All others are presented in the financial statements and
classified as noncurrent assets. Accordingly, information about items that do not qualify for
noncurrent assets include the following: recognition.
a. Property, plant and equipment ● Notes to financial statements are used to report
b. Long-term investments information that does not fit into the body of
c. Intangible assets the financial statements in order to enhance
d. Deferred tax assets the understandability of the financial
e. Other noncurrent assets statements.
● PAS 1, paragraph 69, provides that an entity ● The purpose of the notes is to provide the
shall classify a liability as current when: necessary disclosure required by Philippine
a. The entity expects to settle the liability Financial Reporting Standards.
within the entity's normal operating cycle. ● Forms of statement of financial position
 a. Report form - The report form sets forth the - Purchase returns, allowances and
three major section downward sequence of discounts
assets, liabilities and equity = Net purchases
b. Account form - As the title suggests, the ● Computation for Cost of goods sold of
presentation follows that account, meaning, manufacturing entity
the assets are shown on the left and the Beginning raw materials
liabilities and equity on the right side of the + Net purchases
statement of financial position. = Raw materials available for use
- Ending raw materials
Chapter 9: Presentation of Financial = Raw materials used
Statements (Statement of Comprehensive + Direct labor
Income) + Factory overhead
= Total manufacturing cost
● An income statement is a formal statement + Beginning goods in process
showing the financial performance of an entity = Total cost of goods in process
for a given period of time. - Ending goods in process
● Information about financial performance is = Cost of goods manufactured
useful in predicting future performance and + Beginning finished goods
ability to generate future cash flows. = Goods available for sale
● Sources of income - Ending finished goods
Sales of merchandise to customers - Sales = Cost of goods sold
returns, allowances and discounts shall be ● Distribution costs constitute costs which are
deducted from gross sales to arrive at net sales. directly related to selling, advertising and
b. Rendering of services - Income from delivery of goods to customers.
rendering of services, among others, includes ● Administrative expenses constitute cost of
professional fees, media advertising administering the business
commissions, admission fees for artistic ● Other expenses are those expenses which are
performance and tuition fees. not directly related to the selling and
c. Use of entity resources - This income administrative function.
category includes interest, rent, royalty and ● the income statement may be presented in two
dividend income. ways, namely functional and natural.
d. Disposal of resources other than products - ● Comprehensive income is the change in equity
Examples include gain on sale of investments during op resulting from transactions and
and gain on sale of property, plant and other events, other changes resulting from
equipment transactions with owners u capacity as owners.
● Components of expense ● The term profit or loss is the total of income
a. Cost of goods sold or cost of sales less expenses, excluding the components of
b. Distribution costs or selling expenses other comprehensive income.
c. Administrative expenses ● Other comprehensive income comprises items
d. Other expenses of income and expense that are not recognized
e. Income tax expense in profit or loss or not shown the traditional
● Computation for Cost of goods sold of a income statement
merchandising concern ● The purpose of this statement is to provide a
Beginning inventory more comprehensive information on financial
+ Net purchases performance measured more broadly than the
= Goods available for sale income as traditionally computed.
- Ending inventory
= Cost of goods sold Chapter 10: Statement of Cash Flow

Gross purchases ● A statement of cash flows is a component of

+ Freight in financial statements summarizing the
= Total
 operating, investing and financing activities of
an entity.
● The primary purpose of a statement of cash
flows is to provide relevant information about
cash receipts and cash payments of an entity
during a period.
● Cash comprises cash on hand and demand
deposits.
● Cash equivalents are short-term highly liquid
investments t are readily convertible to known
amount of cash and which are subject to an
insignificant risk of change in value.
● Operating activities are the cash flows derived
primarily from the principal revenue producing
activities of the entity.
● Investing activities are the cash flows derived
from the acquisition and disposal of long-term
assets and other investments not included in
cash equivalent
● Financing activities are the cash flows derived
from the equity capital and borrowings of the
entity.
● Noncash investing and financing transactions
shall be disclosed only either in the notes to
financial statements or in a separate schedule
or in a way that provides all relevant
information about these transactions.
● Interest paid may be classified as financing
cash flow because it is a cost of obtaining
financial resources.
● Interest received may be classified as investing
cash flow because it is a return on investment.
● dividend received may be classified anesting
cash flow because it is a return on investment
● dividend paid may be classified as operating
cash flow in order to assist users to determine
the ability of the ontity to pay dividends out of
operating cash flows