Part 1 SVFC BS Accountancy SY14-15 061714

8/12/2019 Part 1 SVFC BS Accountancy SY14-15 061714

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SAINT VINCENT DE FERRER COLLEGE JUNE 16, 2014

BS ACCOUNTANCY (1stsemester SY 2014-2015) Part 1

ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

1Copyright of Prof. Hector U. Santos Jr., CPA, MBAThis online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified thatany disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may beunlawful.

AUDITING THEORY

I. Topic(s):Overview of Auditing, Attestation and Assurance

II.Learning Objectives:1. Describe auditing and explain why it is important.2. Explain the unique characteristics of the auditing profession.3. Understand managements incentiveto misstate financial statements.4. Explain the role of the auditor in the corporate governance process.5. Understand Framework of Philippine Accounting Standards6. Understand Assurance Engagements

7. Understand objective and general principles governing an audit of financial statements

III. RundownDescription of Auditing and Its ImportanceWhat is the auditing process? For society, what purpose does it serve? What role doesauditing play in corporate governance? Why is the process so important? As we beginthe study of auditing, these are key questions to answer. Unless we understand theunique role that auditing performs in our society for contemporary business and thepublic, we will not appreciate the significance of the various auditing standards as wediscuss principles, rules, and professional practice.

Auditing is the process of reviewing the financial information prepared by themanagement of a company (the financial statements and the footnotes) to determinethat it conforms to a particular standard (the applicable financial reporting framework).The person who conducts the assessment follows a set of standards (generallyaccepted auditing standards). The person completing the assessment is not anemployee of the company but works for an accounting firm that is associated with thecompany only by being hired to perform an audit (a firm that is independent from thecompany). The individual doing the assessment is hired to verify the fairness andcompleteness of the decisions recorded by the firm so that outsiders have accurateinformation to make decisions. The outsiders may be bankers, current or potentialstockholders, or regulatory bodies (outsiders to company management). The accountants

making the assessment provide a valuable, indeed, a crucial, service. Withoutsuch an assessment, outsiders would be forced to rely solely on the information thefirm provided. Even without deliberately misleading outsiders, the firms executivesare likely to be more optimistic about the firms status than an outs ider might be.Would you lend money to a company or buy its stock based solely on managementsoptimistic picture of the firms performance? Would you trust financial reports thatuse an optimistic viewpoint to report all information without any independentchecks or review?

The relationship of the audit firm to the client can be described in the framework ofa principal-agent relationship. The principals in this relationship are the shareholders

of the company. The agent is management. A principal-agent relationship exists becausethe owners of the company (the principals) are not involved in the daily managementof the company. They hire an agent (management) to run the company for them and tomake daily decisions for the company. This means that the owners of the company (theprincipals) are removed from its daily operations and that management has more knowledgeabout the daily operations than the owners. The owners (the principals) would likemanagement (the agent) to report correctly what its members know, so the principalhires an auditor to increase the likelihood of correct reporting. Knowing that an auditorwill assess the financial statements, management is more likely to prepare them inaccordance with the accounting standards because it is the auditors job to determinethat management has complied with this requirement. Outsiders benefit when the


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owners hire an auditor to protect their interests in the company because the informationavailable to outsiders is more likely to correspond to financial accounting standards.

The corporate governance process should protect outsiders from misstated financialstatements. Auditors perform an important job in corporate governance because theirrole as trained professionals who are independent from the firm is unique in the corporategovernance process. Because auditors are independent, they are in a perfect positionto provide an opinion on whether the financial statements that management presentshave been prepared according to an applicable financial reporting framework. Outsidersmight reasonably trust such an opinion from an independent professional but would nottrust such an opinion from a person who was not independent. The review of the independentauditor is not necessarily a pessimistic assessment, but it will likely be a lessoptimistic assessment than that of management because an outsider without any relationship(ownership, financial, employment) to the company issued it. The auditor will

present a relatively unbiased picture of the firms compliance or noncompliance withthe applicable financial reporting framework.

The capital markets system in the Philippines and the rest of the world rely onaccurate information. If auditors fail to perform their job, outsiders are hurt becausethey make decisions about the companies based on information disclosed, and if theinformation is wrong, the decision is likely to be wrong. For example, bankers may lendmoney when they shouldnt or may lend at a lower interest rate than appropriate if they had known the correct information. Investors may fail to sell stock or buy stock in companiesthat they wouldnt if they had information that fairly presented the firms financial position.

If the auditors fail to do their job, no one else does it. The financial statements forpublic companies are filed with the

Securities and Exchange Commission (SEC), but neither organizationconducts audits of the information (unless to review the statements). The financialstatements for private companies are simply given to the owners and are not reviewedby any outside source. For all practical purposes, the buck stops with the auditors, soif they fail to do their job, their failure has serious implications for the decisions madeby outsiders.

Unique Characteristics of the Auditing ProfessionThe auditing profession offers a wide range of employment opportunities for newaccountants. Most accounting firms offer client services in three areas: auditing, tax,and consulting. A new accountant might be hired to work in any of these areas. Thisbook describes the job of an accountant working in the audit area. Even in the auditarea, the accountant may work for a variety of clients including private or public companies,clients in banking, insurance, manufacturing, technology, retail, health care, orgovernment. Individuals working in the audit area may also spend most of their timeproviding internal audit services to clients rather than working as an external auditor.Working in any of the areas in an accounting firm may be one of the most demandingjobs you will ever have, but it is also one of the most interesting, exciting experiences

and a great way to prepare yourself to work in the corporate business world. Working asa certified public accountant (CPA) will greatly expand your career opportunities if youchoose to leave public accounting for other fields.

Accounting firms are structured as partnerships.This means that someone in the accounting firm haspersonal liability for the firmsdecisions (this differs from the corporate form of organization in which no one has personalliability for the firms decisions). There are four large accounting firms in the Philippines (the

bigfour) SGV & Co., Isla Lipana, KPMG, and Delloite.Auditors work in many places in addition to accounting firms. There are government


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auditors, tax auditors and internal auditorsworking in corporations. As an auditor, you have a wide range of places in which youmight work. You can also choose large or small companies in each of these categories as

your employer. You might work for a large public accounting firm or a small localaccounting firm.

We often speak of auditors providing audit and assurance services. This means thatauditors provide several services. They provide the audit function, which involves havingthe auditor assess whether the financial statements are presented in accordance withthe applicable financial reporting framework. This book focuses on the audit functionof auditors. Auditors also provide services that do not involve the review of a completeset of financial statements or the issue of an opinion on the financial statements. Forexample, each year SGV & Co. certifies the winners of the Ms. Earth Beauty Pageant.

In this case, an auditor provides an assurance service, not an audit service. Thepublic have more confidence in the process that determines

the winners when an outside, independent source is involved in preparing the information.The other services provided by an auditing firm (that are not tax or consulting) arereferred to as attest services. For these services, the auditor typically attests or authenticatesthe accuracy of some type of information. The attestation standards provide theauditor guidance for such services. Some of the services that fall under attestation standardsare reports on (1) descriptions of systems of internal controls, (2) compliancewith statutory, regulatory, and contractual requirements, and (3) investment performancestatistics. An opinion is not issued as a result of attestation services. Instead, theauditor issues a signed report containing the information requested by the outside party.

What would your life be like working in a public accounting firm? Exciting certainly,

occasionally tedious, and sometimes stressful because of deadlines and the constantpressure to finish an audit, a tax return, or a consulting engagement by the deadlineand within the hours allowed for the job. A unique aspect of this profession is its promotionpolicy. Accountants are typically promoted every year to assume new and increasedresponsibilities. The profession relies on the constant influx of new employees (staffaccountants) at the lower levels to perform many of the daily auditing tasks. Fewer managersand partners are needed at the upper levels to review the work of the lower levelstaff. You will seldom be bored, and you will constantly be challenged. If these factorssound appealing to you, then by all means consider joining this group of professionalswho are responsible to outsiders for information used in the business world to makeimportant decisions about companies.


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Managements Incentive to Misstate Financial StatementsTo be a good auditor, it is important that you understand managements incentive to

misstate financial statements. If you understand how management gains by misstatingcertain transactions, it is easier to plan your audit to devote an increased amount of timeto transactions that are more likely to be wrong than other transactions. The areas inwhich management is more likely to misstate transactions are riskier for the auditorbecause failing to correct the misstatements may lead to issuing a clean audit opinionon financial statements that are materially misstated. This would give outsiders the viewthat the financial statements are presented fairly in accordance with the applicablefinancial reporting framework when they are not.

Management of public companies typically prefers higher net income to lower netincome. Net income can be increased by either reducing expense or increasing revenue.

Various methods, for example, recording fictitious revenue will increase net income,allowing the company to report higher net income; failing to record expenses at the endof the year will also increase net income. Growth in revenue is also an important factorfor many companies. In this situation, managers try to show that revenue has increasedfrom the previous year even if net income has not. The desired outcome in many businessesis for revenue and possibly net income to increase at a rate at least equal to theprior years increase, and if possible, more than the previous years rate. Outsiders, particularlystockholders, expect this level of growth, and if companies fail to meet thesetargets, their stock price may drop as investors sell their stock and invest in other companiesthat can meet the growth level desired.The principal reason to misstate financial statements is to keep the companys stock

price from falling. Investors react unfavorably when companies report lower revenue ornet income numbers from the previous year. Stock analysts from investment firms provideadvice on company stocks. These analysts generate expectations for quarterlyearnings per share for the companies they follow. If a company fails to meet these earningstargets, even by $0.01, their stock price is likely to fall. A falling stock price isgenerally bad for a company and often for the management of a company because managersfrequently have stock options in the firm in their compensation packages or ownshares of their companys stock in their investment portfolios. A falling stock price hurtsthe firm and often its management. If at all possible, it is to be avoided.How can a company avoid a falling stock price? If revenue has not increased and netincome is lower this year than the prior year, one way to prevent a drop in the stock price

is to misstate the financial statements. It is the auditors job to gather sufficient appropriateevidence and to assess with professional skepticism the decisions that managementmade in preparing the financial statements. Before issuing a clean opinion on theclients financial statements, the auditor should be sure that the evidence gathered duringthe audit supports the assessment that the financial statements are prepared using anapplicable financial reporting framework.The incentives for misstatement in the financial statements for private companiesmay completely differ from the incentives in a public company. Private companies management may prefer lower net income to higher net income because it reduces their taxburden, so it improves their cash flow. Or they may prefer higher net income becausethey need to show growth in earnings to gain a bank loan. Understanding the incentives

of the company to misstate the financial statements is an important part of the auditprocess. It is crucial for the auditor to identify the financial statement accounts with themost potential for misstatement and to design audit procedures to determine that theaccounts are fairly presented according to the applicable financial reporting framework.

The Role of the Auditor in the Corporate Governance ProcessTodays auditors play a crucial role in business and society. A consequence of recentaudit failures includes the loss of public reputation for the accounting profession. Alongwith the awareness of recent business scandals, you should realize that the accountingprofession is reforming itself. This is good news. Public scrutiny of the professionprompts auditors to become more careful and efficient in their fundamental tasks in


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their daily work. The value of clear and accurate financial disclosure and the auditorsresponsibility to outside users of financial statements to provide financial informationconsistent with accounting regulations have never been more important than in todays

business environment.Auditors exercise a strong bargaining position with management. The high financialand social costs of failed audits reflect both public interest and business necessity. Recognitionof the crucial place of the audit for users of financial statements serves noticethat accounting firms cannot merely use the audit process as a loss leader marketingdevice to gain lucrative management consulting fees from their clients. The publicvalue of the audit cannot be too highly emphasized. The negative impact of failedauditsloss of public confidence and investors trustis apparent to observers of theprofession.Recent world accounting scandals have demonstrated the vulnerability of firms and the high costof

audit failures. In 2002, Arthur Andersens (worlds no. 1 auditing firm in 2002) audit failure, itslegal battles, and the loss ofpublic reputation forced it out of business. This may not have been in the publics bestinterest or fair to the firms many partners, but Arthur Andersens damaged reputationand a felony conviction related to its Enron audit led inevitably to the firms undoing.Accounting firms do not sell a product; they produce a service. They have nothing tooffer except the quality of the service they provide and their image of integrity. Once afirms reputation is destroyed, its professionals have little to offer clients. In 2002, in theaftermath of the Enron scandal, would you have wanted to issue stock with ArthurAndersens name on your financial statements?

With the many changes in the profession, you will face the challenge of learning newrules and performing new internal control tests. Federal and state regulators and interestedoutsiders will watch auditors as they perform their professional duties. Attentionwill be focused on the auditors responsibility to determine whether the financial statementspresent fairly the financial position of the firm and the results of its operations.The auditors are expected to approach an audit with an independent mind and torecognize that they are hired to protect the interests of outsiders. As an auditing student,you must understand the importance of presenting unbiased information to these outsiders,and you must avoid conflicts of interest and even the appearance of such conflictsas you perform your job. This is an exciting and challenging time to enter theprofession.

IV. Recommended References:1. Text Book - Auditing Theory latest Edition by Salosagcol2. Philippine Standards on Auditing 1002003. Text BookAssurance Principle by Cabrera4. Text Book Auditing & Assurance Services - David Ricchiute5. Internet


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MANAGEMENT ADVISORY SERVICES

MAS 01: MANAGERIAL ACCOUNTING AND COST CONCEPTS

Key Terms and Concepts to Know

Major Management Activities

Planning- formulating long and short-term plans

Directing and Motivating- implementing plans

Controlling- measuring performance; comparing actual to planned performance

Manufacturing or Product Costs

Direct Costs can be easily and conveniently traced to the finished product:

Direct Materials includes material costs which are an integral part of the finished product

Direct Labor includes labor costs used to make the finished product

Indirect Costs- cannot be easily and conveniently traced to specified cost objects:

Manufacturing Overhead includes all costs of manufacturing except direct materials and directlabor; i.e., only those costs associated with operating the factory are included in manufacturingoverhead.

Prime Costs are direct materials + direct labor

Conversion Costs are direct labor +manufacturing overhead

Nonmanufacturing or Period Costs Period costs, generally named Selling and Administrative Costs, consist of all other costs not

included in product costs. Period costs are expensed in the period incurred.

Cost Classifications for Predicting Cost Behavior

In addition to classifying costs by function (manufacturing vs. nonmanufacturing), costs may beclassified by how they behave in total when the activity level changes:

In total Per unit

Variable cost Varies directly The same

Fixed cost The same Varies inversely

Mixed cost Varies Varies (often

inversely

The relevant range is the range of activity levels throughout which the assumptions for costbehavior are valid. Outside the relevant range, total fixed costs may change and/or variable costsper unit may change.

Cost Classifications on the Balance Sheet

Manufacturing companies have three inventory accounts which appear as current assets on thebalance sheet: Raw Materials, Work in Process, Finished Goods. These accounts replaceMerchandise Inventory which is used in a retailing company.

Finished goods account is most similar to the merchandise inventory account because it containsthe value of goods to be sold to customers. However, the purchases added to merchandise

inventory are replaced by the cost of goods manufactured when dealing with a manufacturingrather than a retailing company because the goods to be sold are manufactured, not purchased.

Rather than purchasing inventory to sell, manufacturing companies purchase raw materials whichwill be used to produce finished goods.

Cost Classifications on the Income Statement

Certain activities in these accounts appear on the Income Statement as Cost of Goods Sold orCost of Goods Manufactured, a component of Cost of Goods Sold.

Analyzing General Ledger Account Activity: All general ledger accounts have four basic components: beginning balance


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Additions or inflows Withdrawals or outflows ending balance

Since inventory is a current asset account with a normal debit balance, the basic equation for allinventory accounts is:

Beginning balance + Additions = Ending balance + WithdrawalsOR

Beginning balance + Additions - Withdrawals = Ending balance OR Beginning balance + Additions - Ending balance = Withdrawals OR Withdrawals + Ending balance - Beginning balance = Additions OR Withdrawals + Ending balanceAdditions = Beginning balance

Managerial and Financial Accounting Contrasted

Example #1The finished goods inventory of company XYZ on May 1 was P 40,000. During May, P100,000 ofcompleted goods was added. The balance on May 31 was P30,000. Determine the value of goods soldfrom the finished goods inventory during May.

Solution #1

Beginning balance P40,000+Cost of goods manufactured 100,000

=Goods available 140,000

Deduct: Ending inventory 30,000

=Cost of goods sold during May P110,000

Flow of Costs Through Inventory Accounts

Raw materials inventory may contain both direct materials and indirect materials waiting to beused

Work-in-process inventory is the manufacturing or production account because this accountaccumulates direct materials used and the addition of conversion costs (direct

labor and overhead costs incurred) to complete the manufacturing process. After the goods have been manufactured, the Cost of Goods Manufactured is transferred from

work-in-process inventory to finished goods inventory. The cost of completed or finished goods remains in finished goods inventory until the goods are

sold, at which time the cost of goods is transferred from finished goodsinventory to cost of goods sold.


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Raw materials Work in process Finished Goods Cost of Goods Sold

Debit Credit Debit Credit Debit Credit Debit Credit

Beg.

Balance

+Purchases

DirectMaterials(DM)Usage

Beg.

Balance

+DMusage+DirectLaborusage+FactoryOverheadincurred

Cost ofgoodsmanufactured

Beg. Balance

Cost ofgoodsmanufactured

Cost ofgoodssold

Beg.

Balance

Cost ofgoodssold

Ending

balance

Ending

balance

Ending

balance

Ending

balance

Schedule of Cost of Goods Sold

In Financial Accounting, cost of goods sold was based on merchandise inventory which waspurchased and then to customers.

For manufacturing companies, the finished goods inventory account replaces the merchandiseinventory account.

Rather than being purchased, finished goods are the end-product of the manufacturing processand are transferred into the finished goods account from the work-in-process inventory account.

Example #2A:The Tartan Company has provided the following financial information for last year.

Raw materials inventory, January 1 P20,000Work in process inventory, January 1 40,000Finished goods inventory, January 1 70,000Direct labor incurred 110,000Raw materials purchases 80,000Finished goods inventory, December 31 30,000Raw materials inventory, December 31 10,000Rent expense, factory 50,000Indirect labor expense 20,000

Depreciation expense, factory 10,000Utilities expense, factory 10,000Prepaid insurance 38,000Work in process inventory, December 31 60,000

Note: all balances are normal balances

Required: Prepare a schedule of cost of goods sold.

Solution #2A:Schedule of Cost of Goods Sold

Beginning finished goods inventory P70,000Add: Cost of goods manufactured 270,000Goods available for sale 340,000Deduct: Ending finished goods inventory 30,000Cost of goods sold P310,00

Schedule of Cost of Goods Manufactured

The value of the goods transferred from work-in-process to finished goods is called Cost ofGoods Manufactured.

Work in process and raw materials accounts are used to determine cost of goods manufactured


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Example #2B:Using the data in Example 2A, prepare a cost of goods manufactured schedule.

Solution #2B:Schedule of Cost of Goods Manufactured

Cost Classifications for Decision Making

Differential Costs and Revenues differ among alternatives Opportunity Costs are the potential benefits given up by making a decision Sunk Cost is a cost previously incurred; it cannot be changed by a present or future decision

Example #3Classify the following costs according to the cost terms.1. Wood used for making tables.2. Wages of the assembly workers in a furniture factory.3. Salary of the factory supervisor.4. Electricity to run factory equipment.5. Janitorial salaries.6. Rent on a factory building.7. Plastic parts used to make toys.8. Glue used to make toys.9. Lubricants on production machines.

Solution #3Cost Behavior To Units of Production

Variable Fixed Direct Indirect

1. X X2. X X3. X X4. X X5. X X6. X X7. X X

Beginning raw materials inventory P20,000

Add: Purchases of raw materials 80,000

Raw materials available for use 100,000

Deduct: Ending raw materials inventory 10,000

Raw (direct) materials used production P90,000

Direct labor

Manufacturing overhead:Rent, factory 50,000

110,000

Indirect labor 20,000

Depreciation, factory 10,000

Utilities, factory 10,000

Total manufacturing overhead cost 90,000

Total manufacturing cost 290,000

Add: Beginning work in process inventory 40,000

330,000

Deduct: Ending work in process inventory 60,000

Cost of goods manufactured P270,000


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8. X X*9. X X

* These materials would usually be considered indirect. They are insignificant in amount and it would notbe cost-effective to trace them to individual products.

If you really want to do something, you will find a way. If you dont, youll find an excuse- JimRohn

--END--

V.Recommended References:1. Managerial Accounting by Garrison2. Managerial Accounting by Kieso Weyganth3. Managerial Accounting by local authors4. Internet


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THEORY OF ACCOUNTS

I. Topic(s):Conceptual Framework of Accounting

II.Learning Objectives:Understand conceptual framework of accounting

III. RundownPlease read the latest textbook version of Financial Accounting Volume 1 by Valix

And other accounting authors about the conceptual framework of accounting.

First Level: Basic Objective

The objective of financial reporting is the foundation of the Framework. The objective ofgeneral-purpose financial reporting is to provide financial information about thereporting entity that is useful to present and potential equity investors, lenders, andother creditors in making decisions in their capacity as capital providers.

An implicit assumption is that users need reasonable knowledge of business andfinancial accounting matters to understand the information contained in financial

statements. This means that financial statement preparers assume a level ofcompetence on the part of users, which impacts the way and the extent to whichcompanies present information.

Second Level: Fundamental Concepts

The fundamental qualities that make accounting information useful for decision makingare relevance and faithful representation.

a. Relevance: Accounting information is relevant if it is capable of making adifference in a decision. Financial information is capable of making a difference

when it has predictive value, confirmatory value, or both.b. Faithful Representation:Means that the numbers and descriptions contained

in the financial statements match what really existed or happened. To be afaithful representation, information must be complete, neutral, and free ofmaterial error.

(1) Completeness:The financial statements include all the information that isnecessary for faithful representation of the economic phenomena that itpurports to represent.

(2) Neutrality:Information is neutral if it is unbiased, i.e., it is not presented ina manner that favors one set of interested parties over another.

(3) Free from error:Does not mean total freedom from error. It means thatthe information presented is as accurate as possible, given any estimatesare based on the best information available at the time.

The enhancing qualities are complementary to the fundamental qualitativecharacteristics. They include comparability, verifiability, timeliness, andunderstandability.

a. Comparability:Information that is measured and reported in a similar mannerfor different companies is considered comparable. It enables users to identify


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the real similarities and differences in economic events between companies.Consistency is present when a company applies the same accountingtreatment to similar events, from period to period.

b. Verifiability:Occurs when independent measurers, using the same methods,obtain similar results.

c. Timeliness:Means having information available to decision-makers before itloses its capacity to influence decisions.

d. Understandability: Is the quality of information that lets reasonably informedusers to see the connection between their decisions and the informationcontained in the financial statements. Understandability is enhanced wheninformation is classified, characterized, and presented clearly and concisely.

Elements of the financial statementsThe first group describes amounts of resources and claims to resources at a moment intime. The second group describes transactions, events and circumstances that affect acompany during a period time.

a. Resources and claims to resources at a moment in time.

(1) Asset:A resource controlled by the entity as a result of past events andfrom which future economic benefits are expected to flow to the entity.

(2) Liability: A present obligation of the entity arising from past events, thesettlement of which is expected to result in an outflow from the entity ofresources embodying economic benefits.

(3) Equity:The residual interest in the assets of the entity after deducting allits liabilities.

b. Transactions, events, and circumstances that affect a company during a periodof time.

(1) Income: Increases in economic benefits during the accounting period inthe form of inflows or enhancements of assets or decreases of liabilitiesthat result in increases in equity, other than those relating to contributionsfrom equity participants.

(2) Expenses:Decreases in economic benefits during the accounting periodin the form of outflows or depletions of assets or incurrences of liabilitiesthat result in decreases in equity, other than those relating to distributions toequity participants.

Third Level: Recognition, Measurement, and Disclosure Concepts

In the practice of financial accounting, certain basic assumptions are important to anunderstanding of the manner in which information is presented. The following fivebasic assumptions underlie the financial accounting structure.

a. Economic Entity Assumption:Means that economic activity can be identifiedwith a particular unit of accountability. In other words, a company keeps itsactivity separate and distinct from its owners and any other business unit.

b. Going Concern Assumption:In the absence of information to the contrary, acompany is assumed to have a long live. The legitimacy of the cost principle isdependent upon the going concern assumption.

c. Monetary Unit Assumption:Money is the common denominator of economicactivity and provides an appropriate basis for accounting measurement andanalysis. The monetary unit is assumed to remain relatively stable over the


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years in terms of purchasing power. Therefore, this assumption disregards anyinflation or deflation in the economy in which the company operates.

d. Periodicity Assumption:The life of a company can be divided into artificialtime periods for the purpose of providing periodic reports on the economicactivities of the company.

e. Accrual Basis of Accounting: Transactions that change a companysfinancial statements are recorded in the periods in which the events occur. Thecash basis of accounting is prohibited under IFRS because it violates both therevenue recognition principle and the expense recognition principle.

The basic principles of accounting are used to record and report assets, liabilities,equity, revenues, and expenses. The four basic principles of accounting are:

a. Measurement Principles: We currently have two acceptable measurementprinciples: cost and fair value. Choosing which principle to follow generallyreflects the trade off between relevance and faithful representation.

(1) Cost Principle: IFRS requires many assets and liabilities be reported attheir acquisition price, or cost, sometimes referred to as historical cost. Itis thought to be a faithful representation of the amount paid for a givenitem. Many users favor the cost principle because it is verifiable.

(2) Fair Value:Is a market based measure. At acquisition historical cost andfair value are identical. In subsequent periods, as market and economicconditions change, the two diverge. It is felt that where fair value

information is available, it provides more relevant information about theexpected future cash flows related to an asset or liability.

b. Revenue Recognition Principle:Revenue is recognized (1) when realized orrealizable and (2) when earned. Recognition at the time of sale provides auniform and reasonable test. Certain variations in the revenue recognitionprinciple include: certain long-term construction contracts, end-of-productionrecognition, and recognition upon receipt of cash.

c. Expense Recognition Principle: Recognition of expenses is related to netchanges in assets and earning revenues. The expense recognition principle isimplemented in accordance with the definition of expense by matching efforts(expenses) with accomplishment (revenues). Some costs are difficult toassociate with revenues and must be allocated to expense based on arational and systematic policy. Product costs are expense when the unitsthey are attached to are sold. Period costsare expense as incurred.

d. Full Disclosure Principle: Financial statements should include sufficientinformation to permit a knowledgeable user to make an informed decisionabout the financial condition of the company in question. Users can findinformation (1) within the main body of the financial statements, (2) in thenotes to those statements, or (3) as supplementary information.

In providing information with the qualitative characteristics that make it useful,companies, must consider two overriding factors that limit the reporting: the cost-benefit relationship and materiality.

a. Cost-Benefit Relationship: This constraint relates to the notion that thebenefits to be derived from providing certain accounting information shouldexceed the costs of providing that information. The difficulty in cost-benefitanalysis is that the costs and especially the benefits are not always evident ormeasurable.


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b. Materiality: In the application of basic accounting theory, an amount may beconsidered less important because of its size in comparison with revenues and

expenses, assets and liabilities, or net income. Deciding when an amount ismaterial in relation to other amounts is a matter of judgment and professionalexpertise. Companies must consider both quantitative and qualitative factors indetermining whether an item is material.

A CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING

A CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING (with details)


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A HIERARCHY OF ACCOUNTING QUALITIES

ELEMENTS OF FINANCIAL STATEMENTS

VI. Recommended Reference(s):Latest Edition - Financial Accounting 1 by Conrado ValixForeign authored books


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BUSINESS LAW

IV. Topic(s):Law on Business Transactions - Obligations

V.Learning Objectives:1. To learn about the sources of obligation and their concepts2. To learn kinds of obligations in general and under Civil Code3. To learn specific circumstances affecting obligation in general4. To learn duties of an obligor to give, to do and not to do5. To learn extinguishment of obligation

VI. RundownPlease read the latest textbook version of Obligation and Contractby Hector S. De Leon or bySuarez

VII. Recommended Reference(s):Latest Edition - Obligation and Contract by Hector S. De LeonLatest Edition - Obligation and Contract by SuarezCivil Code


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ONLINE ASSESSMENTS

Reminders:1. Should be submitted using excel format on or before June 22, 2014 exclusively [email protected]

2. Answers should follow below format for easy checkinga. Mutiple Choice

Multiple

Choice AT TOA MAS BL

1 a a b a

2 c a a a

3 a a b a

4 c a a a

5 a a b a6 c

7 a

8 a

9 c

10 a

b. True or FalseTrue or

False AT TOA MAS BL

1 True False True False

2 True False True False3 True False True False

4 True False True False

5 True False

6 True False

7 True False

8 True False

9 True False

10 True False

c. Identification

True orFalse AT TOA MAS BL

1 PSA GAAPManagementAccounting Obligatio

2 AASC

3

4

5

6

7

8

9

10

d. Problem Solvingmust write/type the solution and answer.

e. Fill in the blanksmust write the question and answer

3. Excell file should have a file name which consists of surname, first name and partnumber (Example: SantosHectorPart1, DelaCruzJuanPart1, etc.)


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4. Failure to follow instruction 1,2 and 3 will automatically get zero score from thisedition of online assessment

5. Not all the answer in the online assessments can be found here, so its your

responsibility to read, read, read and read other resources such as text books etc.


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2. Financial accounting reports to those inside the organization.True False

3. Managerial accounting emphasizes decisions affecting the future.True False

4. Manufacturing costs are product costs.True False

5. Period costs include direct materials, direct labor and manufacturing overhead.True False

6. Period costs are expensed in the period incurred.True False

7. Direct materials and direct labor are also called prime costs.True False

8. Conversion costs are manufacturing costs.

True False

9. Sales commissions are a product cost.

True False

10. Manufacturing companies have one inventory account.

True False

11. Variable costs per unit remain constant.

True False

12. Fixed costs vary in total.

True False

13. A direct cost cannot be easily traced to a cost object.

True False

14. A cost that differs between two alternatives is a sunk cost.

True False

15. A common cost is a type of indirect cost.

True False

16. Selling and administrative expenses are included in the schedule of cost ofgoods manufactured.

True False

17. Factory rent is part of manufacturing overhead.

True False

18. Depreciation on administrative offices equipment is a product cost.

True False

19. Finished goods inventory consists of units completed that have not been sold to a

customer.

True False

20. Raw materials can be direct or indirect.


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True False

Multiple Choice Questions

1. Which of the following is not a characteristic of managerial accounting:

a) Emphasizes decisions affecting the future

b) Mandatory for external reports

c) Need not follow GAAP

d) Reports to those inside the organization

2. Which of the following is not a manufacturing cost:a) Direct materials

b) Manufacturing overhead

c) Administrative costs

d) Direct labor

3. How many classes of inventory accounts do manufacturing companies have:a) One

b) Three

c) Two

d) Four

4. Costs that are taken directly to the income statement as expenses in the period in

which they are incurred are:

a) Product costs

b) Prime costs

c) Sunk costs

d) Period costs

5. The potential benefit given up when one alternative is selected over another is a:

a) Prime cost

b) Sunk costc) Opportunity cost

d) Direct cost

6. A direct cost is one which:

a) Is not worth the effort of tracing to a specific cost object

b) Remains constant no matter the activity level

c) Can be easily and conveniently traced to a specific cost object

d) Always sunk

7. At production level of 2000 units a cost is P20,000; at production level of 4500units the same cost is P45,000. This is an example of a:

a) Variable cost

b) Direct cost

c) Fixed costd) Sunk cost

8. Which of the following is an example of a fixed cost in a manufacturingcompany:

a) The cost of raw materials


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b) The cost of electricity for running machines

c) Wages of assembly line workers

d) Depreciation on factory equipment

9. Mary works at a convenience store and is paid P400 a week. She considersenrolling in a college to earn a degree. She thinks she will have to quit her job if she goesto college. The wages that she will lose if she chooses college are:

a) Sunk cost

b) Opportunity cost

c) Indirect cost

d) Prime cost

10. Which cost is not relevant to the decision whether to purchase a new chocolatedipping machine or continue using the old one:

a) The cost of the new machine

b) Lower maintenance costs for the new machine

c) The cost of the old machine

d) Additional training required for operating the new machine

11. At the end of June XYZ company had the following balances:

Direct materials used P30,000

Direct labor 18,000

Factory rent 7,000

Indirect materials 5,000

Salary of production supervisor 4,000

Advertising costs 12,000

Rent on administrative office 3,500

Depreciation on factory equipment 6,100

The total manufacturing cost was:

a) P85,600

b) P70,100

c) P48,000

d) P68,600

12. Company ABC had the following balances for the month of April: Finished goods,

April 1 P45,000

Cost of goods manufactured 20,000

Finished goods, April 30 14,000

The cost of goods sold for April is:

a) P 51,000b) P 20,000

c) P34,000

d) P 65,000

13. Conversion costs consist of:

a) Direct materials and direct laborb) Direct materials and manufacturing overheadc) Manufacturing and nonmanufacturing costs

d) Direct labor and manufacturing overhead


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14. A cost that goes into Work in Process inventory and then into the Finished Goodsinventory before appearing on the income statement as cost of goods sold is a:

a) Period cost

b) Fixed cost

c) Opportunity cost

d) Product cost

15. Fixed cost:a) Remains the same per unit

b) Decreases per unit as the activity level rises

c) Increases per unit as the activity level rises

d) Varies in total

16. The following information was taken from company XYZs records for the currentmonth. Raw materials used in production P 35,000 (P25,000 direct, P10,000 indirect);direct labor costs incurred P20,000; selling expenses P5,000; insurance on factoryP4,000; administrative salaries P12,000; Rent P15,000 (80% factory,

20% administrative offices). The total inventoriable costs for the current month were:

a) P88,000

b)P61,000

c) P71,000

d) P74,000

17. Period costs are reported:

a) On the balance sheetb) On the income statement

c) As part of the schedule of cost of goods manufactured

d) When the related products are sold

18. Commissions paid to salespersons (P10 per unit sold) are:a) Fixed cost

b) Variable cost

c) Sunk cost

d) Differential cost

19. Which of the following statements is true:a) Product costs are expensed as incurred.b) Selling costs are considered sunk costs.c) Manufacturing overhead is a prime cost.

d) Product costs are sometimes called inventoriable costs.

20. An increase in cost between two alternatives is a:

a) Direct cost

b) Sunk cost

c) Incremental cost

d) Period cost


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Theory of Accounts

1. The overriding criterion by which accounting information can be judged is that ofa. usefulness for decision making.b. freedom from bias.c. timeliness.d. comparability.

2. Which of the following is a fundamental quality of useful accounting information?a. Comparability.b. Relevance.c. Consistency.d. Materiality.

3. Which of the following is a fundamental quality of useful accounting information?a. Conservatism.b. Comparability.c. Faithful representation.d. Consistency.

4. What is meant by comparability when discussing financial accounting information?a. Information has predictive or feedback value.

b. Information is reasonably free from error.c. Information that is measured and reported in a similar fashion across companies.d. Information is timely.

5. What is meant by consistency when discussing financial accounting information?a. Information that is measured and reported in a similar fashion across points in time.b. Information is timely.c. Information is measured similarly across the industry.d. Information is verifiable.

6. Which of the following is an ingredient of relevance?a. Completeness.

b. Representational faithfulness.c. Neutrality.d. Predictive value.

7. Which of the following is an ingredient of faithful representation?a. Predictive value.b. Timeliness.c. Neutrality.d. Feedback value.

8. Changing the method of inventory valuation should be reported in the financialstatements under what qualitative characteristic of accounting information?a. Understandability.

b. Verifiability.c. Timeliness.d. Comparability.

9. Company A issuing its annual financial reports within one month of the end of the year isan example of which enhancing quality of accounting information?a. Neutrality.b. Timeliness.c. Predictive value.d. Representational faithfulness.


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10. What is the quality of information that enables users to better forecast future operations?a. Reliability.b. Materiality.

c. Comparability.d. Relevance.

11. Which of the following ingredients of fundamental qualities is part of faithfulrepresentation?a. Neutrality.b. Productive value.c. Confirmatory value.d. Timeliness.

12. Decision makers vary widely in the types of decisions they make, the methods ofdecision making they employ, the information they already possess or can obtain fromother sources, and their ability to process information. Consequently, for information to

be useful there must be a linkage between these users and the decisions they make. Thislink isa. relevance.b. reliability.c. understandability.d. materiality.

13. The two fundamental qualities that make accounting information useful for decisionmaking area. comparability and consistency.b. materiality and timeliness.c. relevance and faithful representation.

d. reliability and comparability.

14. Accounting information is considered to be relevant when ita. can be depended on to represent the economic conditions and events that it is

intended to represent.b. is capable of making a difference in a decision.c. is understandable by reasonably informed users of accounting information.d. is verifiable and neutral.

15. The quality of information that gives assurance that it is reasonably free of error and biasa. relevance.b. faithful representation.

c. verifiability.d. neutrality.

16. Financial information does notdemonstrate consistency whena. firms in the same industry use different accounting methods to account for the same

type of transaction.b. a company changes its estimate of the salvage value of a fixed asset.c. a company fails to adjust its financial statements for changes in the value of the

measuring unit.d. none of these.

17. When information about two different enterprises has been prepared and presented in asimilar manner, the information exhibits the characteristic ofa. relevance.b. reliability.c. consistency.d. none of these.

Business Law1. Obligation is a juridical necessity to give, to do or not to do

Right is the power which a person has to demand from another prestation

a. True, True b. True, False c. False, True d. False, False


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2. Fortuitous event is any event which can be forseen and inevitable.

Generally, may an action for future negligence be waived?


3. Resolutory obligation is the fulfillment of which will give rise to obligationPotestative condition is a suspensive condition which depends upon the sole will of thedebtor


4. Facultative obligation is one where only one prestation has been agreed upon but theobligor may render another substitution.Generally, may the debtor pay anyone of the solidary creditors?


5. Merger in the person of the principal debtor or creditor do not extinguishes the principalobligation.In law, payment and performance are synonymous.


6. The following are kinds of negligence except one.a. Culpa Aquilanab. Quasi-delictc. Culpa criminald. Culpa contractual

7.Obligation that bounds only one party to perform obligation, one debtor and one creditora. Individualb. Accessoryc. Legald. Unilateral

8.TRUE or FALSE. Negligence is the voluntary execution of a wrongful act, or a willfullomission knowing and intending the effects which naturally and necessarily arise from such actor omission.

9.Events which could not be foreseen or which though foreseen were inevitable.

10.Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there hasbeen no stipulation to the contrary. Which of the following are not an exception?

a. Not transmissible by lawb. Not transmissible by their very naturec. Presumptions are rebuttable by evidence.

d. There is a stipulation of the parties that they are not transmissible


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Documents

Part 1 SVFC BS Accountancy SY14-15 061714