CHAPTER 1

FRAMEWORK OF ACCOUNTING
QUESTION 1-1

Define accounting.

ANSWER 1-1

The Accounting Standards Council defines accounting as follows:

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decision.

The Committee on Accounting Terminology of the American Institute of Certified Public Accountants
defines accounting as follows:

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are in part at least of a financial character and interpreting the
results thereof.

The American Accounting Association in its statement of Basic Accounting Theory defines accounting as
follows:

Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.

QUESTION 1-2

What are the three important activities in the accounting process as embodied in the accounting
definition?

ANSWER 1-2

The accounting definition provides three important activities in the accounting process, namely:

a. Identifying
b. Measuring
c. Communicating

QUESTION 1-3

Explain fully the identifying process of accounting.

ANSWER 1-3

Identifying means the recognition or nonrecognition of “accountable” events. Not all business activities
are accountable.

An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other
words, the subject matter of accounting is economic activity or the measurement of economic resources
and economic obligations. Only economic activities are emphasized and recognized in financial
accounting. Sociological and psychological matters are beyond the province of accounting.

QUESTION 1-4

Explain the two classifications of economic transactions or events.

ANSWER 1-4

Economic activities of an entity are referred to as transactions which may be classified as external and
internal.

External transactions or exchange transactions are those economic events involving one entity and
another entity. Purchase of merchandise from a supplier, borrowing money from a bank, sale of
merchandise to customer and payment of salaries to employees are examples of external transactions.

Internal transactions are economic events involving the entity only. These are economic activities that
take place entirely within the entity. Production and casualty loss are examples of internal transactions.

QUESTION 1-5

Explain briefly the measuring process of accounting.

ANSWER 1-5

Measuring or measurement is the process of determining the monetary amounts at which the elements
of the financial statements are to be recognized and carried in the balance sheet and income statement.

If accounting information is to be useful, it must be expressed in terms of a common financial

denominator. Financial statements without monetary amounts would be largely unintelligible or
incomprehensible. The Philippine peso is the unit of measuring accountable economic transactions.

The measurement bases are historical cost, current cost, realizable value and present value. Historical
cost is the most common.

QUESTION 1-6

Explain fully the communicating process of accounting.

ANSWER 1-6
Communicating is the process of preparing and distributing accounting reports to potential users of
accounting information.

Identifying and measuring are pointless if the information contained in the accounting records cannot
be communicated in some form to potential users, like the investors, owners, managers, creditors and
other interested parties.

Actually, it is for this reason that accounting has been called the “language of business”.

Implicit in the communication process are the recording, classifying and summarizing aspects of
accounting.

Recording or journalizing is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.

Classifying is the sorting or grouping of similar and interrelated economic transactions into their
respective class. Actually, classifying is accomplished by posting to the ledger.

Summarizing is the preparation of financial statements which include the statement of financial
position, income statement, statement of comprehensive income, statement of cash flows and
statement of changes in equity.

QUESTION 1-7

What is the basic purpose of accounting?

ANSWER 1-7

The basic purpose of accounting is to “provide quantitative financial information about a business that is
useful to statement users particularly owners and creditors, in making economic decisions. “

An accountant’s primary task therefore is to supply information to help users, such as shareholders,
bankers and managers make informed judgment and better decision.

QUESTION 1-8

What do you understand by the accountancy profession?

ANSWER 1-8

Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines. This law is
known as the “Philippine Accountancy Act of 2004”.

Accountancy has developed as a profession attaining a status equivalent to that of law and medicine.

In the Philippines, in order to qualify to practice the accountancy profession, a person must finish a
degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by
the Board of Accountancy.
Incidentally, the Board of Accountancy is the body authorized by law to promulgate rules and
regulations affecting the practice of the accountancy profession in the Philippines.

QUESTION 1-9

Explain the accreditation to practice public accountancy.

ANSWER 1-9

Certified Public Accountants, firms and partnership of certified public accountants, including partners
and staff members thereof, are required to register with the Board of Accountancy and Professional
Regulation Commission for the practice of public accountancy.

The PRC upon favorable recommendation of the Board of Accountancy shall issue the Certificate of
Registration to practice public accountancy which shall be valid for 3 years and renewable every 3 years
upon payment of required fees.

Certified Public Accountants generally practice their profession in three main areas, namely public
accounting, private accounting and government accounting.

QUESTION 1-10

Explain the limitation of the practice of public accountancy.

ANSWER 1-10

Single practitioners and partnerships for the practice of public accountancy shall be registered certified
public accountants in the Philippines.

A certificate of accreditation shall be issued to certified public accountants in public practice only upon
showing in accordance with rules and regulations promulgated by the Board of Accountancy and
approved by the Professional Regulation Commission that such registrant has acquired a minimum of
three years of meaningful experience in any of the areas of public practice including taxation.

The Securities and Exchange Commission shall not registerany corporation organized for the practice of
public accountancy.

QUESTION 1-11

What is public accounting?

ANSWER 1-11

Public accounting, in essence, is the practice of the accountancy profession. Individual practitioners,
small accounting firms and large multinational organizations render independent and expert financial
services to the public such as auditing, taxation and management advisory services.

QUESTION 1-12
Explain briefly the three kinds of services rendered by a public accountant.

ANSWER 1-12

1. Auditing has traditionally been the primary service offered by most public accounting
practitioners.
Auditing or specifically external auditing is the “examination of financial statements by
independent certified public accountant for the purpose of expressing opinion as to the fairness
with which the financial statements are prepared”.
2. Taxation service includes the preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors. The CPA not infrequently represents the
client in tax investigations.
3. Management advisory service has become increasingly important in recent years, although
audit and tax services are undoubtedly the mainstay of public accountants.
The term “management advisory service” has no precise coverage but is used generally to refer
to services to clients on matters of accounting, finance, business policies, organization
procedures, product costs, distribution and many other phases of business conduct and
operations.

QUESTION 1-13

Explain briefly private accounting.

ANSWER 1-13

Private accounting means that Certified Public Accountants are employed in business entities in various
capacity as accounting staff, chief accountant, internal auditor and controller. The highest accounting
officer in a business entity is the controller.

The major objective of the private accountant is to assist management in planning and controlling the
entity’s operations. This will include maintaining the records, producing the financial reports, preparing
the budgets and controlling and allocating the cost of the business.

The private accountant has also the responsibility for the determination of the various taxes the
business is obliged to pay.

QUESTION 1-14

Explain briefly government accounting.

ANSWER 1-14

Government accounting “encompass the process of analyzing, classifying, summarizing and

communicating all transactions involving the receipt and disposition of government funds and property
and interpreting the results thereof”.
The focus of government accounting is the custody and administration of public funds.

Many Certified Public Accountants are employed in many branches of the government, more
particularly the Bureau of Internal Revenue, Commission on Audit, Department of Budget and
Management, Securities and Exchange Commission and even in a police agency like the National Bureau
of Investigation.

QUESTION 1-15

Distinguish financial accounting and managerial accounting.

ANSWER 1-15

Financial accounting is primarily concerned with the recording of business transactions and the eventual
preparation of financial statements. Financial accounting focuses on general purpose reports known as
financial statements. These financial statements are intended for internal and external users.

Financial accounting is the area of accounting that emphasizes reporting to creditors and investors.

Managerial Accounting is the accumulation and preparation of financial reports for internal users only.

In other words, managerial accounting is the area of accounting that emphasizes developing accounting
information for use within an entity.

QUESTION 1-16

What is the meaning of generally accepted accounting principles?

ANSWER 1-16

Generally accepted accounting principles (GAAP) encompass the conventions, rules and procedures
necessary to define what accepted accounting practice is.

Generally accepted accounting principles are conventional- that is, they become generally accepted by
agreement often tacit agreement rather than by formal derivation from a set of postulates and basic
concepts. The principles have developed on the basis of experience, reason, custom, usage, and
practically necessity.

Simply stated, generally accepted accounting principles represent the “rules, procedures, practice and
standards followed in the preparation and presentation of financial statements.”

Generally accepted accounting principles are like laws that must be followed in financial reporting.

In the Philippines, the development of generally accepted accounting principles is formalized initially
through the creation of the Accounting Standards Council. The accounting standards promulgated by
the Accounting Standards Council constitute the generally accepted principles in the Philippines.
The approved statements of the ASC are called previously as “Statement of Financial Accounting
Standards” or SFAS.

These ASC statements of Financial Accounting Standards are now known as Philippine Accounting
Standards or PAS and Philippine Financial Reporting Standards or PFRS.

QUESTION 1-17

What is the purpose of accounting standards?

ANSWER 1-17

The overall purpose of accounting standards is to identify proper accounting practices for the
preparation and presentation of financial statements.

Accounting standards create a common understanding between preparers and users of financial
statements particularly on how items, for example the valuation of assets, are treated.

Financial statements shall therefore comply with all applicable accounting standards.

QUESTION 1-18

What do you understand by the Financial Reporting Standards Council or FRSC?

ANSWER 1-18

The FRSC now replaces the ASC.

The FRSC is the accounting standard setting body created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy to assist the Board of accountancy in carrying out
its powers and functions provided under R.A. Act No. 9298.

The main function is to establish and improve accounting standards that will be generally accepted in the
Philippines.

The FRSC is composed of 15 members with a chairman who had been or is presently a senior accounting
practitioner and 14 representatives from the following:

Board of Accountancy 1
Securities and exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users
of financial statements 1
Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2

Total 14

The Chairman and members of the FRSC shall have a term of 3 years renewable for another term. Any
member of the ASC shall not be disqualified from being appointed to the FRSC.

QUESTION 1-19

What do you understand by the Philippine Interpretations Committee?

ANSWER 1-19

The Philippine Interpretations Committee or PIC has replaced the Interpretations Committee or IC
formed by the Accounting Standards Council in May 2000.

The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and in the context of
the framework, to provide timely guidance on financial reporting issues not specifically addressed in
current PFRS.

In other words, interpretations are intended to give “authoritative guidance” on issues that are likely to
receive divergent or unacceptable treatment because the standards do not provide specific and clear cut
rules and guidelines.

The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations
committee or IFRSC which has already replaced the Standing Interpretations Committee or SIC.

QUESTION 1-20

What do you understand by the International Accounting Standards Committee?

ANSWER 1-20

The IASC is an independent private sector body, with the objective of achieving uniformity in the
accounting principles which are used by business and other organizations for financial reporting around
the world.

It was formed I June 1973 through an agreement made by professional accountancy bodies from
Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland,
and the United States of America.

The IASC subsequently expanded to include representatives from over 100 countries and by year 2000
the membership included 143 bodies in 104 countries representing over two million accountants. The
IASC is headquartered in London, United Kingdom.
QUESTION 1-21

What are the objectives of the International Accounting Standards committee?

ANSWER 1-21

a. To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and
observance.
b. To work generally for the improvement and harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.

The approved statements of the IASC are known as International Accounting Standards or IAS.

QUESTION 1-22

What are the factors considered by the Philippines in deciding to move totally to international
accounting standards?

ANSWER 1-22

a. Support of international accounting standards by Philippine organizations, such as the Philippine

SEC, Board of Accountancy and PICPA.
b. Increasing internalization of business which has heightened interest in a common language for
financial reporting.
c. Improvement of international accounting standards- Removal of free choices of accounting
treatments.
d. Increasing recognition of international accounting standards by the Word Bank, Asian
Development Bank and World Trade Organization.

QUESTION 1-23

What do you understand by the International Accounting Standards Board?

ANSWER 1-23

The International Accounting Standards Board or IASB now replaces the International Accounting
Standards Committee or IASC. The IASB publishes its standards in a series of pronouncements called
“International Financial Reporting Standards” or IFRS.

However, the IASB has adopted the body of standards issued by the IASC. The pronouncements of the
IASC continue to be designated as “International Accounting Standards” or IAS.

The IASB’s objective is to raise the quality and consistency of financial reporting and to have a platform
of high quality and improved standards.
The IFRS is a global phenomenon intended to bring about greater transparency and a higher degree of
comparability in financial reporting, both of which will benefit the investors and are essential to achieve
the goal of one uniform and globally accepted financial reporting standards.

QUESTION 1-24

What are accounting assumptions?

ANSWER 1-24

Accounting assumptions are the basic notions or fundamental premises on which the accounting
process is based. Accounting assumptions are the “givens” and they exist without saying.

Like a building structure that requires a solid foundation to avoid or prevent future collapse and provide
room for expansion, and so with accounting.

Accounting assumptions serve as the foundation or bedrock of accounting in order to avoid

misunderstanding but rather enhance the understanding and usefulness of the financial statements.
Accounting assumptions are also known as postulates.

QUESTION 1-25

What are the underlying accounting assumptions?

ANSWER 1-25

1. Accrual
2. Going concern
3. Accounting entity
4. Time period
5. Monetary unit

The Framework for the Preparation and Presentation of Financial Statements mentions two underlying
assumptions, namely accrual and going concern.

However, implicit in accounting are the basic assumptions of accounting entity, time period and
monetary unit.

QUESTION 1-26

Explain fully the accrual assumption.

ANSWER 1-26

The preparation of financial statements every accounting period is usually based on accrual accounting.

Accrual accounting means that income is recognized when earned regardless of when received and
expense is recognized when incurred regardless of when paid.
Under this basis, the effects of transactions and other events are recognized when they occur and not as
cash or its equivalent is received or paid, and they are recorded in the accounting records and reported
in the financial statements of the period to which they relate.

The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid
expenses, accrued expenses, deferred income, and accrued income.

QUESTION 1-27

Explain briefly the going concern assumption.

ANSWER 1-27

Going concern assumption means that the accounting entity is viewed as continuing in operation
indefinitely in the absence of evidence to the contrary.

In other words, financial statements are prepared normally on the assumption that the entity shall
continue in operation for the foreseeable future.

Thus, assets are normally recorded at original acquisition cost. As a rule, market values are ignored.
However, the new standards require measurement of certain assets at fair value.

This postulate is the very foundation of the cost principle. It is also known as the continuity assumption.

QUESTION 1-29

Explain briefly the time period assumption.

ANSWER 1-29

The time period assumption requires that “the indefinite life of an entity is subdivided into time periods
or accounting periods which are usually of equal length for the purpose of preparing financial reports on
financial position, financial performance, and cash flows.”

The accounting period or fiscal period is one year or a period of twelve months. The “one-year period” is
traditionally the accounting period because usually it is after one year that government reports are
required.

The accounting period may be a calendar year or a natural business year. A calendar year is a twelve-
month period that ends on December 31. A natural business year is a twelve-month period that ends on
any month when the business is at the lowest or experiencing slack season.

QUESTION 1-30

Explain fully the monetary unit assumption.

ANSWER 1-30
The monetary unit assumption has two aspects, namely quantifiability and stability of the peso. The
quantifiability aspect means that the assets, liabilities, equity, income and expenses should be stated in
terms of a unit of measure which is the peso in the Philippines.

How awkward to see financial statements without any common unit of measure. Such statements would
be largely unintelligible and incomprehensible.

The stable peso postulate is actually an amplification of the going concern assumptions so much so that
the adjustments are unnecessary to reflect any changes in purchasing power.

The accounting function is to account for pesos only and not for changes in purchasing power.

In today’s world, the assumption that the peso is a stable measure over time is not necessarily valid.

Consider an equipment that was imported 10 years ago from the united States for $100, 00 when the
exchange rate was P35 to $1 or an equivalent of P3,500,000.

If the same equipment is purchased now and assuming there is no change in the $100,000 purchase
price, the replacement cost in terms of pesos would be in the vicinity of P4, 800, 00, considering a
current exchange rate of P48 to $1.

Obviously, there is a significant gap between historical cost and current replacement cost.

In this regard, PAS 16 provides that an entity shall choose either the cost model or revaluation model as
its accounting policy to an entire class of property, plant and equipment.

On the other hand, US GAAP encourages entities to make supplementary disclosures relating to the
impact of changing prices.

QUESTION 1-31

What do you understand by the by the framework for the Preparation and Presentation of financial
statements?

ANSWER 1-31

The framework for the Preparation and Presentation of financial statements is promulgated by the
International Accounting Standards Board and adopted by the local Financial Reporting Standards
Council.

The Framework is a summary of the terms and concepts that underlie the preparation and presentation
of financial statements. It is the underlying theory for the development of accounting standards and
revision of previously issued accounting standards.

The Framework is an attempt to provide an overall theoretical foundation for accounting which will
guide standard-setters, preparers and users of financial information in the preparation and presentation
of statements.
In other words, the concepts are the foundation on which financial statements are constructed, and
provide a platform from which accounting standards are developed and revised.

The Framework is concerned with general-purpose financial statements, including consolidated financial
statements.

The financial statements are prepared at least annually and are directed toward the common needs of a
wide range of users.

QUESTION 1-32

What are the basic purposes of the Framework?

ANSWER 1-32

The basic purposes of the Framework are:

a. To assist the Financial Reporting Standards Council in developing accounting standards that
represents Philippine GAAP.
b. To assist preparers of financial statements in applying accounting standards and in dealing with
issues not yet covered by GAAP.
c. To assist the Financial Reporting Standards Council in its review and adaption of International
Accounting Standards.
d. To assist users of financial statements in interpreting the information contained in the financial
statements.
e. To assist auditors in forming an opinion as to whether financial statements conform with Philippine
GAAP.
f. To provide information to those interested in the work of the Financial Reporting Standards Council
in the formulation of Philippine Financial Reporting Standards.

QUESTION 1-33

Explain the authoritative status of the Framework.

ANSWER 1-33

If there is a standard or an interpretation that specifically applies to a transaction, the standard or

interpretation overrides the Framework.

In the absence of a standard or an interpretation that specifically applies to a transaction, management

shall consider the applicability of the Framework in developing and applying an accounting policy that
results in information that is relevant and reliable.

However, it is to be stated that the Framework is not a Philippine Financial Reporting Standard and
hence does not define standard for any particular measurement or disclosure issue.

Nothing in the Framework overrides any specific Philippine Financial Reporting Standard.
In case where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall
prevail over the Framework.

QUESTION 1-34

What is the scope of the Framework?

ANSWER 1-34

a. Objective of financial statements.

b. Qualitative characteristics that determine the usefulness of information in financial statements.
c. Definition, recognition and measurement of the elements from which financial statements are
constructed.
d. Concepts of capital and capital maintenance.

The Framework is applies to the financial statements of all commercial, industrial and business reporting
entities, whether in the public or private sector.

However, special purpose financial reports, for example, prospectuses and computations prepared for
taxation purposes, are outside the scope of the Framework.

QUESTION 1-35

What is the objective of financial statements?

ANSWER 1-35

The objective of financial statements is to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide range of users in making economic
decisions.

QUESTION 1-36

What is the financial position of an entity?

ANSWER 1-36

The financial position of an entity comprises its assets, liabilities and equity at a particular date.

The financial position pertains to the economic resources, liquidity, solvency, financial structure and
capacity for adaptation of an entity. Such information is pictured in the statement of financial position.

QUESTION 1-37

Define the following:

1. Economic Resources
2. Liquidity
 3. Solvency
4. Financial structure
5. Capacity for adaptation

ANSWER 1-37

1. Economic resources simply refer to the assets owned by the entity. Information about the
economic resources controlled by the entity and its capacity to modify these resources is useful
in predicting the ability of the entity to generate cash and cash equivalents in the future.
2. Liquidity is the availability of cash in the near future to cover currently maturing obligations.
3. Solvency is the availability of cash over a long term to meet financial commitments when they
fall due.
Information about liquidity and solvency is useful in predicting the ability of the entity to comply
with its future financial commitments.
4. Financial structure is the source of financing for the assets of the entity.
Financial structure indicates what amount of assets has been financed by creditors which is the
borrowed capital, and how much has been financed by owners which is the invested or equity
capital.
5. Capacity for adaptation is the ability of the entity to use its available cash for unexpected
requirements and investment opportunities.
This may be accomplished by raising cash at a short notice through borrowing and issuance of
securities or by raising cash through disposal of assets without disrupting normal operations.
Capacity for adaptation is also known as financial flexibility.

QUESTION 1-38

What is the meaning of “financial performance of an entity?”

ANSWER 1-38

The financial performance of an entity comprises its revenue, expenses and net income or loss for a
period of time.

Financial performance is the level of income earned by the entity through the efficient and effective use
of its resources.

The financial performance of an entity is also known as result of operations and is portrayed in the
income statement and statement of comprehensive income.

Information about performance is useful in predicting the capacity of the entity to generate cash flows
from its operations. It is also useful in forming judgment about the effectiveness of the entity in
employing additional resources.

QUESTION 1-39
What is financial reporting?

ANSWER 1-39

Financial reporting is the provision of financial information about an entity to external users that is
useful to them in making economic decisions and for assessing the effectiveness of the entity’s
management.

The principal way of providing financial information to external users is through the annual financial
statements.

However, financial reporting encompasses not only financial statements but also other information
such as financial highlights, summary of important financial figures, analysis of financial statements and
significant ratios.

Financial reports also include nonfinancial information such as descriptions of major products and a
listing of corporate officers and directors.

QUESTION 1-40

What is the objective of financial reporting?

ANSWER 1-40

The overall objective of financial reporting is to provide information that is useful for decision making.

Specifically, the AICPA Financial Accounting Standards Board in its Statement of financial Accounting
Concepts enumerates the following objectives of financial reporting:

a. To provide information useful in investment, credit and similar decision.

b. To provide information useful in assessing cash flow prospects.
c. To provide information about entity resources claims to those resources and changes in them.

QUESTION 1-41

Explain the following concepts in conjunction with the objective of financial statements.

1. Entity theory
2. Proprietary theory
3. Residual equity theory
4. Fund theory

ANSWER 1-41

1. Entity theory- The accounting objective is geared toward proper income determination. Proper
matching of cost against revenue is the ultimate end.
 Thus, the entity theory emphasizes the importance of the income statement. This is explained
by the equation:
Assets= Liabilities + Capital
2. Proprietary theory- The accounting objective is directed toward proper valuation of assets.
Thus, this theory emphasizes the importance of the balance sheet. It is exemplified by the
equation:
Assets- Liabilities= Capital
3. Residual equity theory- The accounting objective is also proper valuation of assets. This is
applicable where there are two classes of shareholders, ordinary and preference. Thus, the
equation is:
Assets- Liabilities- Preference Shareholders’ Equity= Ordinary Shareholders’ Equity
4. Fund theory- The accounting objective is neither proper income determination nor proper
valuation of assets but the custody and administration of funds.
The objective is directed toward cash flows exemplified by the formula “cash inflows minus cash
outflows equals fund.”
Government accounting and fiduciary accounting are examples of the application of this
concept.

QUESTION 1-42

Enumerate the users of financial statements and their information needs.

ANSWER 1-42

a. Investors- The providers of risk capital and their advisers are concerned with the risk inherent in
and return provided by their investments.
Investors need information to help them determine whether they should buy, hold or sell.
Shareholders are also interested in information which enables them to assess the ability of the
entity to pay dividends.
b. Employees- Employees are interested in information about the stability and profitability of the
entity.
The employees are interested in information which enables them to assess the ability of the
entity to provide remuneration, retirement benefits and employment opportunities.
c. Lenders- Lenders are interested in information which enables them to determine whether their
loans and interest thereon will be paid when due.
d. Suppliers and other trade creditors- These users are interested in information which enables
them to determine whether amounts owing to them will be paid on maturity.
e. Customers- Customers have an interest in information about the continuance of an entity
especially when they have a long-term involvement with or are dependent on the entity.
f. Government and its agencies- Government and its agencies are interested in the allocation of
resources and therefore the activities of the entity.
These users require information to regulate the activities of the entity, determine taxation
policies and as a basis for national income and similar statistics.
 g. Public- Entities affect members of the public in a variety of ways.
For example, entities make substantial contributions to the local economy in many ways
including the number ofpeople they employ and their patronage of local suppliers.
Financial statements may assist the public by providing information about the trends and recent
developments in the prosperity of the entity and the range of its activities.

QUESTION 1-43 Multiple choice (ACP)

1. Accounting is a service activity and its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decision. This accounting definition is given by
a. Accounting Standards Council
b. AICPA Committee on Accounting terminology
c. American Accounting Association
d. Board of Accountancy
2. The Basic purpose of accounting is
a. To provide the information that the managers of an economic entity need to control its
operations.
b. To provide information that the creditors of an economic entity can use in deciding whether
to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making
rational economic decision.
3. These are the events that affect the entity and in which other entities participate.
a. Internal events
b. External events
c. Summarizing
d. Interpreting
4. The “communicating” process of accounting includes all of the following, except
a. Recording
b. Classifying
c. Summarizing
d. Interpreting
5. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
6. It is the body authorized by law to promulgate rules and regulations affecting the practice of the
accountancy profession in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
 c. Securities and exchange Commission
d. Financial Reporting Standards Council
7. Accountants employed in entities in various capacity as accounting staff, chief accountant or
controller are said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
8. It is the accounting standard setting body created by PRC upon recommendation the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and functions under
R.A No.9298.
a. Accounting Standards Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards Council
9. Which is not required to be represented in the FRSC?
a. Bangko Sentral ng Pilipinas
b. Bureau of Internal Revenue
c. Commission on Audit
d. Department of Budget and Management
10. Which statement is true about the Philippine Interpretations Committee?
I. The role of the Philippine Interpretations Committee is to prepare interpretations of
PFRS for approval by the Financial Reporting Standards Council and in the context of the
framework, to provide timely guidance on financial accounting issues not specifically
addressed in current PFRS.
II. The interpretations are intended to give “authoritative guidance” on issues that are
likely to receive divergent or unacceptable treatment because standards do not provide
specific clear cut rules and guidelines.
a. I only
b. II only
c. Both I and II
d. Neither I or II

ANSWER 1-43

1. a 6. a
2. d 7. b
3. b 8. d
4. d 9. d
5. a 10. c

QUESTION 1-44 Multiple choice (IAA)

 1. Financial accounting is covered with
a. General-purpose reports on financial position and financial performance.
b. Specialized reports for inventory management and control
c. Specialized reports for income tax computation and recognition
d. General-purpose reports on changes in stock prices and future estimates of market position.
2. Financial accounting can be broadly defined as the area of accounting that prepares
a. General purpose financial statements to be used by parties internal to the entity only.
b. Financial statements to be used by investors only.
c. General purpose financial statements to be used by parties both internal and external to the
entity.
d. Financial statements to be used primarily by management.
3. The primary focus of financial accounting has been on meeting the needs of which of the
following groups?
a. Managers of an entity
b. Present and potential creditors of an entity
c. National and local existing authorities
d. Independent auditors
4. Financial accounting is the area of accounting that emphasizes reporting to
a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors
5. Managerial accounting is the area of accounting that emphasizes
a. Reporting financial information to external users
b. Reporting to the SEC
c. Combining accounting knowledge with an expertise in data processing
d. Developing accounting information for use within an entity

ANSWER 1-44

1. a
2. c
3. b
4. d
5. d

QUESTION 1-45

1. Generally accepted accounting principles

a. Are accounting adaptations based on the laws of economic science
b. Derive their credibility and authority from legal rulings and court precedents
c. Derive their credibility and authority from the national government through the SEC
 d. Derive their credibility and authority from general recognition and acceptance by the
accountancy profession
2. Which of the following statements best describes generally accepted accounting principles?
a. They have been formulated in the public sector.
b. They have been developed on the basis of such factors as usage and practical necessity.
c. They are the same as laws within our legal system.
d. They do not apply to small entities
3. Proper application of accounting principles is most dependent upon the
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
4. The process of establishing financial accounting standards
a. Is a democratic process in that a majority of practicing accountants must agree with a
standard before it becomes implemented.
b. Is a legislative process based on rules promulgated by government agencies.
c. Is based solely on economic analysis of the effects each standard will have if it is
implemented.
d. Is a social process which incorporates political actions of various interested user groups as
well as professional research and logic.
5. Once an accounting standard has been established
a. The standard is continually reviewed to see if modification is necessary.
b. The standard is not reviewed unless SEC makes a complaint.
c. The task of reviewing the standard to see if modification is necessary is given to the PICPA.
d. The principle of consistency requires that no revisions ever be made to the standard.
6. As independent or external auditors, CPAs are primarily responsible for
a. Preparing financial statements in conformity with the GAAP
b. Certifying the accuracy of financial statements
c. Expressing an opinion as to the fairness of financial statements
d. Filing financial statements with the SEC
7. The singularly unique function performed by Certified Public Accountants is
a. Tax preparation
b. Management advisory services
c. The attest function
d. The preparation of financial statements
8. The purpose of the International Financial Reporting Standards is to
a. Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
b. Develop a uniform currency in which the financial transactions of entities throughout the
world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
 9. The International Accounting Standards Board was formed to
a. Enforce IFRS in foreign countries
b. Develop worldwide accounting standards
c. Establish accounting standards for multinational entities
d. Develop accounting standards for countries that do not have their standard-setting bodies
10. It is a “global phenomenon” intended to bring about transparency and a higher degree of
comparability in financial reporting, both of which will benefit the investors and are essential to
achieve the goal of one uniform and globally accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology

ANSWER 1-45

1. d 6.c
2. b 7. c
3. d 8. c
4. d 9. b
5. a 10.a

QUESTION 1-46 Multiple choice (assumptions)

1. The framework specifically mentions two underlying assumptions, namely

a. Accrual and going concern
b. Accrual and accounting entity
c. Going concern and time period
d. Time period and monetary unit
2. Which of the following is listed in the Framework as underlying assumption regarding financial
statements?
a. The financial statements are reliable.
b. Any changes in accounting policy are neutral.
c. The financial statements are prepared under accrual basis.
d. The entity can be viewed as a liquidating concern.
3. Which of the following terms best describes financial statements whose basis of accounting
recognizes transactions and other events when they occur?
a. Accrual basis of accounting
b. Going concern basis of accounting
c. Cash basis of accounting
d. Invoice basis of accounting
4. The accrual basis of accounting is based primarily on
a. Conservatism and revenue realization
b. Conservatism and matching
 c. Consistency and matching
d. Revenue realization and matching
5. Which of the following statements best describes the term “going concern”?
a. When current liabilities of an entity exceeds assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The expenses of the entity exceeds its income
6. Which of the following is not an implication of the going concern assumption?
a. The historical cost assumption is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current and noncurrent classification of assets and liabilities is justifiable and significant.
d. Amortizing research and development costs over several periods is justifiable and
appropriate.
7. The relatively stable economic, political and social environment supports
a. Conservatism
b. Materiality
c. Timeliness
d. Going Concern
8. Which underlying concept serves as the basis for preparing financial statements at regular
intervals?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit
9. Which of the following is not an important characteristic of the financial statements that
accountants currently prepare?
a. The information in financial statements is expressed in units of money adjusted for changing
purchasing power.
b. Financial statements articulate with one another because measuring financial position is
related to measuring changes in financial position.
c. The information in financial statements is summarized and classified to help meet users’
needs.
d. Financial statements can be justified only if the benefits they provide exceed the costs.

10. Which of the following statements is incorrect?

a. The accrual method, which builds directly on the revenue and matching principles, ignores the
timing of the cash receipts or payments in determining when to recognize revenue or expenses.

b. In accordance with the unit of measure assumption, the changing purchasing power of money
due to inflation or deflation.
 c. In accordance with the going concern assumption, the life of an entity is presumed to be
indefinite.

d. Accountants prepare financial statements at arbitrary points in time during an entity’s

lifetime in accordance with the accounting period.

ANSWER 1-46

1. A 6. D
2. C 7. D
3. A 8. C
4. D 9. A
5. B 10. B

QUESTION 1-47 multiple choice (AICPA Adapted)

1. The concept of accounting entity is applicable

a. Only to the legal aspects of business organizations
b. Only tot the economic aspects of business organization
c. Only to business organizations
d. Whenever accounting is involved

2. When a parent and subsidiary relationship exists, consolidated financial statements are
prepared in recognition of
a. Legal entity
b. Economic entity
c. Stable monetary unit
d. Time period

3. The valuation of a promise to receive cash in the future at present value is valid because of the
accounting concept of
a. Entity
b. Time period
c. Going concern
d. Monetary unit
4. This accounting concept justifies the usage of accruals and deferrals.
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit
 5. During the lifetime of an entity accountants produce financial statements at arbitrary points in
time in accordance with which basic accounting concept?
a. Accrual
b. Periodicity
c. Unit of measure
d. Continuity

ANSWER 1-47

1. D
2. B
3. C
4. A
5. B

QUESTION 1-48 multiple choice (Framework)

1. The Framework for the Preparation and Presentation of Financial Statements should
a. Lead to uniformity of financial statements among entities within the same industry.
b. Eliminate alternative accounting principles and methods.
c. Guide the PICPA in developing generally accepted auditing standards.
d. Define the basic objectives, terms and concepts of accounting.

2. Which is not a basic purpose of the Framework?

a. To assist the Financial Reporting Standards Council in developing accounting standards.
b. To assist the preparers of financial statements in applying accounting standards.
c. To assist the Financial Reporting Standards Council in reviewing and adopting
International Accounting Standards.
d. To assist the Board of Accountancy in promulgating rules and regulations affecting the
practice of accountancy in the Philippines.

3. Which of the following is not a purpose of the Framework?

a. To provide definitions of key terms of key terms and fundamental concepts.
b. To provide specific guidelines for resolving situations not covered by existing accounting
standards.
c. To assist accountants and others in selecting among alternative accounting and
reporting methods.
 d. To assist the Financial Reporting Standards Council in the standard-setting process.

4. Which is a basic purpose of the Framework?

I. To assist users of financial statements in interpreting the information contained in
the financial statements.
II. To assist auditors in forming an opinion as to whether financial statements conform
with Philippine GAAP.
III. To provide information to those interested in the work of the Financial Reporting
Standards Council in the formulation of PFRS.

a. I and II only
b. I and III only
c. II and III only
d. I, II and III

5. What is the authoritative status of the Framework?

a. The Framework has the highest level of authority
b. In the absence of a standard or an interpretation that specifically applies to a
transaction, the Framework shall be followed.
c. In the absence of a standard or an interpretation that specifically applies to a
transaction, management shall consider the applicability of the Framework in
developing and applying an accounting policy that result in information that is relevant
and reliable.
d. The Framework applies only when the FRSC develops new or revised standards.

6. The Framework is intended to establish

a. Generally accepted accounting principles in financial reporting by entities.
b. The meaning of “ present fairly in accordance with GAAP”
c. The objectives and concept for use in developing standards of financial accounting and
reporting.
d. The hierarchy of sources of GAAP.

7. Which statements is incorrect concerning the framework?

I. The Framework applies to the financial statements of all commercial, industrial and
business reporting entities, whether in the public and private sector.

II. Special purpose financial reports, for example, prospectuses, are within the scope of
the Framework.
 a. I only
b. II only
c. Both I and II
d. Neither I nor II

8. Which statement is correct concerning the Framework?

I. The Framework is not a Philippine Financial Reporting Standard and hence does not
define standard for any particular measurement or disclosure issue.

II. The Framework is concerned with general-purpose financial statements including

consolidated financial statement.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

9. Which is not included in the scope of the Framework?

a. Qualitative characteristics that determine usefulness of financial accounting information
b. Definition, recognition and measurement of the elements of financial statements
c. Objective of financial statements
d. Generally accepted accounting principles

10. As regards the relationship between PFRS and the Framework, which of the following
statements is true?
I. The Framework is a reporting standard.

II. In case of conflict, the requirements of the Framework prevail over those of the
relevant PFRS.

a. I only.
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 1-48

1. D 6. C
2. D 7. B
3. B 8. C
4. D 9. D
 5. C 10. D

QUESTION 1-49 Multiple Choice (Users of Information)

1. Which of the following is an internal user of an entity’s financial information?

a. Board of Directors
b. Shareholder in the entity
c. Holder of the entity’s bonds
d. Creditor with long term contracts with the entity

2. These users require information on risk and return on investment and hence an entity’s ability
to pay dividends.

a. Investors
b. Employees
c. Lenders
d. Customers

3. These users are interested in information about the profitability and stability of an entity in
order to assess the ability of the entity to provide remuneration, retirement benefits and
employment opportunities.

a. Customers
b. The public
c. Government and their agencies
d. Employees

4. These users are interested in information that enables them to determine whether amounts
owing to them will be paid when due.

a. Suppliers and trade creditors

b. Lenders
c. Banks
d. Finance entities

5. These users are interested in information about the profitability and stability of an entity in
order to assess whether an entity is able to repay loans and related interest when the loans fall
due.

a. Lenders
 b. Borrowers
c. Trade creditors
d. Owners

6. These users are interested in information about the continuance of an entity, especially when
they have a long-term involvement with or are dependent on the entity.

a. Customers
b. Employees
c. Trade unions
d. Suppliers

7. These users are interested in information in order to regulate the activities of an entity,
determine taxation policies and provide a basis for national statistics.

a. Governments and their agencies

b. Major organization of users
c. Bureau of internal revenue
d. Department of finance

8. These users are interested in information on trends and recent developments where an entity
makes a substantial contribution to the local economy providing employment and using local
suppliers.

a. The public
b. Governments and their agencies
c. Finance entities
d. Private entities

9. The providers of risk capital and their advisers

I. Are concerned with the risk inherent in and return provided by their investments.
II. Need information to help them determine whether they should buy or sell.

a. I only
b. Ii only
c. Both I and II
d. Neither I and II

10. Which statement is correct regarding information needs?

 I. All information needs of users cannot be met by financial statements.

II. As investors are providers of risk capital to the entity, the provision of financial
statements that meet their needs will also meet most of the needs of other users that
financial statements can satisfy.

a. I only
b. II only
c. Both I and II
d. Neither I and II

ANSWERS 1-49

1. A 6. A
2. A 7. A
3. D 8. A
4. A 9. C
5. A 10. C

QUESTIONS 1-50 Multiple Choice (AICPA Adapted)

1. The theory of accounting which best describes the accounting equation expressed “assets +
equity” is the

a. Entity theory
b. Fund theory
c. Proprietary theory
d. Residual equity theory

2. What theory of ownership equity is enumerated by the following equation: assets minus
liabilities minus preference share equity equals ordinary share equity?

a. Fund
b. Entity
c. Proprietary
d. Residual equity

3. Classifying preference dividends as expense is an application of what concept?

a. Entity
b. Proprietary
c. Residual equity
 d. Fund

4. The primary accounting objective is fair presentation of the financial performance of the entity.

a. Entity
b. Proprietary
c. Residual equity
d. Fund

5. Fiduciary accounting is an application of

a. Entity theory
b. Proprietary theory
c. Residual equity theory
d. Fund theory

ANSWER 1-50

1. A
2. D
3. C
4. A
5. D

QUESTION 1-51 multiple choice (IAA)

1. The overall objective of financial reporting is to provide information

a. That is useful for decision making

b. About an entity’s assets, liabilities and owner’s equity
c. About an entity’s financial performance during a period
d. That allows owners to assess management’s performance

2. Which of the following statements concerning the objective of financial reporting is correct?

a. The objectives are intended to be specific in nature.

b. The objectives are directed primarily toward the needs of internal users of accounting
information.
 c. The objectives are the end result of the conceptual framework project.
d. The objectives encompass not only financial statement disclosures but other information as
well.

3. Information about financial structure is useful in predicting

a. Future borrowing needs and how future profits and cash flows will be distributed among
those with an interest in the entity
b. The ability of the entity to meet its financial commitments as they fall due over a longer
term.
c. The ability of the entity to use its available cash for unexpected requirements and
investment opportunities.
d. The capacity of the entity to generate cash flows from its operations.

4. Which of the following statements best describes the term “financial position”?

a. The net income and expenses of an entity.

b. The net of financial assets less liabilities of an entity
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The assets, liabilities and equity of an entity

5. Which of the following best describes “financial performance” of an entity?

a. The revenue, expenses and net income or loss for a period of an entity.
b. The assets, liabilities and equity of an entity
c. The total assets minus total liabilities
d. The total cash inflow minus cash outflows

ANSWER 1-51

1. A
2. D
3. A
4. D
5. A

QUESTION 1-52 multiple choice (AICPA Adapted)

1. The objectives of financial reporting for entities are based on

a. The need for conservatism

 b. Reporting on management’s ownership
c. Generally accepted accounting principles
d. The needs of the users of the information

2. The information provided by financial reporting pertains to

a. Individual business entities, rather than to industries or an economy as a whole or to

members of society as consumers
b. Individual business entities and an economy as a whole or to members of society as
consumers
c. Individual business entities and an economy as a whole, rather than to industries or to
members of society as consumers
d. Individual business entities, industries and an economy as a whole, rather than to members
of society as consumers

3. During a period when an entity is under the direction of a particular management, financial
reporting will directly provide information about

a. Both entity performance and management performance

b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance.

4. Which one of the following items is not listed as major objectives of the financial reporting?

a. Financial reporting shall provide information about entity resources, claims to those
resources and changes in them.
b. Financial reporting shall provide information useful in evaluating management’s
stewardship.
c. Financial reporting shall provide information useful in investment, credit and similar
decisions.
d. Financial reporting shall provide information useful in assessing cash flow prospects.
 5. Which of the following statements is not normally an objective of financial reporting?

a. To provide information about an entity’s assets and claims against those assets.
b. To provide information that is useful in assessing an entity’s sources and uses of cash.
c. To provide information that is useful in lending and investing decisions.
d. To provide information about an entity’s liquidation value

ANSWER 1-52
1. D
2. A
3. C
4. B
5. D

QUESTION 1-53 Multiple Choice (PHILCPA Adapted)

1. The principles which constitute the ground rules for financial reporting are termed “generally
accepted accounting principles”. To qualify as “generally accepted,” an accounting principle
must

a. Usually guide corporate managers in preparing financial statements, which will be

understood by widely scattered shareholders.
b. Guide corporate managers in preparing financial statements, which will be used, for
collective bargaining agreement with trade unions.
c. Guide an entrepreneur of the choice of an accounting entity like single proprietorship or
corporation.
d. Receive substantial authoritative support.

2. Under generally accepted accounting principles

a. Income and expenses, assets and liabilities are measured based on the occurrences of
changes in the economic resources and obligations
b. Assets and liabilities are measures on the basis of their liquidation value.
c. Income and expenses are recognized on the basis of cash receipts and payments, including
depreciation of property, plant and equipment.
d. Financial position and financial performance are measured on the basis of cash received and
cash paid.

3. The four phases of accounting are recording, classifying, summarizing and interpreting. The
phase whereby the liquidity, solvency and profitability of an entity are significantly portrayed is
known as

a. Summarizing
b. Classifying
c. Recording
d. Interpreting
4. Four types of money prices are used in measuring resources in financial accounting. The
measurement which uses such concepts as present value, discounted cash flow and value in
use is known as

a. Price is a current purchase exchange

b. Price in past purchase exchange
c. Price based on future exchange
d. Price in a current sale exchange

5. External events include all of the following, except

a. Sale of merchandise
b. Borrowing from bank
c. Donation received from shareholder
d. Casualty loss caused by flood, earthquake or other natural disaster

ANSWER 1-53

1. d
2. a
3. d
4. c
5. d
CHAPTER 11

OPERATING SEGMENTS

QUESTION 11-1

What is the “core principle” of PFRS 8 on operating segments?

ANSWER 11-1

The core principle of PFRS 8 is as follows:

“An entity shall disclose information to enable users of its financial statements to evaluate the nature
and financial effects of the business activities in which it engages and the economic environment in
which it operates”.

QUESTION 11-2

What is the scope of PFRS 8?

ANSWER 11-2

PFRS 8 shall apply to the separate or individual financial statements of an entity and to the consolidated
financial statements of a group with a parent:

a. Whose debt or equity instruments are traded in a public market.

b. That files or is in the process of filling the consolidated financial statements with the securities
commission or other regulatory organization for the purpose of issuing any class of instruments
in a public market.

However, if a financial report contains both the consolidated financial statements of the parent and the
parent’s separate financial statements, segment information is required only in the consolidated
financial statements.

QUESTION 11-3

What is an “operating segment”?

ANSWER11-3

An operating segment is a component of an entity:

 a. That engages in business activities from which it may earn revenue and incur expenses,
including revenue and expenses relating to transactions with other components of the same
entity.
b. Whose operating results are regularly reviewed by the entity’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance.
c. And for which discrete financial information is available.

An operating segment may engage in business activities for which it has yet to earn revenue. For
example, start-up operations may be operating in segments before earning revenue.

Not every part of an entity is necessarily operating segment or part of an operating segment.

For example, corporate headquarters or some functional departments that may not earn revenue or
may earn revenue that is incidental only to the activities of the entity would not be operating segments.

An entity’s postemployment benefit plans are not also operating segments.

QUESTION11-4

Explain the term “chief operating decision maker”.

ANSWER11-4

The term “chief operating decision maker” identifies a function and not necessarily a manager with a
specific title.

This function is “to allocate resources to the segments and assess their performance”.

The chief operating decision maker may be the entity’s chief executive officer, chief operating officer or
a group of executive directors depending on who within the organization is responsible for the
allocation of resources and assessing the performance of operating segments.

QUESTION11-5

What is the “management approach” of identifying operating segments?

ANSWER11-5

The management approach means that the operating segments are identified on the basis of internal
reports about components of the entity that are regularly reviewed by the chief operating decision
maker in order to allocate resources to the segment and to assess its performance.
In other words, operating segments are identified based on the components of the entity that are
considered to be important for internal management purposes.

A component of entity that sells primarily or exclusively to other operating segments is included in the
definition of an operating segment if the entity is managed that way.

The idea is that the reporting of segment information is seen through the “eyes of management” and
users would wish to see the business as the chief operating decision maker sees it.

PFRS8 has abandoned the “risks and reward approach” of identifying operations by business segments
and geographical segments.

QUESTION 11-6

What are the “quantitative thresholds” of identifying an operating segment?

ANSWER 11-6

An entity shall disclose information about an operating segment that meets any of the following
quantitative thresholds:

1. The segment revenue, including both sales to external customers and intersegment sales or transfers,
is 10% or more of the combined revenue, internal and external of all operating segments.

2. The absolute amount of profit or loss is 10% or more of the greater in absolute amount of:

a. Combined profit of all operating segments that reported a profit.

b. Combined loss of all operating segments that reported a loss.

3. The assets of the segment are 10% or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable
and separately disclosed on a voluntary basis if management believes that information about the
segment would be useful to the users of the financial statements.

QUESTION 11-7

Explain the “75% of the entity revenue” threshold of identifying operating segments.

ANSWER 11-7
If the total external revenue of reportable operating segments constitutes less than 75% of the entity
external revenue, additional operating segments shall be identified as reportable segments even if they
do not meet the quantitative thresholds until at least 75% of the entity external revenue is included in
reportable segments.

This “overall size test” is to ensure that all entities present a sufficient level of information regarding
their business activities in order that users of financial statements can make informed economic
decisions.

QUESTION 11-8

What is the practical limit to the number of reportable segments to be disclosed separately by an entity?

ANSWER 11-8

There may be a practical limit to the number of reportable segments to be disclosed separately by an
entity beyond which segment information may become too detailed.

Although no precise limit has been determined, as the number increase above ten, the entity shall
consider whether a practical limit has been reached.

In other words, the standard suggests that if the number of reportable segments exceeds ten, it is likely
that the information may become too detailed and consequently lose its usefulness.

QUESTION 11-9

Explain the “aggregation” of two or more operating segments to constitute a “single operating
segment”.

ANSWER 11-9

Two or more operating segments may be aggregated into a “single operating segment” if the
aggregation is consistent with the core principle of segment reporting, the segments have similar
economic characteristics and the segments are similar in each of the following respects:

a. Nature of the product or service

b. Nature of the product process
c. Type or class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment, for example, banking, insurance or public utility

Accordingly, an entity may combine information about operating segments that do not meet the
quantitative thresholds to achieve the “75% of entity external revenue” threshold if the operating
segments have similar economic characteristics and share a majority of the five aggregation criteria.
QUESTION 11-10

Explain the treatment of e reportable segment in the immediately preceding period but no longer
reportable in the current period.

ANSWER 11-10

If the management judges that an operating segment identified as a reportable segment in the
immediately preceding period is of continuing significance, information about the segment shall
continue to be reported separately in the current period even if it no longer meets any of the
quantitative thresholds for reportability.

QUESTION 11-11

Explain the treatment of reportable segment in the current period but not reportable in the prior
period.

ANSWER 11-11

If an operating segment is identified as a reportable segment in the current period in accordance with
the quantitative thresholds, segment data for a prior period presented for comparative purposes shall
be stated to reflect the newly reportable segment even if that segment did not satisfy any of the
quantitative thresholds in the prior period.

However, prior period information shall not be restated if the necessary information is not available and
the cost to develop it would be excessive.

QUESTION 11-12

What are the disclosures required under PFRS 8?

ANSWER 11-12

An entity shall disclose the following for each period:

1. General information about the operating segment.

2. Information about reported profit or loss, including specified revenue and expenses included in
the measure of profit or loss, segment assets, segment liabilities and the basis of measurement.
3. Reconciliations of the totals of segment revenue, profit or loss, segment assets, segment
liabilities and other material segment items to corresponding items in the entity’s financial
statements.

QUESTION 11-13

What data are included in the “general information” disclosure for an operating segment?
ANSWER 11-13

An entity shall disclose the following general information about an operating segment:

1. Factors used to identify the reportable segments, including the basis of organization.

For example, whether management has chosen to organize the entity around differences in
products and services, geographical areas, regulatory environment, or a combination of factors,
and whether operating segments have been aggregated.

2. Types of products and services from which each reportable segment derives its revenue.

An example of disclosure about type of products and services is as follows:

An entity has three reportable operating segments, namely car parts, motor vessels and software.

The car parts segment produces replacement parts of sale to car parts retailers.

The motor vessels segment produces replacement parts for serve the offshore oil industry and similar
businesses.

The software segment produces application software for sale to computer manufacturers and retailers.

QUESTION 11-14

What information shall be disclosed by an entity about segment profit or loss, assets and liabilities?

ANSWER 11-14

An entity shall disclose for each reportable segment a measure of profit or loss, total assets and total
liabilities.

Under the old version of PFRS 8, the measure of profit or loss and total assets for each reportable
segment shall be disclosed under all circumstances, meaning mandatory.

However, under the amended version, an entity shall also disclose a measure of total assets and total
decision maker.
QUESTION 11-15

Specifically, what information shall be disclosed by an entity about the measure of profit or loss?

ANSWER 11-15

An entity shall disclose the following if the specified amounts are included in the measure of segment
profit or loss or otherwise regularly provided to the chief operating decision maker even if not included
in the measure of segment profit or loss:

1. Revenue from external customers

2. Revenue from transactions with other operating segments of the same entity
3. Interest revenue
4. Interest expense
5. Depreciation and amortization
6. Material items of income and expense as required by paragraph 97 of PAS 1.
7. The entity’s interest in the profit or loss of associate and joint venture accounted for by the
equity method
8. Income tax expense
9. Material noncash items other than depreciation and amortization

Note that interest revenue and interest expense must be reported separately, unless a majority of the
segment revenue is from interest and the chief operating decision maker relies primarily on net interest
revenue in assessing the performance of the segment and in making decisions about resources to be
allocated to the segment.

Note also that the specified amounts are disclosed because they are included in the measure of profit or
loss reviewed by the chief operating decision maker or otherwise regularly provided to the chief
operating decision maker if not included in the measure of profit or loss.

QUESTION 11-16

Define segment revenue and segment expense.

ANSWER 11-16

PFRS 8 does not define any more segment revenue and segment expense. As a consequence, entities
shall have a wide direction in determining the measurement of these items.

PFRS 8 simply states that the amount of segment revenue and segment expense shall be the measure
reported to the chief operating decision maker.

The definition in the old standard may be of help.

Segment revenue is revenue that is directly attributable to a segment and the relevant portion of entity
revenue that can be allotted on a reasonable basis to the segment.

Specifically, segment revenue includes sales to external customers and intersegment sales.

Segment expense is expense resulting from the operating activities of the segment that is directly
attributable to the segment and the portion of an expense that can be allotted on a reasonable basis to
the segment.

QUESTION 11-17

Define segment assets.

ANSWER 11-17

PFRS 8 does not also define segment assets. The amount of total assets disclosed for a reportable
segment shall be the measure reported to the chief operating decision maker.

The old definition of segment assets may be of help.

Segment assets are those operating segments that are employed by a segment in its operating activities
that are either attributable to the segment or can be allocated to the segment on a reasonable basis.

Examples of segment assets include current assets that are used in the operating activities of the
segment, property, plant and equipment, and intangible assets.

Segment assets include goodwill that is directly attributable to a segment or can be allocated to a
segment on a reasonable basis.

Under PFRS 8, segment assets that are not required to be disclosed include deferred tax assets,
postemployment benefit assets, financial instruments, and rights arising under insurance contracts.

QUESTION 11-18

Define segment liabilities.

ANSWER 11-18

PFRS 8 does not define segment liabilities. The amount of total liabilities reported for a reportable
segment shall be the measure reported to the chief operating decision maker.
The old definition of segment liabilities may be of help.

Segment Liabilities are those liabilities that result from the operating activities of a segment and that are
either directly attributable to the segment or can be allocated to the segment on a reasonable basis.

Examples of segment liabilities include trade and other payables, accrued liabilities, customer advances,
product warranty liabilities and other claims relating to provision of goods and services.

QUESTION 11-9

Illustrate disclosure of segment profit or loss, total assets and total liabilities using the following
information for a reportable segment:

Sales-external 60,000

Sales-Internal 10,000

Total sales 70,000

Cost of sales (30,000)

Gross profits 40,000

Interest revenue 3,000

Distribution costs (8,000)

Administrative expenses (4,000)

Doubtful accounts (1,000)

Employee benefits expense ( 500)

Depreciation and amortization (2,500)

Interest expense (2,000)

Impairment loss (5,000)

Profit or loss 20,000

Total assets 60,000

Additions to noncurrent assets sold 8,000

Carrying amount of noncurrent assets sold 5,000

Total liabilities 20,000

ANSWER 11-19
The minimum disclosures under PFRS 8 relating to the reportable segment shall include the following:

Sales-external 60,000

Sales-internal 10,000

Interest revenue 3,000

Interest expense 2,000

Depreciation and amortization 2,500

Impairment loss 5,000

Profit or loss 20,000

Total assets 60,000

Additions to noncurrent assets 8,000

Total liabilities 20,000

Note that the amount for profit or loss is disclosed under all circumstances.

The other items disclose are specified in PFRS 8 and are disclosed only because they are included in the
measure of profit or loss assets and total liabilities reviewed by the chief decision maker.

The impairment loss is disclosed because the amount is deemed material.

Question 11-20

What specific segment assets shall be disclosed by an entity for each reportable segment?

ANSWER 11-20

An entity shall disclose for each reportable segment the if the specified amounts are included in the
measure of segment total assets or if not included, are regularly provided to the chief operating
decision maker.

1. The amount of investment in associates and joint ventures accounted for by the equity method.

2. The amount of additions to noncurrent assets, other than the financial instruments, deferred tax
assets, postemployment benefit assets, rights arising under insurance contracts.

QUESTION 11-21
Explain the reconciliations of segment amounts and entity amounts shown in the statement of financial
position and income statement.

ANSWER 11-21

An entity shall provide reconciliations of all the following:

1. The total revenue reportable segments to the entity revenue.

2. The total profit or loss of all reportable segments to the entity profit or loss before income tax
expense and discontinued operations.

3. The total assets of all reportable segments to the entity total assets.

4. The total liabilities of all reportable segments to the entity total liabilities.

5. The total for every other material item of information disclosed by the reportable segments to the
corresponding amount for the entity.

Illustration of reconciliations

Revenue

Total revenue of reportable segments 78,000

Other revenue-nonreportable segments 2,000

Elimination of investigation revenue (9,000)

Entity revenue 71,000

Profit or loss

Total profit or loss of reportable segments 7,800

Other profit or loss-nonreportable segments 200

Elimination of Intersegment profit (1,000)

Unallocated amount:

Ligation settlement received 1,000

Corporate expenses (1,500)

Entity profit or loss 6,500

Total assets
Total assets of reportable segment 158,000

Other assets-nonreportable segments 4,000

Unallocated other assets 3,000

Entity total assets 165,000

Total liabilities

Total liabilities of reportable segments 85,000

Other liabilities-nonreportable segments 5,000

Unallocated liabilities 10,000

Entity total liabilities 100,000

QUESTION 11-22

What are “entity-wide disclosures”?

ANSWER 11-22

“Entity –wide disclosures” are additional information that is required to be disclose by all entities if such
information is not provided as part of the reportable segment information.

Entity-wide disclosures include the following:

1. Information about products and services

2. Information about geographical areas

3. Information about major customers

QUESTION 11-23

Explain the entity wide disclosure of information about products and services.

ANSWERS 11-23

An entity shall disclose the revenue from external customers for each product and services, or each
group of similar products and services, unless the necessary information is not available and the cost to
develop it would be excessive.

QUESTION 11-24
Explain the entity-wide disclosure information about geographical areas.

ANSWER 11-24

An entity shall disclose the following geographical information:

a. Revenue from external customer in the entity’s country or domicile, and in all foreign operations
in total.
b. Separate disclosure of material revenue from external customer in an individual foreign country.
c. The basis for attributing revenue from external customers to individual countries.
d. Noncurrent assets, other than financial instruments, deferred tax assets, postemployment,
benefit assets and rights under insurance contracts, located in the entity’s country of domicile
and in all foreign countries in total.

An example of an entity-wide disclosure of information about geographical areas as follows:

REVENUE NONCURRENT ASSETS

Philippines 150,000 90,000

Japan 30,000 35,000

China 35,000 65,000

USA 40,000 20,000

Other countries 10,000 15,000

Total 265,000 225,000

QUESTION 11-25

What is a “major customer”?

ANSWERS 11-25

A “major customer” is defined as a single external customer providing revenue which amounts to10% or
more of an entity’s external revenue.

For purpose of PFRS 8, the following shall be considered a single customer:

1. A group of entities under common control.

2. A government and entities under the control of such government.

QUESTION 11-26
Explain the “major customer disclosure”.

ANSWER 11-26

The major customer disclosure means that “an entity shall provide information about extent of its
reliance on its major customers”.

The entity shall disclose such facts of reliance on major customers, the total amount of revenue from
such customer and the identity of the segments or segments reporting the revenue.

The entity is not required to disclose the identity of the major customer or the amount of revenue that
each segments reports from that customer.

QUESTION 11-27 MULTIPLE CHOICE (PFRS 8)

1. What is the “core principle significant “of PFRS8 on operating segments?

a. An entity shall disclose significant financial, information by business segments geographical

segments.
b. An entity shall disclose information to enable users of its financial statements to evaluate the
nature and financial effects of business activities which it engages.
c. An entity shall disclose information to enable users to evaluate the nature and financial effects
of the environment in which it operates.
d. An entity shall disclose information to enable users to evaluate the nature and financial effect of
the business activities in which it engages and the economic environment in which it operates.

2. PFRS 8 shall apply to

a. Separate financial statements of entity only.

b. Consolidated financial statements of a group only.
c. Both the separate financial statement of an entity and the consolidated financial statement of a
group.
d. Neither the separate financial statement of an entity nor the consolidated financial statement of
a group.

3. PFRS 8 shall apply to the separate financial statement of an entity and to the consolidated financial
statements of a group with a parent

I. Whose debt and equity instruments are traded in a public market.

II. That files or is in the process of filling the consolidated financial statements with a securities
commission for the purpose of issuing any class of instruments in a public market.

a. I only
 b. II only
c. Both I and II
d. Neither I nor II

4. If a financial report contains both the consolidated financial statements of a parent and the parent’s
separate financial statements, segment information is required in

a. The separate financial only

b. The consolidated financial statements only
c. Both the separate and consolidated financial statements
d. Neither the separate nor the consolidated financial statements

5. An operating segment is a component of an entity

I. That engages in business activities from which it may earn revenue and incur expenses,
including revenue and expenses relating to transactions with other components of the same
entity.
II. Whose operating results are regularly reviewed by the entity’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance.
III. For which discrete information is available

a. I only
b. II only
c. I and III only
d. I,II and III

6. Which may be considered an operating segment?

a. Start-up operations before earning revenue

b. Corporate headquarters that earn revenue
c. Functional department
d. Postemployment benefit plans

7. What is the function of the chief operating decision maker?

a. To allocate resources to the operating segments only.

b. To assess the performance of the operating segments only.
c. To provide general information to financial statement users about operating segments.
d. To allocate resources to the operating segments and asses their performance.

8. Who could be the chief operating decision maker?

 a. Chief operating officer
b. Chief executive officer
c. Group of executive directors
d. All those mentioned depending on who within the organization is responsible for the allocation
of resources and assessing the performance of operating segments.

9. What is the approach prescribed by PFRS 8 in identifying an operating segment?

a. Management approach
b. Risk and rewards approach
c. Matrix approach
d. Geographical segment approach

10. What is the “management approach” of identifying operating segment?

I. Operating segments are identified on the basis of internal reports about components of an
entity that are regularly reviewed by a chief operating decision maker in order to allocate
resources to the segment and assess its performance.
II. Operating segments are identified on the basis of the dominant source and nature of the
entity’s risk and rewards.

a. I only
b. II only
c. Both I and II
d. Neither I or II

ANSWER 11-27

1. d 6. a

2. c 7. d

3. c 8. d

4. b 9. a

5. d 10. a

QUESTION 11-28 Multiple choice (PFRS 8)

1. An entity disclose information about an operating segment when

a. Its reported external and internal revenue is 10 % or more of the combine external revenue of
all operating segments.
b. Its reported external revenue is 10% or more of the combine external and internal revenue of all
operating segments.
c. Its reported external revenue is 10% or more of the combine external revenue of all operating
segments.
 d. Its reported external and internal revenue is 10% or more of the combine external and internal
revenue of all operating segments.

2. An entity shall disclose information about an operating segment when the absolute amount of its
profit or loss is

a. 10% or more of the absolute amount of the combine profit or loss of all operating segments.
b. 10% or more of the absolute amount of the combine profit of all operating segment that
reported a profit.
c. 10% or more of the absolute amount of the combine loss of all operating segments that
reported a loss.
d. 10% or more of the greater in absolute amount between the combine profit of all operating
segments that reported a profit, and the combine loss of all operating segments that reported a
loss.

3. An entity shall disclose information about an operating segment when

a. Its assets are 10% or more of the combine assets of all operating segments.
b. Its net assets are 10% or more of the combine assets of all operating segments.
c. Its net assets are 10% or more of the combine net assets of all operating segments.
d. Its assets are 10% or more of the total assets of the entity.

4. Operating segments that do not meet of the any quantitative thresholds

a. Cannot be considered reportable.

b. Maybe considered reportable and separately disclosed if management believes that information
about the segments would be useful to the users of the financial statements.
c. Maybe considered and separately disclosed if the information is for internal use only.
d. Maybe considered reportable and separately disclose if this is the practice within the economic
environment in which the entity operates.

5. What is the quantitative requirement for the revenue that must be reported by reportable operating
segments?

a. The total external and internal revenue of all reportable segments is 75% or more of the entity
external revenue.
b. The total external revenue of all reportable segments is 75% or more of entity external and
internal revenue.
c. The total external revenue of all reportable segments is 75% or more of the entity external
revenue.
d. The total internal revenue of all reportable segments is 75% or more of the entity internal
revenue.

6. Two or more operating segments may be aggregated into a single operating segment if (choose the
incorrect one)
 a. The aggregation is consistent with the core principle of segment reporting.
b. The segments have similar characteristics.
c. The segments are similar in the nature of product or service, nature of production process, class
of customer, method of product distribution and regulatory environment.
d. The segments have dissimilar characteristics.

7. What is the practical limit to the number of reportable operating segments?

a. Five segments
b. Ten segments
c. No precise limit but if the number increases above five, the entity shall consider whether a
practical limit has been reached.
d. No precise limit but if the number increases above ten, the entity shall consider whether a
practical limit has been reached.

8. Which is correct concerning segment reporting?

I. An operating segment identified as a reportable segment in the immediately preceding period

shall continue to be reported separately in the current period even if it no longer meets any of
the quantitative thresholds, if management judges the segment to be of continuing significance.
II. If an operating segment is identified as reportable segment in the current period in accordance
with the quantitative thresholds, prior segment data presented for comparative purposes shall
be restated to reflect the newly reportable segment even if that segment did not satisfy any of
the quantitative thresholds in the prior period.

a. I only
b. II only
c. I and II
d. Neither I nor II

9. Under PFRS 8, an entity shall disclose for each period

I. General information about the operating segment.

II. Information about segment for profit or loss, including specified revenue and expenses included
in profit or loss, segment assets and segment liabilities.
III. Reconciliations of total segment revenue, total segment profit or loss, total segment assets and
total segment liabilities to the corresponding amounts in the entity’s financial statement.

a. I only
b. I and II only
c. I and III only
d. I, II and III

10. An entity shall disclose which of the following general information?

 I. Factors used to identify the entity’s reportable segments including the basis of organization.
II. Types of products and services from which each reportable segment derives its revenue.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWERS 11-28

1. d 6. d

2. d 7. d

3. a 8. c

4. b 9. d

5. c 10. c

QUESTION 11-29 multiple choice (PRFS 8)

1. An entity shall disclose for each reportable segment a measure of all the following, except

a. Profit or loss
b. Total assets if such amount is regularly provided to the chief operating decision maker
c. Total liabilities if such amount is regularly provided to the chief operating decision maker.
d. Net assets

2. An entity shall disclose for each reportable segment all of the following specified amounts included in
the measure of profit or loss, except

a. Revenue from external customers

b. Revenue from transactions with other operating segments of the same entity
c. Interest revenue
d. Gain on disposal of investment
3. An entity shall disclose for each reportable segment all the following specified amounts included in
the measure of profit or loss, except

a. Depreciation and amortization

b. The entity’s interest in the profit or loss of associates and joint ventures accounted for by the
equity method.
c. Income tax expense
d. General corporate expenses

4. An entity shall disclose for each reportable segment which of the following specified amounts that are
included in the measure of segment assets?

a. The amount of investment in associates and joint ventures accounted for by the equity method.
b. Financial instrument
c. Deferred tax assets
d. Postemployment benefits assets

5. Which of the following statements in relation to reporting is true?

I. If an entity changes the way it is structured internally so its reportable segments change, the
comparative information for earlier periods must be restated.
II. Disclosure is always required of the profit or loss of each reportable segment.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

6. Which of the following statements in relation to information about profit or loss or a reportable
operating segment is true?

I. The measurement of profit or loss to be disclosed for each reportable segment is defined in
PFRS 8.
II. The profit or loss disclosed for a reportable segment shall relate to the total assets attributed to
that segment.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

7. Entity-wide disclosure include all of the following, except

a. Information about products and services

b. Information about geographical areas
c. Information about major customers
d. Information about intersegment sales or transfers
8. Information about geographical areas includes all of the following, except

a. Revenue from external customers for each product or service.

b. Revenue from external customer in entity’s country of domicile and in all foreign operations in
total.
c. Separate disclosure of material revenue from external customers attributed to an individual
foreign country.
d. Noncurrent assets other than financial instruments, deferred tax assets and postemployment
benefit assets in the entity’s country domicile and all foreign countries in total

9. The “major customer” disclosure includes all the following, except

a. The fact of the entity’s reliance on major customers.

b. The total amount of revenue from each such customer.
c. The identity of the segment or segments reporting the revenue from major customers.
d. The identity of the major customer.

10. Under PFRS 8, which of the following statements is true about major customer disclosure?

I. A major customer is defined as one providing revenue which amounts to 10% or more combined
external revenue of all operating segments.
II. The identities of major customers need not to be disclosed.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWERS 11-29

1. d 6. d

2. d 7. d

3. d 8. a

4. a 9. d

5. c 10. c

QUESTION 11-30 Multiple choice (IFRS)

1. What is the definition of “major customers”?

 a. Those customers that individually account for revenue of 10% or more of the entity external
revenue.
b. Those customers that individually accounts for revenue of 10% or more entity external and
internal revenue.
c. Those customers that individually account revenue of at least 90% of the entity revenue.
d. Those customers who have been dealing with the entity for at least 5 years regardless of volume
of revenue.

2. A chemical entity has no overseas sales. The entity produces different products from process. The
entity sells its product to small businesses, larger national business and multinational entities. Internal
reports are reviewed by the chief operating decision maker on this basis. The management of the entity
proposed to disclose just one business segment. Can entity disclose just one business segment because
it sells all of its products nationally?

a. Yes, PFRS 8 will allow the entity to disclose a single business segment.
b. No, the entity can identify three different sets of customer and shall therefore disclose
information on that basis.
c. Yes, even though there are three different groups of customer they all present the same risk to
the entity
d. PFRS 8 on “segment reporting” is silent on this matter.

3. An entity is in the entertainment industry and organizes outdoor concerts in four different areas of
the world, Europe, North America, Australia and Japan. The entity reports to the board directors on the
basis of each of the four regions. The records show the profitability for each of the four regions. The
concerts are two types: popular music and classical music. What is the appropriate basis for segment
reporting in this entity?

a. The segments shall be reported by class of business, that is popular and classical music
b. The segments shall be reported by region, so Australia and Japan would be combined.
c. The segment information shall be reported as North America and the rest of the world.
d. Segment information shall be reported for each of the four different regions.

4. An entity is engaged in the manufacturing industry and has recently purchased an 80% holding in a
small financial service group. This group does not meet any of the threshold criteria for a reportable
segment. Can entity disclose the financial service group as a separate operating segment?

a. No, because it does not meet any of the criteria for a reportable segment
b. Yes, even though it does not meet the criteria for a reportable segment, an entity can disclose
operating segments separately if management believes that information about the segment
would be useful to the users of the financial statements.
c. The entity can disclose only 80% of the results and the net assets of the financial service group.
d. Because of the disparity in type of business, the entity shall disclose its segmental information
on a geographical basis.

5. An entity manufacturer suits, cloth bed linen and various cotton and manmade fiber products. The
entity has several segments which are reported internally as follows:

Segments Sales Profit Segments assets

Suits 40% 45% 50%

Shirts 30% 35% 33%

Bed linen 15% 10% 7%

Blinds 8% 6% 5%

Cloth 7% 4% 5%

100% 100% 100%

The table represents the percentages of sales, profit and segment assets that are attributable to be
different segments. The entity wants to present bed linen and cloth as single segment but is wondering
whether the information can be aggregated. How would segmental information be presented in the
financial statements?

a. Bed linen and cloth, suits, and shirts would all be shown as separate segments with blinds in the
other category.
b. All of the segments shall be presented separately.
c. Suits, shirts, bed linen would be separate segments with blinds and cloth shown as a single
segment.
d. Suits and cloth would be one segment with shirts, bed linen and blinds shown as other separate
segments.

ANSWERS 11-30

1. a

2. b

3. d

4. b

5. a
CHAPTER 10
INTERIM FINANCIAl REPORTING
QUESTION 10-1
What is “interim financial reporting”?

ANSWER 10-1
Interim financial reporting means the preparation and presentation of financial information for a period of less
than one year.

Interim financial reports may be presented monthly, quarterly or semiannually.

But quarterly interim reports are the most common although publicly traded entities are encouraged to provide
interim financial reports semiannually and such reports are to be made available not later than 60 days after the
end of the interim period.

QUESTION 10-2
It is required to prepare interim financial statements?

ANSWER 10-2
PAS 34 does not mandate which entities are required to publish interim financial reports, how frequently, or how
soon after the end of an interim period.

The Securities and Exchange Commission and Philippine Stock Exchange, however, require certain entities to file
interim financial statements.

For example, the Sec and PSC require entities covered by the reportorial requirements of Revised Securities Act to
file quarterly interim financial reports within 45 days after the end of each of the first three quarters.

The SEC also requires entities covered by the Rules on Commercial Papers and Financing Act to file quarterly
financial reports within 45 days after each quarter end.

QUESTION 10-3
What are the two views on interim financial reporting?

ANSWER 10-3
1. The first view is that each interim period is an integral part of the annual accounting period. This is known
as the “integral view”.
2. The second view is that each interim period is a basic accounting period and the results of operations
shall be determined in essentially the same way as if interim period were annual accounting period. This is
known as the “independent view” or “discrete view”.

QUESTION 10-4
Explain fully the “integral view” of interim financial reporting.

ANSWER 10-4
Under the integral view, annual operating expenses are estimated and then allocated to the interim periods based
on forecasted revenue or sales volume.

In other words, costs incurred which clearly benefit the entire year are allocated to the interim periods based on
forecasted revenue or sales volume.

When this approach is followed, the results of subsequent interim periods must be adjusted to reflect prior
estimation errors.

Proponents of the integral view argue that the estimation and allocation are necessary to avoid creating
misleading fluctuations in interim period income.

Using the integral interview would result to interim income which would be more indicative of the annual income
and thus useful in predicting future operations and making informed decisions.

QUESTION 10-5
Explain fully the “independent view” of interim financial reporting.

ANSWER 10-5
Under the independent view, each interim period is considered a discrete or separate accounting period with
status equal to a fiscal year.

Thus, no estimations or allocations are made for interim purposes, unless such estimations or allocations are
allowed for annual reporting. The same expense recognition rules shall apply asunder annual reporting and no
special interim accruals or deferrals are permitted.

In other words, annual operating expenses are recognized in the interim period in which they are incurred,
irrespective of the number of interim periods benefited, unless deferral or accrual would be allowed in the annual
financial statements.

Proponents of the independent view argue that the smoothing of interim results through estimation and allocation
of annual operating expenses may have undesirable effects.

For example, a significant drop in an earnings trend during the year may be obscured.

QUESTION 10-6
Which view on interim financial reporting is followed in practice?

ANSWER 10-6
PAS 34 on interim financial reporting does not mention about the integral view and the independent view.
Essentially, the standard adopts a mix of the integral and independent views.

A clear example of the independent view is the accrual or deferral for interim purposes of costs that are incurred
unevenly during the year only when it is also appropriate to accrue or defer such costs at the end of the year.

Another example of the independent view is the nonaccrual of cost of a planned major periodic maintenance or
overhaul that is expected to occur late in the year.

However, the method of accounting for income taxes is consistent with the integral view. The recognition of
commission and warranty cost based on sales is also an application of the integral approach.

At this point, it is safe to say that there is no pure integral view nor pure independent view. A mix of the two views
will be necessary as dictated by the nature of the cost or revenue being reported for interim purposes.

Many believe that the distinction between the integral view and the independent view as arbitrary and
meaningless.

These theoreticians note that direct costs and revenue are best accounted for as incurred and earned which
equates an independent view.

Indirect costs are more likely to require an allocation process which is suggestive of the integral view.

QUESTION 10-7
What are the components of an interim financial report?

ANSWER 10-7
An interim financial report shall be include, as a minimum, the following components:
a. Condensed statement of financial position
b. Condensed income statement
c. Condensed statement of comprehensive income
d. Condensed statement of changes in equity
e. Condensed statement of cash flows
f. Selected explanatory notes
Nothing in the standard is intended to prohibit or discourage an entity from publishing a complete set of financial
statements, rather than condensed financial statements and selected explanatory notes.

In other words, PAS 34 allows an entity to publish a set of condensed financial statements or complete set of
financial statements in its interim financial report.

“Condensed” means that each of the heading and subtotals presented in the entity’s most recent annual financial
statements is required but there is no requirement to include greater detail unless this is specifically required by
PAS 34.

QUESTION 10-8
Explain disclosure of compliance of interim financial reports with PFRS.

ANSWER 10-8
If an entity’s interim financial report is in compliance with Philippine Financial Reporting Standards, that fact shall
be disclosed.

An entity shall not describe an interim financial report5 as complying with PFRS unless it complies with all the of
the requirements of applicable Philippine Financial Reporting Standards.

QUESTION 10-9
Give examples of selected explanatory notes

ANSWER 10-9
The selected explanatory notes are designed to provide an explanation of significant events and transactions
arising since the last annual financial statements.

PAS 34 assumes that the financial statement users have an access to the entity’s most recent annual report. As a
result, the standard reiterates that it is a superfluity to provide the same notes in the interim financial report.

Examples of disclosures required in a condensed interim financial report include:

a. Writedown of inventories to net realizable value and the reversal of such a writedown.
b. Recognition of loss from the impairment of property, plant and equipment, intangible assets, other assets
and the reversal of such an impairment loss.
c. The reversal of any provisions for the costs of restructuring.
d. Acquisitions and disposal of items of property, plant and equipment.
e. Commitments for the purchase of property, plant and equipment.
f. Litigation settlements
g. Corrections of prior period errors in previously reported financial data.
h. Any debt shall or any breach of a debt covenant
i. That has not been corrected subsequently.
j. Related party transactions

QUESTION 10-10
Explain the presentation of comparative interim financial statement.

ANSWER 10-10
a. Statement of financial position as of the end of the current interim period and a comparative statement
of financial position as of the end of the immediately preceding year.
b. Income statements of the current interim period and cumulatively for the current financial year to date,
with comparatives income statements for the comparable interim periods (current and year to date) of
the immediately preceding year.
c. Statement of comprehensive income of the current interim period and cumulatively for the current
financial year to date, with comparative statements of comprehensive income for the comparable interim
periods (current and year to date) of the immediately preceding year.
d. Statement of changes in equity cumulatively for the current financial year to date, with comparative
statement for the comparable year to date period of the immediately preceding year.
e. Statement of cash flows cumulatively for the current financial year to date, with a comparative statement
for the comparable year to date period of the immediately preceding year.

QUESTION 10-11
What are the basic principles of interim financial reporting?

ANSWER 10-11
1. An entity shall apply the same accounting policies in its interim financial statements as are applied in its
annual financial statements.
2. Revenues from products sold or services rendered are generally recognized for interim reports on the
same basis as for the annual period.
3. Cost and expenses are recognized as incurred in an interim period.
a. Expenses associated directly with revenue are matched against revenue in those interim periods in
which the related revenue is recognized.
b. Expenses not associated directly with revenue are recognized in interim periods as incurred or
allocated over the interim periods benefited.

Thus, costs incurred such as major repairs, year-end bonuses, insurance, property taxes and
depreciation are allocated over the interim periods benefited.
4. If the business is seasonal, the standard encourages the entity to disclose financial information for the
latest 12 months ending on a given interim date, and comparative information for the prior 12-month
period, in addition to the interim period financial statements.
5. The preparation of interim financial reports generally will require a greater use of estimation than the
annual financial reports.

QUESTION 10-12
Explain the measurement of inventories for the interim financial reporting.

ANSWER 10-12
Paragraph 25 of Appendix 2 of PAS 34 provides that inventories are measured for interim financial reporting by the
same principles as at financial year-end.

This simply means that inventories shall be measured at the lower of cost or net realizable value even for
interim purposes.

The cost of the inventory may be estimated using the gross profit method or retail inventory method. Full
inventory and the valuation and the valuation procedures are not required for inventories at interim date.

Accordingly, if the net realizable value is lower than cost, a loss on inventory writedown shall be recognized
regardless of whether the writedown is temporary or nontemporary.

This approach is in accordance with PAS 34, paragraph 7, which requires disclosure of the writedown of inventories
to net realizable value and the reversal on such writedown in a later interim period.

The net realizable value of inventories is determined by reference to selling prices and related cost to complete
and dispose at interim dates.

QUESTION 10-13
Explain the treatment of seasonal, cyclical of occasional revenue for interim financial reporting.

ANSWER 10-13
Seasonal, cyclical or occasional revenue shall not be anticipated or deferred as of an interim date of anticipation or
deferral would not be appropriate at the end of the entity’s financial year.

Thus, dividend revenue, royalties and government grants shall be recognized in the interim period when they
occur.

For example, dividend revenue is not recognized until declared because even when highly predictable based on
past experience, the dividend is not an obligation of the paying corporation until it is legally declared.

QUESTION 10-14
Explain the treatment of uneven costs for interim financial reporting.

ANSWERB 10-14

Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred for interim
purposes only if it is also appropriate to anticipate or defer that type of cost at the end of financial year.

For instance, a provision for a warranty is recognized at interim date because the entity has no realistic alternative
to make a transfer of economic benefits as a result of an event that has created a legal or constructive obligation.

Expenditure for advertising is not deferred but recognized as expense in the interim period it is incurred because it
is not appropriate to defer such cost at year-end.

QUESTION 10-15
Explain the treatment of the year-end bonuses for interim financial reporting.

ANSWER 10-15
The nature of the year-end bonuses varies widely period. Some are earned simply by continued employment
during a time period.

Some bonuses are earned based on a monthly, quarterly or annual measure of performance.

Some bonuses may be purely discretionary, contractual or based on years of historical precedent.

A bonus is anticipated for interim purposes if and only if:

a. The bonus is legal obligation or past practice would make the bonus a constructive obligation for which
the entity has no realistic alternative but to make the payment.
b. A reliable estimate of the obligation can be made.

QUESTION 10-16
Explain the treatment of irregular costs for interim financial reporting.

ANSWER 10-16
Certain costs are expected to be incurred irregularly during the financial year, such as charitable contribution and
employee training costs.

Such costs are generally discretionary and even though they are planned shall not be anticipated as of an interim
date simply because the costs have not yet been incurred.

QUESTION 10-17
Explain the treatment of the following for the interim financial reporting:
a. Depreciation and amortization
b. Paid vacation and holiday leave
c. Income tax
d. Gains and losses

ANSWER 10-17
1. Depreciation and amortization for an interim period shall be based only on assets owned during that
interim period.
Asset acquisitions or dispositions planned for later in the financial year shall not be taken into account.
2. Paid vacation and holiday leave shall be accrued for interim purposes because there are enforceable as
legal commitments.
3. Interim period income tax expense should reflect the same general principles of income tax accounting
applicable to annual reporting.
4. Gains or losses from disposal of property, gains and losses from discontinued operation and other gains or
losses shall not be allocated over the interim periods.
The gains shall be reported in the interim period in which they are realized and the losses are reported in
the interim period in which they are incurred.

QUESTION 10-18 MULTIPLE CHOICE (PAS 34)

1. Which statement is correct concerning interim financial reporting?

I. PAS 34 mandates which entities are required to publish interim financial reports, how frequently,
or how soon after the end of an interim period.
II. Entities that provide interim financial reports in conformity with generally accepted accounting
principles shall conform to the recognition measurement and disclosure principles set out in the
standard.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

2. The Securities and Exchange Commission and Philippine Stock Exchange require entities covered by the
reportorial requirements of the Revised Securities Act to file

a. Quarterly interim financial reports within 45 days after the end of each of the first three quarters.
b. Quarterly interim financial reports within 30 days after the end of each of the first three quarters.
c. Semiannual interim financial reports within 45 days after the end of the first six months.
d. Semiannual interim financial reports within 30 days after the end of the first six months.

3. Interim financial report means a financial report containing

I. A complete set of financial statements
II. A set of condensed financial statements

a. I only
b. II only
c. Either I or II
d. Neither I nor II

4. An interim financial report shall include, as a minimum, all of the following components, except

a. Condensed statement of financial position and statement of comprehensive income

b. Condensed statement of cash flows
c. Condensed statement of changes in equity
d. Accounting policies and explanatory notes

5. Publicly traded entities are encouraged to provide interim financial reports

 a. At least at the end of the half year and within 60 days of the end of the interim period.
b. Within a month of the half year-end.
c. On a quarterly basis
d. Whenever the entity wishes

6. Which is incorrect concerning presentation of comparative interim financial statements?

a. Statement of financial position as of the end of the current interim period and comparative
statement of the current interim period and comparative statement of financial position as of the end
of the immediately preceding fiscal year.
b. Income statements for the current interim period and cumulatively for the current financial year to
date with comparative income statement for the immediately preceding year.
c. Statement of changes in equity cumulatively for the current financial year to date with comparative
statement for the immediately preceding year.
d. Statement cash flows cumulatively for the current financial year to date with comparative statement
for the comparable year to date period of the immediately preceding year.

7. The entity’s financial year ends December 31 and the entity presents financial statements in its quarterly
interim financial report on September 30, 2010. Which is an incorrect presentation of the comparative
interim financial statements?

a. Statement of financial position at September 30, 2010

Statement of financial position at December 31, 2009
b. Income statement for nine months ending September 30,2010
Income statement for 9 months ending September 30, 2009
Income statement for three months ending September, 2009
c. Statement of cash flows for nine months ending September 30, 201
Statement of cash flows for year ending December 31, 2009
d. Statement of changes in equity for nine months ending September 30, 2010
Statement of changes in equity for nine months ending September 30, 2009

8. Which statement is incorrect concerning interim financial reporting?

a. To save time and cost, entities often use estimates to measure inventories at interim dates to a
greater extent than at annual reporting dates.
b. Depreciation and amortization for an interim period shall be based only on assets owned during the
interim period.
c. The cost of planned major periodic maintenance or overhaul that is expected to occur late in the year
is not anticipated for interim purposes, unless an event has caused the entity to have legal or
constructive obligation
d. Charitable contribution, employee training costs and other costs that are expected to be incurred
irregularly during the financial year shall be accrued at the end of interim reporting period.

9. A bonus is anticipated for interim purposes when

I. The bonus is a legal obligation or past practice would make the bonus a constructive obligation
for which the entity has no realistic alternative but make the payment.
II. A reliable estimate of the obligation can be made.

a. Both I and II
b. Neither I nor II
c. Either I or II
d. I only

10. Which statement is correct concerning interim financial reporting?

I. An entity shall apply the same accounting policies in its interim financial statements as are
applied in its annual financial statements.
II. If an entity’s interim financial report is in compliance with PFRS, that fact shall be disclosed.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 10-18
1. B 6. B
2. A 7. C
 3. C 8. D
4. D 9. A
5. A 10. C

QUESTION 10-19 MULTIPLE CHOICE (IFRS)

1. Under PAS 34, interim financial reports shall be published

a. Once a year at any time in that year

b. Within one month of the half year-end
c. On a quarterly basis
d. Whenever the entity wishes

2. If an entity does not prepare interim financial reports

a. The year-end financial statements are deemed not to comply with PFRS
b. The year-end financial statements’ compliance with PFRS is not affected.
c. The year-end financial statements will not be acceptable under local legislation
d. Interim financial reports shall be included in the year-end financial statements.

3. Interim financial reports shall include as a minimum

a. A complete set of financial statements.

b. A condensed set of financial statements and selected notes
c. A statement of financial position an income statement only
d. A condensed statement of financial position, income statement and statement of cash flows
only.

4. PAS 34 states a presumption that anyone reading interim financial reports shall

a. Understand all Philippine Financial Reporting Standards.

b. Have access to the records of the entity.
c. Have access to the most recent annual report.
d. Not make decisions based on the report.

5. An entity owns a number of farms that harvest produce seasonally. Approximately 80% of the entity’s
sales are in the period. August to October. Because the entity’s business is seasonal, PAS 34 suggests

a. Additional notes be written in the interim reports about seasonal nature of the business.
b. Disclosure of financial information for the latest and comparative 12-month period in addition to
the interim report.
c. Additional disclosure in the accounting policy note.
d. No additional disclosure.

ANSWER 10-19
1. D
2. B
3. B
4. C
5. B

QUESTION 10-20 MULTIPLE CHOICE (IFRS)

1. Which of the following is not true regarding interim financial reporting?

a. Decline inventory shall be deferred to future interim periods.

b. Use of the gross margin method for computing cost of goods sold must be disclosed
c. Costs and expenses not directly associated with interim revenue must be allocated to interim periods
on a reasonable basis.
d. Gains and losses that arise in an interim period shall be recognized in the interim period in which they
arise if they would not normally be deferred at year-end.

2. Which of the following statements in relation to an interim financial report is true?

I. An interim financial report may consist of a complete set of financial statements.
II. An interim financial report may consist of a condensed set of financial statements.

a. I only
b. II only
c. Both I and II
d. Neither I nor II
 3. Which of the following statements in relation to interim financial reporting is true?
I. It is necessary to count inventories in full at the end of each interim period.
II. The net realizable value of inventories is determined by reference to selling prices at the interim
date.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. An entity is preparing interim financial statements for the six months ended June 30,2010. In the interim
financial statements for the six months ended June 30, 2010, a statement of financial position at June 30,
201 and a statement of comprehensive income for the six months ended June 30, 201 shall be presented.
In addition all of the following shall be presented, except

a. Statement of financial position at June 30, 2009

b. Statement of financial position at December 31, 2009
c. Statement of comprehensive income for the half year ended June 30, 2009
d. Statement of cash flows for the half year ended June 30, 2009

5. An entity is preparing its financial statements for the first half of its financial year ending June 30, 201.

One class of inventory has a cost per unit of P500 and a net realizable value at June 30, 201 of P480 per
unit. The business is seasonal and the net realizable value at December 31, 201 is expected to be P550.

The entity’s budget for the year scheduled a major refurbishment project from April to June 2010. For
legal reasons, the contract for the refurbishment was not signed until July 15, 2010, on which date the
work was started.

Which of the following statements is true?

I. The inventory shall be carried at its cost per unit of P500 on June 30, 2010.
II. The cost of the major refurbishment project shall be accrued on June 30, 2010.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 10-20
1. A
2. C
3. B
4. A
5. D

QUESTION 10-41MULTIPLE CHOICE (AICPA ADPATED)

1. Interim financial statements are usually presented on a

a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. Nine-month basis

2. For interim financial reporting, an inventory loss from a market decline in the second quarter shall be
recognized as a loss

a. In the fourth quarter

b. Proportionately in each of the second, third and fourth quarters
c. Proportionately in each of the first, second, third and fourth quarters
d. In the second quarter

3. If annual major reports made in the first quarter and paid for in the second quarter clearly benefit the
entire year, when should the repairs be expensed?

a. An allocated portion in each of the last three quarters

b. An allocated portion in each quarter of the year
c. In full in the first quarter
 d. In full in the second quarter

4. For external reporting purposes, it is appropriate to use estimated gross profit rate to determine the cost
of goods sold for
I. Interim reporting
II. Year-end reporting

a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. For interim financial reporting, an expropriation gain occurring in the second quarter shall be

a. Recognized ratably over the last three quarters

b. Recognized ratably over all four quarters with the first quarter being restated
c. Recognized in the second quarter
d. Disclosed by footnote in the second quarter

6. Advertising costs incurred shall be deferred to provide an appropriate expense in each period for
I. Interim reporting
II. Year-end reporting

a. I only
b. II only
c. Both I and II
d. Neither I nor II

7. An inventory loss from a market price decline occurred in the first quarter. However, in the third quarter
the inventory had a market price recovery that exceeded the market decline that occurred in the first
quarter. For interim financial reporting, the peso amount of net inventory should

a. Decrease in the first quarter by the amount of the market price decline and increase in the third
quarter by the amount of the market price recovery.
b. Decrease in the first quarter by the amount of the market price decline and increase in the third
quarter by the amount of decrease in the first quarter.
c. Not be affected in the first quarter and increase in the third quarter by the amount of the market
price recovery that exceeded the amount of the market price decline.
d. Not be affected in either the first quarter or the third quarter.

8. Due to a decline in market price in the second quarter, an entity incurred an inventory loss. The market
price is expected to return to previous levels by the end of the year at the end of the year, the decline had
not reversed. When should the loss be reported in the entity’s interim income statement?

a. Ratably over the second, third and fourth quarters

b. Ratably over the third and fourth quarters
c. In the second quarter only
d. In the fourth quarter only

9. How is income tax expense for the third quarter interim period computed?

a. The annual rate multiplied by the third quarter pretax earnings.

b. The estimated tax for the first three quarters based on annual rate less a similar estimate for the first
two quarters.
c. The rate applicable during the third quarter multiplied by four times the third quarter pretax
earnings.
d. One-half of the difference between total estimated annual income tax expense and the income tax
for the first two quarters.

10. Conceptually, interim financial statements can be described as emphasizing

a. Timeliness over reliability

b. Reliability over relevance
c. Relevance over comparability
d. Comparability over neutrality

ANSWER 10-21
1. B 6. D
2. D 7. B
3. B 8. C
4. A 9. B
5. C 10. A