Chapter 4 – Financial Statements and Reporting Entity Underlying Assumptions

1. What is the general objective of financial statements?

→ The objective of financial statements is to provide information about the financial
position, performance, and changes in financial position of an entity that is useful
to a wide range of users in making economic decisions.
→ Provides information about economic resources of the reporting entity, claims
against the entity and changes in the economic resources and claims.
→ Provides financial information about an entity’s assets, liabilities, equity, income
and expenses useful to users of financial statements in assessing future cash flows
to the reporting entity and management stewardship of the entity’s economic
resources.
2. Explain a reporting period.
→ A reporting period is the span of time covered by a set of financial statements. It
is typically either for a month, quarter, or year. Organizations use the same
reporting periods from year to year, so that their financial statements can be
compared to the ones produced for prior years.
→ It is the period when financial statements are prepared for general purpose
financial reporting.
3. Explain a reporting entity.
→ A reporting entity is an entity that is required or chooses to prepare financial
statements.
→ Can be a single entity or a portion of an entity or can comprise more than one
entity.
→ It is not necessarily a legal entity.
Accordingly, the following can be considered a reporting entity:
❖ Individual corporation, partnership, or proprietorship.
❖ The parent alone
❖ The parent and its subsidiaries as single reporting entity
❖ Two or more entities without parent and subsidiary relationship as a single
reporting entity
❖ A reportable business segment of an entity
4. Define consolidated financial statements, unconsolidated financial statements and
combined financial statements.
→ Consolidated Financial Statements are the financial statements prepared when
the reporting entity comprises both the parent and its subsidiaries.
→ Unconsolidated Financial Statements are the financial statements prepared
when the reporting entity is the parent alone.
 → Combined Financial Statements are the financial statements when the reporting
entity comprises two or more entities that are not linked by a parent and
subsidiary relationship.
5. Explain underlying assumptions in the preparation of financial statements.
→ According to the framework of IFRS, the underlying assumptions in the
preparation of financial statements is:
❖ Accrual basis is the financial statements are prepared under the accrual
basis. According to accrual basis of accounting, the effects of transactions
and other events are recognized when they occur and not when the cash
is received or paid. In other words, the transactions are recorded in the
books of accounts when they occur and not when the cash is received or
paid. It is opposite to cash basis of accounting.
6. Explain going concern assumption.
→ The going concern assumption is that a business will remain active for the
foreseeable future.
→ Also called as continuity assumption means that in the absence of evidence to the
contrary, the accounting entity is viewed as continuing in operation indefinitely.
7. Explain time period assumption.
→ The time period assumption allows a company to report financial activity for a
period of time. Activity for certain accounts such as revenues and expenses are
cleared out or taken to zero after the company completes its year-end reporting.
→ A completely accurate report on the financial position and performance of an
entity cannot be obtained until the entity is finally dissolved and liquidated.
8. Distinguish calendar year and natural business year.
→ A calendar year is a twelve-month period that ends on December 31. To tell apart,
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.
9. Explain monetary unit assumption.
→ It has two aspects, namely quantifiability and stability of the peso.
→ The monetary unit assumption states that a company must record its business
transactions in dollars or some other unit of currency. Companies use the dollar
since it is stable in value and available everywhere. It also provides a consistent
method of comparing the results of one company with those of another.
10. Explain quantifiability and stability of the peso in relation to monetary assumption unit.
→ 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.
→ Stability of the peso assumption means that the purchasing power of the peso is
stable or constant and that its instability is insignificant and therefore may be
ignored.