CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS ConrADO 7. VALI, BS, 11.8 led Publi Aoantant and Lamy President GPA evow Dear nd CPA Rewer ‘Ca Ravew Soll he Pires Lies Meer Integrated Barf the Pilipinas JOSE F. PERALTA, BBA, MBA, DBA \Corfod PublitAcsoustant Presidentend Dean Philipps Shoal ef Business Administration CHRISTIAN ARIS M. VALIX, BSME, BSA Cerio Public Acountant Ateneo Management Eopioeering Gradua ‘Asistat Ree Drestar and GPA Reviewer ‘CPA Review Scholof the Philippines 2020 EditionCopyright 2020 by Conrado T. Valix Jose F. Peralta Christian Aris M. Valix ‘Any copy of thie book not bearing the signature of one ofthe authors on this page is unauthorized and shall be fonsidered as proceeding from an ‘legal source. ) hte "ALLRIGHTS RESERVED ISBN: 978-621-416-085-3, Published & Printed by: glomerennises & co. 1%, “Nota Bo ction or eg 2017 CM, Recto Avenue, Sampaloc a ania Pape PREFACE ‘This new book isin accordanee with the memorandum ofthe Commision on Higher Education required for the degree of Bachelor of Science in Accountancy. ‘The book covers description of the Accountancy Profession, the Conceptual Framework, an introduction to the preparation of financial statements and concise discussion of all Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS related to financiol ‘accounting. ‘The book will introduce the Bachelor of Science in Accountancy students tothe wide world of accounting standards known at International Financial Reporting Standards or IFRS, Moreover, the book will provide a solid foundation for the Bachelor of Ssivace in Accountancy students before taking up the three intermediate or financial accounting subjects. VALIX PERALTA VALIX ‘January 2020Accounting Standards standards related t0 financial The flowing aunt. eel he new a pas 1 23 4 28 29 38 40 a Presentation of financial statements Inveatories Statement of cashflows ‘Accounting’ policies, changes in accounting fstimate and errors ‘vente after the reporting period Income taxes: ‘Property, plant and equipment Employee benefite Accounting for government grant and Fomecork? ritative sta 3. Explain the author Pomneer ad their information needs, as of the Conceptual 4 Bapai the primary ter seer wera tse 5: Bales the “othr conerptual Frameorit «What i the sope of th Revised Corea information needs, Boe oma Pere ianete tet a sop nl ri to a tos i rel ie 14. Beplain management stewardship of the entity's economic 16. What are the Kimitatons of nancial reporting? “a te ope objectives of financial reporting? PROBLEMS Problem2-1 Multiple choice (FRS) 1. Which stats sont in true about the Conceptual Framework for Financial Reporting? 4 The Conceptual Framework isnot a Standard. 1 The Coneptual Framework desrne the concept for general purpose financial sey 6. In ease of conflict, the requirements of the TFRS Dreval over the Conceptual Pramemork. ‘4. Aiof alee statment are tus abot the Conceptual 2 Which is mot a purpose of the Revised Conceptual Framework? PP it ‘8 Tonssit the IASB té develop IFRS based on consistent concepts », ‘To astiet preparers to consistent accounting policy when no Standard applies to a particular Eransuction or when Standard allowe'a cholce of accounting policy ©, To asst sll partes to understand and interpret the Stendaria, 4. To assist regulatory agencies in issuing rules and * regulations for a particular sndusty. 3.The scope of the Revised Conceptual Framework comprises how many chapters? a. Five & six © Seven a Bighe 4 The Conceptual Framework provides the foundation for Standards that P Contribute to transparency by enhancing international ‘comparability and quality of Brandl information, 'b. Strengthen accountability of management ©: Contribute fo economie efficiency by helping investors to identify oppoetunities and sik, 4. All of these are the result of Standards developed ‘based on consistent concept aProblem 22 Multil 1 hat is the Fromewrt s monceot it 4 2. The Conceptual Frametor® is it aFRS). ee ihe Coe 1 ene authoritative Pinte cy Benet Peandard oF an: interpretation that Inv pene agen aren al cee otesnere ae Soc Heese acheter nia =e EE eran vie te neh tended to establish GAAP in Snmni ee iy in aewrdance with ores racopts for use in developing The bist ancl sexoatng and reporting Bind dures 8.4 Conceptual Framework should 8 cal statements ‘Lead to unity of nani] statements mins alent eure psc. 4. Which is not a purpse ofthe Conceptual Framework? » ‘To provide definition of key terms and fundamental concer vide oper gudalinos for resolving situations torcneret ying eauntag seeds ‘To ani ectuntanta fn ‘among alternative scoounting and reporting ‘Board in the standard . To assist the International Aceounting Standards setting process. a Problem 2-8 Multiple choice (IAA) ‘In the Concoptual Framework for Financial Reporting, ‘whut provides the "wig" of cong? 4 Mearurement and recognition cone © Qualitative characterate of accounting information © Homent of Snante sasesens 4 Otjecie of Haase reports 2. The underlying theme of the Conceptual Framework is Decision unofulnees B. Understandabality © Timeliness Comparability 8.The objective of financial reporting indation forthe Conceptual Framework ‘the qualitative characteristics of tseful information «. Tenet found in the Conceptual Framework 4. Allof these are correct checes regarding the objective of financial reporting, 4. Which of the following is not a benefit associated with the Conceptual Framework? A Goneetual Framework shuld increase uae understanding and confidence in financial reporting ', Pratical problems should be more quicily aheatle™” § A coherent set of scounting standards should react 4 Business entities will ned far less assistance fom accountants, 5. Which statement is not true concerning the Conceptual Framework? 4 The Conceptual Framework should be a bass for Standard st 0. The Gonesta Bramevork shoul low pute problame to be enved more quickly. «. The Conceptual Framework should be b fundamental wrt derived fom the law of netare. 4. The Conceptual Framework should increase ers’ understanding and eonSdenee ia Bnei reporting 45cP) cnnice (A Problem 2-4 arttiple vcd wbik of the llowing? 91 reports 1. Users of financial ation include ‘2. The primary ere of Sanit sate investors a. ining and potential other eeditry eel a. Existing and potent crediars ines ee which group is not ameg be exter UTE uncial statements are PrP 4 Customers & Suppliers Employees 4. Allorthee are 4. Which of the following information? 1 Board of Directors © shareoaer Holder of bon Creditor with longterm contract extemal ser of nancial statements 1 internal user of financial : nd return ‘These users require information on isk a S Srvded by te invert Investors b Employees ©. Lendere 4. Customers 6 6.Thene users a {nveroated in information about the ay hd ait fe ety in ore ty eens the ability of entty to provide remuroraton,Fesremet henefita tnd employment opportuni Customer & The pubite § Garemmente and their agencion 4. Employee 7 Mee tr nesta in nlrmaton that entee sm to assess whether their loans, the related sere fhoreon, and ther amounts owing Yo them wil be pad Lenders and other cteditors B. Borrowers Tage er re Snersted in information abut the Iong-tcrm involement With or a depeneek ooh 9. These users are interested in information in order to regulate the activities of an entity, determine taxation policies and provide a Basia for national stance & Governments and their a 1. Major organisation of wets g Bureau of Internal Revente 4 Department of Finance ‘a The public B. Governments and their agencies . Finance entities Private entities asioanial 1 1 epg Aa eee . ae png oho soe ae £ MAST at +. Netonal taxing authoiioe ; Slee Se tS eta #1 pr ‘tefl information 12 ia eee ‘oes 3 eee crn tf ote information that ie useful in making restos, lenders and other a. To provi {posing end credit desions. ‘ 1 Pea Rforaton that wef fo manage 2 Three aration aboot the potential users, To rode information about waye to solve intera tad external coisa about tho ent 5 Which ean obaetive of financial reporting? fa. To provide information that is useful to management in taking decisions. 'b To provide information that clearly portrays oa transactions, «To provide information thet fa useful to assess tht mount, timing, and uncertainty of prospective oui, 4. Te provide information that excludes claims agit 8 6.An objective of financial reporting isto provide {Information about the investors in the entity. ‘Information about the liquidation value. Information that is useful in assessing cash flow pronpects, 4. Information that will attract new investors, 1 Aesessing cash flow prospects is interpreted to moan ‘8 Cash basis acounting i preferred over aceual basis, 1 Information about the financial effect of cash receipts and cash payments ia generally considered tho best Indicator of ability to generate favorable eash flows Over the long run, trends in revenue and expenses are generally more meaningfl than trends in ash fcolpts and dlsbureementa 4. Allof the choios are correct regarding assessing cath ‘ow prospec ‘8m measuring financial performance, accrual accounting is used because 4 Cash flows are considered less provides « better indication of ability to generate ‘ash flows than cash base > It recognizos revenue when cash is received, 4. tis one ofthe implicit assumptions, ‘The most useful information in predicting future cash flows is Information about curzent cash flows Curzent earnings based on aocrudl accounting Information regarding the accounting plicies used Information regarding the results obtained by using * wide variety of acoounting policies pore 10, "The accrual bass of accounting is most useful for ‘4 Determining the amount of income tax liability 1. Predicting the short-term fnencial performance, Preficting the long-term financial performanceancial reporting? snot ere Sout vr pid oto hn oe ear 2. Which staterent ‘a. Financial reporting ey ee ae 2 Regn iste eee een « Reaaterey ae econ Se sion ay a Tpnaoarng ces flow prospects 4. Which of the following is not an objective of financial reporting? To provide information ebout an entity's assets and lime against thove assets To provide information thet is weful in assessing an cnt’ sources and uss of ash . To provide information that is useful in lending and investing decisions 4. Toprovde information abou the liquidation value of an entity 4. Financial reporting pertaina to information about ‘Individual businees entities, rather than to industries an economy a a wholao to members of eoxey os ‘Businese industries, rather than to individual entities for an economy ee a Whole or to members of eocsty ae «. Individual business entities, industries, and en ‘conomy asa whole, rather than to members of society 4. An economy as a whole and to members of society a ‘consumers, rather than to individual entities industries, 4 Under the Ravised Conceptual Framework, during a period when an entity i under the dreon of Particular management, financial reporting provides information about porting Ps Entity performance and management performance Management performance but not entity performance Entity performance but not management performance Neither entity performance nor management performance. peepCHAPTER 3 UAL FRAMEWORK CONCEPT! istios Qualitative character! TECHNICAL KNOWLEDGE ‘To idemify the qualitative characteristics of accounting information To identify the fundamental qualitative charocteristics, ‘To identify the enhancing qualitative characteristics. ‘To understand the coat constraint on useful tnformation. QUALITATIVE CHARACTERISTICS stn cna In deciding which information to include in finencial satament, Under the Conceptual Framework for Financial Reporting, qualitative character lansified into fundamental dualitative characteristics and enhancing qualitative characteriates, Fundamental qualitative characteristics ‘The fundamental qualitative characteristics relate to the content or cubstance of nancial information. ‘The fundamental qualitative characteristics are relevance and eithhal ee ‘Information must be both elevant and faithull-represented itt is to be useful. Neither a faithful representation of an irrelevant Phenomenon nor an unfaithfal representation of relevant Phenomenon helps users make good decisions Application of qualitative characteristics ‘The most efficient and effective process of applying the fundamental qualitative characteristics would uoually be: ftom Se mm ‘Third, determine whether tho iformation is available!Relevance sae nthe simplest terme, Tle) eanrarerant he 6aann eeatlne ae ponds that the 4 In other wor ites on Information that doesnot bor ele. “To be useful, informatio ‘aking eods of were For example, broadly, the elevant im determining Sis ratement is relevant in determi can economic decision ig rn must be relevant to the decision sani inal ein sateen ted aot ee cial, the casings pet share information is more More special alae er share in determining the ‘svcuvenes ofan vest Ingredients of relevance nancial formation incapable of aking a dilerence in a SESSA pedi clean eonratory value, Financial information has predictive value if it gan be Spent Seas ame. evenly For example, information about financial position and past performance is frequently used in predicting dividend and ‘wage payments and the ability ofthe etity to meet maturing commitment, ‘The net cash provided by operating activities ie valuable in predicting loan peymen o etal “ information haw confirmatory vlue i it provi feelboc oa prove ese 1a other words, fandom ou a — has i omalcs unr conti or soe For example a net izone meatus hus cnimalory value it can hel ureholders mh ~ Wieeente Often information bs bth preditieand confirmatory valu. ‘The predictive and confirmatory roles of information ae interrelated. ‘An example isan interim income statement which provides feedback’ about income to date and torves a2 a basis for predicting the annual income, ‘The interim income statement for the first quarter shows net income of P2,000,000. This isthe confirmatory value If this trond continues for the entire year, itis logical to assume that che net income after four quarters cr ove Year ‘Would be P8,000,000. This is the predictive valu, Materiality toiaity ieneee of statements ‘The materiality concept is also known as the doctrine of Matec ia rly quantitative “hres linked very Anh te uate dares af lee The relevance of information is fected by ite nature ond ‘materiality. a ered be Im other words materiality ia subquolity of elerane band fn the nature or magnitude or both ofthe item to which the information relates, ‘The Conceptual Feamework does not specify « uniform, ‘Quantitative threshold for materiality or predetermine what could be material in a particular situation,sativity Materiality is a xe! ioe ‘Material of item depend holt se a vata co eauty ma beste ance oaae ‘gnancial statoments of a hn oreo ponno00 in eo saanse] wate of Sonal enya Bot 80 {real for nell nt Whom isa tem material? Tere in o tet o waif rte fot determining whether Trio i materi 2 ‘ery often this x ependeton god ucdement, profesional pure and common see Foowever, a general guide may be given, to wit: = aitrn 6 tg are often expensed ‘Seng rather nn epee he st ew Seve on cevl cova ef recording depreciation because the ‘ct onthe seston oo Ip enough to abt ‘eononie deen Another example ofthe application of materiality is the common prac of large ents of rounding amounts to the ‘nearest thousand pesos in their nancial statements. ‘Smal entitios may round off tothe nearest peso. New definition of materiality ‘The IASB provided the following new definition of materiality oe sar ents make on the basis of those statements which provide perience tees eit hao coe ae ‘misstatement and obscuring of the information could reasonably affect the econome decision of primory user, ‘The revised definition of materiality highlights three {important aspects: ‘4 Could reasonably be expected to influence 1b. Obscuring information © Primary users Could reasonably be expected to influence ‘The could reosondbly be expected torinfluence threshold adds tn clement of reasonability of nancial information on which ‘economic decison in base. By including the term could reasonably be expécted to influence in the new definition, limited to arObscuring information ering information it ® Sees of wate Information Eee inion of Souni, ‘Oucaring information menos Gr lary expressed, s nv oncpt aed 0 tH ney Sere on ane iscsi ldo cig tlt ‘Examples of obecured material : Tie angele eater ho Tee a ceaeelle BANE Naas re aerated inappronizaely. yughout the financial Primary sors ea gaye he tition aay diy eon Bowed atest ee ‘Beery cree ‘The other users include the employe ‘government agencies and the public in general ‘The new definition specified thatlonly primary users of are coidered beeause these groups are ‘utes to whom general purpose financial slatements are customers, Such primary wore canot require reporting entition to ror labs directly to them and therefore must rely ‘Somat ec PO Bow mach finan Factors of materiality ty depends ; mognitude ond. nature of the In the exercise of judgment ad fn dtrmining matey, 0 ‘relative size and nature of an item are considered, a (The sie ofthe tem in relation tothe total of the group to ‘mbich che tom belong inten nt axagnt For example, the amount of advertising in relation to total cling expenecs, the amount of oicesaacion to Administrative expenes, the amount of prepaid expenses to total current. assets and the amount of leasehold Anmprovments to total property, plant and equipment, {The nature ofthe item may b inherently material because by {ie very nature it affects economic. dessin, For example, the discovery of a P20,000 brite is a materiel event even for avery large entity. Faithful representation imate eee palette eee compliance, Seah ween Simply worded fifa epreentaton mesos hate atu eft ofthe trations ‘sported in th fnuncal stoma For example, ifthe entity reports purchases of PS 000,000 ‘when the actual amount is P8,000,00, the information would not be faithfully represented, ‘To record a sale of merchandise as miscellaneous income would not also be » faithful representation of the tale ‘ansaction. 59mntation greens of ee dentin shou To hem pct te Bove eve caret s Gomletenet & Seca ‘c Free from error Completeness ae cevut ofthe odequote disclosure ee ffl Standard of adequate disclosure The fodequotedissoe remeans that al significant nt information leading to the preparstion-of seen shal be cary reported ‘Adequate disclosure however does not meen disclosure of jst any data The accountant shall disease a material fact known. hi hich is not disclosed in the financial statements bul Aiselonure of whichis necewry in order that the financial ‘Statements would not be misleading. ‘The sondard of adequate disclosure is best described by of any i 9yigal falwesfcat naught 60 4 ‘Actually, to be complete, the Gnancil statement shall be ccompanied ty “noten Uo financial statements” ‘The purpose of the notes is to provide the mecessaryy a Notes narrative description 2 disaggregation of the iteme prevented inthe steenta and information sit sth do at recognition, Neutrality ‘A neural depiction i without bins i the prepartintor ‘resentation of nancial information. ‘A ncutzal depiction is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users. {In other words, t0.be neutral, the information contained in ‘he Snancial statements must be free from biad. Scena fetciment of another parts. T ‘The information ie directed tthe common needacf many users ‘and not tothe particular needs of specific users ‘Neutrality is synonymous with the all-encompassing principle! of fires. ‘Tobe neutral ia tobe for. a— i es be cand wade pubes | mci ith rept when alternatives exist, ih cut should echoes ‘means “in case of, In the simplest words, anservatiom ‘record any loss and Foreampl therein ai ec ter aaa evens re mansre a the Toner of cot spain ti ite conn ea isin 4 vit be | Cotage cette ray mere | Comings gins ot cgi teow oly. Imes cepa tat erate ant nsf ae aerator nce ad net seta Peregngan san ethan ah cf 50,00 ad eta re Pima tta eesonsrretectuttrengorinecee | Sorte Exprattios of conservation {fasiote no profit ond pride for probable ond measurable ‘petneen tw9 acceptable asset “In the mater of income rept, the accountant takes the ‘aston that ne mtr hw eure the Businessman might be ‘staring the bird the but, he, the acoundan, must ec it "Dont count your chicks until the eggs hate Moreover, the process used to produes the reported information has been selocted and applied ith no errors iy In this context, free from error does not mean perfectly ‘accurate in all respects, ‘Forexample, an estimate ofan unobservable price or value ‘cannot be determined to be accurate or inaccurate, However, a roprosontetion of tht eatimate can be faithful if the amount is described cleary and accurately ne an estimate, Moreover, the nature and limitations of the estimating process are explained, and no errora have been made in Selecting and applying an appropriate proces for developing the estimate. Pinion aa ea Arta tet Eze eas oe nea ‘ifthe level of uncertainty in providing an estimate i highy However, the use of reasonable etimate in an geen at ofroviing Gnancol information and dove not undermine ‘sefulness ofthe inangal information, ry ond Seb eploined, even high ee of mengaroment weer, “oes not affect the usefulness ofthe financial information.form neti Substance over pl the tranenctiony 9 snore eet it BECHAAY tha atone ee ea Sominm seer form 308 si Te redundong Seas el vert hn ail repent yo teaneaction rather thaq ‘Sel representing the lea Fem. Representing ea fre ht de oe cba nee iia representation, Example of substance over form ‘An example is when the lease lened property from the lesc, ‘The terms of the lense provide that the lease transfers ‘Ownership ofthe anet to the lessee bythe end of the lease Tn form, the contract i a lense as popularly understood. But in substance in reality, ifthe "transfor of ownership provision’ is to be considered, the real intent of the partis Sn nwtalinent purchase of ant by tho lease from the ‘Accordinly, theless shall resord an acquisition of right of ‘we asset and setup a liabilty to the lessor. Th perience a i st Tie cumin a an linen a “u Enhancing qualitative characteristics Bator ‘The enhancing qualitative characteristics are intended to Increase the usefulness of tho fnancal information that is relevant and faithfully represented ‘The enhancing qualitative characteriatic are comparability, understondabiliy, verifiahiity and timeliness Relevant and faithfully represented Snancial information is ‘useful but the information would be most useful if i is comparable, understandable, verGable and timely Comparability ne = (pelpeccie nating pein of Hhoneen ont Siar Comparability is the enhancing qualitative chars that Bnabls user to Ment and understand sires fd dissimilarities among items. ‘Comparability may be made within an entity or between and ‘crass entities. Comparability within an entity is the quality of information that allows comparisons within & single entity through tne ‘or from one accounting period to the next. Comparability within an entity ia also known as horizontal comparability or intracomparabilty. Comparability between and across entities isthe quality of information that allows comparisons between two or more entities engaged in the same industry. Comparability across entities is also known as Intercomparability oF dimensional comparability, + For information tobe comparable like things must lok alike ‘and diferent things muat lok different Comparability isnot enhanced by making unlike things lok alk oF making like things look different.siform application o sen constancy i the i tint Sno period within an entity comparability athe unifoem appicton rte spt Bete docs ents i he sang escuntne att akey. cannot th FIFO tind ofinventory vation facie cri eerage net methed inthe net year, 3 ome 2Fn6 etd in uedag Year and oon FO method ie apn ino year, such meta ie Thibcad fon peat t ger, Connency is doirble and ‘Shot to eve cpardy of neil statements However, consistency does not mean that no change in sccounting method can be made. If the change would result to more useful and meaningful information, then such change shall be made, 2B te alba dhe chang and ha pe ‘ere. i ron ety ee ‘acoounting policiet d acceptable alternatives eis. Undoratandability Understandably requires that financial information must ‘be comprehensible or intligible if itn to be moat useful. Accordingly, the information should be presented in a form and expreseed in terminology that a user understands lnssifying, characterizing and presenting informatign ‘and conciely! maken it understandable. ‘An easential quality of th information provided in nancial ‘statementa is that it in peadiy understandable by users: But the complex economic activities make it impossible to reduce the financial information to the simplest terms. ‘Accordingly, the users shall have an understanding of the complex economic activities, the financial accounting process and the terminology in the financial statements, Financial statements cannot realistically be understandable to everyone, Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information diigenty, ‘At times, even well.informed and diligent users may need to seek the aid of an adviser to understand information about complex phenomena or transactions. Understandablity is vory essential because «relevant and represented information may prove useless ity pot understood by users, erpies result that would sl acl fren Pepa nie Ome Semeset cordingly, eit oman transaction spew a eur uses that informa ‘Types of verification \Veriieation ean be diet or indirect, amount or irect verification means verifying 02 sentation trough dre cbeervaton, for example, by ‘An cram vein the caring mnt of inventor by (Socio psn fanned ot and ecaling Sheeting ieveny aang esac eo Now aot, seit Si not portant attribute of quarterly of interim financial information i its timeliness, Generally, the older the information, the lee useful, However, some information may continue be timely long after the end of reporting period because.comte users may need to identify and aseese trends Timeliness enhances the truism that without knowledge ofthe ‘Bast, the basis or prediction will ueually be lacking and ‘without interest inthe future, knowledge ofthe past i tere. Wat happened in the pst would become the basis of what sould Rape are eae aers vervasive constraint on the information that can be Sires Important that such cost is justified by the beneBt dorived from the financial information Hc rt, the xt ogni ie acide fhe ‘st incurred in generating nancial information agains benefit to be obtained from having the information, ‘The benefit derived from the information should exceed the ‘oat incurred in obtaining the information. However, the evaluation ofthe cot constraints substantially 1 judgmental process, ‘Asvessing whether the cost of reporting outweighs or short of the benefit ia difficult to measure and becomes & ter of professional judgment.QUESTIONS i he 1 Bane seo ae ramental gusta vmtaleuatatve racer haractoriaticn of acacteristicn? arethetr i a and fective Procese of cient ame ie characterstcn, ficient Bain ektental 1. Explain predictive ale. Balen enfinatony val 4. Wien ean material? 1. Bplain the new dition of materiality may be considered ia 1. What are the factors that may determining materia? 12 Explain the fundamestal qualitative characteristic of faithful representation. 18, What are the thre ingredients of nithful representation? 1M. Beplain completeness of financial information. 15, What isthe standard of adequate disclosure? 16 Explain notes to financial statements in relation &, completenes of fsanil information. 17. Explain neutrality of fnancil information. 7 18, What in prudence? 19, Bxplain consorvatiam, 20, Explain fev from errr financial information. 21, Explain the effect of mensurement uncertainty to twefulnees of finaneial information £22, plain the concept of aubstance over form, 28, What are enhancing qualitative characeratin? 24, Bnumerate the four enhancing qualitative charactors 25. Beplain comparability 26. plain comparability within a single entity 21. Bxplain comparability between and across entities 28, What i consistency? 28, Distinguish consistency from comperablty. 0. Beplain understandably. 1. Beplain veriGablity. {52 Distinguish direct vrication and indirect verication. 58, Byplain timelines ‘4, Beplain east constraint on usaf nancial information, ‘5, What i the rule on cot constraint? nPROBLEMS a am .1 Mk che? Probie ae rete ta he emgin Pod 1. at are te ae a offs eecm ener acct Ee Irang Sin nie este ntti Ce ee a Snformacion for ing purpose a MOOT Saa ar ome 4. finda eave encase ‘a. Relevance and faithful representation & Relevance, fthfl rprosentation and materiality ©. Relevance and reliability Faithful representation and materiality 2 2 Bares 4 Accounting information is considered relevant when it ‘4 Can be depended on to represent the economic ‘cositions end events that itis intonded to represent. », Incapable of making a difference in a decision. €: Is understandable by reasonably informed users of accounting information, 4. Te veriGable and neutel. 5, The ingredients of relevant financial information are ‘Predictive value and eonfmatory value 1 Preictevadu, caiman plus an telnet 4, Pedi val, conSmatry value and matory 4: Predictive value, confirmatory value, timeliness aa materiality n 6. What inthe quality f information that 2 that ite ably free of error and £ Beleance i Faithful reprerentaton © Veritabity 4. Neutra ity Which ofthe following i the best description of fithfl reprecentation” in relation to Information i Gnancial ‘4 Influence on the economic decisions of users 16 Inclusion ofa degree of easton ¢. Freedom from material error 4 Compechensbiity to users '8. To achiow fitful reprosontation, the Snacil statements 1. a. Must have predictive and confirmatory value 15 Must be complete, neutral and reasonably fe from Are 'nderstandable, comparable, verifiable and 4. Mast possess al ofthese. ‘The financiel accounting information is directed toward the common needs of users and is independent of presumptions about particular needs and desires of Specific users, Relevance Veritability Neutrality Completeness In tho event of conflict between the economic substance of ‘transaction and the legal form, the economic subtance shall prevail. ‘a. Form over substance 1, Substance over orm ©. Relevance 4. Completeness pore 18cxhiite consistency when sensei na le * Sees at pr coe noe sealement cies give similar events the same ee icounn an ntl » SeSitiead So ve wean go nt nn ung 8: ign neni i a ced and pe Irie adn Bye tect esi ed a. Relevance , BRthfl representation © Conaise & Comperabity 4 The chagacteriste that is demonstrated when ‘Pens can inne a SESS Sg sane vasroent matod 2. Finns informe a. Relevance B Underetandabiity © Veriianty 4. Necteality 5. Which Revenue tealzton Berio & Monetary nit a ah “ 6 10. ‘An entity inuing the annual financial reporte within one ‘month afer the end of roprting period ie an example of ‘which enhancing quality of accounting infomation? © Predictive value 4. Ropresentational faithfulness Allowing entities toeatimete rather than physically count javontory a interim period in an example of rade a. Verifability and comparability & Timeliness end comparability 6 Thineliness and vertabiity Neutrality and consistency Which qualitative characterntic of financial information ‘requires that information should not be based in favor of one group of users tothe detriment of others? a. Relevance Free from error ©) Competences 4 Neutrality For information tobe useful the Linkage between the users tnd the decison® made ie 2. Relevance 1. Faithful representation © Understandability @ Verifiablity Which statement is true in relation to the enhancing quality of understandably? Users have a reasonab¥ knowledge of bisiness and economic activities and reviow the information with Feaconable diligence, b. Users are expected to have significant business knowledge. Financial statoments shall exclude complex mater Financial statoment shall be fre from material error 18Problem 3-8 Mult 1. The overriding avait fnformationi* E Gerona Perl eon & Decision 12 Which ofthe flowing hat infenoes the eoncmie | a Rolinble 1 Prospective ©. Relovant & Understandable ‘4 What i he quality of information that enables users tp ‘etter foreast fare operations ‘. Faithfl representation B. Materiaity © Comparability 4. Relevance 4. Asording tothe Conceptual Framework, predictive value tnd confirmatory value are ingredients of Relevance 1. Faithful roprosntition ©. Understandability 4. Comparshiity 5. Which term best describes information in financial statements that i nero! Understandable ® Compareble © Relevant Unbiased 6 6, What ie meant by comparability when discussing financial sccounting information? 1. Information has predictive and confirmatory value, 1. Information ia ‘Gee from exror, ©. Information is meavured and reported in a simile~ {fashion across entice 4. Tnformation ie timely. 7, What is meant by consistency when discussing financial accounting information? ‘4. Tnformaticn ie measured and reported in siz. «t 4. Information is veritable, {8 Which of tho following is not an enhancing qualitative characteristic? ‘a. Understandability . Profitoriented, ©, Timeliness 4 Comparability 8. Changing the method of inventory valuation should be reported in the financial statements under what ‘enhancing quality of eccounting information? 8. Understandability 1b. Veritability ©. Timeliness 4. Comparability 10. When an entity applios the same accounting treatment to similar events from period to period, th entity is ‘exhibiting which ofthe following qualiten? Verifibility Consistency Predictive valug All of the choices are correct pose nyoice CAA) Problem 4 Halil ey measure arcenent MLTCrrata to hpregat 1 when ee eine ee Screen Venta ane Pop repesnton & Tineines ‘The guahtatve character of incoder fa Predictive value & Nestrality Gocfimatory valve @ Timeliness fal representation 8. Enhancing qualitatiy Eahancing duu al of te flowing, except &. Timelinces Material © Comparability 4. Ventablity 4. Th enuning uty of nab means at tia Ral ended by Those who are experts in the interpretation of Senne infermation b. Thoe who have a ressonable understanding of busines and economic activites ¢, Financial analysts chat tesa ees & React ite 8 wve characteristics of accounting 6, When different competent accountants independently tree on the amount and wth of ryporting an economic ‘ent, what in the eoncnpe demonsteneed? 1. Recording to the conceptual framework, veriability implies a Legal evidence bet © Conteneus Legal verdict 8. When an entity has started placing its quarterly nancial statements on ita web page, thereby reducing by tn daye the time to get information to investors and creditors, the qualitative concept invalved is & Comparability B. Consintency’ e. Timeliness Faithful representation 9. Wen amenity changed he inventory vlan mated ‘heh Sharan foprdad yt haa? a Comparability 10, Recognizing expected losses immediately but defering expected gains isan example of Materility Conservatiam Coat effectiveness ‘Timeliness peer ”pe coin OAD riality ia true? about ate erence oF St nee NOt he Problem 35 Mi “L Which statement ve tem aust mabe © _ Beclosed ater of elative ste ot Importance, 1 Mat cl op ary oe a an rset mii, peepee 4 considered item would be a is the additional cost, pect ae ‘The standard deog ot obscuring the information Omitting erence to the primary users material when 4 The Conceptual Framework inciudes which constraint? a Prudence © Conservatism © Cast Si. Ail of the choles are constraints 4. Which best describes the cot benefit constraint? 1 Beto fhe iratn mut be gener than 1 Flaencal nformetio should be fre from cost to , Gost of providing financial information isnot alwaye ‘lent or meanrabe but must be considered. a. Allo the canes are corect 5. What oan enhancing quality of seounting information? 4 Teoma mus be deine to all users. 1, Genera-prpene franca reporting isthe pray toute of inbrmetin for talement ures, © ara Stemae invidge of basnes and ncal ecountng matters to understand the Jglrnaton contained i fossa RIES ten tn aaa aes 80 Problem 3-6 Multiple choice (AICPA Adapted) 1. The ability through consensus among measurersto ensure that information represents what i purports to represent is an example of the concept of a. Relevance B Verifability © Comparability 4 Feedback value 2 Which of the foliowing accounting concept states that ‘an accounting transection shall be supported by euffcient idence to allow two or more qualified individuals to ‘arrive at easentially similar conclusion? 2 Conservatism B. Objectivity © Periodieity &, Stable monetary unit ‘8. Objectivity ia ntaumed to be achieved wl transaction Is recorded ina fixed amount of posos Involves the payment or receipt of cath Involves en arm's length transaction between two Independent parties Allocates revenue and expenses in a rational and ‘ystematic manner o a 4. The principle of objoctvity includes the concept of a. Summarization ©. Claneifeation 5. Proponents of historical cost maintain that statements prepared sing historical cost are more & Objective & Relevant Indicative of purchasing power 4. Conservative a14. which f the flowing situations violates the concept of linet ae * statements were usd ine month BRS the ae eect rik ay Prod to analy eotating fate ce FERSuttinnent included an item of property, Hana equiae! wh cng emo ieee Bre aopet este of marke value 4. Management repr to sbareolders regulary refer {o'sew pines uaeraben ‘9, What is the underlying concept governing the GAAP pertaining to recording gin contingencies? ‘a Conservatin © Relevance © Consistency 4. Relisiiey 10.The usefulness of providing information in financial statements i ubject to the constraint of © Relisilty 4. Representational feithfuneas Problem 8-7 Identification (ACP) Indicate the acounitng emcopt that ia defined or described. 1 Information thet has no bearing on an econo decision to bo made ie unoless, 2 Its the ability to bring togother for the purpose of noting points of Hcenees and difference, 23. Itrequires that users have some knowledge of the complex ‘economic activities of entities, the accounting proces and the technical terminology inthe statements, 4.Proparors of statements should not try to increase the usefulness ofthe information to afew user tothe detriment cof othare wo may have opposing interest, 5 In case of conflict between economic substance and legal form ofa transaction, the economic substance sball prevail 6. Small expenditures for tools are expensed immediately. 1. When in doubt, recognize all losses and dos't recognize xine 8. The information should be presented in s manner that facilitates understanding and avaids erroneous impliation. 9. bis th capacity ofthe information to influence a decision. 10, The description and numbers or figures must match what really existed or happened, 11. The financial statements shall be accompanied by notes to financial statements 12. There are no errors or omissions in the description of the Phenomenon, 1. is the gual achieved by consistency. 11. This enhascing qualitative characteristic implies consensus, 15. The ler the information, the less usefulerent aystem, 1 conceal fgeer ass fname BA Tend " interrelated ot See characteristics of fi a.undamental gait Ar leva oF prudent ‘asunting in machen 4. An eshancing qualitative chars J i fe characteristic 4A fandamental qualita a ‘understandabbiy- Tobe a fut representation, on information ust by ‘redictve and conirnto: : San quality financial esounting information ‘s comparably. coining weet to snr event, 7. ppving rdw won of verabliy. ean ow rot tan that ete cannot SOE Eo pe tang metiod to another. nancial statement ure are © Riutnaabie Kaoviedge of busine ‘eroutng mates 10. Entities consider only quantitative factors in determining ‘whether an item io mater. med to have no ‘and financial Neutrality and proditve value are cheracterstice of relevant information. 12. The tendency to reognve favorable events early isn sample ef conervtim, 1 The, Conetual Pamevorkfoutes primarily onthe ‘ovis teal wes af Era ea 14.Te on : ee pring ao ee 1 Sree mete i dpe, it should ever % CHAPTER 4 CONCEPTUAL FRAMEWORK ‘Financial statements and reporting entity Underlying assumptions TECHNICAL KNOWLEDGE To know the general objective of financial statements, To define a reporting entity. To explain the assumptions underlying the Preparation of financial statements.STATEMENTS, opsecrive oF tn a GENERAL informer aginst the provide | 8 agains * en ca tae 7 changet ia © fi nc aera Fogel ee “ Seales sa Ancsing tre ch road ino floving tn, yong net, reporting entity, up of the entity The ul ination fini 1. Statement of : 2, Ratios and egncial performance, WY recognizing Income and expense resenting and disclosing 8, Other etatemients and notes BYP iene sox 1 Recognize ants we ErsSied ante ed ilies Fee from equity holders and distibution tg e. ESL ismption and judement in estimating soon pss ‘Types of financial statements The Revised Conpae Framework recognizes three type lnc neo 1. Consolidated fnoncil statements ~ These are the compre tl he pore nd subahen ® feel tegen popu hh apg She pet ce Strid onl men Thane the Saal Soe ou tiablities, equity, income ang Consolidated financial statements odted financial watchers provid aration boat tae abn egy nea ad op at and Ita acide ess ingle rortng "The parent inthe entity that exe srbldiaion " Consolidated information is useful for existing and potenti investors, lenders and other creditors ofthe parent sn thelt, ent of future net cash inflows ta the parent. control over the hi wet cash inflows to the parent include distributions to the parent from ita subsidaricn Consolidated financial statements are not designed to provide separate information about the assets, labiitiee faulty, income and expenses of a particular subsidiary. ‘A aubsidiary's own financial statements are designed to provide suc information, Uneonsolidated financial statements Unconsolidated financial statements are designed to provide information about the parent’ asset, nblites, income and ‘expenses and nol cbout those ofthe subsidiaries fe iran tl yn ng ol peta feraain sa al srt fee arkananaeatria neetces that claim again subsidies = Information provided in unconsolidated financial statement Ss typically not sufficient to meet the requirement needs of rman users Accordingly, when contolidated financial statements are ized, unconsolidated financial statements cannot serve ‘substitute for consolidated Enancial statements, Combined financial statements Combined financial statemeite provide Gnancal information about the ussets, liabilities, equity, income and expenses of two or more entities not linked sth parent and eubsidiory relationship, 7entity oF @ portion of gy nee ent. ja legal entity. eat oe acti! Rene cae soon a ee pn ‘The parent me aires as single reporting entity fae ite ce Remeron (pe ‘anche considered 8 Teporting parterhip OF Proprietothip Reporting period te ped wi gna tate Be mpesing pried th ee Saal poring veal eet maybe prope on 2 inti ba, Eel URIS SAL Gini or ie month Intern rani otemens oe not required bt optional & owetr, Geen taeeats mart be prepared on an Sond TAPERS pet of rele moth oat statements are prepared for a opecifed period of ‘Sie and prone nrmaton aoa 4 Assets linbities and equity atthe end of the reporting period. Tecome and eens dung the reporting period. ‘pba sta of ancl eatements to identify and anes. asain teas saa vatemein tno prvi conparatee ce preceding eparng poco, ‘isanceleatemente may iaclude information about ‘etoactont td ter eens ares sngrmation sbgut f Teagan sesaary to meet UNDERLYING ASSUMPTIONS decounting ntngaosun lions are the basic notions or fundamental hich the accounting process is based. iting assumptions are alan known aapostulates,” building structure that solid foundation to br prevent future collapse and provide room for sion, and wo 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, ‘The Conceptual Framework for Financial Reporting mentions ‘only one assumption, namely going concern the that the entity will = Pe oh th asumen tht tbe ent wil cnn opens {Se the erseabe future. ‘The going concern postulate is the very foundation of the cost priniple, ‘Thus, asses are normally values ae ignored However, some new standards require measurement of cvvtain auebta at fair value, recorded at cost, As a rule, market If there is evidence that the entity would experience lage and persistent lonees or that the entity's operations are t ‘be terminated, the going concera assumption is abandoned, Im this ease, the users of the statements will havea great ‘interest in the amount of cash that will be generated fom ‘the entity's aasate Sn the short termtty oe. ‘Accounting © sing entity i O90 speci ine, ‘teaaay De ‘a proprietorshiy tn fanaa ws. ch mY hip, erator © SP iyi parte fom te une, veneers Seer cet he spunea ne se ceton forthe entity Sa oon enn the oe sal it 8 allowed ‘penta ames aoe fe eB. or nami, th a ved tbe opr i reat {en eae ofthe pops assumption is to have a for aoe mecmmemer arama ao caer iad beoktare, separate statements ehall be are ee mi eas Each business is an independent accountng entity. rhen 4 major sarod of «corporation borrows money Tog afant en hscwnpenoral soounttelonn a aby Fike charcolder alone and ofthe corporation ‘The shareholder eno the corporation and the corporation i rot the shareholder lowever,wbere parent and oubsiiary relationship exis, ghee dent he fae ae aly ade efor practical and esmamie purpeees, the parent ‘he eubsdiary area “single economic entity” ‘Pas onsclidation, oweves, doesnot eliminate the legs! Tocndty seating sated cee ‘Accounting wil coat Azo ive to be done separately for euch ‘Time period completly ncurste report on the financial postion and an entity canoe be obtained unk the ent, Finely inolved nod igldated “ (Only then can the final net income and networth ofthe entity ‘be detormined precisely. However, usors of financial information ne! information for taking an ecomamie timely Te becomes noceanry therefore to prepa yer. yo. financial position, performance and caoh flows ofan entity. [Phe time period assumption requires thatthe indefinite feof |B enlily is subdivided into accountng periods which are ually of equa length for the purpote of preparing frei! son financial position, performance and cosh flows = By eynventon, the aeounting period or Sxcal period is one year or a petod of brelve months, ‘The “one-year period” is traditionally the accounting period ‘echuse usualy itn after ove year that goverment eperta are require. ‘The accounting period may be a calendar year oF a natural business year, ‘A colendar sear is a twelve-month period that ends on December 3 [A natwrol business year ia a twelve-month period that ends fn any month when the business is at the lowest of experiencing slack season,wis sae bn 08 P08, nny ‘monetary ui aaity of the PES = a iP mons hat te atta rayon ett ated i ema eee antes the Pines. oe ements without How awborard 9 S00 a0 ements Would be large Se a ane sy of pm sr ats a ing pve ct rie ay etn era ai ‘an amplification of thy Te ttle pon ae Ss eat ater a sng concn ey ey changes in PUPCRASINg owe, evuating ftom is ac for nominal ps0 oy Tag san pecans in Purchasing ove, wo the sumption that the 700 it te ever nedr at mecesully valid Consider an equipment that was imported 10 years ago fom the United States for $100,000 when the exchange rate was 25 to SI or an equivalent ofP, 500,000. Ifthe mse eupmentis purchased now and assuming are {sno chang inthe 10,00 purchase price, the replacemest cost in terme feos would be in the wit of PB 400,00, ‘onsderng erent exchange rate of 4 to bv, her sian gap betwoon histori cos ‘and current replacement cost, o Jn this oar neaiy may a SENSE gi ae he the revaluation nol 2 QUESTIONS 1, What inthe general objective of financial statements? ~ 2. Explain a reporting period, 8. Explain a reporting entity. 4. Define consolidated financial statements, unconsolidated Financial statements and combined Financial tatemente 5. Bxplain underlying assumptions in the preparation of financial statements __6. Brplain going concern assumption. 11 Explain time period assumption {Distinguish calendar year and natural business year. 8. Explain monotary unit assumption. 10-Esxplain quantifibility and stability ofthe pesoin relation to monetary assumption unitPROBLEMS ad (conceptual Frameworyy Problem4l Multi sieeve of finial statements cal bie st economic TeSOUTCAR 2 Mati a on a em eo sein othe enki. hs as eardship of €coRomie Temas ae 8 Le ASO eos to pe 5 Newly ou ied o nos Lo repary seset a. aimmllany goverment autho A paige Cant aig ents & GSR pire in entity © Gat Se re than ae ay & GREREOMEW onde «raping entity 4th reporting entity comprises both the parent and its toledo, the financial statements are referred to as ‘4 Consolidated financial statements 1, Unconeldated fnacial statements © Combined financial statements 4. Separate nancial etatemente 5. Combined financial information about statements provide financial ‘Foe paren and its eubidarien pres ‘The subsiding TERS eon without « parent-subsiiany % Problem 4-2 Multiple choice (AA) 1, Which best deseribes the term going concern? ‘@. When current liabilities exogod current assets Bb. The ability of the entity to continue in opertion for the foreseeable future, ‘The potential to contribute tothe flow of cash and cash equivalents & the entity 4. The expenses exceed income 2, Which i an implication ofthe going concern assumption? Bhs Neto ote pine i crib Depron and smortintion pole re jostle and appropiate, «The cutrent and noncursent aud lables i junta aod 44 Allo these are an implication of going socern sification of asets "The relatively stable economic, political and social nvironment supports 2. Conservatiam B Matersaity © Timeliness Gang concern Which of the following is not 2 basic assumption underlying financial accounting? a. Boonomic entity assumption Going concern assumption Periodicity assumption Historical cost acsumption Which basic assumption may not be followed when an entity in bankruptcy reporte financial results? Economie entity sasumption Going concern assumption Periodicity nessmption Monetary unit assumptionsont tie pis = ange a in conecion with 8 Beano ent © Penobt © Mover wit & Costinuty sumption serves a6 the basis 8 Which underving a raat opus artifical pie, 9, Which basi accounting aatumptio is threatoned by the existence of severe inflation inthe economy? Megan numton ty assumption © Going concera assumption 4. Eeonomic entity assumption 10 Ialation is ignored in seaountng due to 4. Beonomic entity assum © Gang conen mcrae & Monetary uit assumption 4 Time period sesumption Pfoblem 4.3 Multiple choice (AICPA Adapted) 1. The concept of accounting entity i applicable fa. Only to the logal aspect of business organizations 1 Only tothe economic xprct of business organizations Only to business organisations 4. Whenever accounting is involved 2 When a parent and subsidiary relationship exists, ial statements are prepared in 8. The valuation ofa promise to reese cash in the future fat present value ie valid because of what accounting foncept? a Entity 1D. Time period © Going'concern @. Monetary unit 4. What isthe acoounting concept thet justifies the usage of accruals and deferrals? ‘8. Going concern B. Materility © Consistency 4. Stable monetary unit 65. During the lifetime of an entity accountants produce financial statements at arbitrary points in time in sccordance with what basic accounting concept? a Accrual b. Periodicity ©. Unit of measure 4. Continuity 7Problem 44044) tacky So barns onl saving bank ae bn evan py off og De® ‘Maria has ‘Tho parent enity in Mant diary are translated ‘The Baancal ation with the financial statement, 12 pos a Selb aren entity 892 mpored fom USA at 8 certain cit A machinery we Sune fiat, the machinery ag Sve eas ak, Beste which ty MU igh Thaw te Risto ‘Management would like to report the machinery at curt replacement cos ‘An entity hus experienced a drastic reduction in revenue ty reason of long dy opll inthe area where the entity ‘rows it tabaco. "The management desided to wait until next year and present finan eatementa fra twoyear period rather than prepare now the traditional twelve-month financial ftatemente ‘A subsidiary was exiting poor financial performance forthe esront year, {nam efor o increase the subidiary’s reported income, she part ety parcel pd i he saan a ‘wie the normal markup. = Bs Problem 4-5 Identification (LAA) ‘entity the assumption that is moet clearly violated bythe sccounting practice, 1. Anentity decided to publish financial statements only in ‘the years when it had good news to report 2 An entity reported inventory, property, plant and ‘equipment and intangible ascete at current valve at year-end, ‘An electronics entity owned by proprietor reported the ‘tof the proprietr's swimming pool ns en asset of the entity. An entity propared financial statements adjusted for changes in purchasing power A.mining entity kept no accounting record ater starting bbusinoas Tho entity is waiting until the mine in exhausted to determine the success or failure of business Problem 46 Identification (IAA) ‘ontfy the assumption defined or described, 1. An entity reported financial etatementa in nominal potoe ‘that have mixed rather than uniform amount of purchasing powe ‘A multinational entity published complete set of financial statements at least once a Year, regardless of whether the fnandal rvules were good or bad. "Tho pesos of taday can buy as much goods and service as the perce five yea ‘An accounting entity is viewed as continuing in operation in tho absance af evidence tothe contrary 5. An accounting practitioner mixed personal accounting ‘cords with the record ofthe acoaunting practin,CHAPTER 5 CONCEPTUAL FRAMEWORK Elements of financial statements TECHNICAL KNOWLEDGE ‘Yo identify the elements directly related to the measurement of financial position and financial performance. To understand the concept of asset, liability and equity. To understand the concept of income and expenses. 100 ELEMENTS OF FINANCIAL STATEMENTS, cording to co broad classes ate termed the ie These trond [elements of financial Jal statements refer tothe quantitate Teported in the statement of financial position fand income etatement. : ‘The elements of financial statements are the Pbuilding blocks? ‘constructed. from which financial statements are For example, assets and labilitios may be classified by their ature or function in the businese ofthe entity in order to ‘dieplay information in manner most useful to users for purposes of making economic detisions ‘The elements directly related to the measurement of FRrnancial position are fs. Asset & Liability & Equity ‘The elements directly related to the measurement of financial performance a a Income b Expense ‘The Concoptusl Framework identifies no elements that are uunigue to the statement of changes in equity because such statement comprises items that appear in the statement of position and the income statement. isang abe at -_ tor