FOREWORD

In line with the goal of continuing educational development despite this

COVID 19 pandemic, this module serves as a basic resource for students to
still have grasp with their lessons. It is designed to meet the need of first
year BSA students to have introductory knowledge on financial
accounting. Each unit of this module presents the concepts in a
summarized approach but not compromising all the key points per topic.

Module I is divided in three (3) units covering introduction to accounting, conceptual framework
(part 1), and conceptual framework (part 2). Unit I defines the real purpose of accounting
including how it started then eventually giving students an overview of the accountancy
profession through discussing R.A. 9298 and its governing bodies. It also discusses the areas of
accountancy profession and the role of generally accepted accounting principles (GAAP).
Meanwhile, unit II starts with giving students the history, purpose, scope, and meaning of new
conceptual framework for financial reporting. It mainly covers the first three (3) scopes of
conceptual framework and objectives of financial reporting. Lastly, for unit III, it tackles the last
five (5) scopes of conceptual framework where elements of financial statements are already
introduced. At the end of every unit, formative assessment tasks are also included for students
to assess themselves up to what level they understand their lesson through this material.

With this module, the author hopes that students would really have an adequate preparatory
knowledge for them to have a glimpse on what is this course all about as they get their foot in
the door of financial accounting.

i
 TABLE OF CONTENT

Unit I – Introduction to Accounting Page 01

Definition of Accounting
Overall Objective of Accounting
Components of Accounting
Aspects of Accounting
Brief History of Accounting: From Ancient Times to the Modern Profession
Accountancy in the Philippines
Composition of FRSC
International Accounting Standards Board (IASB)
Four Areas of Accountancy Profession
Generally Accepted Accounting Principles (GAAP)
Development of Philippine GAAP or Accounting Standards Observed in the Philippines
Factors Considered by ASC in Deciding to Move to IAS
Philippine Financial Reporting Standards

Unit II - 2018 Conceptual Framework for Financial Reporting (Part 1) Page 08

History of the Conceptual Framework
Reasons for Revision of 2010 Conceptual Framework
Emphasis of the Revision
Items not Addressed by IASB and 2018 Conceptual Framework
Definition of Conceptual Framework for Financial Reporting
Purposes of Conceptual Framework
Authoritative Status of Conceptual Framework
Mission of IFRS Foundation
Transition to 2018 Conceptual Framework
Arguments over Information Needs of Long- Term Investors
Users of Financial Information
Scope of Revised Conceptual Framework
Objective of Financial Reporting
Accrual Accounting
Limitations of Financial Reporting
Qualitative Characteristics
Cost constraint on Useful Information

Unit III - 2018 Conceptual Framework for Financial Reporting (Part 2) Page 18
Financial Statements and Reporting Entity
Underlying Assumption/Postulates/Accounting Assumption
Elements of Financial Statements
Recognition and Derecognition
Measurement
Presentation and Disclosure
Concepts of Capital and Capital Maintenance

Summative Assessment Page 27

ii
 UNIT I – Introduction to Accounting

This unit begins with defining the real purpose of accounting including how it started. Then
eventually giving students an overview of the accountancy profession through discussing R.A.
9298 and its governing bodies.

Essential Questions

What is Accounting and the Accountancy Profession as a whole?

Intended Learning Outcomes

o Define accounting and identify its objectives.

o Explain the impact of accounting on the decisions of the various users of financial information
at all levels of the economy
o Have a fair knowledge of the evolution of accounting and find how it affected accounting
pedagogy, policy and practice
o Learn and distinguish each area of the accountancy profession from one another.
o Summarize the salient features of the Accountancy Act of 2004
o Differentiate the various governing bodies directly and indirectly affecting the Accountancy
Profession

Definition of Accounting

Accounting is a service activity. The accounting function is to provide quantitative

information, primarily financial in nature, about economic entities, that is intended to be
useful in making economic decisions. (According from Accounting Standards Council)
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. (According from Committee on Accounting
Terminology of the American Institute of Certified Public Accountants)
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information.
(According from Statement of Basic Accounting Theory of American Accounting
Association)

Overall Objective of Accounting

To provide quantitative financial information about a business that is useful to statement users
in making economic decisions.
ACCOUNTING

Components of
Aspects of Accounting
Accounting

Identifying Recording

Measuring Classifying

Communicating Summarizing

SSP || Don’t stop until you’re proud. Page 1 of 30

Components of Accounting
Identifying – analytical component; this involves recognition or non- recognition of business
activities as accountable events.
*An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.
Classification of Economic Activities:
 External or Exchange Transactions – economic events involving one entity and
another entity
 Internal Transactions – economic events involving the entity only
Measuring – technical component; this involves assigning of peso amounts to the accountable
economic transactions and events.
Communicating – formal component; this involves preparing and distributing accounting reports
to potential users of accounting information.

Aspects of Accounting
Recording – journalizing; this is the process of systematically maintaining a record of all
economic business transactions after they have been identified and measured.
Classifying – posting; this is the sorting or grouping of similar and interrelated economic
transactions into their respective classes.
Summarizing – this is the preparation of financial statements.

Brief History of Accounting: From Ancient Times to the Modern

Profession

Birth of
New and The Accounting
Early The Coming to Early Financial
Improved Mathematical Profession and
Accounting Bookkeepers America Statements
Ledger Monk Accounting
Today

Early Accounting
 Earliest accounts go back to Mesopotamian civilizations. These people kept the earliest
records of goods traded and received.
 It was also related to the early record-keeping of the ancient Egyptians and Babylonians.
Keeping records that detailed transactions involving animals, livestock, and crops.
 In India, philosopher and economist Chanakya wrote "Arthashasthra" during the Mauryan
Empire around the second century B.C. The book contained advice and details on how to
maintain record books for accounts.
The Bookkeepers
 Bookkeepers most likely emerged while society was still using the barter system to trade
(pre-2000 B.C.) rather than a cash and commerce economy. Ledgers from these times
read like narratives with dates and descriptions of trades made or terms for services
rendered.
To illustrate:
Monday, May 12: In exchange for three chickens, which I provided today, William Smallwood
(laborer) promised a satchel of seed when the harvest is completed in the fall.
Wednesday, May 14: Samuel Thomson (craftsman) agreed to make one chest of drawers in
exchange for a year's worth of eggs. The eggs are to be delivered daily once the chest is
finished.

SSP || Don’t stop until you’re proud. Page 2 of 30

New and Improved Ledger
 Until the late 1400s, this information was arranged in a narrative style with all the
numbers in a single column, whether an amount was paid, owed, or otherwise. This is
called single-entry bookkeeping.
To illustrate:
Date Item Details Amount
Monday, May 12 Bought one sack of seeds -Php 48.00
Monday, May 12 Sold three chickens -Php 48.00
Wednesday, May 14 Bought a chest of drawers Php 900.00
Wednesday, May 14 Sold one year's worth of eggs Php 900.00
 The bookkeeper had to read the description of each entry to decide whether to deduct
or add the amount when calculating something as simple as monthly profit or loss.
The Mathematical Monk
 In the 15th century, Italian monk Luca Pacioli revamped the common bookkeeping
structure and laid the groundwork for modern accounting. Pacioli, who is commonly
known as the father of accounting, published a textbook called "Summa de Arithmetica,
Geometria, Proportioni et Proportionalita" in 1494, which showed the benefits of a
double-entry system for bookkeeping.
 The idea was to list an entity’s resources separately from any claims upon those resources
by other entities.
 It was Amatino Manucci who was the inventor of double-entry bookkeeping. Therefore,
Luca Pacioli did not invent double-entry bookkeeping, but rather described what were
prevalent accounting practices of the day.
 Pacioli said that the purpose of bookkeeping was “to give the trader without delay
information as to his assets and liabilities."
To illustrate the double-entry system:
Details Debit Credit
Sold Chickens Debit Cash Php 48.00 -
Sold Chickens Credit Chickens - Php 48.00
Bought Seeds Debit Seeds Php 48.00 -
Bought Seeds Credit Cash - Php 48.00
Coming to America
 Bookkeeping migrated to America with European colonization.
The appearance of corporations in the United States and the creation of the railroad
were the catalysts that transformed bookkeeping into the practice of accounting.
 Early Financial Statements
To attract investors, corporations began to publish their financials in the form of a
balance sheet, income statement, and cash flow statement. These documents were
proof of a company's profit-making abilities.
 Birth of Accounting Profession and Accounting Today
 The accounting profession was recognized in 1896 with the establishment of the
professional title of certified public accountant (CPA). The title is awarded to those
who pass state examinations and have three years of experience in the field. The
creation of professional accountants came at an opportune time.
 Bookkeeping is now automated. Since the first records were kept in America,
bookkeepers have used a number of tools.
 The adding machine in 1890 helped early accountants calculate receipts and quickly
reconcile their books. When IBM released the first computer in 1952, accountants
were among the first to use them.

SSP || Don’t stop until you’re proud. Page 3 of 30

 Let’s pause for a bit…

Identifying TRUE or FALSE. Write TRUE if the statement is true, otherwise write FALSE and
correct the part/s which makes the statement false.

__________1. According from Accounting Standards Council, the accounting function is to

provide qualitative information.

__________2. Identifying analytical component which involves recognition or non- recognition

of business activities as accountable events.
__________3. Classifying is the preparation of financial statements.

Accountancy in the Philippines

Profession
March 17, 1928 when Act No. 3105 was approved by the 6th Legislature and when
accountancy was recognized as profession in the Philippines.
Act No. 3105 entitled “An Act Regulating the Practice of Public Accounting; Creating the
Board of Accountancy; Providing for Examination, for the Granting of Certificates, and the
Registration of Certified Public Accountants; for the Suspension of Certifications; and for
Other Purposes”

• This is the law regulating the practice of accountancy in the Philippines. This law is
Republic Act known as the Philippine Accountancy Act of 2004.
No. (RA 9298)

• The body authorized by law to promulgate rules and regulations affecting the
Board of practice of the accountancy profession in the Philippines.
Accountancy
(BOA)

• Accounting standard setting body created by the Professional regulation

Commission upon recommendation of the Board of Accountancy to assist the BOA
in carrying out its powers and functions provided under RA 9298 which main
Financial Reporting
Standards Council function is establish and improve accounting standards that will be generally
(FRSC) accepted in the Philippines.

• Formed by FRSC to prepare interpretations of PFRS for approval by FRSC and to

provide timely guidance on financial reporting issues not specifically addressed in
Philippine
Interpretations current PFRS.
Committee (PIC)

Composition of FRSC
 Chairman (should be a senior accounting practitioner)
14 representatives from:
1. BOA 1
2. SEC 1
3. BSP 1
4. BIR 1
5. COA 1

SSP || Don’t stop until you’re proud. Page 4 of 30

 6. Major org. of preparers and users of financial statements- FINEX 1
7. APO of CPAs in:
7.1. Public Practice 2
7.2. Commerce and Industry 2
7.3. Academe or Education 2
7.4. Government 2

International Accounting Standards Board (IASB)

Formerly known as International Accounting Standards Committee; international
counterpart of FRSC.
Objectives of IASC:
 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
 Work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of financial
statements
IASB Standard- Setting Process:
1. Research 3. Exposure Draft
2. Discussion Paper 4. Accounting Standard

Four Areas of Accountancy Profession

1. Public practice – composed of individual practitioners, small accounting firms and large
multinational organizations rendering independent and expert financial services to the
public which include:
a. Auditing – primary service offered by most public accounting practitioners;
specifically known as external auditing; this refers to examination of financial
statements by independent certified public accountant for the purpose of
expressing an opinion as to the fairness with which the financial statements are
prepared; also known as attest function.
b. Taxation – includes preparation of annual income tax returns and determination
of tax consequences of certain proposed business endeavors.
c. Management Advisory Services – generally refers to services to clients on matters
of accounting, finance, business policies and many other phases of business
conduct and operations.
2. Private practice – major objective of private accountant is to assist management in
planning and controlling the entity’s operations.
3. Government accounting – encompasses 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. Its focus is custody
and administration of public funds.
4. Accounting in Education – focuses on teaching accounting, taxation, business law,
finance, business management and other related fields in any higher education
institutions.

SSP || Don’t stop until you’re proud. Page 5 of 30

 Generally Accepted Accounting Principles (GAAP)
These are rules, procedures, practice and standards followed in the preparation
and presentation of financial statements.
Important Notes on GAAP:
 The principles have developed on the basis of experience, reason, custom,
usage and practical necessity.
 The process of establishing GAAP is a social process which incorporates
political actions of various interested user groups as well as professional
judgment, logic and research.
Purpose of Accounting Standards:
 To identify proper accounting practices for preparation of financial
statements
 Create a common understanding between prepares and users of financial
statements particularly the measurement of assets and liabilities

Development of Philippine GAAP or Accounting Standards Observed in the Philippines

Pre - 1996

• Formerly, accounting standards followed in the Philippines were called Statement of

Financial Accounting Standards (SFASs). These were based from existing US GAAP during
that time.

1996

• ASC started shifting basis of accounting standards from US GAAP to IAS. SFAS, in effect,
were re-issued as Philippine Accounting Standards (PAS).

1997

• ASC decided to totally move to adoption of IAS.

2004

• SEC indicated in SEC Memorandum Circular #19, series of 2004 requires the adoption of the
IAS, PAS and IFRS in audited financial statements.

2005

• Effective January 2005, Philippines is fully compliant with IFRS

2009

• SEC resolved to adopt PFRS for SMEs as part of its rules and regulations.

Factors Considered by ASC in Deciding to Move to IAS:

1. Support of IAS by Philippine Organizations
2. Increasing Internationalization of Business
3. Improvement of IAS
4. Increasing Recognition of IASB Standards

SSP || Don’t stop until you’re proud. Page 6 of 30

 Philippine Financial Reporting Standards
This is the current Philippine GAAP which collectively includes PFRS, PAS, and Philippine
Interpretations.

Comparisons of Terms
Local International
Accounting Standard Council International Accounting Standard Council
Interpretations Committee Standard Interpretations Committee
Philippine Accounting Standards International Accounting Standards
Financial Reporting Standards Council International Accounting Standards Board
Philippine Interpretations Committee International Financial Reporting
Interpretations Committee
Philippine Financial Reporting Standards International Financial Reporting Standards

TRY THIS ONE

1. He was the inventor of double-entry bookkeeping.

a. Giovanno Farolfi c. Amatino Manucci
b. Luca Pacioli d. Jose Mari Chan
2. Proper application of accounting principles is most dependent upon
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
3. The primary responsibility for properly applying GAPP lies with
a. External auditor
b. Internal auditor
c. Management
d. National accounting organization
4. The Philippine Financial Reporting Standards (PFRS) collectively include
a. PFRS corresponding to IFRS
b. PAS corresponding to IAS
c. Philippine Interpretations corresponding to IFRIC and SIC interpretations and
interpretations developed by PIC.
d. All of these are included in PFRS.

---END OF UNIT ONE---

SSP || Don’t stop until you’re proud. Page 7 of 30

 UNIT II – 2018 Conceptual Framework for Financial Reporting (Part 1)

This part gives students the history, purpose, scope, and meaning of new conceptual
framework for financial reporting.
Essential Questions

o What is use of the new Conceptual Framework for Financial Reporting?

o What are its contents?
o What are the added features of the new Framework?

Intended Learning Outcomes

o Define the conceptual framework and understand its rationale, purpose and scope
o Understand the objectives of Conceptual Framework for Financial Reporting
o Identify the primary users of financial statements
o Differentiate each of the qualitative characteristics of financial statements and
explain its significance in making the financial statements useful.

History of the Conceptual Framework

1989 2004 2010 2012 2018

• IASC created • IASB and • The two • IASB • IASB

the 1989 FASB started parties restarted the released the
Framework an eight- released the project 2018
entitled phase joint 2010 without the Conceptual
Framework project to Conceptual FASB. Framework
for the revise the Framework for Financial
Preparation Conceptual for Financial Reporting.
and Framework Reporting
Presentation with the new
of Financial parts,
Statements Objective of
general
purpose
financial
reporting
and
Qualitative
characteristic
s of useful
financial
information,
and the rest
completely
copied from
the 1989
Framework.

Reasons for Revision of 2010 Conceptual Framework

1. Some important areas of accounting development and development of accounting
standards were not covered.
2. Guidance in some areas was unclear.
3. Some aspects included were out of date.

SSP || Don’t stop until you’re proud. Page 8 of 30

 Accounting Standards Advisory Forum
(ASAF)
It is a consultative group of the IASB in the 2018 Conceptual Framework Project.

Emphasis of the Revision

IASB sought a balance between providing high- level concepts and providing enough
detail for the 2018 Conceptual Framework to be useful to the Board and others.
IASB concluded that a Conceptual Framework would not fulfill this role if it described
concepts without explaining the factors the Board needs to consider in making judgments
when the application of the concepts does not lead to a single answer, or leads to
conflicting answers.
The discussion of capital and capital maintenance in the 2018 Conceptual Framework is
unchanged from 2010 Conceptual Framework, which originally appeared in the 1989
Framework.

Items not Addressed by IASB and 2018 Conceptual Framework

1. Classification of financial instruments with characteristics of both liabilities and equity.
2. Equity method of accounting
3. Translation of amounts denominated in foreign currency
4. Restatement of the measuring unit in hyperinflation.

Definition of Conceptual Framework for Financial Reporting

Also called the Conceptual Framework
Sets out the concepts that underlie the preparation and presentation of financial
statements for external users (2010 version).
Describes the objective of, and the concepts for, general purpose financial
reporting. (2018 version)

Purposes of Conceptual Framework

Assist the IASB to develop IFRS (Standard) that are based on consistent concepts
Assist preparers to develop consistent accounting policies when no Standard
applies to a particular transaction or other event, or when a Standard allows a
choice of accounting policy
Assist all parties to understand and interpret the Standard
Note: Purposes are simplified and minimized as compared to 7 purposes stated in the
2010 Conceptual Framework.

Authoritative Status of Conceptual Framework

This is not a Standard. Nothing in the Conceptual Framework overrides any
Standard or any requirement in a Standard
To meet the objective of general purpose financial reporting, the Board may
sometimes specify requirements that depart from aspects of the Conceptual
Framework. If the Board does so, it will explain the departure in the Basis for
Conclusions on that Standard
The Conceptual Framework may be revised from time to time on the basis of the
Board’s experience of working with it. Revisions of the Conceptual Framework will
not automatically lead to changes to the Standards. Any decision to amend a
standard would require the board to go through its due process for adding a
project to its agenda and developing an amendment to that Standard.

SSP || Don’t stop until you’re proud. Page 9 of 30

Mission of IFRS Foundation is to Develop Standards that Bring:
1. Transparency
2. Accountability
3. Efficiency

Transition to 2018 Conceptual Framework

 The Board and the IFRIC will start using 2018 Conceptual Framework immediately once it
is used.
 When IFRIC develops an interpretation and encounters inconsistency between the
Standard and the Conceptual Framework, it will refer the issue to the Board.
 Changes to the Conceptual Framework will not automatically lead to changes in existing
Standards.
 These changes will generally have no immediate effects on the financial statements of
most reporting entities.
 Preparers of financial statements could be directly affected by the changes only if they
need to use the Conceptual Framework to develop an accounting policy when no
Standard applies to a particular transaction or other event.

Arguments over Information Needs of Long- Term Investors

1. The Board focuses too much on the needs of short- term investors
2. The Board gives too much weight to the needs of potential investors and not enough
weight to the needs of existing long- term investors
3. Excessive use of current value measurement bases

Let’s pause for a bit and answer the following…

1. What is the meaning of Conceptual Framework (CF)?
2. What are the purpose of the Revised Conceptual Framework?
3. What is the authoritative status of the Conceptual Framework?
a. The Conceptual Framework has the highest level of authority.
b. In the absence of a standard or an interpretation that specifically applies to a
transaction, the CF 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 CF in developing and
applying an accounting policy that results in information that is relevant and faithfully
represented.
d. The CF applies only when the IASB develops new standard.

SSP || Don’t stop until you’re proud. Page 10 of 30

 Users of Financial Information

Users of Financial Information

Primary Users Others Users

They need information which enables them to

They need information to help them determine
assess the ability of the entity to provide
whether they should buy, hold, or sell their
remuneration, retirement benefits and
investments.
Existing and potential employment opportunities.
investors Employees
They need financial information which enables They have an interest in information about the
them to determine whether thier loans, interest continuance of an entity especially when they
thereon and other amounts owing to them will be have a long-term invesmtment with or are
paid when due. dependent on the entity.
Lenders and other
creditors Customers

They require information to regulate the

activities of the entity, determine taxation
policies and as a basis for national income and
similar statistics. Government and their
agencies

Financial information may assist the public by

providing information about the trend and the
range of its activities.
Public

Scope of Revised Conceptual Framework

a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. Financial statements and reporting entity
d. Elements of financial statements
e. Recognition and derecognition
f. Measurement
g. Presentation and disclosure
h. Concepts of capital and capital maintenance

Objective of Financial Reporting

The overall objective of financial reporting is to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

The objective of financial reporting is the "why", purpose or goal of accounting.

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.

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 repots also include nonfinancial information such as description of major products and a listing of corporate
officers and directors.

SSP || Don’t stop until you’re proud. Page 11 of 30

 Specific Objectives of Financial Reporting

To provide information useful in making decisions about providing resources to the entity.

The decisions are about:

 Buying, selling or holding equity and debt instruments (investors)
 Providing or settling loans and other forms of credit; or (lenders and other
creditors)
 Exercising rights to vote on management’s actions (investors)
To provide information useful in assessing the cash flow prospects of the entity.

Cash Flows information is about the inflow and outflow of cash arising from any kind
of transaction an entity undergoes.
In making these decisions, primary users need to assess both:
 Prospects for future net cash inflows to the entity (principal and interest for
lenders and other creditors) (dividends for investors)
 Management’s stewardship of entity’s economic resources
To provide information about entity resources, claims and changes in resources and claims.

Financial position is information about the entity’s economic resources and the
claims against the reporting entity. It comprises the assets, liabilities, and equity of
an entity.
The economic resources are the assets and the claims are the liabilities and equity
of the entity.
Changes in economic resources and claims result from financial performance and
from other events or transactions, such as issuing debt or equity instruments.
Financial performance is the level of income earned by the entity through the
efficient and effective use of its resources. It comprises revenue, expenses and net
income or loss for a period of time.
The financial performance of an entity is also known as results of operations and is
portrayed in the income statement and statement of comprehensive income.

Accrual Accounting

Financial reports are basically prepared by applying the principle of accrual basis of
accounting.
Accrual basis of accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the periods in
which those effects occur (when income is earned or when expense is incurred), even if
the resulting cash receipts and payments occur in a different period.
Simply stated, in accrual accounting means that income is recognized when earned
regardless of when received and expense if recognized when incurred regardless of when
paid.

Limitations of Financial Reporting

Even though general purpose financial reporting intends to provide financial information
to primary users to help them in making decisions, the financial information provided
won’t entirely meet the needs of these users because they need to consider other
pertinent information such as economic conditions, political events and climate, and
industry and company outlook.

SSP || Don’t stop until you’re proud. Page 12 of 30

 General purpose financial reports are not designed to show the value of a reporting
entity; rather, these will help users to estimate the value of the reporting entity.
General purpose financial reports are intended to provide common information to users
and cannot accommodate every request for information.
To a large extent, general purpose financial reports are based on estimate and judgment
rather than exact depiction.
Qualitative Characteristics

Qualitative Characteristics

Fundamental Qualitative Characteristics (RF) Enhancing Qualitative Characteristics (VCUT)

Faithful
Relevance Verifiability Comparability Understandability Timeliness
Representation

Direct
Predictive Value Completeness Horizontal
verification

Confirmatory Indirect
Neutrality Dimensional
Value Verification

Materiality Free from error

Qualitative Characteristics – qualities or attributes that make financial accounting

information useful to the users.

Fundamental Qualitative Characteristics – relates to the content or substance of

financial information.
Relevance – capacity of the information to influence a decision
- It requires that the financial information should be related or pertinent to
the economic decision.
- Ingredients of relevance – Financial information is relevant if it has
predictive and confirmation value.
A. Predictive value
- Financial information has predictive value when it can help users
increase the likelihood of correctly or accurately predicting or
forecasting outcome of events.
B. Confirmatory value
- Financial information has confirmatory value if it enables users
confirm or correct earlier expectations.
For example:
An interim income statement which provides feedback about income
to date and serves as a basis for predicting the annual income.
The interim income statement for the first quarter shows net income
of Php2,000,000. This is the confirmatory value.

SSP || Don’t stop until you’re proud. Page 13 of 30

 If the trend continues for the entire year, it is logical to assume that the
net income after four quarters or one year would be Php8,000,000.
This is the predictive value.
- Materiality Concept – also known as Doctrine of Convenience
- Materiality is a sub quality of relevance based on the nature or
magnitude or both of the items to which the information relates.
- It is really a quantitative “threshold” linked very closely to the
qualitative characteristics of relevance.
- Materiality of an item depends of relative size rather than absolute
size. What is immaterial for one entity may be immaterial for
another.
- Generally, an item is material if its omission or misstatement could
influence the economic decision that the users make on the basis
of the financial information about an entity.
- In the exercise of judgment in determining materiality, the relative
size and nature of an item are considered.
- The size of the item in relation to the total of the group to which
the item belongs is taken into account.
- The nature of the item may be inherently material because by its
very nature it affects economic decision.
- For example:
a. An error of Php100,000 in the financial statements of a
multinational entity may not be important but may be so
critical for a small entity. (Relative size)
b. Small expenditure for tools are often expensed immediately
rather than depreciated over their useful lives to save on
clerical costs of recording depreciation because the effect on
the financial statements is not large enough to affect economic
decision.
c. The amount of advertising in relation to total selling expenses.
(Size of the item)
d. The discovery of a Php20,000 bribe is a material event for a very
large entity. (Nature of the item)
Faithful representation – it means that financial reports represent economic
phenomena or transactions in words and numbers.
- That actual effects of the transactions shall be properly accounted for an
reported in the financial statements.
- Ingredients of faithful representation –
A. Completeness
- It requires that relevant information should be presented in a way
that facilitates understanding and avoids erroneous implication.
- For example, a complete depiction of a group of assets would
include description of the assets, numerical depiction and
description of the numerical depiction, such as cost, current cost or
fair value.
- Standard of adequate disclosure – it means that all significant and
relevant information leading to the preparation of financial
statements shall be clearly reported. That is, disclosure of any
financial facts significant enough to influence the judgment of
informed users.

SSP || Don’t stop until you’re proud. Page 14 of 30

 - To be complete, financial statements shall be accompanied by
“notes to financial statements”. Its purpose is to provide the
necessary disclosures required by Philippine Financial Reporting
Standards.
B. Neutrality
- To be neutral, the information contained in the financial
statements must be free from bias. The financial information
should not favor one party to the detriment of another party.
- Neutrality is supported by the exercise of prudence.
- Prudence – the exercise of care and caution when dealing with the
uncertainties in the measurement process such that assets or
income are not overstated and liabilities or expenses are not
understated.
- Conservatism – is synonymous with prudence. It means that when
alternative exist, the alternative which has the least effect on
equity should be chosen. In case of doubt, record any loss and do
not record any gain.
C. Free from Error
- It means there are no errors or omissions the description of the
phenomenon or transaction. Moreover, the process used to
produce the reported information has been selected and applied
with no errors in the process.
- Measurement Uncertainty – arises when monetary amounts in
financial reports cannot be observed directly and must instead be
estimated
- As long as the estimate is clearly and accurately described and
explained, even a high level of measurement uncertainty does not
affect the usefulness of the financial information.
- For example, an estimate of an unobservable price or value cannot
be determined to be accurate or inaccurate but a representation of
that estimate can be faithful if the amount is described clearly and
accurately as an estimate.
- Substance over form – if information is to represent faithfully the
transactions and other events it purports to represent, it is
necessary that the transactions and events are accounted in
accordance with their substance and reality and not merely their
legal form.
- Representing a legal form that differs from the economic substance
of the underlying economic phenomenon or transaction could not
result in a faithful representation.
- To illustrate, when the lessee leased property from the lessor. The
terms of the lease provide that the lease transfers ownership of the
asset by the end of the lease term. In form, the contract is a lease
but in substance, in reality, if the “transfer of ownership provision”
is to be considered, the real intent of the parties is an installment
purchase of an asset by the lessee from the lessor.
Enhancing Qualitative Characteristics – it relates to the presentation or form of the
financial information. These characteristics are intended to increase the usefulness of
the financial information that is relevant and faithfully represented.

SSP || Don’t stop until you’re proud. Page 15 of 30

 Verifiability – it means that different knowledgeable and independent observers
could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.
- Verifiable financial information provides results that would be
substantially duplicated by measurers using the same measurement
method.
- Types of Verification:
A. Direct verification
- It means verifying an amount other representation through direct
observation (e.g. counting cash).
B. Indirect verification
- It means checking the inputs to a model, formula or other
technique and recalculating the inputs using the same
methodology (e.g. verifying the carrying amount of inventory by
checking the inputs in quantities and costs, and recalculating the
ending inventory using the same cost flow assumption).
Comparability – it means the ability to bring together for the purpose of noting
points of likeness and difference.
- It enables users to identify and understand similarities and dissimilarities
among items.
- Types of Comparability:
A. Comparability within an entity
- Also known as horizontal comparability or intracomparability
- It allows comparison within a single entity through time or from
one accounting period to the next.
B. Comparability between and across entities
- Also known as intercomparability or dimensional comparability
- It allows comparisons between two or more entities engaged in
the same industry.
- Principle of consistency – implicit in the qualitative characteristic of
comparability. Consistency refers to the use of the same method for the
same item, either from one period to period within an entity or in a single
period across entities.
- Comparability is the goal and consistency helps to achieve that goal.
- For example, an entity cannot use the FIFO method of inventory valuation
in one year, the average method the next year, again the FIFO method in
succeeding year and so on.
- NOTE: Consistency does not mean that no change in accounting method
can be mad. If the change would result to more useful and meaningful
information, then such change shall be made with full disclosure of the
change and the peso effect thereof.
Understandability – it requires that financial information must be comprehensible
or intelligible if it is to be most useful
- Understandability is very essential because a relevant and faithfully
represented information may prove useless if it is not understood by users.
- Classifying, characterizing and presenting information “clearly and
concisely” makes it understandable considering that the users shall have
an understanding of the complex economic activities, the financial
accounting process and the terminology in the financial statements.

SSP || Don’t stop until you’re proud. Page 16 of 30

 Timeliness – it means that financial information must be available or
communicated early enough when a decision is to be made.
- Generally, the older the information, the less useful it is. However, some
information may continue to be timely long after the end of reporting
because some users may need to identify and assess trends.

Cost constraint on Useful Information

It is a consideration of the cost incurred in generating financial information against the

benefit to be obtained from having the information.
The benefit derived from the information should exceed the cost incurred in obtaining
the information.
The evaluation of the cost constraint is substantially a matter of professional judgment.

TRY THIS ONE

1. What is the general objective of financial statements?
2. Explain the most efficient and effective process of applying the fundamental qualitative
characteristics.
3. Distinguish consistency from comparability.
4. Explain the authoritative status of the Conceptual Framework.
5. What are the purposes of the Revised Conceptual Framework?
6. What provides the “why” of accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Elements of financial statements
d. Objective of financial reporting
7. The economic entity assumption
a. Is inapplicable to unincorporated businesses.
b. Recognizes the legal aspects of business organizations.
c. Requires periodic income measurement.
d. Is applicable to all forms of business organizations.

---END OF UNIT TWO---

SSP || Don’t stop until you’re proud. Page 17 of 30

 UNIT III – 2018 Conceptual Framework for Financial Reporting (Part 2)

This part gives students the continuation of discussing the scope of conceptual framework which
leads them mainly in learning the elements of financial statements and understand the concept
of asset, liability, equity, income, and expenses.

Essential Questions

o What are the other scope of the new Framework?

o What are the elements of financial statements?

Intended Learning Outcomes

o Know the elements of financial statements and understand when they should be recognized
and how they should be measured
o Scrutinize the updated recognition and derecognition principles relating to the essential
elements of financial statements
o Distinguish the different measurement bases and identify the specific scenarios each base is
duly applicable
o Find out the underlying principles relating to presentation of financial statements
o Determine the underlying principles relating to adequate disclosure
o Explain the concept of capital and capital maintenance

Financial Statements and Reporting Entity

Interim Financial Reports

General-purpose financial
(coverage is less than one
reports
year)
Common Forms of
General- Purpose
Financial Reports

Management commentary Supplementary materials

General Objective of Financial Statements

To provide elements of financial statements that are useful in decision making.

Scope of Financial Statements
1. Assets, Liabilities and Equity in Statement of Financial Position
2. Income and Expenses in Statement of Comprehensive Income
3. Other Information such as:
a. Recognized assets, liabilities, equity, income, and expenses (ALEIE) description
and pertinent information in Notes
b. Unrecognized ALEIE description and pertinent information in Notes
c. Cash flows in Statement of Cash Flow
d. Contribution from and distributions to owners in Statement of Changes in
Equity
e. Methods, assumption and judgments in Notes

SSP || Don’t stop until you’re proud. Page 18 of 30

 Types of Financial Statements
A. Consolidated Financial Statements – Financial statements which include
information both coming from the parent and the subsidiary. However, it only
provides total or consolidated amounts and not the composition of those
consolidated amounts.
B. Unconsolidated Financial Statements – Financial statements which include
information only coming from the parent. However, it is not sufficient to meet the
information needs of primary users and cannot serve as a substitute to a
consolidated financial statements.
C. Combined Financial Statements – Financial statements which include information
coming from two or more entities with no control existing between them.
Reporting Entity – entity that is required or chooses to prepare financial
statements.
- Forms of Reporting Entity:
1. Single entity 2. Portion of an entity 3. Two or more entities
Parent – subsidiary relationship only exists if there is control.

Underlying Assumption/Postulates/Accounting Assumption

These are the basic notions or fundamental premises on which the accounting process is based. It
serves as the foundation or bedrock of accounting in order to avoid misunderstanding but rather
enhance the understanding and usefulness of the financial statements.

Going Concern Accounting Entity Time Period Monetary Unit

It is the specific It has two aspects:
This states that It requires that the
company will continue business organization, indefinite life of an a. Quantifiability - means
which may be a that the ALEIE should be
in operation for the entity is subdivided stated in terms of a unit of
foreseeable future. proprietorship, into accounting measure which is
This means that the partnership or periods which are Philippine peso.
entity does not see corporation. usually of equal length b. Stability of the peso -
itself to be closing in It states that the entity for the purpose of means that the
the future and thus, is separate from the preparing financial purchasing power of peso
has indefinite life and owners, managers, reports on financial is stable or constant and
use accruals and position, performance that its instability is
and employees who insignificant and therefore
deferrals. constitute the entity. and cash flows.
may be ignored.

Accounting Period may

be:
a. Calendar year - a 12-
month period that ends
on December 31.
b. Fiscal year - a 12-
month perio dthat ends
on any month.

SSP || Don’t stop until you’re proud. Page 19 of 30

 Elements of Financial Statements

These are the “building blocks” from which financial statements are constructed

Measurement of: Management's Stewardship of: Elements

Financial Position Economic resource Assets
Claim Liability
Equity
Financial Performance Changes in economic resources and claims Income
reflecting financial performance

Expenses

Asset – it is a present economic resource controlled by the entity as a result of

past events.
- Economic Resource – a right that has the potential to produce economic
benefits.
Aspects of Asset:
a. Right – capacity to impose an act to other party.
b. Potential to produce economic benefits.
c. Control – present ability to direct the use of economic resource and obtain
the economic benefits that may flow from it.
Forms of Rights:
a. Rights that correspond to an obligation of another party (example:
right to receive cash, goods or services)
b. Rights that do not correspond to an obligation of another party
(example: rights over physical objects and rights to use intellectual
property)
c. Rights established by contract or legislation (example: owning a debt
or equity instrument)
Ways for an Entity to Obtain Rights:
1. Contract 3. Acquisition/creation
2. Legislation 4. Constructive obligation of another party
Nature of Right:
1. It is temporary.
2. It is not automatically an asset. Right is not equal to an asset. A right
should be accompanied by the other two aspects
3. It is not imposed to the entity who has the right.
4. Rights that are related to one another (accompanied by other two
aspects) are treated as a single asset.
5. Existence uncertainty of right also leads to existence uncertainty of
asset.
Principles Related to Potential to Produce Economic Benefits:
a. It does not have to be certain. For as long as there is a chance (even if
it is very slim) for it to happen, this aspect is achieved.
b. The economic resource is the present right that contains the potential,
not the future economic benefits.
c. Incurring expenditure may mean that an asset is acquired but is not
conclusive because an asset can be acquired without incurring any
expenditure.
Ways for an Economic Resource to Product Economic Benefits (one or
more of the following):
1. Receive contractual cash flow or other resource

SSP || Don’t stop until you’re proud. Page 20 of 30

 2. Exchange economic resource with another party on favorable terms
3. Produce cash inflow or avoid cash outflow
4. Receive cash or other resource by selling the economic resource
5. Extinguish liabilities by transferring the economic resource
Principles Related to Control:
a. Control identifies up to what extent an entity should recognize an
asset.
b. If an entity has control over an economic resource, no other party
controls that resource as well as the benefits that may flow from it.
c. An entity has control of an economic resource if it has either of the
following:
o Right to deploy that resource in its activities
o Right to allow another party to use it
d. An indicator that an entity controls an economic resource is that the
entity is exposed to significant variations in the amount of economic
benefits to be produced.
Liability – a present obligation of an entity to transfer an economic resource as a
result of past events
- Obligation - duty or responsibility that an entity has no practical ability to
avoid. Types of obligation:
a. Legal obligations – consequence of a binding contract or statutory
requirement (example: accounts payable for goods and services
received)
b. Constructive obligations – arise from normal business practice, custom
and a desire to maintain good business relations or act in an equitable
manner (example: an entity decides as a matter of policy to rectify
faults in the products even when these become apparent after the
warranty period)
Aspects of Liability:
a. Entity has an obligation
b. Obligation is to transfer an economic resource
c. Obligation is a present obligation that exists as a result of past events
Nature of Obligation:
a. It is always owed to another party
b. An obligation to transfer of one entity has always a counterpart of a
right to receive of another entity.
c. An entity has no practical ability to avoid an obligation if any means
doing so would have economic consequences significantly more
adverse than the transfer itself or it could only be avoided by
liquidating the entity.
d. Existence uncertainty of the obligation also leads to existence
uncertainty of the liability.
Ways for an Entity to Obtain Obligation:
1. Contract 2. Legislation
3. Entity’s customary practices, published policies or specific statements
(constructive obligation)
Principles Related to Transfer of an Economic Resource:
a. It does not have to be certain. For as long as there is a chance (even if
it is very slim) for it to happen, this aspect is achieved.
b. For as long as it is not yet settled, transferred or replaced, the
obligation to transfer economic resource still exists.
Ways to Transfer an Economic Resource:
1. Pay cash
2. Deliver goods

SSP || Don’t stop until you’re proud. Page 21 of 30

 3. Provide services
4. Exchange economic resources with another party on unfavorable
terms
5. Transfer an economic resource if a specified uncertain future event
occurs.
6. Issue a financial instrument that will oblige the entity to transfer an
economic resource
Requisites for a present obligation to exist as result of past events:
1. Entity has already obtained economic benefits or taken an action
2. Entity will have to transfer economic resource that it would not
otherwise have had to transfer
Income – increases in assets or decreases in liabilities that result in increases in
equity, other than contributions from owners.
- Revenue – arises in the ordinary regular activities (example: sales, fees,
interest, dividends, royalties and rent)
- Gains – other items that meet the definition of income and do not arise in
the course of the ordinary regular activities (example: gain from disposal
of noncurrent asset)
Expenses - decreases in assets or increases in liabilities that result in decreases in
equity, other than distribution to owners
- Expenses – arise in the course of ordinary regular activities (example: cost
of goods sold, wages, and depreciation)
- Losses – do not arise in the course of the ordinary regular activities and
include losses resulting from disasters (example: losses from fire, flood,
losses from disposal of noncurrent assets)
Equity – residual interest in the assets of the entity after deducting all its liabilities
- Equity Claim can either be:
a. Shares of various types issued by entity
b. Some obligations of the entity to issue another equity claim.

Let’s take a review...

1. What is being violated if an entity provides financial reports with a new product
introduction?
a. Economic entity
b. Periodicity
c. Monetary unit
d. Continuity
2. Which is not within the new definition of an asset?
a. An asset if a present economic resource.
b. The economic resource is a right that has potential to produce economic benefit.
c. The economic resource is controlled by the entity as a result of past event.
d. Future economic benefit is expected to flow to the entity.
Defining TRUE or FALSE.
______1. Obligation is a duty or responsibility that an entity has no practical ability to avoid.
______2. Expense is the residual interest in the assets of the entity after deducting all of the
liabilities.

Recognition and Derecognition

Recognition – process of including in the statement of financial position or statement of finance

performance an item that meets definition of one of the elements of financial statements. This
also includes depicting the item in words and by a monetary amount.

SSP || Don’t stop until you’re proud. Page 22 of 30

 Importance of Recognition:
a. It links elements of financial statements.
b. It also links the components of a set of financial statements in such a way that
recognition of item requires the recognition or derecognition of one or more
item.
Recognition Criteria:

Source: Handouts on Conceptual Framework (Part 4) [PDF]

Factors Affecting Recognition Criteria:

Source: Handouts on Conceptual Framework (Part 4) [PDF]

Point of Sale Income Recognition
Income shall be recognized when earned.
Expense Recognition
Expenses are recognized when incurred.
Expense recognition principle is the application of matching principle

Matching Principle

The cost incurred is expensed

The expense is recognized when Some costs are expensed by
outright because of uncertainty
the revenue is already simply allocating them over the
of future economic benefits.
recognized. (Example: cost of peirod benefited. (Example:
(Example: advertising and selling
merchandise inventory). depreciation of property)
expenses)
Systematic and Rational
Cause and Effect Association
Allocation Immediate Recognition

Carrying Amount – amount at which real accounts are recognized in statement of financial
position.
Matching of Cost with Income – simultaneous recognition of income and related expenses
Derecognition – the removal of all or part of a recognized asset or liability from an entity’s
statement of financial position.
Derecognition normally occurs:
1. For an asset – when the entity loses control of all or part of the recognized
asset.
2. For a liability- when the entity no longer has a present obligation for all or part
of the recognized liability.

SSP || Don’t stop until you’re proud. Page 23 of 30

 Objectives of Derecognition:
1. To faithfully represent any assets and liabilities retained after the transaction
that led to derecognition.
2. To faithfully represent the change in the entity’s assets and liabilities as a
result of that transaction.
Note: These two are achieved by identifying the transferred and retained
component and presenting these to the financial statements including
explanatory information.

Measurement
Defined as quantifying in monetary terms the elements in the financial statements
Categories of Measurement
Historical Cost Current Value
Historical Cost – entry price or value to acquire an asset or to incur a liability

Historical cost of an asset Historical cost of an liability

- The cost incurred in acquiring or creating the - The consideration received to incur the
asset comprising the consideration paid plus liability minus transaction cost.
transaction cost.
Updated due to: Updated due to:
a. Depreciation and amortization a. Payment made or satisfying an obligation
to deliver goods
b. Payment received as a result of disposing b. Increase in value of the obligation to
part or all of the asset. transfer economic resources such that the
liability becomes onerous
c. Impairment c. Accrual of interest to reflect any financing
component of the liability
d. Accrual of interest to reflect any financing d. Amortized cost measurement of financial
component of the asset liability
e. Amortized cost measurement of financial
asset

Current Value – which include the following:

1. Fair value 3. Fulfillment value for liability
2. Value in use for asset 4. Current cost
Fair Value (FV)
- An exit price or exit value.
- It can be observed directly using market price of the asset or liability in an active market.
- If FV is cannot be directly measured, an entity can use present value of cash flows.
FV of an asset FV of liability
Price that would be received to sell an asset Price that would be paid to transfer a liability in
in an orderly transaction between market an orderly transaction between market
participants at measurement date. participants at measurement date.
Value in Use
Present value of the cash flows that an entity expects to derive from the use of an asset and
from ultimate disposal.
Fulfillment Value
Present value of the cash flows that an entity expects to transfer in paying or settling a liability.

Current Cost
Based on the entry price or value but reflects market conditions on measurement date.

SSP || Don’t stop until you’re proud. Page 24 of 30

 Current cost of an asset Current cost of liability
Cost of an equivalent asset at the Consideration that would be received less any
measurement date comprising the transaction cost at measurement date.
consideration paid and transaction cost.

Note: In selecting a measurement basis for an asset or liability and for the related
income and expenses, it is necessary to consider the nature of the information that
the measurement basis will produce. The IASB did not mandate a single
measurement basis because the different measurement bases could produce useful
information under different circumstances.

Presentation and Disclosure

Presentation – process of including in the face of the set of financial statements (except
in Notes) an item that meets the definition of any element of financial statements and is
deemed useful.
Disclosure – refers to the process of providing explanatory information related to the
items presented in the set of financial statements, except in Notes where the explanatory
information is found.
Requirements of Effective Communication of Information into Financial Statements:
Focus on Presentation and
Disclosure Objectives and Classification Aggregation
Principles

Presentation and disclosure objectives can be achieved in various ways, thus, entities can
present and disclose in a manner they prefer to, provided, they meet the objectives and
the financial statements they prepared are still intercomparable and intracomparable.
Objective of Presentation and Disclosure
- To make information being communicated more relevant and contributes
to better faithful representation of the information.
Presentation and Disclosure Principles:
1. Entity - specific information is more useful than standardized descriptions.
2. Avoid duplication of information in different parts of the financial statements.
Classification – sorting of elements of financial statements on the basis of shared
characteristics for presentation and disclosure purposes.
Offsetting – preparing asset and liability at net amounts. This is generally
inappropriate but there are exceptions.
Note: Equity claims that differ from others should be segregated.
Income and expenses are classified and included either:
a. In the statement of profit or loss (primary source of entity’s financial
performance), or
b. In other comprehensive income (OCI)
Aggregation – adding together of elements of financial statements that have shared
characteristics and are included in the same classification.

Test yourself

1. Explain recognition of the elements of financial statements.

2. What are the three (3) applications of the matching principle?
3. The matching principle is best demonstrated by
a. Not recognizing any expense unless some revenue is realized.
b. Associating effort with accomplishment.
c. Recognizing prepaid rent received as revenue.
d. Establishing as appropriation for contingency.

SSP || Don’t stop until you’re proud. Page 25 of 30

Concepts of Capital and Capital Maintenance
Two Approaches in Determining Financial Performance
Transaction Approach Capital Maintenance Approach
This is the traditional Net income occurs only after the capital used from the
preparation of income beginning of the period is maintained
statement.

Two Concepts of Capital Maintenance

Financial Capital Physical Capital
This is synonymous to net This pertains to physical
assets or equity of entity; no productive capacity of
measurement basis entity; requires current
required. Effect of change in cost as measurement
price of asset and liability of basis. Effect of change in
entity is treated as part of price of asset and liability
income of entity is not treated as
part of income.

Net Assets, End xxx PPC, End xxx

Net Assets, Beginning (xxx) PPC, Beginning (xxx)
Excess xxx Excess xxx
Distribution to owners xxx Distribution to owners xxx
Contribution from owners Contribution from owners
(xxx) (xxx)
PROFIT xxx PROFIT xxx

----END OF UNIT THREE---

SSP || Don’t stop until you’re proud. Page 26 of 30

 Summative Assessment

I. IDENTIFICATION: Write in CAPITAL LETTERS the term being identified by the following
statements.
1. It is the accounting standard setting body created by the Professional Regulation Commission
(PRC) which main function is to establish and improve accounting standards that will be
generally accepted in the Philippines. _______________________________________________
2. It represents the rules, procedures, practice and standards followed in the preparation and
presentation of financial statements. _______________________________________________
3. Indicate the accounting concept that is defined. Small expenditures or tools are expensed
immediately.___________________________________________________________________
4. It means the ability to bring together for the purpose of noting points of likeness and
difference. ____________________________________________________________________
5. It is a present economic resource controlled by the entity as a result of past events.
_____________________________________________________________________________
6. It is a right that has the potential to produce economic benefits. ______________________
7. This approach means that net income occurs only after the capital used from the beginning
of the period is maintained. _______________________________________________________
8-17. Indicate the accounting concept that is defined or described.
8. Information that has no bearing on an economic decision to be made is useless.___________
9. It is the ability to bring together for the purpose of noting points of likeness and difference.
10. In case of conflict between economic substance and legal form of a transaction, the
economic substance shall prevail. __________________________________________________
11. Small expenditures for tools are expensed immediately. _____________________________
12. When in doubt, recognize all losses and don’t recognize gains. ________________________
13. It is the capacity of the information to influence a decision. __________________________
14. The older the information, the less useful. ________________________________________
15. There are no errors or omissions in the description of the phenomenon. ________________
16. The description and numbers or figures must match what really existed or happened. _____
17. It is the goal achieved by consistency. ____________________________________________

II. TRUE OR FALSE: Write TRUE if the statement is false then write FALSE if the statement is
true.
___________18. Accountants employed in entities in various capacity as accounting staff, chief
accountant or controller are said to be engaged in government accounting.
___________19. The Financial Reporting Standards Council is composed of a chairman who had
been or is presently a senior accounting practitioner and 15 representatives from the following
(i.e., BOA, SEC, BSP, BIR, COA, FINEX, and APO).
___________20. The overall objective of financial reporting is to provide information that is
useful for decision making.
___________21. In case where there is conflict, the Conceptual Framework shall prevail over the
requirements of the International Financial Reporting Standards.
___________22. Income is an increase in asset or a decrease in liability that results in increase in
equity other than contribution from equity holders.
___________23. Generally, revenue is recognized at the point of sale.

SSP || Don’t stop until you’re proud. Page 27 of 30

III. MULTIPLE CHOICE: Encircle the letter of the CORRECT answer.
24. 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 C. American Accounting Associate
B. AICPA Committee on Accounting Terminology D. Board of Accountancy
25. Financial accounting emphasizes reporting to
A. Management C. Internal Auditors
B. Regulatory Bodies D. Creditors and Investors
26. A Conceptual Framework should
A. Lead uniformity of financial statements.
B. Eliminate alternative accounting principles.
C. Guide multinational entities in developing generally accepted auditing standards
D. Define the basic objectives, terms and concepts of accounting.
27. For information to be useful, the linkage between the users and decisions made is
A. Relevance C. Understandability
B. Faithful representation D. Verifiability
28. Which of the following is not an enhancing qualitative characteristic?
A. Understandability C. Timeliness
B. Faithful representation D. Comparability
29. Inflation is ignored in accounting due to what assumption
A. Economic entity C. Monetary Unit
B. Going concern D. Time Period
30. It is the present ability to direct the use of an economic resource and obtain the benefit that
may flow from it.
A. Control C. Obligation
B. Legal right D. Ownership
31. A decrease in an asset arising from peripheral or incidental transaction is called
A. Capital expenditure C. Loss
B. Cost D. Expense
32. It is the residual interest in the assets of the entity after deducting all of the liabilities.
A. Income C. Retained Earnings
B. Equity D. Asset
33. It is the removal of all or part of a recognized asset or liability from the statement of financial
position.
A. Writeoff C. Extinguishment
B. Derecognition D. Retirement
34. An example of direct matching of an expense with revenue would be
A. Depreciation expense C. Direct labor costs incurred to produce inventory sold during a period
B. Office Salaries expense D. Advertising expense
35. It is the sorting of assets, liabilities, equity, income and expenses with similar characteristics.
A. Classification C. Interpretation
B. Summarization D. Recognition
36. When there is agreement between a measure or description and the phenomenon it purports
to represent, the information possesses which characteristic?
A. Faithful representation C. Neutrality
B. Completeness D. Free from error
37. Which of the following is not an implication of the going-concern assumption?
A. Depreciation and amortization policies are justifiable and appropriate.
B. The historical cost principle is credible.
C. The current/noncurrent classification of assets and liabilities is justifiable and significant.
D. Amortizing research and development costs over multiple periods is justifiable and
appropriate.

SSP || Don’t stop until you’re proud. Page 28 of 30

38. What is the law regulating the practice of accountancy in the Philippines?
A. R.A. No. 9298 C. R.A. No. 9928
B. R.A. No. 9198 D. R.A. No. 9892
39. What are the three main area in the practice of the accountancy profession?
A. Public accounting, private accounting and managerial accounting
B. Auditing, taxation, and managerial accounting
C. Financial accounting, managerial account, and corporate accounting
D. Public accounting, private accounting and government accounting
40. CPAs are licensed by
A. The PICPA C. The city government
B. The SEC D. State government
41. The underlying theme of the Conceptual Framework is
A. Decision usefulness C. Timeliness
B. Understandability D. Comparability
42. In measuring financial performance, accrual accounting is used because
A. Cash flows are considered less important.
B. It provides a better indication of ability to generate cash flows than cash basis.
C. It recognizes revenue when cash is received.
D. It is one of the implicit assumptions.
43. The most useful information in predicting future cash flows is
A. Information about current cash flows
B. Current earnings based on accrual accounting
C. Information regarding the accounting policies used
D. Information regarding the results obtained by using a wide variety of accounting policies
44. What is the primary distinction between revenue and gain?
A. The materiality of the amount
B. The likelihood that the transaction will recur
C. The nature of the activity that gives rise to the transaction
D. The method of disclosing the transaction
45. An example of direct matching of an expense with revenue would be
A. Depreciation expense C. Matching principle
B. Historical cost principle D. Going concern assumption
46. Which measure attribute is not currently used in practice?
A. Present value C. Current cost
B. Fair value D. Inflation adjusted cost
47. Financial capital is defined as
A. Net assets in monetary terms
B. Net assets in terms of physical productive capacity
C. Legal capital
D. Share capital issued and outstanding
48. Which concept is applied to net income and other comprehensive income?
A. Financial capital C. Legal capital
B. Physical capital D. Borrowed capital
49. Which statement regarding the term profit is true?
A. Profit is any amount over and above that required to maintain the capital at the beginning of
the period.
B. Profit is equal to income minus expenses.
C. Profit is the equivalent of net income under IFRS.
D. All of these statements are true about the term profit.
50. Accounting standard-setting has been characterized as
A. A political process C. Pure deductive reasoning
B. Using the scientific method D. A legal process

SSP || Don’t stop until you’re proud. Page 29 of 30

References:

Books
Ballada, S., & Ballada, W. (2013). Basic Accounting (18th Ed.). DomDane Publishers.

Millan, Z.B. (2019). Conceptual Framework & Accounting Standards (2019 Ed.).
Bandolin Enterprise (Publishing and Printing).

Peralta, J.F., Valix, C.A., & Valix, C.M. (2019). Conceptual Framework and Accounting
Standards (2019 ed.). GIC Enterprises & Co., Inc.

Peralta, J.F., Valix, C.A., & Valix, C.M. (2019). Intermediate Accounting Volume 1
(2019 ed.). GIC Enterprises & Co., Inc.

Handouts
Amistoso, J. (2019). FAR2: Overview of Accounting [Class handout]. College of
Accountancy, Pamantasan ng Lungsod ng Valenzuela.

Amistoso, J. (2019). FAR2: Conceptual Framework (Part 1-4) [Class handout]. College
of Accountancy, Pamantasan ng Lungsod ng Valenzuela.

Websites
Investopedia. (2020). Financial History: The Evolution of Accounting. Website.
https://www.investopedia.com/articles/08/accounting-history.asp

“It always seems impossible until it’s done”

 Nelson Mandela

---END OF MODULE I---

SSP || Don’t stop until you’re proud. Page 30 of 30