Unit 1 - Module 1.

Topic 1: THE ACCOUNTANCY PROFESSION

Application

B. In your own words, describe and explain what you have understand about accounting and its
overall objective.

 Based from what I’ve read and learned, I think accounting requires a systematic
process of measuring and reporting relevant financial information about the activities of a
business or of an economic organization which can be of help to decision makers. It is
capable of being expressed in monetary terms. It is said that Accounting is the “language
of business”. This means business/financial information is communicated to interested
users in the business. Furthermore, what I’ve understand about the overall objective of
accounting is that, accounting is very important in the business world since it provides
quantitative financial information about a business, therefore it can be useful for the
business owner or other users in making economic decisions. It can influence the users’
decision in a way that it may help them make a good results out of the financial
information provided.

Feedback

1. A 11. A
2. A 12. B
3. D 13. D
4. C 14. A
5. B 15. D
6. D 16. A
7. B 17. A
8. A 18. B
9. B 19. D
10.D 20. D
Topic 2: THE INTERNATIONAL ACCOUNTING STANDARDS
BOARD (IASB)

Application

1. 4
2. 11
3. 9
4. 5
5. 1
6. 3
7. 8
8. 2
9. 6
10. 12
11. 7
12. 10

Feedback

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

II.
1. International Financial Reporting Standards (IFRS)
2. Financial Reporting Standards Council (FRSC)
3. International Accounting Standards Board (IASB)
4. IFRS Interpretations Committee
5. Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards
(PFRS)
6. Highest hierarchy
7. International Accounting Standards Committee (IASC)
8. Accounting Standards Council (ASC)
9. 15
10. Monitoring Board
 Unit 1 - Module 1.2

Application

Your task:

I. Enumerate the 8 chapters discussed in the Conceptual Framework for Financial

Reporting and give a brief discussion on each topic.

1. The Objective of General Purpose Financial Reporting

The overall objective of general purpose 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. This definition is taken from the ‘Conceptual
Framework for Financial Reporting’. The reason why I underlined those words is
that we need to take note of these important points and its definition. First is the
general purpose financial reporting, it provides financial information about the
reporting entity. Next is financial information, this is about the financial position,
performance and changes in financial position of the reporting entity. Entity is an
organization whose activities are kept separate from those of the owners.
Financial statements are used by a number of interested users/parties such as the
existing and potential investors, lenders, and other creditors. These information
from the financial statements is used to help interested users in making economic
decisions. These important points and their definitions will help you to fully
understand the overall objective of general purpose reporting. To sum it up, the
general purpose financial reporting is a means of communicating relevant and
reliable information about a reporting entity that is useful for the existing and
potential investors, lenders and other creditors in making decisions about
providing resources to the entity.

2. Qualitative Characteristics of Useful Financial Information

In this chapter, it presents qualitative characteristics of financial
accounting information which can be useful to the users. Qualitative
characteristics can be classified into two types and these are fundamental and
enhancing.
First we talk about fundamental qualitative characteristics. Under
fundamental qualitative characteristics we have relevance and faithful
representation. Information must be both relevant and faithfully represented in
order to help users make good decisions. Relevance means that the financial
information you provide should be relevant or significant which can influence the
decisions made by the users in a way that it can be useful to them on decision
 making process. The next one is faithful representation. Financial information
must not only be relevant but also the figures represented must be based on the
truth or what really happened. All information must be factual, complete and
reported in the financial statements.
Enhancing characteristics are intended to increase the usefulness of the
financial information that is relevant and faithfully represented. It consists of
comparability, understandability, verifiability and timeliness. Comparability
allows users to compare entities which enable them to better understand their
similarities and differences. Verifiability means that different knowledgeable and
independent observers must verify financial information and should be supported
by the evidence presented. Timeliness, information must be available in time to
help the users on making decisions. Understandability, information shall be
presented in a way that a user understands. It must be clearly and concisely.

3. Financial Statements and the Reporting Entity

This chapter focuses on financial statements, not just reporting entity. The
objective of Financial Statements is to provide useful information to aid users in
decision making. This information is provided in the following: first is the
statement of financial position, where we can find the assets, liabilities and equity:
second is statement of financial performance where we can find the income and
expenses: and third is other statement which include cash flows, contributions
from and distributions to equity holders, methods and assumptions used for
estimates and recognized and unrecognized assets, liabilities, equity, income and
expenses including their nature and risk.
Financial statements are prepared for a particular reporting period. It is
prepared under going concern assumption, which means that unless evidence to
the contrary exist the reporting entity is assumed to exist for the future. Now what
is reporting entity? A reporting entity is the one who chooses or is required to
prepare a financial statements. It can either be a single entity, a part of an entity or
more than one entity. Consolidated financial statements are prepared for entities
with parent-subsidiary relationship. Otherwise it will be called combined financial
statements.

4. The Elements of Financial Statements

Before we proceed to the elements of financial statements we should
define first what financial statements is. Financial Statements is a formal record of
the financial activities of an entity. These are written reports that quantify the
financial strength, performance and liquidity of a company. So when we talked
about the elements we think about the financial position and financial
performance. Let’s start with financial position, this is measure of a financial
position at a specific date. There are three elements in the financial position
 namely: assets, liabilities and owner’s equity. Assets’ is something that a business
owns or control such as cash, inventory, etc. Liabilities is something a business
owes to someone
(loans, etc.). Equity is what the business owes to the owner. Equity represents the
difference between assets and liabilities. Financial position on the other hand is a
measure of a financial performance over a period of time. Financial performance
is composed of the two elements namely; income and expense. Income is what the
business earned over a period of time, also known as revenue. While expense is
the cost incurred by the business over a period of time.

5. Recognition and Derecognition

Recognition is the process of including an item or an element in the
financial statements. Elements under financial position or statement of financial
performance must be recognize and can only be included if it is relevant or
faithfully represented. Derecognition simply means the removal of all or part of
an asset/liability from the statement of financial position. In asset, if you no
longer control it then derecognize the asset. In liability, if you no longer owe
money to anybody or you already paid the obligations, then you should
derecognize the liability.

6. Measurement
In the previous chapter it talks about recognizing an element of financial
statements. In this chapter it’s about the amounts that we measure and recognized
and carried in the statement of financial position and income statement. This will
require the selection of measurement basis. The framework recognizes two
measurement basis which are historical cost and current value. Historical cost
simply refers to transaction price. Changes in value are not normally recognized.
It is the measurement basis most commonly used in preparing financial
statements. Current value measures provide updated monetary information. It
includes fair value, value in use and current cost. Fair value is the price that would
be received to sell an asset, or paid to transfer a liability in an orderly transaction
between market participants and at the measurement date. Value in use refers to
the present value of movement in cash and economic resources for the use of an
asset. It is based on future cash flows, therefore it does not include past
transactions. Current cost refers to the amount of cash/ cash equivalents that was
paid at the measurement date. Now that we know what the measurement basis are.
Then our next question would be, what measurement basis will we use? In
choosing what measurement basis to be used, you need to consider the
fundamental qualitative characteristics which include the relevance and faithful
representation; and also the enhancing qualitative characteristics which composed
of comparability, verifiability, timeliness and understandability.
 7. Presentation and Disclosure
Accounting is considered as the language of business, which only means
that financial information is communicated to wide range of interested users. For
you to be able to have an effective communication on the financial information, it
requires the following: Focus on presentation and disclosure of objectives and
principles, rather than focusing on rules; Classification, you need to classify
information and group them in similar items and separate them on dissimilar
items. You sort them based on their shared characteristics; Aggregation, you must
only include important details and avoid unnecessary details and excessive
aggregation. If the information is not relevant then don’t include it or else it will
be chaotic.

8. Concepts of Capital and Capital Maintenance

Capital is also known as equity. When we talked about capital, we know
that it is the difference between assets and liabilities as stated in the accounting
equation, A – L = OE. And this is called the financial concept of capital. It is used
by most entities in preparing financial statements. We also have Physical concept
of capital, which considers capital as productive capacity of an entity. For
instance, it may be based on the units of output per day. The concepts of the
capital to be used will be based on the needs of the users of the financial
statements.

II. Using a Venn Diagram, compare recognition from measurement.

RECOGNITION MEASUREMENT

1. Used by accountants 1. Assigning monetary

1. The process of to solve practical amounts at which the
incorporating in the problems include elements of the financial
financial statements assumptions, principles statements are to be
an item that meets the and constraints.
recognized and reported.
definition of an
2. Consist of concepts
element. that explains which 2. In what amount to
when, and how financial recognize assets,
2. When or whether to elements and event liabilities, equity, income
recognize. should be recognize, and expense.
measured, and reported
by the accounting
system.
Feedback

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