CHAPTER 1 CONCEPTUAL FRAMEWORK QUESTION 11 Define accounting. ANSWER 1-1 "The Acoountng Standards Council defines accounting a fillows: Accounting isa service activity. Its funetion isto provide ‘quantitative information, primarilyfinancialin nature, about ‘ceonomic entities, that (s Intended to be useful in making teconomie decision. ‘The Committee on Accounting Terminology of the American Inetitute of Certified Public Accountants defines accounting a8 follows Accounting is the art of recording, classifying and Summarizing in a significant manner and in terms of money, transactions and events which are in partatleast ofa financial character and Interpreting the results thereot. "The American Accounting Association in its Statement of Basie ‘ccounting Thoory defines accounting as follows Accountinstis the process of identifying, measuring and communicating economicinformation to permit informed Judgment and decision by users ofthe information.QUESTION 1-2 What are the three important astivitios in the accountin ‘process as embodied in the accounting definition? . ANSWER 1-2 ‘The accounting definition proves thre important activities in the accounting proces, namely: a. Idontiying i Meaurag © Comaunesting QUESTION 1-3 Explain fully tho identifying process of sesounting ANSWER 12 Hentifying moans the recognition or nonrecognition of “aceountable eveat, Not all business actives ae secon An event it accountable or quantifiable when it has an st on ‘voit nb and equi In other word thn sujet ater at ‘secounting is econamie atvty or the measurement of Sammie esoures and esonomi obligations nt noam tien oe ops nd wg a ‘counting Brogan pepe tes ba ‘provinoe of accounting. ie Question 14 "Bola too casio of commie anaes or eat ANSWER 14 Eooonicasvites of an entity are refered to as iransac which may be classified as external and internal. fee External transactions or exchange transactions ate those ‘economic events involving one eatity and another entity. ‘Purchase of merchandise from » aupplier, hrsowing money feu a bank, sale of merchandise to stoner and pasar selanes to emplyees are cxamples of external trameacons x Internal transactions are economic events invalving the entity hly ‘These ane the eoonomie activities that take place enuirly tvithin the entity. Production and easuallyloes are exannples of {ntemial tansactions ‘Production isthe process by which resources aro transformed, into products Casualty is any sudden and unonticipated loss from fro, Food) sarehquake and other ovent ordinarily termed as an tet of Ga oF act of nature QUESTION 1-5 [Explain briefly the measuring process of accounting. ANSWER 1.5 Measuring or mensurement is the process of determining the monctary amounts ntwhich the efemente of te faanelal Statoments are to be recognized and earrad in the balance Sheet and income statement accountng information eto be useful it must be expressed Te'eeeun ofa common financial denominator, Financial Hlaterents without monetary amounte would bo largely Ainintelligible or incomprehensile ‘The Philippine puso is the unit of measuring accountable conic anaactions. ‘The megsuroment bases are historieal cost, current cost, feniisable value and present value, Historical cost is the QUESTION 15 Explain fully the communieating process of accounting. ANSWER 16 ‘Connasrictinais tha proves of preparing and distributing ‘counting report to polenta ure of acedunting information ‘eotiving and measuring aro pointlss if the information obtained he accounting eesnda cannot be commurieated {p'fome fora t0 potential worm, hko te investors, owner, ‘anngere credtes and other increted parties. ‘Actually, cfr this woagon that acoountng haa been called the language of businossImplicit in the communication process are the recording, Classifying and summarizing aspects of accounting. Recording or jouenalizing ia the process of aystematically maintaining « record ofall economic business transactions after thay have been identified and measured Classifying is the sorting or grouping of similar and interelatad economic transactions into their reepective cla ‘Actually, classifying is aooomplished by posting tothe ledger. ‘Summarizing is the preparation of financial statements ‘hich include the statement of fnancis! position, income Statomont, statement of comprehensive income, statement ofeash flows and statement of ebanges in equity, QUESTION 1-7 What is the basic purpose of accounting? ANSWER 1-7 ‘Tho basic purpose of accounting ia to ‘provide quantitative financial information about 4 business that is useful to statement sor patilany owners abd eer, making Ta other words, an ascountant' primary tas (ou financial information fo aatement oars oo tht they Cooke aaa gre ane econ cade Question 1s What do yu understand by th acsoustaney profusion? ANSWER 1-8 Republic Ast No, 9298 inthe Inw ruling the pracin of fcountancy in tho Pippines Tine law i boos ae the *Plippine Accountancy At of 200 “Accountancy hus developed as profeesion attaining a status ‘equivalent to that of law and medicine, In the Philippines, in order to qualify to practice the accountancy profession, a person rust finish a degree in Bachelor of Science in Accountancy and pass a very dificult government oxamination given by the Board of Actountancy Indentally, the Board of Accountancy is the body authorized by Inw to promulgate rules and regulations affeating the practi of the aesountangy profession in the Philippines QUESTION 1.9 Explain tho accreditation to practice public accountancy ANSWER 19) Cortified Public Accountants, firms and partnership of certified public accountants, including partners and staff members thereof, are required to register with the Board of ‘Accountancy and Profegeional Regulation Commiseion for tho practice af publig accountancy. ‘The PRC upon favorable recommendation of the Board of Accountancy shall issue the Certitiente of Repiatration 10 practice public noeountaney which shall bo valid for 8 years And renewable every 3 years upon payment of required fees. Certified Public Accountants gonorally practice their profession in thrce main aroas, namely publle accounting, private accounting and government accounting. QUESTION 110 ‘Explain the limitation ofthe practice of public accountancy. ANSWER 1-10 Single practitioners and partnerships for the practice of public accountancy chall bo rogietored cortifiod public facsountants in the Philippines. ‘A cortiient of acereditation shall bo issued to cortifid public faceountants in public practice only upon showing in focordance With rules and rogulations promulgatod by the Board of Accountancy and approved by the ProfessionalRegulation Commission that such registrant has acquired a ‘minimum of three years of meanisafal experience in any of ‘the areas of public practice ineluding taxation ‘The Securities and Exchange Commission shall not register any corporation organized for the practice of public ssosountany. QUESTION 111 ‘What is publie accounting? ANSWER 1-11 Publie accounting, in essence, ia the practice of the ‘accountancy profession, Individual practitioners, small ‘counting firms and large multinational organizations render inopendent and expert Enancial services tothe public such as ‘auditing, taxation and management cidieory verve. QUESTION 112 Explain briofly the throe Inds of sorvicos rendored by @ public accountant. ANSWER 1-12 1. Auditing has traditionally boon the primary servic offered bay moat public accounting practitioners. Auditing or eposifically external auditing is tho ‘examination of financial statements by independent certified public accountant for the purpose of expressing: fan opinion as to tho faienoss with which the financial statements aro prepared” 2, Taxation service includos tho propavation of annual ‘income tax returns and determination of tax consaquencea of certain proposed business endeavors. The CPA not infrequently representa the oF nt in tax investigations 8, Management advisory service hae bocome incroasingly ‘important in recent years, although audit and tax services ‘are undoubtedly tho mainstay of public accountants, ‘The term "management advisory service” has no precise coverage but is used generally to reer t sorvices to denis, fn matiors of accounting, finance, business policies, ‘organization procedures, product costs, distribution and ‘ning oftor phases of business eeiduct and operations, QUESTION 118 Explain briefly private accounting. ANSWER 1-13 Private accounting means that Cored Public Aesustants axe ‘emplosed in buinoes ones in various capacity a8 acsounting Stall chitaconantant internal saitr and contre. The highest fseenuntng oor in 8 busines entity i the conrallr ‘Tho major objective of the privats accountant is to asi management in planning and controlling the entity's operations. Thiel include maintaining the res producing che financial reports, preparing the budgots and contralling an Allocating th cotta of the business ‘The private accountant has also the rosponsibility for the Aetermination ofthe various taxes the business is obliged to ay. QUESTION 1.14 Bxplain briefly government accounting ANSWER 1-14 Government accounting “ensompasses the proces of analying, tlassifving, summarizing and communicating all transuetions {involving the receipt and deposition of government funds and property and intrpreting the results therec ‘The focus of gavernmont accounting ia the custody and ‘administration of public fonds. ‘Many Certified Public Accountants aro employed in many branches of the goverment. more partigularly the Burgaw of Internal Revenue, Commistion on Ault, Department of Budget ‘ant Management, Seourities and Exchange Comnion at ‘veninapoice agency like the National Bureau Investigation. 1QUESTION 1:15 Distinguish financial accounting and managerial accounting. ANSWER 1-15, Financial accounting is primarily concerned with the ecneding of Business transactions and the eventual preparation of financial statements Financial accounting focuses on general purpose reports known fs financial statements, These financial slatements are intended for internal nil external users, Financial counting isthe area of accounting that emphasizes reporting to creditors and investors, Managerial accounting is the accumulation and preparation of financial eports for buternol veers only nother words, managerial accounting isthe arce of nccounting that emphatizes developing accounting information Tor use withinan entity, QUESTION 1.16 ‘What is the meaning of generally aseptel scoounting principles? ANSWER 1.16 Generally nesepted accounting principles (GAAP) oncompact tho conventions, rules and procedures necessary to define what is accepted accounting practice. Generally acvepted accounting prinsiples are eoncentionat that is, they become generally accepted by agreement often tacit agreement rather than by dbemal derivation fem a set of postulates and basic concepts. ‘The principles have developed on the basis of experience, ‘reason, custo, usage, and practical necesiy Simply stated, generally accepted accounting principles represent the “rules, procedures, practice and standards followed in the proparation and presentation of financiel statomente” Generally accopted necounting principles are like laws that ‘suit be flowed in Roane oon In the Philippines, the development of generally accepted Accounting principles is formalized initially theough the treation of the Acsounting Standasca Coune ‘The accounting standards promulgated by the Accounting Standards Council constitute the jenerally ‘accepted accounting principles inthe Philippines, The approved statements of che ASC are called proviously ‘8 “Statement of Financial Accounting Standards! oc SEAS ‘These ASC Statements of Financial Accounting Standards are now known as Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards oF PERS, QUESTION 1.17 What is the purpose of accounting standards? ANSWER 1-17 ‘The overall purpose of accounting. stondards isto identify Proper accounting practices for the preparstion wad resentation of financin! statements . Accounting standards ereate a common understanding between preparers and users of financial statements Particularly on how Items, for example the valuation of Assets, aro tevated. Financial statements shall therefore comply with all applicable accounting standards, QUESTION 1.18 What do you understand by the Financial Reportin Standards Coupell or FRSC?” ia ANSWER 1-18 ‘The FRSC now replaces the ASC, ‘The FRSC is tho accounting standard setting boy created by ‘the Professional Regulation Commission upon recommendation of the Board of Aotountene) to aasiet che ‘Board of Azountany in capeying ot es powers and fanekions provided under A Act No. S008?‘The main function is to establish and improve accounting standards that will be generally aceepled in the Philippines ‘The FRSC is composed of 18 members with e Chairman who hail boon or ia presently a conior accounting practitioner and 114 roprosentatives from tho folowing BrordofAcmtancy Seuntis and Ebehenge Commicsion Hangho Sentral ng Pipinas ‘Baron of Internal Revere Commission on Ait [jor orgonraton of proparers and utero nonsal statemeste Aceresited national profesional rguniation of PAS Public Practice (Comte and Indust Aeademe or Bavontion Government Taal 2 2 2 ‘The Chairman and members of the FRSC shall have a term of 3 years renewable for another term, Any member of the ‘ASC shall not bo disqualified from boing appointed to the FRSC. QUESTION 19 ‘What do you understand by the Philippine Interpretations Committee? ANSWER 1-19 ‘The Philippine Interpretations Committee or PIC has roplnoed the Intexpretations Committee or IC formed By the ‘Actounting Standards Council in May 2000, "The role ofthe PIC is to propareintorpretations of PFRS for approval by the FRSC and in the context of the Conceptual ‘Franework, to provide timely guidance on financial reporting ‘nnuos not épectfcally addressed in current PURS. 0 In other words, interpretations are intended to give “authoritative guidance" on issues that are likely to reseive divergent oF unaceeptabo trostment becatise the standards flo not provide speci and clenrent rules and guidelines ‘The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations Commitioe or IFRIC which has already replaced the Standing Interpretations Committee or SIC. QUESTION 1-20 What do you understand by the International Accounting Standard Committee (IASC)? ANSWER 1.20 ‘The IASC is an independent private sector body, with the objective of achieving uniformity in the acoounting principles ‘which ave used by business and other organizations for Financial reporting around the world. It was formed in June 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Weland, and the United Staces of Atneric, ‘The IASC subsequently expanded to inchude representatives from over 100 countries and by year 2000 the membership included 143 bodies in 104 countries reprasenting over Owe tallion accountants. Tho IASC is headquartered in London, United Kingdom, QUESTION 1.21 What are the objectives of the International Accounting Standavds Committee? ANSWER 1.21 a. To formulote and publish in the public interest accounting standards to be observed in tho presentation of financial Statements and to promote thelr worldwide weeeptange 1"1 Towork generally forthe improuement and harmonization of regulations, accounting standards and procedures rolating to the presontation of financial statements, ‘The approved statomenta of the IASC axe known ar International Accounting Standards or 1AS. QUESTION 1:22 ‘What are the factors considerod by the Philippines in deciding fto-mave totally to international aceounting standards? ANSWER 1.22 ‘8. Support of international aeounting standards by Philippine organizations, stel a the Philippine SEC, Board of ‘Accountancy and PICPA. +, Increasing internalization of business which as heightened ‘terest in common language for Bnoncial reparing © Improvement of international accounting standards ~ Hemoval of ee choices of accounting treatments, 4, Inoweasing recognition of intrnational accounting standards ly the Wer Bank, Asian Development Bank and Werld Trad Organization. QUESTION 123, What do you understand by the International Accounting Standards Board? ANSWER 1.23 ‘The International Accounting Standards Board or IASB now replaces the International Accounting Standards Committee ‘or TASC. The IASB publishes its standards in a series of pronouncements called "hi jonal Fineneial Reporting, Standards’ or IFRS, However, the 1ASB has adopted the body of standards issued by the IASC, The pronounsementa of the IASC continue to be designated as "International Accounting Standards” or ‘The IASB's objective isto raise the quality and consistency of financial reporting and to have a platform of high quality ‘and improved standards ‘Tho IFRS is a global phenomenon intended to bring about {weater traneparoncy and a higher degree of comparability in finsncial reporting, both of which will benefit the investors ‘and are escential 19 achieve the goal of one uniform and globally accepted financial reporting standards QUESTION 1-24 What do you understand by the Reporting Standards"? ‘ilippine Financial ANSWER 1-24 ‘The Financial Reporting Standards Council issues its standards in a sorios of pronouncements ealled "Philippine Financial Reporting Standards’ or PRS, ‘Tho Philippine Financial Reporting Standaxds collectively include all of the fallowing: a. Philippine Finanelel Reporting Standards which correspond to International Financial Reporting Standards }. Philippine Accounting Standards which correspond to International Accounting Standards, ©. Philippine Interpretations which correspond to Interpretations of the TFRIC and the Standing Interprfetations Committee, and Interpretations Aeveloped by the Philippine Interpretations Cammitiee. 8QUESTION 1.25 ‘What are accounting assumptions? ANSWER 1-25 ‘Accounting assumptions arethe basic nctionsor fundamental premises on which the accounting proces is based. Accounting fseumptions are the “givens” and they exist without eaying Like a building structure that requires a solid foundation to avoid or prevent future collage and provide room for expansion, ‘and 80 with aooounting Accounting assumptions serve as the foundation or bedrock of ‘accounting in oder to ave misunderstanding bt rather enhana> the understanding and usofulness of the financial statoments Accounting sumptions ee also known as postulates. QUESTION 1-26 What are the underlying aooounting aseumptions? ANSWER 1.26 1. Going concern 2 Recounting entity 5 Time period 4 Monetary unit "Tho now Concoptual Framowork for Finoneial Reporting mentions only one assunpiton, namely going concern. Accrual is no longer carvied forward as’ an underlyin sumption ia the new Conceptual Framewor However, implicit in aceounting are the basic assumptions of accounting entity, time period and monetary unit. QUESTION 127 ‘Explain briefly the going concern assumption, ANSWER 1-27 Going concern assumption means that the accounting ty is viewed as continuing in operation indefinitely {he abeence of evidence to th concer. oe “ In other words, financial statements are prepared normally dn the assumption that tho entity shall continue in oparation or the foreseouble future ‘Thus, assets are normally recorded at original acquisition (ost, Aa a rule, market values are ignored. However, some fnew standards requize measurement of certain assote at fair value. ‘This postulate isthe vory foundation of is also known as the continuity assurm et principle Te If there is evidence that the entity would experience large land persistent losses or that the entity's operations are to io terminated, the going concern assumption is abandoned. Tn this case, the users of the statoments will have a groat {interest in the emount of east that will be generated from the entity's asset in tho short term. QUESTION 128 Explain fully the accounting entity assumption, ANSWER 128, In financial acounting, the accounting entity i the specific Business enterprise, which may be a proprictorship, partnership oF corporation. ‘Under this assumption, the entity is separate from the owners, managers, and employees who constitute the entity Accordingly, the transactions of the entity should not be ‘merged with the transactions of the owners. “The reason for this assumption isto have a fair presentation of financial sfatements ‘The personal transactions of the owners should not be allowed to distort the financial etatomonte of tho entityHowever, wher pret nd slay aonb exis consolidated atomants fr the efiete ae aeeaty Mihi tos ey alia ca eS Patent and subadiae) are viewed co's sage ane entity’ us However, the consolidation daes not eliminate the logal oundary segregating the afltated enti, Accounting wl continue t bo done separately for cach entity. QUESTION 129 Explain briely the time period assumption ANSWER 1-29 The time period sumption requires that “the indeiite 1 ofan entity is subateded ino time periads or crotang veri which ae wally af al length forthe purpue of Preparing finan reports on financial poston, Sane Prformance end each dow By convention, the accounting period or fiscal period is one Sear ora period of twelve months ‘The “one-year pero” is traditionally the acounting period Decnune uli after aves tha government eporte ae required. {he sscountng period may bea calendar year or @ natural A calendar sear ia twalvemonth period that ends on December 31. x i 4 A-naturat business year is « twelve-month poriod that enda on any month when the business is at the lowest or experiencing slack season, 6 QUESTION 130 ‘oxplain fully the monetary unit assumption, ANSWER 1-30 ‘The monsiary unit assumption has two aapects, namely quantifiability and stability of the peso. ‘The quanaifiability aspect means that the aasets, Unblities, ‘equity, income and expenses should be stated in terms of a lunit of measure whieh ta the poso in the Philippines. How awlward to aee financial statements without any common unit of measuse. Such statements would bo largely ‘unintelligible and sneomprohenaible ‘The stability of the peso assumption means that the purchasing power of the peso is stable or constant and that its instabubty is insignificant and therefore may be ignored. ‘The stable peso postulate i actually an amplification of the joing concern aisumption eo much oo that adjustments are tunnecessary to reflect any changes in purchasing powee ‘The accounting function isto account for pesot only and not for changes in purchasing power In today’s world, the assumption that the peso is a stable measure over time is not necessarily val Consider an equipment that was imported 10 years ago from the United States for $100,000 whan the exchange rate wae P35 to $1 oF an equivalont of P3,600,000., ‘Ifthe same equipment is purchased now and assuming there is no change in the $100,000 purchase price, the replacement ‘ost in torms of pesos would be in tho vicinity of P4,100,000, considering a current exchange rate of P4i to SL vObviously, thore is a significant gap between historieal cast fand current replacement cost. ‘In this regard, PAS 26 provides that an entity shall choose fither the ost model gr revalvation model ae it accounting policy and shall apply that policy to an eatice class of property, plant and equipment On th other hand, the AICPA Financial Accounting Standards Board enconroges entities to make supplementary disclosures relating to the impact of changing prices. QUESTION 1.31 What do you understand by Conceptual Framework for Financial Reporting? ANSWER 1-91 ‘The old Framework for the Preparation and Presentation of Financial Statements ia now replaced by a complete, comprehensive and single document called the “Conceptual Framavork for Financial Reporting” promulgated by tho International Accounting Standards Board. "The Conceptual Framework in a summary of tho terms and concepts that underlie the proparation and proventation of ‘nancial statements Tes the underlying theory for the development of accowiting standards and revision of previously issued accounting Standard, "The Conceptual Frameworks an attempt to provide an overall ‘theoretical foundation fo acoounting which wil guide seandar- fettors, propators and sata of financial information in the Droparation snd presentation of statements, In other words, the concepts are the foundation on which financial statements are constructed, and provide a platform from which accounting standards are davaloped and revised, Conceptual Framework is concorned with generale purpose financial statements, Including consolidated Financial szatements, ‘The financial statements are prepared at least annually and {io directed toward the common needs of a wide range of However, special purpose financial reports, for example, prospectuses and computations prepared for taxation purposes, ate outside the scope of the Conceptual Fromersork QUESTION 182 ‘What are the basic purposes ofthe Conceptual Frimework? ANSWER 1-82 ‘The basic purpores of the Conceptnal Framework: azo: ‘4, Tp assist the Financial Reporting Standards Counedl in developing accounting standards that. represent Philippine GAAP, b, To assist proparors of financial statements in applying accounting standards and in dealing with issues not yet ‘covered by GAAP. . To assist the Financial Reporting Standards Council in its review and adoption of International Accounting Standards, 4. Tosssist users of financial statomente in interpreting the information costained in the finaneisl statements fe, To aasist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP, £. To provide information to those interested in the worle of the Financial Reporting Standards Council in the ormlaicn of Philippine Financial Reporting Standards,QUESTION 133 Explain the authoritative status of the Conceptual Framework ANSWER 1-38 If there is a standard or an interpretation that specifically applies to a transaction, the standard of Interpretation overrides the Conceptual Framauorh In the absence of a standard or an interpretation that specifically applies to « traasaetion, management sball onsider the applicability of the Conceptual Prametrork in developing and applying an aesounting policy that results in Information that is relevant and reliable, However, itis tobe stated that the Conceptual Framework: is not a Philippine Financial Reporting Standard and hence does not define standard for any particular measurement or dinslosura insu. Nothing in the Conenptnal Framework overvides any specific Philippine Financial Reporting Standard, Tn ease where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall prevail over the Concepiuat Framework QUESTION 1-34 ‘What are the classifications of users of financial information ‘under the new Conceptual Prainework? ANSWER 1-54 Under the new Conceptual Framework for Financial Reporting the users of financial information may he clseifed into two, namely primary gers and other users. The primary users include the existing and potenti invoctore, lenders and other creditors, The other users include the employees, custome: governments and their agencies, and the public. ™ QUESTION 1-36 ‘Explain “primary users" of financial information and their information neods ANSWER 1.35 ‘The primary users of financial information ae the parties to whom general purpose financial reports are primarily directed, Such users cannot require reporting entities to provide information directly to thom and therefore must ely on general purpose financial reports for much of the finanetel information they need, ‘The primary usore and their information needs aro as fillows: 1, Balsting and potential investors Existing and potential investors are concerned with the risk inherent in and return provided by theie investments, ‘The investors need information to help them determine whether they should buy, hold or sell Sbarolders are lao intrested in information wich enables them to aseoss the ability of the entity to dividend, ae 2 Lenders and other exeditors Bxisting and potontiel lendors and other creditors are interested in information which enables them to dotormino whether their loans, interest thereon and ther amounts awing to them wil be paid when du. QUESTION 1-35, Explain "other users" of financial information and their information needs. ANSWER 1-36 By residual definition, ‘other users” are users of financial - information other than tho exiating and potential investors, Tenders end other creditor,find the general purpose financial reports useful but the reports are not directed to them primarily. ‘The other users and their information needs are as follows: 1. Employes Lmployees axe interested in information about the stability and profitability ofthe entity. Specifically, the employees are interested in information which enables them to asses the ability ofthe entity to provide remuneration, retirement benefite and ‘employment opportunities 2, Custome Customers have an interest in information about the ‘continuance ofan entity expecially when thoy have a long- term involvement sith or are dependent on the entity. 5. Governments and their agencies Govemments and thoir agencies are interested in the allocation of resources and therefore the activities of the entity ‘These users requite information to regulate the activities, of the entity, datormino taxation policice and as a basis {or national Income and similar statistics, 4 Public Entities affect members of the publi in a variety of ways. For example, entitios make substantial contsibution to ‘the local economy in many ways including the number of people they employ and their patronage of local cupplicrs. inancial statements may aselst the public by providing information about the trond and the range ofits activities, 2 QUESTION 1.37 ‘What is the scope of the Conceptual Framework? ANSWER 1-97 Objective of financial reporting. ‘Qualitative charseveristice that determine the usefulness of useful financial information ¢. Definition, recognition and monsuroment of the elements from which financial statements are constructed. 4. Concepts of capital and capital maintenance QUESTION 138 ‘Explain fully “Bnanetal reporting” ANSWER 1-88 Financial reporting i the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the cffetivenosa of tho entity's management. ‘The principal way of providing financial information to external users is through the annual financial statements. However, financial reporting encompasses not only financial statements but also other moans of communicating information that relates directly or indirectly to the financial sesounting process. Financial reports include not only Ananelal statements but also other information such as financial highlights, summary ffimportant financial figuros, analysis of financial statoments fand significant ratios, ‘Financial reports also include nonfinanctal information such fas description of major products and a listing of corporate Dffcers and directors,QUESTION 1.59 What is tho overall objective of financial reporting? ANSWER 1.39 Tho eroral objective of nancial reporting ie“ provide financial information about he reporting ently that ed toguiing and gta tnvenoe) enues and thor Stelios it waking dacs shout providing rence the entity’ a : QUESTION 1-40 Enumerate the “specite objectives’ of financial reporting. ANSWER 1-40 Specifically, the Conceptual Framework for Financial Reporting states the following objectives of financial reposting ‘To provide information useful in making decisions about providing resources to the entity To provide information usaf in assessing the prospects ‘of future nel cash flows tothe entity. © Toprovide information about entity resource changos in resouroos and claims, QUESTION 1-41 claims and ‘Explain fully “economic resources and claims’ ANSWER 1-41 General purpose financial roperta provide information about the financial position ofa eeporting ony, Financiat postin is information about the entty’s economic rosouross tnd the claime gains the reporting entity. m ‘The ewonomic esouroes aro the asses and the claims are the liabilities and equity ofthe entity. In other words, tho financial position of an entity comprises sts nseots,lisbltice and equity at» partieular moment in ime. Taformation about financial position eam help users to assess the entity's liquidity, solvency and its need for additional Snancing, ‘The information about financial position ie pictured in the Halement of financial potion QUESTION 1-42 Explain liquidity and solvency. ANSWER 1-42 Liquidity is the availabilty of cash inthe near future to sovor currently maturing abligations, ‘Solvency is the availability of cash over a Jong term to meet financial eommitments when they fall due, Information about priorities and payment requirements of| ‘iating claims eam help usora to prodict how future enah ows will be distributed among ehoso with m claim against the reporting entity QUESTION 1-43, Explain fully changes in economic resourves and claims, ANSWER 1-49 General purpose financial reports also provide information about the effoews of transactions an otter events that change the entity's economi resources and claims,Changes in economic reapurees and claims result from the entity's financial performance and from other events or transactions, such as issuing debt or oquity instruments, "The financial performance ofan entity comprises its revenue, ‘expeneoe and net income or losa for @ period of time In other words, financial performance is the lovel of income earned! by the entity through the efficient and effective use Df ite economic resources. ‘The financial performance of an entity is also known as reulle of operations and i portrayed in the income statement and stalement of comprehensive income. QUESTION 1-44 What are the “limitations” of financial reporting? ANSWER 1-44 4. Gonoral puxpose financial reports do not and cannot ‘provide all ofthe information that existing and potential investors, lenders and other ereditors nood . General purpose financial eports are not designe to show ‘the value of an entity but they provide information to help the primary uers estimate the value ofthe entity. + General purpose financial reports are intended to provide ‘common information tgusersand cannot accommodate every roqueet for information. 4 To a large extent, general purpose financial reports are bbased on estimate and judgment rather than exact depiction, QUESTION 1-45 Explain the following concepts in conjunction with the bojective of financial reporting 1. Entity cheory 2 Bropretary theory 4 Residual equity theory 4 Fund theory ANSWER 1-45 1. Entity theory “The accountng ghiective is geared toward roper income determination. Proper matching ef cost ‘ngainst rovenue is the ultimave ond Bx ‘hua, ehe entity theory emphasizes the importance of he {come statomont Thi is expiined by Be equation ‘Assota = Linilitos + Capital 2 Proprietary theory ~ ‘The accounting objective is dieced toward proper valuation of assets ‘Thus, thie thoory emphasizos tho importance of the statement of financial position. Iris exemplified by the equation Amott Linbiltion = Capitol 3 Residual equity theory The aounting abcd there ate tro clans of shareholders, natuely ordinary Ani preference "Thus, the equation ‘Assets ~ Liabilities ~ Preference Shareholders’ Equity = Ordinary Shareholders! Equity 4. Fund theory ~The accounting objective js neither proper Income determination nor proper valuation of assets but the custody and admintstraion of fund ‘The cbjective ig dinectad toward cash flows exemplified by ae rola Yo snows na enh tows equals Gavornment accounting and fiduciary accounting ere ‘examples of the application of this concept aQUESTION 1.48 Multiple ehoiee (ACP) 1. Accounting is a service activity and its funetion is to provide quantitative information, primarily financial in rnature, about economic entities, that is intended to be ‘useful in making economic decision. his accounting Aofincion ia given by Acoounting Standards Council AICPA Committee on Accounting ‘Terminology American Accounting Association i. Board of Accountancy 2. Tho besic purpose of accounting ia a To provide the information that the managers of an ‘economic entity need to contol its operations. b, To provide information that the ereditors of an ‘economie entity can use in deciding whether to make faddiional loans eo the entity ¢ To measure the periodic income of the economic contity 4, To provide quantitative financial information about fan entity that is useful in making rational economic decision '. These are the events that affect the entity and in whieh | other entities participate, ‘8, Internal events 1. External events Current events Pace events 4, The ‘communiating” process of acsounting ineludes all cof the following, except a. Recording b Classifying © Summarizing Interproting What is tho law rogulating the practice of accountancy in the Philippixes? a. RAND. BO RA'No, © RANe, a. RIA.No, Tes the body authorized by law to promulgats raloe and regulations affecting the practice of the acconmtaney profeaeion ip the Pealippines, fa. Board of Accountancy , Philippine Tnetituto of Cevtifiod Public Aseountante . Sccurities and Exchange Commission @ Hinancial Reporting Standards Council Accountants employed in entitins in various capacity as fccounting tally chick accountant or sonriller are said to be engaged in 4. Dublic accounting 0. Private accounting €. Government accounting 4 Financial aecounting It is the accounting standard setting body created by Professional Regulation " Commission upon recommendation of the Board of Accountancy to astiat the Board of Accountancy in eatrying out its powers and functions under R.A. No, 9298. a. Accounting Standards Council bb Auaiting and Assurance Standards Council ¢ Philippine Accounting Standards Board «d. Financial Reporting Standards Cound ‘Which ie not roquited to be represented in the FRSC? Bangko Sentral ng Pilipinas ‘Bureau of Internal Revenue Commission on Audit Departmont of Budgot and Management10.The Philippine Financial Reporting Standards collectively anclude 1. PFRS corresponding to TERS. I. PAS cocrosponding to TAS, ILPhilippine Interpretations corresponding to TFRIC ‘and SIC Interpretations and Intorprotations Aeveloped by Pl Lon © Tana @ Land ian , hitaad i ANSWER 1-46 Lei ace za $4 pinion Wa oa ca wa QUESTION 1-47 Multiple choice (IAA) 1 ‘Financial accounting is concerned with ‘8. General-purpose reports on financial position and financial performance. Spectlieed reports fr Snrentry management and contro Secalized reports for income tax computation and a. Goreeatpu ts on, chs . Jeneral-purpose reports on changes in stock prices and future estimates of market postion, Financial accounting can be broudly defined as the ara of eosounting that proparos 4. General purpose financial statoments to be used by [parties internal to the entity 01 Binancial statements to be used hy investors onl ‘General purpose fineneial statements to be used by pimice btinternal and extenal fo the enti nancial stacements to be used primarily by management. 3. Financial accounting is the area of accounting that bmiphasizes reporting to ‘Management Regulatory bodies Invernal suitors Creditors and investors Managerial accounting is the area of accounting that emphasizes Reporting financial information to external users Reporting to the Socurities and Bxchange Commission ©. Combining asomnting knowledge with an expertise in data procseing ‘4, Doveloping accounting information for use within an entity One of the basic features of financial accounting is ‘a. Direct measurement of economic resources and bligations and changes in them in toems of money fail sociological and paychological impact. b, Direct mensucement of economic resources and ‘obligations und changoe ia thom is terms of money. ¢. Direct measurement of economic resourcos and bligations and changes in thom in terms of money ‘and sociological impact. 4. Direct mensurement of economic resources and obligations and changes in them in terms of money fand payehologieal impact. ANSWER 1-47QUESTION 1.48 Multiple choice (LAA) Generally aevepted accounting principles 4 Are accounting adaptations based on the laws of », Dorie their credibility and suthorty from legal rulings and court precedents, sy is «. Derive their erodibility and authority from the national government ioough the Seeveities and Bxchango Conumiesion 4 Desve their ery and authority fom gunerl recognition and aczeptance by the accourtane profession, ee ae ‘Which ofthe fellowing statements best describes generally copted accounting principles? 8. They have been formulaied in the public sector. bh. They have buen developod on the basis of such factors as usage and practical nocessty ‘They are the same as lews within ovr Inga system, a They do not apply to small entities Proper application of accounting principles ie most dependent upon the Se 1. Existence of specific guidelines 1, Oversight of regulatory bodies © External audit funetion | Professional judgment ofthe acoountant ‘The process of establishing financial aecounting standards 4 Isa democratic procs in thata majority of practi Accountants must nar incomes implemented ». Is. legislative process based on rules promulgated by gogrnent denn ¢. Tsbaved slay on eoonomi analysis of the ofectse standard will have i is implomenied ae 4, Tem social preccos wich inoorporates politcal actions of various interosted user groups as: well aa profesional research and logic ing with a standaid before it 2 Once an accounting standard has been established a. The standard is continually reviewed to see if modification ie necessary. », ‘The standard ia not reviewed unless the Securities ni Exchange Commision makes a complaint. ¢. The task of reviewing the standard to sve if ‘edification is necessary i given to the PICPA. 4. "The principle of consistency requires that no revisions fever bo made to the standard ‘As independent or extornal auditors, OPAS are primarily responsible for f Proparng nancial statoments in conformity with sine dy 3 nancial stataments bs Gatling th acura of nal tatomen ©. Hapressing an opinion ab to the fairness of financial lane a Fag Rei sttements withthe SEC ‘The singulaely unique function performed by Certifiod ublie Accountants is ‘a. Tax preparation 6. Mangement advisory services ©) The attest function fi ‘The preparation of financial statements ‘The purpose of the International Financial Reporting Standards is to a Issue enforcenble standards which rogulate the financial accounting and reporting of multinational +, Bovelop a uniform exrreney in which the financial fransnctions of entities throughout the world would te measure. ¢. Beomate uniform accounting standards among counties ofthe worl 4. Ariteate accounting dlsputos botween auditors and international entities 339. The International Accounting Standards Board was formed to a. Bnforso IPI in foreign counts bk, Develop worldwide accounting standards © Establish accounting standards for multinational centities 4, Develop accounting standards for countries that do not have their owa standari-retting bodies 10.1 isa “soba phenomenon” intendod to bring about transparency and a higher degree of comparability in financial reporting, oth of which will benefit the instore an ae etna to ache the gon o ene Atiform and globally accepted Gnanclal reports standards, . a. IFRS , Borderless accounting ©. World trade Information technology ANSWER 1-48 aa 6c 2b Te aa Be aa ob Ba 10. a QUESTION 1-49 Multiple choice (assumptions) 1. What is the only underlying assumption mentioned in the new Conoeptual Framework for Financial Reporting? ‘Going concern B. Accounting entity ©. Time period 4. Monetary unit 2, Which of the following statemonts st doseribes the term “going concern"? ‘a, Whon eurvent iailitioa of an entity exoved current », ‘The ability of the entity to continue in operation for the foreseeable future ¢. ‘The potentinl to contribute to the flow of cash and cash equivalents ta the ontity ‘4, The expenses of an entity exesed ite income Ifa business ie not being sold or closed, the amounte reported for assets used in the business operations are based on the cos of the asset, This practic is justified by Accrual Continuity assumption ‘Time period Acsounting entity Continuation af an agoounting entity in the absence of tvidence to the contrary is an example of the basic concept of Accounting entity ‘Timo period Going concern Acertal Which of the fllowing ie not an implication of the going concern assumption? "The historical cost principle is credible Depreciation nnd amortization polisies ae justifiable an appropriate e, The current and noncurvent classification of assets ‘nd linbilities is justfinblo and significant 4. Amortizing research and davelopmont costs over ‘Several periods is justifiable and sppropriste, PP 2%6. The relatively atable economic, political and social environment supports a. Conservatism B Materiaiey ¢ Timeliness 4. Going concern Which underlying concept serves as the basis for preparing finaneial statements at rogulae intervals? ‘4 Aczounting ontity Boing concern €° Aocotnting peso 4. Stable monetary unit ‘Which ofthe following is not an important characteristic of the financial statemente that accountants current prepars? ‘4. The information in financial statement i exprewod in Unit of money adjusted for changing purchasing power. b, Financial statements sriiculate with pne another bette measuring Gnancial position is rlated to . Theinformationan Gnancialetatomente ie summarized and classified to help mest users needs, 4. Finapetal statements can be justiied only if the lenefita they provide exeeed the costs Which of the following statements in relation to underlying assumptions is true? 1 In ascordanco with the unit of measure assumption, Accountants normally revise the amounts to tefles fhe changing purchasing power of mney due to {inflating er deflation TL In accordance wich the going consera assumption, the life of an entity ie presumed to be indofinit Lon Ian Both {and 11 Nalther f noe 1. \ 10. Revenue is expreased as the number of pesos received i ieee ag ineliae Clabishiahd itospremsd asthe hur tess pad ut gr pos tailaiotot ine isa ges oh Ftcuanas wae t fae ines ea tects oe hana 2. Going concern bs. Unit of measure &. Historical cost 11. Realization si ANSWER 1-49 La aa 2b he 3b aoa te ob Ba 1b QUESTION 1-50 Multiple choice (AICPA Adapted) 1. Tho concept of accounting entity is applicable Only to the legal aspeets of business organizations nly to the economie aspects of business organizations Only to business organizations Whenever accounting is involved hee 2, Whom. parent and subsidiary relationship exist, eonlidated financial statements are prepared in resgmition of Togal entity Beonomie entity State monetary unit ‘Time period meee{8 Tho valuation ofa promis to recsive cash in the future ‘at present value ia valid beesuse of the accounting concept of Encity ‘Time period Going concoen Monotary unit, ‘This accounting concept justifies the usage of accruals anil deferrals Going soneoen ‘Materiality Consistency Stable monetary unit During the lifotimo of an entity, accountants produce financial statements at arbitrary points in time in ‘cordance with what basie accounting concept? Acerual Periodicity Unit of measure Continuity ANSWER 1.50 veore QUESTION 1.61 Multiple choice (Conceptual Framewor!) 1, The old Framework forthe Preparation and Presentation of Financial Statements ie now replaced by a complet Comprehensive and single document called 4. Conceptual Framework for Financial Reporting b Conceptual Framework for Financial Statements Conceptual Framework for Business Entities & Conceptual Framework ‘The Conceptual Framework should 4. Lead to uniformity of finaneiol statements among. entities within the same industry. b, Eliminate alternative accounting principles and method. Guide the PICPA in daveloping generally accepted fuditing standards, 44, Define the basie objective accounting. terms and concepts of Which is mot a basic puxpose of the Concepiuast Framework? ‘4, To assist the Financial Reporting Standards Council in developing acwounting standards. b, Toausiet prepavars of nancial statements in applying accounting standards e, To assist the Financial Reporting Standards Council in reviewing and adopting International Accounting Standards. 4, To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of sconuntancy in the Philippines,Be ae eed oneal sean 4. ono owing eno purpose tte Conrad 7 Me ‘a, Generally accepted accounting principles in financial The meaning of "prowent faiely in acoordance with oa ee eee een A. Tho hierarchy of sources of GAAP. 4. To provide definitions of kay terms and fundamental concept ‘Th provide spaciie guidelines for resolving situations not covered by existing ncrounting sendaods 6 Tp assist accountants and othors a selectiog’ among Alternative accounting-und reporting methods 4. To aisist the Financial Reporting Standards Council in tho standard-setting proces, rie concerning the 5. Which isa basie purpose ofthe Conceptual Framework? 1. To astict sors of financial stazements in interpreting ‘ho information contained in the financial slateenonce 8. Which ofthe following statements is Conceptual Framewors? ae Coa, 1 ep Cana satay Cnkiiee ooo 1, To assist auditors in forming an opinion as to whether eda! financial satomente eonforin with Philippine GAAP ML-To provide information to thoss interested in the ‘ork of the Financial Reporting Standards Cound sn the formulation of PETS ane pedlal purpose financial report, for exam i pe ecatis cad envirceccrrea tera Burpusey ars witun the eco ofthe Conceptual pues f. Yond Monty tte, & neat a Lonly ety % deny Bont na 6 What ib the authoritative status of the Conceptual x the 4. Neither I nor 11 9, Which is not included in the scope of the Conceptual Prameworl? a. Qualitative characteristics of useful financial ‘esounng information 1 Definition, recognition aad measurement of the ‘laments of finonial statement . Objctiv of fnania reporting 41 Gonerlly hosted ncooenting pincoton & The Coreeptual Framewor hi authority. ‘In the lisence of standard or an integpretation that specially applies to « transaction, the Conceptual Framework shall be fallow. © Tpanatene of antl ran intnpetation tn specifically applies tou transaction, management skal Sghnider, tho applicability of the Conceptual ‘amework n developing and applving an asounting. Holic that results in information thats relevant and 4. The Conceptual Framework applies only when the Financial Reporting Standards Coundl develops ne cor revised standards. tho highest level of “ 010.As regards the relationshin between PERS and the Conceptuat Framework, which of the following statements "The Conceptual Framework is a reporting standard , In ease of conflict, tho requirements of the Conceptual Framework peevail over those of the relevant PERS. =. Tony b only © BothT and it 4. Neither I nor 1 ANSWER 151 1 QUESTION 1.52 Multiple choice (Users of information) 1. The "primary users" of financial information include 1. Bxiating and potential investors IL Existing and potential lenders and other creditors ULUser group such as employees, customers, governments and their agencies, and the public a Tonly, b. Land Tonly © Tand Il only @ Wend Itt Which of the following is an internat user of financial information? 1. Board of Directors bh Sharsholder in the entity © Holder of the entity's bonds {1 Groditor with long-term contract with the entity, ‘Those users require information on sak and rotwen on a. Investors b. Employees Lenders a. Customers ‘These users aro interested in information about the profitability and stability of an entity in order to assess the ability of the entity to provide remuneration, fetirement benefite and employment opportunities, ‘a. Customers 1b. The public © Governments and their agensies a Employees ‘These users are intorested in information that enables thom to assess whethor thoir oans, the related interest thereon, and other amosnts owing to thom will be paid whom duc Lendove and other creditors eee ‘Owners‘These users are interested in information about the ‘ontinuaneeo an entity, especially whon they have along term involvement with or are dependent on the entity a Customers b Employees Trade unions @. Supplicrs ‘These users are intorested in information in order to regulate tho activities of an entity, determine taxation, Policies and provide a basis for national statistics, 4. Governments and their agencies 1. Major organization of ters ¢ Bureau of Internal Revonue Department of Finance ‘These users neod information on trends and reeent developments where an entity maker a substantial contribution to the loeal economy providing employment and using local suppliers, a. Tho public bb Governments and their agencies © Finanes entities a. Private entice ‘The existing and potential investors 1. Are interested in information which enables them to ‘assess tho ability of the entity to pay dividends U, Neod information to Delp thom determine whether they show buy or sell Tony TWonly Both I nd 11 Neither I nor 1 10.Which of the following, statements in relation to Information needs is true? 1. Information that moets the neods of specified primary users is likely to meet tho needs of other users, suck ais employees, customers, governments and their fgeneies, and the publi. IL, The management is also interested in financial information but it need nae tely om general purpose financial reports because it ean access additional information internally only MWenly Both and 1. Neither I not IL ANSWER 1-52 De Btiariso tata BkeuGten ake oe) aa a6 Ba 1 QUESTION 1.53 Multiple choice (AICPA Adapted) 1. The theory ofarcounting which best deseribes the aeeouning ‘equation expressed “aasats = Habilities + equity” is the a. Entity theory B Fund theory © Propsietary theory Ai Residual equity theory 2, What theory of ownership equity is enumerated by the following equation: assets minus Liabilities minut preference share equity equals ordinary share equity? Bung Entity Propeietary ‘eeldual equity apes8. Classifying preference dividends application of what conoept? expense is an a. Entity 1b. Proprietary © Residual equity @. Fund ‘The primary accounting objective is fair presentation of the financial performance of the entity. Entiey Proprietary’ Rosidunl equity Bund 5, Fiduciary accounting is an application of Entity theory Proprietary theory Rosidual equity theory Fund theory ANSWER 1-53 QUESTION 1.54 Multiple choice (Financial reporting) 1, What is the objective of financial reporting? bw 2, The primary focus of financial reporting bi ‘To provide information about the financial positon, financial performance and changes in financial position of an entity ‘To proparo and present a statement of financial position, an income statement, a statement of ‘comprehensive income, a statement of cashflows and fa statentent of changes in equity. ‘To provide financial information about an entity that ‘is useful to existing and potential investors, lenders fand other creditors in making decisions about providing resources to the entity ‘To preparo financial statoments in accordance with all applicable standards and interpretations, been on meeting the needs of which of tho following groups? b 4 ‘Managors ofan entity Existing and potontil investore, londers and other creditors National and Joel taxing authorits Independent CPAs 4, The overall objective of financial reporting is to provide information ci ‘That is ueoful for decision making About an entity's aseots,liabilitioe and owners! equity ‘About an entity's financial performance during a period ‘That allows owners to performance "3. management'sWhich of the following statements concerning the objectives of financial reporting is true? : 1. The objectives are intended to be specific in nature 5 Theobjetives ae desed many toward tho needs af internal users of acoounting informacion. 6. Tho objectives are tho end result of tho conceptual a famnvork proc. cbjetives eooompass not only financial statement Aiseloetres but other information as well, Which of th fllowing etatements boat deseribos tho term “financial postion ‘The net income and expenses of an entity ‘The net of nancial asst Toes ltilites of an entiey The potential to contribute to the flow of cach and aah equivalenta fo the ently 4, The assets, inbibiios and equity of an entisy ee Which of the following boet di performance of an entity? jribes “financi The revenue, caponses and oct insane oF loss fora © feo oan ot sets, nos and equity ofan ent ¢. The total assets minus total abilities af 41 The total aa ofows mins can outiome Whieh of the following statements is true in rslaton to financial position? 1. Information about financial postion an help users ‘© anaoas the entity’sliguight, solvensy and ie need foe additional faneings Information about priorities and payment sequirements of existing claims ean holp usore to predict how future ask flows will be distributed mong tose with a claim against th entity Tonly Wenly Hoth Tand 1 Neither [nor I 8 ‘Which, ofthe following siatements is true in relation to uaneial reporana? 1. Financial reports include not only’ financial satemente Bue slap other information auch ae financial highlighte, summary of important Bnancial figures, analyels of finanelal etatements and ugnilennt Pate Ml Financial reports, algo. include. nonfinancial Information such 2s description of major produets and 2 listing of corporate officers and directors, froth © Bothl and Tl & Neither f noe 1 ‘Which of the following statements in relation to financial reporting is (rue? ‘4. Thestatement of financial postion reflects the current ‘aloe ofan ently. >. Tho stntement of financial position reflects the {nstabity of the peso ce The financial statement formate and classifications Ao ot vary to reflect industry differences, 4. Due to measurement problem, some entity resources ‘ond obligatings are not eported in the statement of Enancil position. ‘Which of the following statements in relation to nancial reporting is incorrect? ‘4 General purpose finencial reports do not and cannot soride al ft information that primary users nee », Usnoral purpose financial roports are designed to how the'value of tho reporting entity. ¢ Goneeal purpose financial reports are intended to provide common information to users, a. Bipaneial reports are largely based on estimate and jiidement rather than exact depiction. ANSWER 1.54 Le @&a 2b eno : Ray aie rerhorert Ba wbQUESTION 1.55 Multiple choice (AICPA Adapted) 1 ‘The objectives of financial reporting for entities are based ‘Tho need for conacrvatian, Reporting on managements stewardship Generally acoepted accounting principles ‘The needs of the users of the information ‘The information provided by financial reporting pertains to ‘8, Individual business entities, rather than to industries ‘or an economy as @ whole oF 19 members of aociety a3 », Individual business entities and an economy as a whole ‘or to mombers of society ax consumers . Individual business entities and an economy as a whole, rather than to industries or to members of soeiety ab consumats 4. Individual business enticies, industries and an ‘economy as whole, rather than to members of ociety During a period when an entity i under the direction of, ‘particular managomont, financial reporting will divectly provide information about Both entity performance ani management performance , Management performance but not entity performance e; Entity performanes but not management performance 4. Neither entity performance nor management performance 4. Which one of the following ic not listed as @ major bjeotive of financial reporting? ‘a, Financial reporting ehall provide information about lontity resources, claims to those resources and ‘hangs in them. b, Financial reporting shall provide information useful in evalvating managomont’s stowardehip, ¢. Financial zepasting shall provide information useful in investment, credit and similar decisions. 4, Financial reporting shall provide information usoftl in assessing cath flow prospects. Which of the following statements is not normally an ‘objective of financial reporting? 1, To provide information about an entity’ assets and claims against thoso accote », ‘To provide informacion that is usefl in assessing an entity's aourees and uses of eash ce. To provide information that is useful in lending and investing decisions 4. To provide information about an entity's liquidation value ANSWER 1-55 aweQUESTION 1.56 Multiple choice (PHILCPA Adapted) 1. Tho principles which constitute the ground rules for financial reporting are termed “generally accopted sccounting principles" To qualify as "generally accopted," fn accounting prineiple must A. Usually guide corporate managers in preparing financial statements, whch will be undoretood by widely seattored abareholders, b. Guide corporate managers in preparing financial statements, which will be used, Tor eallective bargaining agreement with trade unions & Guide an entrepronour ofthe choice of an accounting ntity like single proprietorship, partnership oF corporation, |. Reccive substantial quthoritative support Under gonorally accepted accounting principles 8 Income and exponges, assets and liabilities are reasuzed based on the occussence of changes in the fone reaenitees nd obligations b, ‘Astets and Hrabilitiee are measured on the basis of ‘hair liquidation value «. Inoome nnd expionsae are reengnized on the basis of aah receipta and payments, inchudiog depreciation of property, plant and equipment. 4. Financial poeition and financial performance are ‘necasuredl on the basis of ensh rescived and cash pai. ‘The four phases of accounting are recording, classifying, summarizing and interpreting. The phase whereby the liquidity, solvency and profitability of an ontity are significantly portrayed is lenown. as a Summarizing b Classifying 2. Recording @ Interpreting 4 Four types of money prices are used in mosassing yeaourecs in finaneial accounting, Tho measurement Which uses such concepts as present value, discounted fash flow and value in use is known a Pree in caren purehnee exchange Price in past purchase exchange nC ij inden ices orshacge Prise in curent slo xshange 5, Extornal events include al ofthe following, except ‘a. Sale of merchandise b. Bonowing from bank @ Donation roseived from shareholder Casualty Joss caused by flood, earthquake or other natural disaster ANSWER 1-56 1d 2a a4 te Ba