NAME: CONCEPCION, Jeizel V.

SCORE:
PROFESSOR: Ma’am Salve Dulong Cahilo BSAIS – 1A September 8, 2020

Problem 2-1 REVIEW QUESTIONS

1. Whys is it that financial statement users need to at least have a basic knowledge of
accounting concepts?

“Accounting identifies, measures, and communicates information about entities

for use in making informed judgment and decision.” Thus, the basic of accounting is to
provide quantitative financial information about a business that is useful to statement
users particularly owners and creditors, in making economic decisions. In other words,
basic knowledge of accounting concepts is indeed needed by financial statement users so
that they could make informed judgment and better decision.

2. Why are the GAAP important?

Generally accepted accounting principles encompass the conventions, rules, and

procedures necessary to define what accepted accounting practice is. It represents the
“rules, procedures, practice and standards followed in the preparation and presentation
of financial statements.” The overall purpose of accounting standards is to identify
proper accounting practices for the preparation and presentation of financial statements.
It creates a common understanding between preparers and users of financial statements
particularly on how items, for instance, the measurement of assets, are treated.
Likewise, the purpose of GAAP is to ensure that financial statements are consistent and
comparable. GAAP is making it possible for people across the world to interpret the
accounting data to make informed financial decisions.

3. What are the main implications of going concern concept?

The going concern assumption means that in the absence of evidence to the
contrary, the accounting entity is viewed as continuing in operation indefinitely. In other
words, the financial statements are normally prepared on the assumption that the entry
will continue in operation for the foreseeable future. The idea comes from the phrase that
business is “always going on”. This assumption is also called as continuity assumption.
It simply means that a company is financially stable enough to meet its obligations and
continue its business for the foreseeable future. If there is evidence that the entity would
experience large and persistent losses or that the entity’s operation are to be terminated,
the going concern assumption is abandoned.

4. Enumerate and discuss the four qualitative characteristics of financial statements.

 Understandability requires that financial information must be comprehensible or
intelligible if it is to be most useful. Accordingly, the information should be presented in
a form and expressed in terminology that a user understands. Classifying,
characterizing, and presenting information clearly and concisely makes it
understandable. Understandability is very essential because relevant and faithfully
represented information may prove useless if it is not understood by users.

Relevance is the capacity of the information to influence a decision. Relevant

financial information is capable of making a difference in the decisions made by users.
Information that does not bear on an economic decision is useless. To be useful,
information must be relevant to the decision-making needs of users.

Financial information is capable of making a difference in a decision if it has

predictive value and feedback value. It has predictive value if it can be used as an input
to processes employed by users to predict future outcome. It has feedback value if it
provides feedback about previous evaluations.

The relevance of information is affected by its nature and materiality. Materiality

is a practical rule in accounting which dictates that strict adherence to GAAP is not
required when the items are not significant enough to affect the evaluation, decision and
fairness of the financial statements. It is an entity-specific aspect of relevance based on
the nature or magnitude or both of the items to which the information relates in the
context of an individual entity’s financial report.

Timeliness means having information available to decision makers in time to

influence their decisions. It requires that financial information must be available or
communicated early enough when a decision is to be made. Accounting information is
communicated early enough to be used for the economic decisions that it might influence.
If there is undue delay in the reporting of information, it may lose its relevance.

Reliability simply means that the information is free from material error and bias
and can be depended upon by users to represent faithfully. Accordingly, it helps assure
users that information represents the economic phenomenon or transaction it purports to
represent. Faithful representation, substance over form, prudence, and neutrality
enhances the reliability of financial information.

Faithful representation means that financial reports represent economic

phenomena or transactions in words and numbers. The descriptions and figures match
what really existed or happened. Simply, it means that the actual effects of transactions
shall be properly accounted for and reported in the financial statements.

To represent faithfully, it is necessary that the transactions and other events are
accounted for and presented in accordance with their substance and economic reality,
 and not their legal form. The economic substance of transactions and events are usually
emphasized when economic substance differs from legal form.

Prudence is the desire to exercise 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. In the simplest terms, it means “in case of
doubt, record any loss and do not record any gain.”

To be neutral, the information contained in the financial statements must be free

from bias. It should not favor one party to detriment another party. Neutrality is
synonymous with all-encompassing principle of fairness. To be neutral is to be fair.

Completeness requires that relevant information should be presented in a way

that facilitates understanding and avoids erroneous implication. It is the result of the
adequate disclosure standard or the principle of full disclosure.

Comparability 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
differences among items.

The principle of consistency requires that the “accounting methods and practices
should be applied on a uniform basis from period to period.

5. Differentiate “comparability” from “consistency.”

Consistency is not the same as comparability. Comparability is the goal and

consistency helps to achieve that goal. Consistency is the uniform application of
accounting method from period to period within an entity. On the other hand,
comparability is the uniform application of accounting method between and across
entities in the same industry. Users must be able to compare the financial statements of
an enterprise over time in order to identify trends in its financial position and
performance. Users must be able to compare the financial statements of different
enterprises in order to evaluate their relative position, performance and financial
adaptability. Consistency is required.
Problem 2-2 TRUE OR FALSE

Instruction: In the space provided before the statement, write TRUE if the statement is correct or
FALSE if the statement is incorrect.

TRUE 1. The main objective of GAAP is to present fair financial statements.

TRUE 2. The performance and economic status of the business are reported in the
accounting financial statements.
TRUE 3. Financial reports are useful in making an economic decision only if their
contents are fully understood.
TRUE 4. Conservatism is an accounting convention that requires prudence.
FALSE 5. Timeliness is an important element of financial statements “comparability”
quality.
TRUE 6. Comparability provides relevance if it enables users to identify similarities and
differences between two or more sets of economic circumstances.
FALSE 7. Balance sheet explains the changes of cash and cash equivalents during an
accounting period.
FALSE 8. The components of the cash flow statement contain all assets items of the
balance sheet.
TRUE 9. Two million is always material for accounting purposes.
TRUE 10. Neutrality is an application of the principle of fairness.