Conceptual Framework: Financial Statement and Reporting Entity

Financial statements provide information about economic resources of the reporting entity, claims against the
entity and changes in the economic resources and claims.

Types of Financial statements

1. Consolidated Financial Statements- Both the parent and its subsidiaries. Single reporting entity.
2. Unconsolidated Financial Statements- Parent alone. Not about those of the subsidiaries
3. Combined Financial Statement

Reporting entity is an entity that is required or chooses to prepare financial statements.

Reporting period is the period when financial statements are prepared for general purpose financial reporting.

Accounting assumptions are the basic notions or fundamental premises on which the accounting process is
based.

Going concern
 Only underlying assumption mentioned in the Conceptual Framework for Financial Reporting.
 The ability of the entity to continue in operation for the foreseeable future.
 Assumption:
o The historical cost principle is credible.
o Depreciation and amortization policies are justifiable and appropriate.
o The current and noncurrent classification of assets and liabilities is justifiable and significant.
o Relatively stable economic, political and social environment.
o Not be followed when an entity in bankruptcy reports financial results.
 The valuation of a promise to receive cash in the future at present value is valid because of the accounting
concept of going concern.
 Justifies the usage of accruals and deferrals.

Economic entity assumption

 Financial statements that are prepared for the business are separate and distinct from the financial
statements of the owners.
 It is applicable to all forms of business organizations.
 Accounting Entity, applicable whenever accounting is involved.
 When a parent and subsidiary relationship exists, consolidated financial statements are prepared in
recognition of economic entity.

Accounting period
 Serves as the basis for preparing financial statements at regular artificial points in time.

Monetary unit assumption

 Threatened by the existence of severe inflation in an economy.
Important characteristics of the financial statements that accountants currently prepare:
 Financial statements articulate with one another because measuring financial position is related to
measuring changes in financial position.
 The information in financial statements is summarized and classified to help meet users’ needs.
 Financial statements can be justified only if the benefits exceed the costs.
Assessing cash flows prospects- Over the king run, trends in revenue and expenses are generally more
meaningful than trends in cash receipts and disbursements.

In measuring financial performance, accrual accounting is used because it provides a better indication of
ability to generate cash flows than cash basis.

Entity equation- the accounting equation “assets = liabilities + equity”

Residual equity- The equation “assets minus liabilities minus preference equity equals ordinary equity”

Classifying preference dividends as expense is an application of residual equity.

Entity- primary accounting objective is fair presentation of the financial performance of the entity.

Fiduciary accounting is an application of fund theory.