St.

Paul University
Surigao
St. Paul University System
8400 Surigao City, Philippines

LIRA, SHEILA MAE O. CONCEPTUAL FRAMEWORK

BSA-201

CHAPTER 4

P. 93-99

QUESTIONS

1. What is the general objective of financial statements?

 The objective of financial statements is to provide information about
the financial position, performance, and changes in financial position of an entity that is
useful to a wide range of users in making economic decisions.

2. Explain a reporting period.

 The reporting period is the period when financial statements are prepared for general
purpose financial reporting. Financial statements may be prepared on an interim basis, for
example three months, six months or nine months. Financial statements may include
information about transactions and other events that occurred after the end of reporting
period if the information is necessary to meet the general objective of financial
statements.

3. Explain a reporting entity.

 Reporting entity is an entity that is required or choose to prepare financial statements.
The reporting entity can be a single entity or a portion of an entity, or can comprise more
than one entity. A reporting entity is not necessarily a legal entity.

4. Define consolidated financial statements, unconsolidated financial statements and

combined financial statements.
 St. Paul University
Surigao
St. Paul University System
 Consolidated financial 8400
statements - these
Surigao City, are the financial statements prepared
Philippines
when the reporting entity comprises both the parent and its subsidiaries. It provides

information about the assets, liabilities, equity, income and expense of both the parent
and its subsidiaries as a single reporting entity.
 Unconsolidated financial statements - these are the financial statements prepared
when the reporting entity is the parent alone. Unconsolidated financial statements are
designed to provide information about the parent’s assets, liabilities, income and
expenses and not about those of the subsidiary.
 Combined financial statements - these are the financial statements when the
reporting entity comprises two or more entities that are not linked by a parent and
subsidiary relationship. It provides financial information about the assets, liabilities,
equity, income and expenses of two or more entities not linked with parent and
subsidiary relationship.

5. Explain underlying assumptions in the preparation of financial statements.

 According to the Framework of IAS/IFRS, the underlying assumptions for the
preparation of financial statements are: Accrual basis The financial statements are
prepared under the accrual basis. Accounting assumptions are the basic notions or
fundamental premises on which the accounting process is based. Accounting assumptions
are also known as postulates. 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.

6. Explain going concern assumption.

 The going concern or continuity 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 entity
will continue in operations for the foreseeable future. The going concern postulate is the
very foundation of the cost principle.
 St. Paul University
Surigao
St. Paul University System
8400 Surigao City, Philippines

7. Explain time period assumption.

 The time period principle or time period assumption is an accounting principle which
states that a business should report their financial statements appropriate to a specific
time period. In financial terms, a time period is often referred to as the accounting year,
or accounting and reporting time periods. These periods can be quarterly, half yearly,
annually, or any other interval depending on the business’ and owners’ preference.

8. Distinguish calendar year and natural business year.

 A calendar year is a twelve-month period that ends on December 31. On the other hand,
the natural business year is a twelve-month period that ends on any month when the
business is at the lowest or experiencing slack season.

9. Explain monetary unit assumption.

 Monetary unit assumption (also known as money measurement concept) states that only
those events and transactions are recorded in books of accounts of the business which can
be measured and expressed in monetary terms. Information that cannot be expressed in
terms of money is useless for financial accounting purpose and is therefore not recorded.
The monetary unit assumption is just an assumption that assumes that transactions and
events can be recorded in a monetary unit as it is constant and stable in the long run.

10. Explain quantifiability and stability of the peso in relation to monetary assumption.
 The monetary unit assumption has two aspects namely quantifiability and stability of the
peso. The quantifiability aspect means that the assets, liabilities, equity, income and
expenses should be stated in terms of a unit of measure which is the peso in the
Philippines. The stability of the peso assumption means that the purchasing power of the
 St. Paul University
Surigao
St. Paul University System
peso is stable or constant and
8400that its City,
Surigao instability is insignificant and therefore may be
Philippines
ignored.

PROBLEMS

Problem 4-1 Multiple Choice (Conceptual Framework)

1. A
2. C
3. D
4. A
5. D

Problem 4-2 Multiple Choice (IAA)

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

Problem 4-3 Multiple Choice (AICPA Adapted)

1. D
2. B
3. C
4. B
5. B

Problem 4-4 Multiple Choice (IAA)

 St. Paul University
Surigao
St. Paul University System
1. Going concern 8400 Surigao City, Philippines
2. Accounting entity
3. Monetary unit
4. Time period
5. Accounting entity

Problem 4-5 Identification (IAA)

1. Time period
2. Going concern
3. Accounting entity
4. Monetary unit
5. Time period

Problem 4-6 Identification (IAA)

1. Monetary unit
2. Time period
3. Monetary unit
4. Going concern
5. Accounting entity

CHAPTER 5

P. 107-112

QUESTIONS

1. Define elements of financial statements.

 The elements of financial statements refer to the quantitative information reported in the
statement of financial position and income statement. The elements of financial
statements are the “building blocks” from which financial statements are constructed.
 St. Paul University
Surigao
St. Paul University System
2. What are the elements directly relatedCity,
8400 Surigao to the measurement of financial position?
Philippines
 The elements directly related to the measurement of financial position in the balance
sheet are assets, liabilities and equity.

3. What are the elements directly related to the measurement of financial

performance?
 The elements directly related to the measurement of performance in the income
statements are income and expenses.

4. Define an asset.
 An asset is a resource with economic value that an individual, corporation, or country
owns or controls with the expectation that it will provide a future benefit. Assets are
reported on a company's balance sheet and are bought or created to increase a firm's value
or benefit the firm's operations.

5. What are the essential characteristics of an asset?

 The essential characteristics of an asset are:
a. the asset is a present economic resource.
b. The economic resource is a right that has the potential to produce economic
benefits.
c. The economic resource is controlled by the entity as a result of past events.

6. Explain a right to produce economic benefit.

 An Economic resource is a right that has the potential to produce economic benefits. For
the potential to exist, it does not need to be certain or even likely that the right will
 St. Paul University
Surigao
St. Paul University System
produce economic benefit. A8400
right can meet
Surigao the definition of an economic resource even
City, Philippines
if the probability that it will produce economic benefits is low.

7. Explain control of an economic resource.

 An entity controls an asset if it has the present ability to direct the use of the asset and
obtain the economic benefits that flow from it.

8. Define a liability.
 A liability is defined as present obligation of an entity to transfer an economic resource as
a result of past events.

9. What are the essential characteristics of a liability?

 The essential characteristics of a liability are:
a. The entity has an obligation
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of past events.

10. Explain an obligation.

 An obligation is a duty or responsibility that an entity has no practical ability to avoid.
Obligations can either be legal or constructive. Obligations may be legally enforceable as
a consequence of a binding contract or statutory requirement.

11. Explain transfer of economic resources.

 St. Paul University
Surigao
St. Paul University System
 The transfer of an economic 8400
resource embodies
Surigao economic benefits that will be required to
City, Philippines
settle the obligation, resulting in an outflow (in general of cash) from the reporting entity
to a third party.

12. Define income.

 Income is defined as increases in assets or decreases in liabilities that result in increases
in equity, other than those relating to contributions from equity holders. The definition of
income has changed to reflect the change in the definition of asset and liability. The
definition of income encompasses both revenue and gains.

13. Distinguish income from revenue.

 Revenue is the total amount of income generated by the sale of goods or services related
to the company's primary operations. Income or net income is a company's

total earnings or profit. Both revenue and net income are useful in determining the
financial strength of a company, but they are not interchangeable.

14. Define an expense.

 Expense is defined as decreases in assets or increases in liabilities that result in decreases
in equity, other than those relating to distributions to equity holders. The definition of
expense has changed to reflect the change in the definition of asset and liability. Expenses
encompass losses as well as those expenses that arise in the course of the ordinary regular
activities. Expenses that arise in the course of ordinary regular activities include cost of
goods sold, wages and depreciation.

15. Distinguish expense from loss.

 One of the main difference between loss and expense is that total loss is computed with
the help of total expenses and effects the total capital invested in the business. On the
other hand, expenses do not directly affect the capital invested in a business.
 St. Paul University
Surigao
St. Paul University System
8400 Surigao City, Philippines
PROBLEMS

Problem 5-1 Multiple Choice (ACP)

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

Problem 5-2 Multiple Choice (Conceptual Framework)

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

Problem 5-3 Multiple Choice (IAA)

1. D
2. C
3. C
4. C
5. C

CHAPTER 6

P. 121-135

QUESTIONS

1. Explain recognition of the elements of financial statements.

 The Revised Conceptual Framework defines recognition as the process of capturing for
inclusion in the financial statements an item that meets the definition of an asset, liability,
 St. Paul University
Surigao
St. Paul University System
equity, income or expense.8400
TheSurigao
amountCity, at which an asset, a liability or equity is
Philippines
recognized in the statement of financial position is reported as carrying amount.
Recognition links the elements to the statement of financial position and statement of
financial performance.

2. Explain the recognition criteria for the elements of financial statements.

 Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position. In addition to meeting the definition of an element, items
are recognized only when their recognition provides users of financial statements with
information that is both relevant and faithfully represented.

3. What is derecognition?
 Derecognition refers to the removal of an asset or liability (or a portion thereof) from an
entity's balance sheet. Derecognition questions can arise with respect to all types of assets
and liabilities. This project focuses on financial instruments.

4. Explain the point of sale income recognition.

 The basic principle of income recognition is that income shall be recognized when
earned. But the question is when is income considered to be earned? With respect to'sale
of goods in the ordinary course of business, the point of sale is unquestionably the point
of income recognition The reason is that it is at the point of sale that the entity has
transferred to the buyer the significant risks and rewards of ownership of the goods.
Stated differently, legal title to the goods passes to the buyer at the point of sale.
Moreover, it is at the point of sale that the entity has transferred control of the goods to
the customer. However, under certain conditions, income may be recognized at the point
of production, during production and at the point of collection.
 St. Paul University
Surigao
St. Paul University System
8400 Surigao City, Philippines
5. What are the three applications of the matching principle?
 The matching principle has three applications, namely:

 Cause and effect association

 Systematic and rational allocation
 Immediate recognition

6. Explain cause and effect association principle.

 Under this principle, the expense is recognized when the revenue is already recognized.
The reason is the presumed direct association of the expense with specific items of
income This is actually the "strict matching concept”. This process, commonly referred to
as the matching of cost with revenue, involves the simultaneous or combined recognition
of revenue and expenses that result directly and jointly from the same transactions or
events. The best example is the cost of merchandise inventory. Such cost is considered as
an asset

in the meantime, that the merchandise is on hand. When the merchandise is sold, the cost
thereof is expensed in the form of "cost of goods sold" because at such time revenue may
be recognized. Other examples include doubtful accounts, warranty expense and sales
commissions.

7. Explain systematic and rational allocation principle.

 Under this principle, some costs are expensed by simply allocating them over the periods
benefited. The reason for this principle is that the cost incurred will benefit future periods
and that there is an absence of a direct or clear association of the expense with specific
revenue. When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined, expenses
are recognized on the basis of systematic and allocation procedures. Concrete examples
 St. Paul University
Surigao
St. Paul University System
include depreciation of property, plant City,
8400 Surigao and Philippines
equipment, amortization of intangibles, and
allocation of prepaid rent, insurance and other prepayments.

8. Explain immediate recognition principle.

 When both the associating cause and effect and systematic and rational allocation
methods cannot be used, expenses are recognized immediately. For example, it can be
difficult to identify future benefits of some costs incurred, or for some costs no rational
allocation scheme can be devised.

9. What are the two categories of measurement?

 The two categories of measurement are the historical cost and current value.

10. Explain historical cost.

 A historical cost is a measure of value used in accounting in which the value of an asset
on the balance sheet is recorded at its original cost when acquired by the company.
The historical cost method is used for fixed assets in the United States under generally
accepted accounting principles (GAAP).

11. Explain fair value.

 Fair value is a broad measure of an asset's worth and is not the same as market value,
which refers to the price of an asset in the marketplace. In accounting, fair value is a
reference to the estimated worth of a company's assets and liabilities that are listed on a
company's financial statement.

12. Explain value in use.

 Value-in-use is the net present value (NPV) of a cash flow or other benefits that an asset
generates for a specific owner under a specific use. In the U.S., it is generally estimated at
 St. Paul University
Surigao
St. Paul University System
a use which is less than highest-and-best
8400 Surigao City,use, and therefore it is generally lower than
Philippines
market value.

13. Explain fulfillment value.

 Fulfillment value is the present value of cash that an entity expects to transfer in paying
or settling a liability. Fulfillment value does not include transaction cost on incurring a
liability but includes transaction cost on fulfillment of a liability. Fulfillment value is an
exit price or exit value.

14. Explain current cost.

 Current cost of an asset is the cost of an equivalent asset at the measurement date
comprising the consideration paid and transaction cost. Current cost of a liability is the
consideration that would be received less any transaction cost at measurement date.
Similar to historical cost, current cost is also based on the entry price or entry value but
reflects market conditions on measurement date.

15. Explain the guideline in selecting an appropriate measurement basis.

 In selecting a measurement basis for an asset or a liability and for the related income and
expense, it is necessary to consider the nature of the information that the measurement
basis will produce. In most cases, no single factor will determine which measurement
basis

should be selected. The relative importance of each factor will depend on facts and
circumstances. The information produced by the measurement basis must be useful to the
users of financial statements. To achieve this, the information must be both relevant and
faithfully represented. Historical cost is the measurement basis most commonly adopted
in preparing financial statements. In many situations, it is simpler and less costly to
measure historical cost than it is to measure a current value. In addition, historical cost is
generally well understood and verifiable. The IASB did not mandate a single
 St. Paul University
Surigao
St. Paul University System
measurement basis because8400
theSurigao
different measurement bases could produce useful
City, Philippines
information under different circumstances.

PROBLEMS

Problem 6-1 Multiple Choice (Conceptual Framework)

1. A
2. B
3. C
4. B
5. A

Problem 6-2 Multiple Choice (IAA)

1. A
2. D
3. D
4. C
5. C

Problem 6-3 Multiple Choice (AICPA Adapted)

1. D 4. A
2. D 5. B
3. B

Problem 6-4 Multiple Choice (AICPA Adapted)

1. D 6. C
2. C 7. B
3. A 8. B
4. D 9. B
5. A 10. B
 St. Paul University
Surigao
St. Paul University System
Problem 6-5 Multiple Choice (IAA)
8400 Surigao City, Philippines
1. B 6. D
2. A 7. C
3. D 8. C
4. D 9. D
5. B 10. C

Problem 6-6 Multiple Choice (Conceptual Framework)

1. D
2. D
3. D
4. D
5. B

Problem 6-7 Identification (IAA)

1. Systematic and Rational Allocation
2. Income Recognition Principle
3. Materiality
4. Completeness/Standard Adequate Disclosure
5. Prudence
6. Materiality
7. Income Recognition Principle
8. Standard Adequate Disclosure
9. Comparability
10. Faithful Representation

Problem 6-8 Identification (IAA)

1. Historical Cost
2. Materiality
3. Matching Principle/Expense Recognition Principle
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Surigao
St. Paul University System
4. Substance over form 8400 Surigao City, Philippines
5. Income Recognition Principle
6. Comparability/Consistency
7. Conservatism
8. Completeness/Standard Adequate Disclosure
9. Matching Principle
10. Conservatism

Problem 6-9 Discussion (IAA)

1. The entire cost of leasehold improvement is to be charged to an expense account.

 When you pay for leasehold improvements, capitalize them if they exceed the
corporate capitalization limit. If not, charge them to expense in the period incurred. If
you capitalize these expenditures, then amortize them over the shorter of their useful
life or the remaining term of the lease.

2. An account receivable carried with a customer who has not been seen for about a
year is expensed.
 Since current assets by definition are expected to turn to cash within one year (or
within the operating cycle, whichever is longer), a company's balance sheet could
overstate its accounts receivable (and therefore its working capital and stockholders'
equity) if any part of its accounts receivable is not collectible. Bad debt expense
would be reported.

3. An amount paid for an advertising campaign to promote a new product that will
be placed on the market in the advertising following year is charged to prepaid
advertising.
 The statement is true since the advertising expense is charge as prepaid account
whereas the latter is not yet demandable to use hence it is paid for future events.
 St. Paul University
Surigao
St. Paul University System
Prepaid expenses represent expenditures
8400 Surigao that have not yet been recorded by a
City, Philippines
company as an expense, but have been paid for in advance. In other words,
prepaid expenses are expenditures paid in one accounting period, but will not be
recognized until a later accounting period. Prepaid expenses are initially recorded
as assets, because they have future economic benefits, and are expensed at the
time when the benefits are realized and it is in accordance with the basic concept
and principle in accounting which is the match making benefits.

4. Cash surrender value of life insurance is reported as a loss since the entity does
not expect to make any claim on the policy until maturity.
 Only permanent life insurance policies have a cash value, which makes them five
to 15 times more expensive than term life insurance.Assuming you're past
the surrender period, you can cancel the policy and take the cash surrender value,
forfeiting future coverage. Keep the death benefit for a shorter term. Your insurer
may allow you to keep the death benefit from your whole life policy for a certain
amount of time, similar to a term life policy.

5. Goods with measurable cost have become obsolete. The goods are included as
part of the inventory since no lose can be incurred until the goods are sold.
 The statement is false, goods with measurable cost is part of the inventory system
of a certain entity but since it had been become obsolete or subjected to spoilage it
is recorded as loss of the company for it cannot be sold anymore. Obsolete
inventory is inventory that a company still has on hand after it should have been
sold. When inventory can’t be sold in the markets, it declines significantly in

value and could be deemed useless to the company. To recognize the fall in value,
obsolete inventory must be written-down or written-off in the financial statements
in accordance with generally accepted accounting principles (GAAP). GAAP
requires companies to establish an inventory reserve account for obsolete
 St. Paul University
Surigao
St. Paul University System
inventory on their balance sheetsCity,
8400 Surigao andPhilippines
expense their obsolete inventory as they
dispose of it, which reduces profits or results in losses.

6. An amount paid in excess of net tangible and intangible, identifiable assets

acquired because of exceptionally high earnings of the acquiree is charged to a
loss account.
 The statement is false since we all know that goodwill impairment is recorded
after company acquires assets and pays a price in excess of the identifiable net
value and the goodwill impairment is an earnings charge that companies record on
their income statements after they identify that there is persuasive evidence that
the asset associated with the goodwill can no longer demonstrate financial results
that were expected from it at the time of its purchase therefore it is not charge as
loss account.

7. Inasmuch as profit for the year appears to be extremely small, no depreciation is

recorded for the year.
 The statement is false for depreciation is a systematic allocation of depreciation
and a depreciation expense is the amount deducted from gross profit to allow for a
reduction in the value of something because of its age or how much it has been
used. When you buy and own equipment, your business may be entitled to deduct
a depreciation expense. Likely, regardless how small the business is earning as
long as it has equipment, property, object and anything that is subject to
depreciation expense are directly affected by the depreciation depending on the
lifespan in line with GAAP.

8. No entry is made when a storm surge destroyed a considerable amount of

uninsured inventory.
 St. Paul University
Surigao
St. Paul University System
 The statement is false, uninsured
8400 inventory
Surigao City, is an accountable event since it is still
Philippines
part of the inventory in general acquisition hence it is recorded in the financial
statements of an entity to know how much has been loss in their inventory system
as it was being subjected to spoilage and expiration

9. Sales made by canteen operated by the entity are credited to the regular sales
account for product sales. Food purchased for the canteen operations is recorded
in the regular purchases account.
 The statement is true for sales made by ordinary course of business should be
credited from sales revenue account or sales account for products sales since the
sales was not done in trading where there will be gain and as for food purchase by
the canteen operations it is understandable that the activity is still within the
boundary of the business normal operations therefore it should be recorded in the
purchases account since it will be part of the inventory system of the company or
entity.

10. A building purchased five years ago including the land on which it stands, can
now be sold at a fair value that exceeds the historical cost. The controller
instructs that the fair value be entered in the accounts

 Under the historical cost principle, most assets are to be recorded on the balance
sheet at their historical cost even if they have significantly increased in value over
time. Valuing assets at historical cost prevents overstating an asset's value
when asset appreciation may be the result of volatile market conditions.

Problem 6-10 Discussion(IAA)

 St. Paul University
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St. Paul University System
1. Because of a “fire sale”8400
delivery truck
Surigao obviously worth P600,000 was acquired at
City, Philippines
a cost of P500,000. The truck was recorded at P600,000 and an income of
P100,000 was recognized.
 Violation of the historical cost principle, record the purchase at cost. Additionally, no
sales revenue should be recorded.

2. The entity is being sued for P500,000 by a customer who claims damage for
personal injury apparently caused by a defective product. The legal counsel
believed that the entity will have no liability for damages resulting from the
situation. Nevertheless, the entity decided to recognize a loss and an estimated
liability of P500,000.
 Legit - because the amount is both probable and can be reasonably estimated, the
company should record the loss.

3. The president of Monica Company used an expense account to purchase a new

car solely for personal use. The payment for the car was debited to an expense of
the entity.
 This practice is not acceptable according to the principle/guideline of Separate Entity
Concept; the care was obviously buy for the personal use of the company. You will
record this transaction as a withdrawal of your investment from the business rather
than a business expense. Furthermore, according to this concept, the business is
viewed as a separate person, distinct from its owner(s).

4. Merchandise costing P300, 000 is reported in the statement of financial position

at P 400,000, the estimated selling price less estimated cost of disposal. The
increase in value of P100, 000 is recognized as an income.
 This falls under the Accounting principle of Consistency Concept, because this
concept mainly requires a business to apply accounting policies consistently, and
present
 St. Paul University
Surigao
St. Paul University System
information consistently,8400
fromSurigao
one period to another. This means that like transaction
City, Philippines
must be accounted for in like manner.

5. Monica Company had been concerned about whether intangible asset could
generate cash in case of liquidation. As a consequence, goodwill arising from a
purchase transaction during the current year and recorded at P1, 000,000 was
written off and charged to retained earnings.
 When the entity sells goods to its customers, the entity will generate revenues and at
the same time, the entity also has to spend its finish goods to its customers. In this
case, sales revenues are recognized in the income statement and the cost of goods sold
is also recognized in the same period. Revenues are matched with cost of goods sold
in the income statement. If either revenue or costs of goods sold are deferred to the
next period because of whatever reason, then net income will not arrive as it should
be. Then the users’ decision could when wrong if it is depending on this information.
The entity might come into the situation where customers pay for the goods they have
not received. In this case, the entity could not recognize the payments that they
received from customers as revenue. This is because goods are not delivered to
customers yet.

Problem 6-11 Identification (IAA)

1. Relevance Characteristics
2. Reliability
3. Comparability
4. Full Disclosure Principle
5. Expense Recognition Principle
6. Revenue Recognition
7. Materiality
8. Going Concern Assumption
9. Expense Recognition
10. Adjusting Events
 St. Paul University
Surigao
St. Paul University System
8400 Surigao City, Philippines
Problem 6-12 Discussion (IAA)

1. Disagree, this is a violation of the historical cost (original transaction value)

principle
2. Disagree, this is a violation of the economic entity assumption
3. Disagree, this is a violation of appropriate revenue recognition
4. Agree, Insurance policies are usually purchased in advance. Cash is paid up front to
cover a future period of protection. The remaining amount would be transferred to
expense over one year by preparing adjusting entries at the end of the current year.
5. Agree, the company is conforming to the full disclosure principle. Financial
statement notes refer to the additional notes included in the financial statements of a
company. The notes are used to make important disclosures that explain the
assumptions used to prepare the financial statements of a company.