What do you understand by the by the framework for the Preparation and Presentation of

financial statements?
 The framework for the Preparation and Presentation of financial statements is promulgated by the
International Accounting Standards Board and adopted by the local Financial Reporting Standards
Council.
 The Framework is a summary of the terms and concepts that underlie the preparation and presentation of
financial statement. It is the underlying theory for the development of accounting standards and revision
of previously issued accounting standards.
 The Framework is an attempt to provide an overall theoretical foundation for accounting which will
guide standard-setters, preparers and users of financial information in the preparation and 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 developed and revised.
 The Framework is concerned with general-purpose financial statements, including consolidated
financial statements.
 The financial statements are prepared at least annually and are directed toward the common needs of a
wide range of users.

What are the basic purposes of the Framework?

The basic purposes of the Framework are:
a. To assist the Financial Reporting Standards Council in developing accounting standards that represents
Philippine GAAP.
b. To assist preparers of financial statements in applying accounting standards and in dealing with issues
not yet covered by GAAP.
c. To assist the Financial Reporting Standards Council in its review and adaption of International
Accounting Standards.
d. To assist users of financial statements in interpreting the information contained in the financial
statements. To assist auditors in forming an opinion as to whether financial statements conform with
Philippine GAAP. To provide information to those interested in the work of the Financial Reporting
Standards Council in the formulation of Philippine Financial Reporting Standards.

Explain the authoritative status of the Framework.

 If there is a standard or an interpretation that specifically applies to a transaction, the standard or
interpretation overrides the Framework.
 In the absence of a standard or an interpretation that specifically applies to a transaction, management
shall consider the applicability of the Framework in developing and applying an accounting policy that
results in information that is relevant and reliable.
 However, it is to be stated that the Framework is not a Philippine Financial Reporting Standard and
hence does not define standard for any particular measurement or disclosure issue.
  Nothing in the Framework overrides any specific Philippine Financial Reporting Standard.
 In case where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall
prevail over the Framework.

What is the scope of the Framework?

a. Objective of financial statements.
b. Qualitative characteristics that determine the usefulness of information in financial statements.
c. Definition, recognition and measurement of the elements from which financial statements are
constructed.
d. Concepts of capital and capital maintenance.

 The Framework is applies to the financial statements of all commercial, industrial and business
reporting entities, whether in the public or private sector.
 However, special purpose financial reports, for example, prospectuses and computations prepared for
taxation purposes, are outside the scope of the Framework.

What is the objective of financial statements?

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

What is the financial position of an entity?

 The financial position of an entity comprises its assets, liabilities and equity at a particular date.
 The financial position pertains to the economic resources, liquidity, solvency, financial structure and
capacity for adaptation of an entity. Such information is pictured in the statement of financial position.

1. Economic resources simply refer to the assets owned by the entity. Information about the economic
resources controlled by the entity and its capacity to modify these resources is useful in predicting the
ability of the entity to generate cash and cash equivalents in the future.
2. Liquidity is the availability of cash in the near future to cover currently maturing obligations.
3. Solvency is the availability of cash over a long term to meet financial commitments when they fall due.
Information about liquidity and solvency is useful in predicting the ability of the entity to comply with
its future financial commitments.
4. Financial structure is the source of financing for the assets of the entity. Financial structure indicates
what amount of assets has been financed by creditors which is the borrowed capital, and how much has
been financed by owners which is the invested or equity capital.
5. Capacity for adaptation is the ability of the entity to use its available cash for unexpected requirements
and investment opportunities.
  This may be accomplished by raising cash at a short notice through borrowing and issuance of
securities or by raising cash through disposal of assets without disrupting normal operations.
Capacity for adaptation is also known as financial flexibility.

What is the meaning of “financial performance of an entity?”

 The financial performance of an entity comprises its revenue, expenses and net income or loss for a
period of time.
 Financial performance is the level of income earned by the entity through the efficient and effective use
of its resources.
 The financial performance of an entity is also known as result of operations and is portrayed in the
income statement and statement of comprehensive income.
 Information about performance is useful in predicting the capacity of the entity to generate cash flows
from its operations. It is also useful in forming judgment about the effectiveness of the entity in
employing additional resources.

What is financial reporting?

 Financial reporting is the provision of financial information about an entity to external users that is
useful to them in making economic decisions and for assessing the effectiveness of the 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
 information such as financial highlights, summary of important financial figures, analysis of financial
statements and significant ratios.
 Financial reports also include nonfinancial information such as descriptions of major products and a
listing of corporate officers and directors.

What is the objective of financial reporting?

 The overall objective of financial reporting is to provide information that is useful for decision making.
 Specifically, the AICPA Financial Accounting Standards Board in its Statement of financial Accounting
Concepts enumerates the following objectives of financial reporting:
a. To provide information useful in investment, credit and similar decision.
b. To provide information useful in assessing cash flow prospects.
c. To provide information about entity resources claims to those resources and changes in them.
Entity theory - The accounting objective is geared toward proper income determination. Proper matching
of cost against revenue is the ultimate end.

 Thus, the entity theory emphasizes the importance of the income statement. This is explained by the
equation:
  Assets = Liabilities + Capital

Proprietary theory - The accounting objective is directed toward proper valuation of assets.Thus,this
theory emphasizes the importance of the balance sheet. It is exemplified by the equation:

 Assets – Liabilities = Capital

Residual equity theory - The accounting objective is also proper valuation of assets. This is applicable
where there are two classes of shareholders, ordinary and preference. Thus, the equation is:

 Assets – Liabilities - Preference Shareholders' Equity = Ordinary Shareholders' Equity

Fund theory -The accounting objective is neither proper income determination nor proper valuation of
assets but the custody and administration of funds.

 The objective is directed toward cash flows exemplified by the formula “cash inflows minus cash
outflows equals fund."
 Government accounting and fiduciary accounting are examples of the application of this concept.

Enumerate the users of financial statements and their Information needs.

Investors - The providers of risk capital and their advisers are concerned with the risk inherent in and return
provided by their investments.

 Investors need information to help them determine whether they should buy, hold or sell. Shareholders
are also interested in information which enables them to assess the ability of the entity to pay dividends.
Employees - Employees are interested in information about the stability and profitability of the entity. The
employees are interested in information which enables them to assess the ability of the entity to provide
remuneration, retirement benefits and employment opportunities.
Lenders - Lenders are interested in information which enables them to determine whether their loans and
interest thereon will be paid when due.
Suppliers and other trade creditors - These users are interested in information which enables them to
determine whether amounts owing to them will be paid on maturity..
Customers - Customers have an interest in information about the continuance of an entity especially when
they have a long-term involvement with or are dependent on the entity.
Government and its agencies - Government and its agencies are interested in the allocation of resources
and therefore the activities of the entity.

 These users require information to regulate the activities of the entity, determine taxation policies and as
a basis for national income and similar statistics.
Public - Entities affect members of the public in a variety of ways.

 For example, entities make substantial contributions to the local economy in many ways including the
number of people they employ and their patronage of local suppliers.
 Financial statements may assist the public by providing information about the trends and recent
developments in the prosperity of the entity and the range of its activities.