Acctng 2 – Conceptual Framework & Accounting Standards

Activity #4 – Conceptual Framework and Theoretical Structure of FAR 1

Name: Hayna Marie D. Aguilar Program: _BSA-1B__ Date: _March 16, 2021___

Exercise 1 - Discussion Questions:

1. What is the function and primary focus of financial accounting?

Financial accounting communicate and provide information about the economic
effects of accounting transaction and other events on a business entity that is useful to
users in making decisions relating to providing resources to these entity.
2. Discuss what is meant by: The benefits of accounting information must exceed the
costs.
The benefits of the accounting information must exceed the cost, meaning, in
providing financial information, the business entity must give more satisfaction in
providing information to the users under benefits, such as; diverse group of investors and
creditors and by customers because they are assured a steady supply of goods and
services and by the preparer itself, because they use it for internal decision making. These
are the users that has a great impact and a great help to the business entity. The business
must provide relevance and reliable financial information to these users for the continuity
of the business and the relationship with the suppliers and investors.
3. List and explain the main reasons that a conceptual framework of accounting is
important.
 Conceptual framework is important because it provides a strong theoretical
foundation and allows for the systematic adaptation of accounting standards for a
changing business environment.
 Conceptual framework plays a vital role in the development of new standards and
in the revision of previously issued standards. It guide the Board in developing
accounting and reporting standards.
 Help preparers develop consistent accounting principles where there is no
standard in place and to assist all parties to understand and interpret the standards.
4. One objective of financial reporting is understandability. Understandable to whom?
The accounting or financial information should be understandable to the users
who have a reasonable knowledge of business and economic activities and who are
willing to study the information with reasonable diligence. It cannot be understandable to
the users who does not have the interest of reading and understand the information or
those without basic knowledge how business and corporate environment operates.
5. Distinguish between the qualities of relevance and reliability.
Relevance is a qualitative characteristics of bearing directly on the outcome of a
decision. A relevant financial information is capable of making a difference in the
decisions made by users. It results in information that is meaningful and useful to those
who need to know something about a certain organization.
 Reliability is a qualitative characteristics of being representationally faithful,
variable, and neutral. It is financial information that is able to be trusted to use or provide
what is needed that is likely to be true or correct and information that is faithfully
presented to the maximum extent possible, complete, neutral and free from error.
6. Does reliability imply absolute accuracy?
Reliability is free from error but it doesn’t mean that it is absolute accurate or
have total freedom because a number of financial reporting measures involve estimates of
various types that incorporate management’s judgment. For instance, estimation, we have
estimated amount in accounting.
7. What are the components of relevant information? What are the components of
reliable information?
Relevant financial information is capable of making a differences in the decisions
if it has:
 Predictable Value – if the financial information can be used as an input to
processes employed by users to predict future outcomes.
 Confirmatory Value – if the financial information provides feedback about
previous evaluations, if it confirm or change. It helps users to confirm or correct
earlier predictions.
 Relationship of Materiality to Relevance – it is the practical boundary or
constraint to achieving desired qualitative characteristics of relevance on the type
of information provided.
Reliable information is also called as faithful representation, it means that the
numbers and descriptions match what really existed or happened.
 Completeness – means that all information necessary for a user to understand the
economic activity or a phenomenon must be depicted, including all necessary
description and explanations.
 Neutrality – means that an enterprise cannot select information to favor one set
of interested parties over another.
 Free from Errors – when an information item is free from error, it will be a more
accurate representation of a financial item. Faithful representation or reliability,
however, does not imply total freedom from error nor perfectly accurate in all
respect.
 Measurement uncertainly – it does not prevent information from being useful.
8. What is meant by the term materiality in financial reporting?
Materiality in accounting context, if a more costly way of providing information
is not expected to have a material effect on decisions made by those using the
information, the less costly method may be acceptable. Materiality is an entity specific
reporting of relevance based on the nature or magnitude, or both of the items to which
information relates in the context of an individual entity’s financial report.
9. What is meant by the term “qualitative characteristics of accounting information”?
Qualitative characteristics of accounting information is the standards for judging
the information that accountants give to decisions makers. These are the characteristics of
financial information that is based on its quality, in order for this information to become
useful, it must both relevant and provide a faithful representation. Relevant and faithful
representation information are the fundamental qualitative characteristics of useful
 financial information and the guiding concepts that apply throughout the revised
conceptual framework.
10. Under what conditions should an item be recognized in the financial statements?
The financial statement are normally organized and prepared on the assumption
that an enterprise is a going concern and will continue in operation for the foreseeable
future. However, it is assumed that the entity has neither the intention nor the need to
enter liquidation or to cease trading, if such an intention or need exists, the financial
statement may have to be prepared on a different basis and, if so, the basis used is
disclosed.
Exercise 2 - Fill in the Blanks with Correct Answers:
In the blanks provided to the left of the following eight statements, enter the letter of the
concept most closely associated with the statement.

Concepts
A. Reliability C. Comparability (includes consistency)
B. Relevance D. Some other concept

______C_____1. Improves comparisons of financial statements of successive reporting periods.

______A_____2. Financial statements are audited by an independent CPA.
______C_____3. A quality requiring that data should be comparable among entities and time.
______B_____4. The capacity of information to make a difference in decisions by helping users
make reasonable predictions about the future.
______D_____5. Acquisition cost is the proper starting point for asset valuation.
______A_____6. A quality that states accounting information should possess representational
faithfulness, verifiability and neutrality.
______B_____7. The primary stock exchanges, such as the Philippine Stock Exchange, will not
list the shares of stock of a corporation that does not provide independently audited financial
statements, or that has major exceptions specified in the opinion of the independent auditor.
______C_____8. A company cannot change to or from alternatively acceptable accounting
methods (such as FIFO, Weighted Average, etc.), each reporting period.

Exercise 3 – Matching Type:

List below are several terms and phrases associated with the IASB’s conceptual framework. Pair
each item from List A (by letter) with the item from list B that is most appropriately associated
with it.

List A

_______O______ 1. Predictive value

_______H______ 2. Relevance
_______G______ 3. Timeliness
_______A______ 4. Distribution to owners
_______J_______5. Confirmatory Value
_______P______ 6. Reliability
_______N______7. Gain
_______F______ 8. Faithfulness Representation
_______K______9. Comprehensive Income
_______E_____10. Materiality
_______C_____11. Comparability
_______M_____12. Neutrality
_______L_____13. Recognition
_______D_____14. Consistency
_______B_____15. Cost effectiveness
_______I_____16. Verifiability

List B

a. Decrease in equity resulting transfers to owners

b. Requires considerations of the costs and value of information
c. Important for making interfirm comparisons comparisons.
d. Applying the same practice overtime.
e. Along with relevance, a primary decision-specific quality
f. Agreement between a measure and the phenomenon it purports to represent.
g. Information is available prior to the decision.
h. Pertinent to the decision at hand.
i. Implies consensus among different measures.
j. Information confirms expectations.
k. The change in equity from non-owner transactions.
l. The process of admitting information into financial statements.
m. Accounting information should not in favor a particular group
n. Results if an asset is sold for more than its book value.
o. Information is useful in predicting the future.
p. Concerns the relative size of an item and its effect on decisions.