Financial Accounting 1

Chapter 1, 2 and 3 – Conceptual Framework

Team Teaching Assistant

Problem 1 – The Importance of Accounting Boards

Some argue that having various organizations established accounting principals is wasteful and
inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the
type of information it considered important. In addition, if an investor wants additional information,
they could contact the company and pay to receive the additional information desired.

Comment the appropriateness of this viewpoint!

Problem 2 – Story in Numbers

Hardly a day goes by without an article appearing on the crisis affecting many of our financial
institutions. For example, it is estimated that the financial institution debacle of 2008 that cause a
deep recession. Some argue, that if financial institutions had been required to report their
investment at fair value instead of cost, large lossess would have been reported earlier, which would
have signaled regulators to close these financial institutions and, therefore, minimize the losses to
many investors.

Explain how reported accounting numbers might affect an individual’s perceptions and actions
(give example)!

Problem 3 - Conceptual Framework

A. Users of financial statements can face different questions about the recognition and
measurement of financial items. To help develop the type of financial information that can be
used to answer these questions financial accounting and reporting rules on a conceptual
framework.
Instructions:
1. What is the objectives of financial statement?
2. What are the assumption and main qualitative characteristic based on PSAK?
3. Gives one of example of trade-offs between qualitative characteristics!

B. Boedi is an accounting student in a well-known university in Depok. Budi is asked by his aunt,
Mrs. Srimul, to help her. His aunt is the owner of PT Century Mutiara. Mrs. Srimul asks Boedi
why Bapepam rejects PT Century Mutiara’s financial statement. He is asked by his aunt to review
PT Century Mutiara’s financial statement. He found the following things:
1. PT Century Mutiara’s financial statement per December 31, 2008 is attached with financial
statement per December 31, 1996. She said that it has done because the company didn’t
prepare financial statement between 1997 and 2007. This is because the company has fired
its accounting staff.
 2. Mrs. Srimul bought a car for private use in 2005. Mrs. Srimul used company’s money, but
this car is recorded in Property, Plant, and Equipment section in Balance Sheet.
3. PT Century Mutiara has received Rp 2 billion for service contract. PT Century Mutiara has
not done this service. This cash receipt has been recorded as revenue in 2008 income
statement.
4. PT Century Mutiara changes its inventory valuation method to FIFO Method because PT
Century Mutiara wants to make up its financial statement. PT Century Mutiara has a plan to
borrow money from Bank CIMA.
5. PT Century Mutiara’s warehouse has been burnt up at January 31, 2009. PT Century Mutiara
rejects to disclose it in Notes to Financial Statement.
Instruction:
You are required to indicate qualitative characteristic, assumption, principle, or constraint which
is not obeyed by PT Century Mutiara for 5 items above.

Problem 4 – Adjusting Entries

The following data pertaining to preparation of annual adjusting entries.
1. Salaries payable $ 0, there are 8 salaried employees. Salaries are paid every Friday for the
current week. 5 employees receive salary of $ 700 each per week, and 3 employees earn $ 500
each per week. December 31 is Tuesday. Employees do not work weekend. All employees
worked the last 2 days of December

2. Unearned rent revenue $ 324.000 consist of:

Date Term in months Rent/ Number of leases

month
Nov 1 6 months $ 4000 5
Dec 1 6 months $ 8500 4
3. Prepaid advertising $13.200. This balance consists of payments on two advertising contract. The
contract provide for monthly advertising in two trade magazines. The terms of contract are:
Contract Date Amount Number of magazines issued
A May 1 $ 6000 12
B Oct 1 $ 7200 24
The first advertisement runs in the month in which the contract is signed

4. Notes payable $ 80.000, this balance consist of a note for one year at annual interest rate of
12%, dated June 1. Prepare The Adjusting Entries At December 21, 2013!

5. The records for Todd Inc. showed the following for 2010:
Jan. 1 Dec. 31
Accrued expenses R$1,800 R$2,150
Prepaid expenses 720 870
Cash paid during the year for expenses, R$42,500
Show the computation of the amount of expense that should be reported on the income
statement.
SOLUTIONS

Problem 1
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily
disclose the type of information it considered important. Without a coherent body of accounting
theory and standards, each accountant or enterprise would have to develop its own theory structure
and set of practices, and readers of financial statements would have to familiarize themselves with
every company’s peculiar accounting and reporting practices. As a result, it would be almost
impossible to prepare statements that could be compared.

In addition, voluntary disclosure may not be an efficient way of disseminating information. A

company is likely to disclose less information if it has the discretion to do so. Thus, the company can
reduce its cost of assembling and disseminating information. However, an investor wishing
additional information has to pay to receive additional information desired. Different investors may
be interested in different types of information. Since the company may not be equipped to provide
the requested information, it would have to spend additional resources to fulfill such needs, or the
company may refuse to furnish such information if it’s too costly to do so. As a result, investors may
not get the desired information or they may have to pay a significant amount of money for it.
Furthermore, redundancy in gathering and distributing information occurs when different investors
ask for the same information at different points in time. To the society as a whole, this would not be
an efficient way of utilizing resources.

Problem 2
Accounting numbers affect investing decisions. Investors use the financial statement of different
companies to enhance their understanding of each company’s financial strength and operating
results. Because these statements follow international accounting standards, investors may make
meaningful comparisons of different financial statements to assist their investment decisions.

Accounting numbers also influence creditor’s decisions. A commercial bank usually looks into a
company’s financial statements and past credit history before deciding whether to grant a loan and
in what amount. The financial statements provide a fair picture of the company’s financial strength
(accounting ratios such as short-term liquidity, solvency ratio, profitability ratio) and operating
performance for the current period and over a period of time. The information is essential for the
bank to ensure that the loan is safe and sound (could illustrate by showing that a loan to bad
companies may affect the bank, therefore, the analysis for the financial statements may help the
bank to sustain their business)

Problem 3
Section A
1. The objective of financial statement 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 economics decisions (e.g: whether to sell or hold an investment in the entity)
2. The basic assumption for financial reporting based on PSAK:
a. Accrual basis: transactions are recorded in the periods in which the events occur, even if the
resulting cash receipts and payments occur in a different period.
 b. Going concern : company to last long enough to fulfill objectives and commitments

The main qualitative characteristic based on PSAK:

a. Relevant : accounting information must be capable of making a difference in a decision
b. Understandability : the quality of information that lets reasonably informed users see its
significance
c. Reliable : occurs when independent measurers, using the same methods, obtain similar
results
d. Comparability : Information that is measured and reported in a similar manner for different
companies

3. Example of trade-offs between qualitative characteristic:

a. Relevant vs Representational Faithfulness
There is a trade-off between reporting relevant information in a timely manner and taking
time to ensure that the information is representational faithfulness. if information is not
reported in a timely manner, it may lose its relevance. Therefore, entities need to balance
relevant and representational faithfulness in determining when to provide the information
b. Cost vs Benefit
There is trade-off between benefit and cost in preparing and reporting information. In
principle, the benefit derived from information by users should exceed the cost for the
preparer of providing it.
c. Relevant vs Reliable
There is a trade-off between providing information that is relevant, but is subject to
measurement uncertainty (e.q the fair value of financial instrument) and providing
information that is realible but not necessarily relevant (e.g historical host of financial
instrument)
Section B
1. Assumption >>> Periodicity/ Timeliness
2. Assumption >>> Economic entity
3. Principle >>> Revenue recognition
4. Qualitative characteristic >>> Faithfull representation >>> Neutrality
5. Principle >>> Full disclosure

Problem 4
1. Dec. 31 Salaries Expense 2,000
Salaries Payable 2,000
(5 X $700 X 2/5 days) = $1,400
(3 X $500 X 2/5 days) = 600
Total accrued salaries $2,000

2. 31 Unearned Rent Revenue 74,000

Rent Revenue 74,000
(5 X $4,000 X 2 months) = $40,000
(4 X $8,500 X 1 months) = 34,000
 Total rent earned $74,000

3. 31 Advertising Expense 4,900

Prepaid Advertising 4,900
($500 per month
for 8 months) = $4,000
$300 per month
for 3 months) = 900
Total advertising expense $4,900

4. 31 Interest Expense 5,600

Interest Payable 5,600
($80,000 X 12% X 7/12)

5. Accrued Expense = 2.150 -1800 = 350

Prepaid Expense = 870 – 720 = 150
Cash Paid for expense = 42.500

Expense (in Income Statement)

42.500 + 350 – 150 = 42.700