CHAPTER II

 TERMINOLOGIES IN CONCEPTUAL FRAMEWORK

Financial Reporting = General Purpose Financial Reporting

Financial Reports = General Purpose Financial Reports

Financial Statements = General Purpose Financial Statements

Primary Users (Users) = EXISTING and POTENTIAL Investors, Lenders, and other Creditors Many of these induvial
cannot require reporting entities they must rely on GENERAL PURPOSE FINANCIAL REPORTS.

 CATEGORIES OF USERS

External Party - Users of Financial Information

1. Customers - Interested in service can be provided.

2. Tax Authorities - Basis for Income.
3. Government - particular in the latter’s obligation to investors
4. Auditors - External auditors, tasked to examine financial reports.
5. Public - Consumer, Environmental Protection, advocating in duties of a good citizen.

Internal Users - are stakeholders.

1. Owners and Management - Responsible in stewardship of resources. It needs timely and reliable
information.
2. Employees - Important resources of the entity.

 OBJECTIVE OF GENERAL-PURPOSE FINANCIAL REPORTING

Tue objective of the general-purpose financial reporting is to provide financial information about the reporting entity
that is useful to primary users in making decision relating to providing resources to the entity.

To make assessments, users need information about:

a. Economic resources of the entity, claims against the entity. And changes in those resources and claims
b. How efficiently and effectively the entity’s management and governing board have discharged their
responsibilities to use the entity’s economic resources.

 LIMITATION OF FINANCIAL REPORTING

1. Scope of Limitation – General Purpose Financial Report do not and cannot provide all information that the
primary user needs.
2. Valuation of the Entity - General Purpose Financial Report are not designed to show the value of a reporting
entity, but they provide information to help primary users estimate the value of the reporting entity.
3. Estimates and Judgments – To a large extent, financial reports are based on estimates, judgments, and
model rather than exact depictions.
4. Conflicting Information needs of Users – Individual primary users have different and possibly conflicting
information needs and desires.
5. Management – The management of a reporting entity is also interested in financial information about the
entity.
 6. Regulators and members of the Public – Other parties, such as regulators and members of the public other
than investors, lenders, and other creditors, may also find General Purpose Financial Report useful. But not
primarily directed to this group.

 DESIGN OF COMPONENT OF GENERAL-PURPOSE FINANCIAL REPORT

- Financial reports are designed to provide information that is instrumental un fulfilling the
primary user’s need in undertaking the process of assessing the reporting entity’s future net
cash flow- the timing, and uncertainty-and management stewardship

Financial information can be categorized as the entity’s:

1. Economic resources and claims (Presented in the statement of financial position of balance sheet)
2. Changes in Economic claims”
i. ACCURAL accounting (Presented in the statement of COMPREHENSIVE INCOME or statement of PROFIT
OR LOSs if no comprehensive)
3. Use of economic resources:
Accounting Equation: Assets = Liabilities + Equity - A=L+E
Extended Accounting Equation: Assets = Liabilities + Equity + Income – Expense - A=L+E+I-Ex

Liquidity - Having cash or cash equivalent to pay off current liabilities with current assets. (SHORT TERM CONCEPT)

Solvency - Ability to run the operation for a long period (LONG TERM CONCEPT)

ACCURAL ACCOUNTING

Effects of transaction in the period in which those effects occur.

QUALITATIVE CHARACTERESTIC

1. Relevant
2. Faithful Representation (Reliability)
3. Comparability
4. Verifiability
5. Timely
6. Understandability

1. RELEVANCE
Information capable of making a difference in the decision made by the users.

Predictive Value - If it can be used as an input to processes employed by users to predict future value.
Confirmatory Value - If it provides feedback about (Confirm of changes) previous evaluation.
Materiality - If material is omitting misstating or obscuring that it could influence the decisions.

2. Faithful Representation (Reliability)

Should posses the quality of being reliable.

This has 3 characteristics:

1. Complete
2. Neutral
3. Free from error
 Completeness - It includes all information necessary for a user to understand the event being depicted.
Neutral - Is without bias when presenting the financial position.
Free from error - No error or omissions in the description of the event.

3. Comparability
Similar information about the same entity for another period. This decision is choosing between alternatives.
4. Verifiability
Different knowledge and independent observer could reach a consensus, though not necessarily complete
agreement, that a particular depiction is a faithful representation.
5. Timeliness
Means that information is available to decision makers in time to be capable of influence their decisions.
6. Understandability
Classifying, Characteristics, and presenting information clearly and concisely makes it understandable.