CONCEPTUAL FRAMEWORK AND ACCOUNTING

CABILTO LOVELY JANE R.

BSA – 1

MODULE 1: ASSESSMENT

1. Discuss the important 3 activities included in the definition of accounting.

Accounting is the “process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information.”
(American Association of Accountants)

Identifying - The first step in accounting is to determine which transactions must be

recorded. In the accounting book, only transactions that can be stated in terms of currency
are documented. Mr. Rivera, for example, employed one employee with a weekly pay of
P1500 for his company. Because Mr. Rivera has not yet paid the worker and the worker
has not rendered service, this transaction has no monetary value and should not be
recorded in the accounting book.

Measuring - The aggregation of quantitative data to business transactions and events

expressed in monetary terms is referred to as measuring in accounting. An accountant
might choose from a range of accounting measuring systems to assist him or her in
calculating accounting data.

Communicating – Accounting functions as a channel of communication between the

company and others who want to know about it ( Internal and External). Accounting
reports enable managers to make well-informed decisions based on the company's
historical and current financial status and performance. This knowledge will assist them
in increasing the effectiveness and efficiency of their work.

Explain the difference types of events or transactions.

External Events / Transactions- It occurs when a company/business enters into a

transaction with another economic entity. For example, if a corporation purchased raw
materials from a supplier in order to manufacture their own goods, this is considered an
external event.

Internal Events/ Transactions- Are events that do not involve an outside party. It is a
business activity that has an impact on the company's financial position.
 Enumerate the measurement bases used in accounting.

Several measurement bases used in accounting, include, but not limited

to (Millan, 2018):

1. Historical cost
2. Fair value
3. Present value
4. Realizable value
5. Current cost
6. Sometimes inflation-adjusted cost

2. Discuss the 3 aspects of communicating process of accounting.

Recording- After determining which transactions are included in the accounting

information, the accountant will properly record these transactions in the book in an
organized manner.

Classifying- The classification of your accounts into different categories in your

accounting records based on their similarities.

Summarizing- The accountants will compile their data to determine the state of the
company's overall health. Summarizing is an accounting phase in which an accountant
presents the company's financial activities over a period of time.

3. Give examples of accounting concept.

Historical Cost Concept

Concept of articulation
Full disclosure principle
Consistency Concept
Matching
Economic entity
Double-entry system
Going concern assumption
Separate entity (Accounting entity/Business entity concept/Entity concept)
Stable monetary unit (Monetary with assumption)
Time period (Periodicity/Accounting period)
Materiality concept
Cost-Benefit
 Accrual Basis
Proprietary theory
Residual equity theory
Fund Theory
Realization
Prudence

4. Discuss the common branches of accounting.

Financial Accounting- It is a subset of private accounting that provides financial data to

creditors, investors, and other external users of accounting data. This branch of
accounting adheres to generally accepted accounting principles (GAAP), which are
intended to meet the specific information needs of external users.

Management Accounting- Finance control and planning for the development of

accounting systems are involved.

Cost Accounting- Cost accounting is concerned with the systematic accumulation of the
costs of manufacturing materials, which is necessary for financial reporting.

Auditing- It is the process of reviewing business operations in order to ensure

compliance with management policies.

Tax Accounting- refers to the procedures and policies used to prepare various tax
returns and tax planning.

Government Accounting- deals with the recording, categorization, and summarization

of transactions relating to government office revenues and expenditures.

Fiduciary Accounting- The trustee is required to keep detailed financial records when
managing the trust under this accounting.

Estate Accounting- gives specific information about a deceased person's estate to the
beneficiaries.

Social Accounting- The social and environmental consequences of an entity's economic

actions on society are measured.

Institutional Accounting- The course covers the principles and problems of non-profit
fund accounting.
 Accounting Systems- is a collection of accounting processes that organizes financial
data. These systems are put in place to keep track of financial transactions, which is
necessary for data collection.

Accounting Research- refers to the careful examination of economic events in order to

address issues related to accounting activities and convert this into comprehension.

5. What are the four sectors in the practice of Accountancy?

Under RA 9298 also known as “Philippine Accountancy Act of 2004”, the practice of

Accounting is sub-classified into the following:

Practice of Public Accountancy- For a fee, the firm provides accounting services to a
variety of clients, including consulting, personal financial planning, tax return
preparation, and tax advice.

Practice in Commerce and Industry- refers to working in the private sector

In a position that entails the creation and interpretation of accounting data to aid
management in the operation of a business.

Practice in Education/ Academe – accountable for the education of future accountants

Accounting, financial management, taxation, and other business-related courses are
taught at this educational institution.

Practice in the Government- All employees who are involved in government

accounting, auditing, and financial reporting in order to keep track of the government's
revenue and expenditures.

Why there is need for reporting standards ?

- Accountants should use reporting standards when preparing financial statements. It
seeks to govern and standardize accounting definitions, methods, and assumptions.
Reporting standards will direct them in carrying out accounting procedures that will
aid in the complexity of financial transactions.

6. Name the accounting setting bodies and other relevant organizations.

Accounting standard setting bodies and other relevant organizations (Millan, 2018)

• Financial Reporting Standards Council (FRSC)

• Philippine Interpretations Committee (PIC)
• Board of Accountancy (BOA)
• Securities and Exchange Commission (SEC)
• Bureau of Internal Revenue (BIR)
• Bangko Sentral ng Pilipinas (BSP)
• Cooperative Development Authority (CDA)

International
• International Accounting Standards Board (IASB)

Other relevant international organizations (Millan, 2018):

• International Financial Reporting Interpretations Committee (IFRIC)

• IFRS Advisory Council (previously known as the Standards Advisory Council ('SAC’)
• International Federation of Accountants (IFAC)
• International Organization of Securities Commissions (IOSCO)

Problem 1: True of False

1. All events and transactions of an entity are recognized in the books of accounts. False

2. The accounting process of assigning numbers, commonly in monetary terms, to the

economic transactions and events is referred to as classifying. True

3. The basic purpose of accounting is to provide information about economic activities

intended to be useful in making economic decisions. True

4. Financial accounting is the branch of accounting that focuses on general purpose

reports of financial position and operating results known as the financial statements.
True

5. General purpose financial statements are those statements that cater to the common
and specific needs of a wide range of external users. True

6. The financial statements are the only source of information when making economic
decisions. False

7. All information presented in the financial statements are sourced from the accounting
records of the entity. False

8. Entity A’s accounting period starts on July 1 and ends on June 30 of the following
year. Entity A uses a fiscal year period. True

9. Once promulgated, accounting standards are never changed. False

 10. The entity’s management is responsible for the selection of appropriate accounting
policies, not the accountant. True

MODULE 2: ASSESSMENT

1. Discuss the purpose of the Conceptual Framework.

The purpose of the Philippine Conceptual Framework is to:

•Assist the Financial Reporting Standards Council (FRSC) in the development of

accounting standards as well as the review and adoption of existing IFRSs;
• Assist financial statement preparers in applying the Standards and dealing with topics
that have yet to be covered by an FRSC Standard;
• Assist auditors in determining whether financial statements comply with the Standards;
• Assist financial statement users in interpreting the information in financial statements;
and
• Provide information about the FRSC's approach to the formulation of the Standards to
those who are interested in its work.

• Discuss the scope of the Conceptual Framework.

The Conceptual Framework deals with the following:

a. Objective of financial reporting- The goal of financial reporting is to

provide useful financial information to financial report users so that they can
make decisions.

b. Qualitative characteristics of useful information - The financial

information attributes identify which types of information are relevant to the
users.

c. Definition, recognition and measurement of financial statement elements-

Financial statement elements are broad categories that are grouped together to
show the effects of business transactions and events.
 d. Concepts of capital and capital maintenance- Capital is a valuable asset to a
company. According to capital maintenance, a revenue is earned after all costs
have been recovered.

2. State the objective of financial reporting.

- The goal of financial reporting is to provide information about the company's

financial performance and position. Financial reporting reveals whether or not your
company is profitable, which is important for information users such as investors.
This data will be used by business decision makers to analyze and create plans.

3. What are the economic information that are presented in the financial reporting?

General purpose financial reports provide information on a reporting entity’s:

•Financial position- information on the reporting entity's economic resources (assets) and
claims against it (liabilities and equity); and
• Changes in economic resources and claims- information on financial performance as
well as other transactions and events that result in changes in financial position.

Explain briefly the qualitative characteristics of useful information and how they
are applied to financial reporting.

- The qualitative characteristics of financial information distinguish the types of data

that are likely to be most useful to key clients when making decisions based on an
entity's financial related report. It makes it easier for businesses to use data to make
well-informed decisions.

4. Define the elements of financial statements.

Assets- resources that the business controls as a result of previous transactions and from
which future economic benefits are expected to flow.

Liabilities- current obligations owed by the company as a result of past transactions.

Equity- The difference between total assets and total liabilities is referred to as the net
difference.

Income- profits from previous transactions.

Expenses- The cost incurred by the business in order to generate profit.

5. Discuss the recognition criteria for each of the elements of the financial statements.

The primary criterion for asset recognition is that the expenditures will provide economic
benefits to the business.
When a resource will result in the settlement of a current obligation, a liability is
recognized.
The difference between current assets and liabilities is referred to as equity.
Income is recognized as soon as goods are sold or services are rendered.
Expenses are recognized and recorded at the time they are incurred, regardless of when
they are paid in cash.

MULTIPLE CHOICES

1. A 11. D
2. D 12. D
3. B 13. A
4. D 14. A
5. D 15. D
6. C 16. A
7. D 17. A
8. D 18. A
9. D 19. A
10. D 20. B

21. D 31. D
22. A 32. A
23. B 33. C
24. B 34. B
25. A 35. D
26. D 36. D
27. A 37. A
28. A 38. A
29. C 39. B
30. D 40. B

41. A
42. D
43. B
44. D
45. A
46. A
47. d
48. C
49. A
50. D

MODULE 3 Assessment

Discussion Questions

1. Enumerate and describe the general features of financial statement

Presentation.

Fair Presentation and Compliance with PFRSs- Accountants must faithfully present
financial statements using consistent methods. Financial statements should fulfill the
owners' and managers' stewardship function. Users expect accounting information to be
trustworthy and verifiable.

Going concern- When preparing financial statements, it is assumed that the business will
exist long enough to carry out its objectives and commitments and will not liquidate in
the near future.

Accrual Basis of Accounting- All business transactions must be recorded in the

accounting records when they occur, rather than when the cash or equivalent is received,
according to financial statements.

Materiality and Aggregation- Business transactions must be properly reported in

financial statements if they may influence the decision of the information user.

Offsetting- Assets and liabilities, as well as income and expenses, are shown separately.
And are not offset unless required or permitted by the PFRSs.

Frequency of Reporting- Financial statements are prepared at least once a year for the
benefit of shareholders, regulators, and tax authorities.

Comparative Information- According to PAS 1, an entity must disclose comparable

information in respect of the preceding period for all amounts reported in the current
period’s financial Statements, unless a different PFRS needs differently.

Consistency of presentation- The presentation and classification of financial statement

items
Is retained from one period to the next unless a change in presentation:

e. Is required by a PFRS, or

f. Results in information that is reliable and more relevant.

2. What comprises the complete set of financial statements?

Complete set of financial statements (Millan, 2018):

A complete set of financial statements consist of:

1. Statement of financial position

2. Statement of profit or loss and other comprehensive income.
3. Statement of changes in equity.
4. Statement of cash flows
5. Notes (5a) comparative information; and
6. Additional statement of financial position (required only when
Certain instances occur).

3. Discuss the general features of financial statements.

- At the end of the accounting period, financial statements are prepared.

-Financial statements include information about both facts and opinions.
-The financial statements are prepared on the basis of the going concern value.
-Financial statements are documents that record the facts of financial transactions at
their historical cost.

4. What is the responsibility of management over financial statements?

The management is responsible for an entity’s financial statements.

The responsibility encompasses:

a. The preparation and fair presentation of financial statements in accordance

with PFRSs;
b. Internal control over financial reporting;
c. Going concern assessment;
d. Oversight over the financial reporting process; and
 e. Review and approval of financial statements

5. What is the purpose of the Statement of financial position?

The purpose of the financial position is to present reliable information about business’
assets , liabilities, and equity. A statement of financial position may be presented in a
“classified” or an “unclassified” manner.

a. A classified presentation shows distinctions between current and noncurrent

assets and current and noncurrent liabilities.

b. An unclassified presentation (also called ‘based on liquidity’) shown no

distinction between current and noncurrent items.

6. What is an asset? A liability?

- An asset is a piece of property that a company owns and controls that has economic
value and can be used to generate revenue. A liability is a monetary obligation owed
by a company to another entity.

7. What are current assets? What are current liabilities?

- Current assets are those that can be expected to be realized within one year of the
normal operating cycle. Current liabilities are liabilities that the business expects to
settle in cash within one year of the reporting date.

8. What is the purpose of the Statement of profit or loss and other comprehensive
income?
- The purpose of a profit and loss statement and other comprehensive income (OCI) is
to show an entity's profit and earnings growth. It displays the entity's revenues
derived from financial activities in order to assess cash inflows.

9. Discuss the methods of presenting expenses.

- Expenses may be presented using either of the following methods:

a. Nature of expense method- under this method, expenses are aggregated

according to their nature and are not reallocated according to their functions
within the entity.
b. Function of expense method- under this method, An entity classifies expenses
according to their function. At a minimum, cost of sales shall be presented
separately from other expenses.

10. What are the components of comprehensive income?

 The components of other comprehensive income include the following:
a. Changes in revaluation surplus;
b. Re-measurements of the net defined benefit liability (asset);
c. Gains and losses on investments designated or measured at fair value
through other comprehensive income (FVOCI);
d. Gains and losses arising from translating the financial statements of foreign
operations;
e. Effective portion of gains and losses on hedging instruments in a cash flow
hedge;
f. Changes in fair value of a financial liability designated at fair value through
profit or loss (FVPL) that are attributable to changes in credit risk;
g. Changes in the time value of option when the option’s intrinsic value and
time value are separated and only the changes in the intrinsic value is
designated as the hedging instrument;
h. Changes in the value of the forward elements of forward contracts when

separating the forward element and spot element of forward contract and

designating as the hedging instrument only the changes in the spot

element; and changes in the value of the foreign currency basis spread of

a financial instrument when excluding it from the designation of that

financial instrument as the hedging instrument.

11. What is the purpose of Statement of cash flows?

- The statement of cash flows tells a specific story about the company's cash receipts,
cash payments, and net change during the accounting period. It enables decision-
makers to determine how the company generates cash through operations,
investments, and financing.

True or False

1. The primary objective of financial accounting is to provide general

purpose financial statements to help external users analyze and interpret
organization’s activities. True

2. External auditors examine financial statements to verify that they are

prepared according to generally accepted accounting principles. True
3. External users include lenders, shareholders, customers, and regulators.
True
4. A partnership is a business owned by two or more people. True
5. Owners of a corporation are called shareholders or stockholders. True

6. In the partnership form of business, the owners are called stockholders.

False
7. The balance sheet shows a company’s net income or loss due to earnings
activities over a period of time. False
8. Generally accepted accounting principles are the basic assumptions,
concepts, and guidelines for preparing financial statements. True

9. The business entity assumption means that a business is accounted for

separately from other business entities, including its owner or owners.
True

10. As a general rule, revenues should not be recognized in the accounting

records until it is received in cash. Revenues are increases in equity from a
company’s earning activities. False

11. A net loss occurs when revenues exceed expenses. False

12. Net income occurs when revenues exceed expenses. True

13. Liabilities are the owner’s claim on assets. False

14. Assets are the resources of a company and are expected to yield future
Benefits. True

15. Owner’s withdrawals are expenses. False

Multiple choice:
1. The accounting concept that requires financial statement information to be supported by
independent, unbiased evidence other than someone's belief or opinion is:
A. Business entity assumption.
B. Monetary unit assumption.
C. Going-concern assumption.
D. Time-period assumption.
E. Objectivity.
2. The accounting assumption that requires every business to be accounted for separately
from other business entities, including its owner or owners is known as the:
A. Time-period assumption.
B. Business entity assumption.
C. Going-concern assumption.
D. Revenue recognition principle.
E. Cost principle.
3. The rule that requires financial statements to reflect the assumption that the business
will
continue operating instead of being closed or sold, unless evidence shows that it will not
continue, is the:
A. Going-concern assumption.
B. Business entity assumption.
C. Objectivity principle.
D. Cost Principle.
E. Monetary unit assumption.
4. To include the personal assets and transactions of a business's owner in the records and
reports of the business would be in conflict with the:
A. Objectivity principle.
B. Monetary unit assumption.
C. Business entity assumption.
D. Going-concern assumption.
E. Revenue recognition principle.
5. The accounting principle that requires accounting information to be based on actual cost
and requires assets and services to be recorded initially at the cash or cash-equivalent
amount given in exchange, is the:
A. Accounting equation.
B. Cost principle.
C. Going-concern assumption.
D. Realization principle.
E. Business entity assumption

6. Which of the following accounting principles would require that all goods and services
purchased be recorded at cost?
A. Going-concern assumption.
B. Matching principle.
C. Cost principle.
D. Business entity assumption.
E. Consideration assumption.
7. Which of the following accounting principles prescribes that a company record its
expenses incurred to generate the revenue reported?
A. Going-concern assumption.
B. Matching principle.
C. Cost principle.
D. Business entity assumption.
E. Consideration assumption.
8. Revenue is properly recognized:
A. When the customer's order is received.
B. Only if the transaction creates an account receivable.
C. At the end of the accounting period.
D. Upon completion of the sale or when services have been performed and the business
obtains the right to collect the sales price.
E. When cash from a sale is received.
9. Net Income:
A. Decreases equity.
B. Represents the amount of assets owners put into a business.
C. Equals assets minus liabilities.
D. Is the excess of revenues over expenses.
E. Represents owners' claims against assets.
10. Resources that are expected to yield future benefits are:
A. Assets.
B. Revenues.
C. Liabilities.
D. Owner's Equity.
E. Expenses.
11. Increases in equity from a company's earnings activities are:
A. Assets.
B. Revenues.
C. Liabilities.
D. Owner's Equity.
E. Expenses.

12. The difference between a company's assets and its liabilities, or net assets is:
A. Net Income
B. Expense.
C. Equity.
D. Revenue.
E. Net loss.
13. Creditors' claims on the assets of a company are called:
A. Net losses.
B. Expenses.
C. Revenues.
D. Equity.
E. Liabilities.
14. Decreases in equity that represent costs of assets or services used to earn revenues
are called:
A. Liabilities.
B. Equity.
C. Withdrawals.
D. Expenses.
E. Owner's Investment.
15.The description of the relation between a company's assets, liabilities, and equity, which
is expressed as Assets = Liabilities + Equity, is known as the:
A. Income statement equation.
B. Accounting equation.
C. Business equation.
D. Return on equity ratio.
E. Net income

MODULE 4 ASSESSMENT

Discussion Questions:

1. Define inventories and its characteristics. Give examples.

Inventories represents asset or stocks held for sale in the ordinary course of business , in the
process of production for sale or in the form of materials .
Inventories are as assets (Millan, 2018):
a. Held for sale in the ordinary course of business (finished goods);
b. In the process of production for such sale (work in process); or
c. In the form of materials or supplies to be consumed in the pro supplies process or in the
rendering of services (raw materials and manufacturing supplies).
Examples: Merchandise that the business is selling, Products that business are installing, Goods
that business manufactured.

2. How are inventories measured?

- Inventories are measured at the lower of cost and net realizable value, and the policy outlines
acceptable cost-determining methods, such as specific identification (in some cases), first-in-
first-out (FIFO), and weighted average cost.
3. Discuss the cost measurement.
- The cost measurement process is concerned with the computation of the cost of inventories that
are charged as expense when the related revenue is recognized (i.e., cost of sales or cost of goods
sold) as well as the cost of unsold inventories at the end of the period that are recognized as
asset.
4. Discuss the net realizable value.
- A valuation method is net realizable value. It is the estimated selling price in the ordinary
course of business less the estimated completion costs and the estimated costs of sale (PAS 2.6).
NRV = sales value - costs.

True of False:

1. Merchandise inventory consists of products that a company acquires to resell to customers.

True
2. A service company earns net income by buying and selling merchandise. False
3. Gross profit is also called gross margin. False
4. Cost of goods sold is also called cost of sales. True
5. A wholesaler is an intermediary that buys products from manufacturers or other wholesalers
and sells them to consumers. True
6. A retailer is an intermediary that buys products from manufacturers and sells them to
wholesalers. True
7. Cost of goods sold represents the cost of buying and preparing merchandise for sale. True
8. A merchandising company's operating cycle begins with the sale of merchandise and ends
with the collection of cash from the sale. True
9. Merchandise inventory is reported in the long-term assets section of the balance sheet. True
10. Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen
operating cycles. True
11. Assets tied up in inventory are not productive assets. True
12. A perpetual inventory system requires updating of the inventory account only at the
beginning of an accounting period. False
13. A perpetual inventory system continually updates accounting records for inventory
transactions. False
14. Beginning merchandise inventory plus the net cost of purchases is the merchandise available
for sale. True
15. The Merchandise Inventory account balance at the end of the current period is equal to the
amount of beginning merchandise inventory for the next period. False
16. Credit terms for a purchase include the amounts and timing of payments from a buyer to a
seller. True
17. Purchase returns refer to merchandise a buyer acquires but then returns to the seller. True