CFAS PRELIMINARY
I. OVERVIEW OF ACCOOUNTING
• Accounting – process of identifying, measuring,
and communicating economic information to
permit informed judgment and decisions by users
of information.
3 ACTIVITIES
1. Identifying – the process of analyzing events and
transactions to determine whether or not they will
be recognized.
- Recognition – refers to the process of
including effects of an accountable event.
- Only accountable events are recognized.
2. Measuring – involves assigning numbers,
normally in monetary terms, to the economic
transactions and events.
3. Communicating – the process of transforming
economic data into useful accounting information,
such as financial statements and other accounting
reports, for dissemination to users.
Types of Events or Transactions
1. External events – events that involve an external
party.
• Exchange (reciprocal transfer) – reciprocal
giving and receiving
• Non-reciprocal transfer – “one way”
transaction
• External event other than transfer – an
event that involves changes in the economic
resources or obligations of an entity caused
by an external party or external source but
does not involve transfers of resources or
obligations.
2. Internal events – events that do not involve an
external party.
• Production – the process by which
resources are transformed into finished
goods.
• Casualty – an unanticipated loss from
disasters or other similar events.
Measurement
• The several measurement bases used in
accounting include, but not limited to, the
following:
1. historical cost
2. fair value
3. present value
4. realizable value
5. current cost
6. sometimes inflation-adjusted costs.
• The most commonly used is historical cost. This is
usually combined with the other measurement
bases. Accordingly, financial statements are said
to be prepared using a mixture of costs and
values.
Valuation by fact or opinion
• When measurement is affected by estimates, the
items measured are said to be valued by opinion.
• When measurement is unaffected by estimates,
the items measured are said to be valued by fact.
Types of accounting information classified as to
users’ needs
• General purpose accounting information -
designed to meet the common needs of most
statement users.
- This information is governed by the Philippine
Financial Reporting Standards (PFRSs).
• Special purpose accounting information -
designed to meet the specific needs of particular
statement users.
- This information is provided by other types of
accounting, e.g., managerial accounting, tax
basis accounting, etc.
Basic Accounting Concepts
1. Double-entry system – each accountable event
is recorded in two parts – debit and credit.
2. Going concern - the entity is assumed to carry
on its operations for an indefinite period of time.
3. Separate entity – the entity is treated separately
from its owners.
4. Stable monetary unit - amounts in the financial
statements are stated in terms of a common unit
of measure; changes in purchasing power are
ignored.
5. Time Period – the life of the business is divided
into series of reporting periods.
6. Materiality concept – information is material if its
omission or misstatement could influence
economic decisions.
7. Cost-benefit – the cost of processing and
communicating information should not exceed the
benefits to be derived from it.
8. Accrual Basis of accounting – effects of
transactions are recognized when they occur (and
not as cash is received or paid) and they are
recognized in the accounting periods to which
they relate.
9. Historical cost concept – the value of an asset
is determined on the basis of acquisition cost.
10. Concept of Articulation – all of the components
of a complete set of financial statements are
interrelated.
11. Full disclosure principle – financial statements
provide sufficient detail to disclose matters that
make a difference to users, yet sufficient
condensation to make the information
understandable, keeping in mind the costs of
preparing and using it.
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12. Consistency concept – financial statements are
prepared on the basis of accounting policies
which are applied consistently from one period to
the next.
13. Matching – costs are recognized as expenses
when the related revenue is recognized.
14. Residual equity theory – this theory is
applicable where there are two classes of shares
issued, ordinary and preferred.
• Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary
Shareholders’ Equity.
15. Fund theory – the accounting objective is the
custody and administration of funds.
16. Realization – the process of converting non-cash
assets into cash or claims for cash.
17. Prudence (Conservatism) – the inclusion of a
degree of caution in the exercise of the judgments
needed in making the estimates required under
conditions of uncertainty, such that assets or
income are not overstated and liabilities or
expenses are not understated.
Common branches of accounting
A. Financial accounting - focuses on general
purpose financial statements.
B. Management accounting – focuses on special
purpose financial reports for use by an entity’s
management.
C. Cost accounting - the systematic recording and
analysis of the costs of materials, labor, and
overhead incident to production.
D. Auditing - the process of evaluating the
correspondence of certain assertions with
established criteria and expressing an opinion
thereon.
E. Tax accounting - the preparation of tax returns
and rendering of tax advice, such as the
determination of tax consequences of certain
proposed business endeavors.
F. Government accounting - refers to the
accounting for the government and its
instrumentalities, placing emphasis on the
custody of public funds, the purposes for which
those funds are committed, and the responsibility
and accountability of the individuals entrusted with
those funds.
Accounting standards in the Philippines
• Philippine Financial Reporting Standards (PFRSs)
are Standards and Interpretations adopted by the
Financial Reporting Standards Council (FRSC).
They comprise:
a) Philippine Financial Reporting Standards
(PFRSs);
b) Philippine Accounting Standards (PASs); and
c) Interpretations
II. Conceptual Framework for Financial Reporting
Purpose of the Conceptual Framework
• The Conceptual Framework prescribes the
concepts for general purpose financial reporting.
Its purpose is to:
a. assist the International Accounting Standards
Board (IASB) in developing Standards that
are based on consistent concepts;
b. assist preparers in developing consistent
accounting policies when no Standard applies
to a particular transaction or when a Standard
allows a choice of accounting policy; and
c. assist all parties in understanding and
interpreting the Standards.
Status of the Conceptual Framework
• The Conceptual Framework is not a PFRS. When
there is a conflict between the Conceptual
Framework and a PFRS, the PFRS will prevail.
• In the absence of a standard, management shall
consider the Conceptual Framework in making its
judgment in developing and applying an
accounting policy that results in useful
information.
Scope of the Conceptual Framework
• The Conceptual Framework – concerned with
general purpose financial reporting.
• General purpose financial reporting – involves
the preparation of general purpose financial
statements.
• The Conceptual Framework provides the
concepts regarding the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial
information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and de-recognition
6. Measurement
7. Presentation and disclosure 8. Concepts of
capital and capital maintenance Conceptual
Framework & Accounting
• The objective of general purpose financial
reporting is to provide financial information about
the reporting entity that is useful to primary users
in making decisions about providing resources to
the entity.
• The objective of general purpose financial
reporting forms the foundation of the Conceptual
Framework.
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Primary users – are those who cannot demand
information directly from reporting entities. The
primary users are:
a. Existing and potential investors
b. Lenders and other creditors.
– Only the common needs of primary users
are met by the financial statements.
Qualitative Characteristics
I. Fundamental qualitative characteristics
A. Relevance – Information is relevant if it can
affect the decisions of users.
• Predictive value – the information can be
used in making predictions
• Feedback value Materiality – the information
can be used in confirming past prediction.
Materiality – entity-specific aspect of relevance
B. Faithful representation – means the information
provides a true, correct and complete depiction
of what it purports to represent.
• Completeness – all information necessary for
users to understand the phenomenon being
depicted is provided.
• Neutrality – information is selected or
presented without bias.
• Free from error – there are no errors in the
description and in the process by which the
information is selected and applied.
Enhancing qualitative characteristics
• Comparability – the information helps users in
identifying similarities and differences between
different sets of information
• Verifiability – different users could reach
consensus as to what the information purports
to represent
• Timeliness – the information is available to
users in time to be able to influence their
decisions
• Understandability – users are expected to
have:
a. reasonable knowledge of business activities;
and
b. willingness to analyze the information
diligently.
Fundamental vs. Enhancing
• The fundamental qualitative characteristics
are the characteristics that make information
useful to users.
• The enhancing qualitative characteristics are
the characteristics that enhance the
usefulness of information.
Financial statements and the Reporting entity
• Reporting period – Financial statements are
prepared for a specific period of time (i.e., the
reporting period) and include comparative
information for at least one preceding reporting
period.
• Going concern – Financial statements are
normally prepared on the assumption that the
reporting entity is a going concern, meaning the
entity has neither the intention nor the need to
end its operations in the foreseeable future.
• Reporting entity – is one that is required, or
chooses, to prepare financial statements, and is
not necessarily a legal entity.
– It can be a single entity or a group or
combination of two or more entities.
Elements of Financial Statements
A. Entity’s Financial Position:
1) Assets
2) Liabilities
3) Equity
B. Entity’s Financial Performance
4) Income
5) Expenses
A. Assets – is “a present economic resource
controlled by the entity as a result of past events.
An economic resource is a right that has the
potential to produce economic benefits.”
Three aspects in the definition of an asset
1) Right – asset refers to a right, and not
necessarily to a physical object, e.g., the right
to use, sell, lease or transfer a building.
2) Potential to produce economic benefits –
the right has a potential to produce economic
benefits for the entity that are beyond the
benefits available to all others.
3) Control – means the entity has the exclusive
right over the benefits of an asset and the
ability to prevent others from accessing those
benefits.
B. Liability – is “a present obligation of the entity to
transfer an economic resource as a result of past
events.”
Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or
responsibility that an entity has no practical ability
to avoid.”
– An obligation can be either legal obligation
or constructive obligation.
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2. Transfer of an economic resource – the obligation
has the potential to require the transfer of an
economic resource to another party.
3. Present obligation as a result of past events – A
present obligation exists as a result of past events
if:
a. the entity has already obtained economic
benefits or taken an action; and
b. as a consequence, the entity will or may have
to transfer an economic resource that it would
not otherwise have had to transfer.
C. Equity – is the residual interest in the assets of
the entity after deducting all its liabilities.”
D. Income – increases in assets, or decreases in
liabilities, that result in increases in equity, other
than those relating to contributions from holders of
equity claims.
E. Expenses – decreases in assets, or increases in
liabilities, that result in decreases in equity, other
than those relating to distributions to holders of
equity claims.
• Recognition – involves recording the item in
words and in monetary amount and including that
amount in the totals of either of those statements
• De-recognition – the removal of a previously
recognized asset or liability from the entity’s
statement of financial position.
• Unit of account – the right or the group of rights,
the obligation or the group of obligations, or the
group of rights and obligations, to which
recognition criteria and measurement concepts
are applied.
Measurement bases
1) Historical cost
2) Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
• Historical Cost
a. an asset is the consideration paid to acquire
the asset plus transaction costs.
b. a liability is the consideration received to incur
the liability minus transaction costs.
• Fair value – the price that would be received to
sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at
the measurement date.
– Value in use is the present value of the
cash flows, or other economic benefits, that
an entity expects to derive from the use of
an asset and from its ultimate disposal.
– Fulfilment value is the present value of the
cash, or other economic resources, that an
entity expects to be obliged to transfer as it
fulfils a liability.
• Classifying – combining similar items and
separating dissimilar items.
• Aggregation – the adding together of assets,
liabilities, equity, income or expenses that have
shared characteristics and are included in the
same classification.
• Financial concept of capital – capital is
regarded as the invested money or invested
purchasing power.
• Physical concept of capital – capital is regarded
as the entity’s productive capacity, e.g., units of
output per day.
I. Philippine Accounting Standard (PAS1) –
basis for presentation of general purpose
financial statements to improve comparability
both with the entity's financial statements of
previous periods (intra-comparability) and with the
financial statements of other entities (inter-
comparability)
a. Intra-comparability – same entity from
another period
b. Inter-comparability – different entities
– PAS 1 does not prescribe the order or format
in which an entity presents item
– PAS 1 prohibits the presentation of any
items of income or expense as extraordinary
items in the statement(s) presenting profit or
loss and other comprehensive income or in
the notes
– Dividends declared by an entity are disclosed
either in the (a) notes or (b) statement of
changes in equity
• General purpose financial statements are
those intended to serve users who do not have
the authority to demand financial reports tailored
for their own needs.
• Financial Statement – structured representation
of an entity’s financial position and results of its
operations
a. Primary objective – provide information
about the financial position, financial
performance, and cash flow; wide range
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b. Secondary objective – show the results of
management’s stewardship over the entity’s
resources
• General Feature of Financial Statement
1. Fair Presentation and Compliance with PFRSs
– The application of PFRSs, with additional
disclosure when necessary, is presumed to result
in financial statements that achieve a fair
presentation.
2. Going concern - An entity is not a going concern
if, as of the financial reporting date or prior to the
date of authorization of the financial statements
for issue
a. The assessment of going concern is at least
12 months.
b. Prepared on a going concern basis
3. Accrual Basis of Accounting – An entity shall
prepare its financial statements, except for cash
flow information, using the accrual basis of
accounting.
4. Materiality & Aggregation - Each material class
of similar items must be presented separately in
the financial statements.
• Line item – similar item
5. Offsetting - Assets and liabilities, and income
and expenses, shall not be offset unless required
or permitted by a PFRS.
6. Frequency of reporting – An entity shall present
a complete set of financial statements (including
comparative information) at least annually.
7. Comparative Information – An entity shall
present comparative information in respect of the
preceding period for all amounts reported in the
current period’s financial statements
8. Consistency of presentation – An entity shall
retain the presentation and classification of items
in the financial statements from one period
• Statement of Financial Position – shows the
entity’s financial condition as at certain date
a. Classified – showing distinctions between
current and noncurrent assets and liabilities,
or
b. Unclassified (based on liquidity) – showing
no distinction between current and
noncurrent items
• Operating cycle – entity is the time between the
acquisition of assets for processing and their
realization in cash or cash equivalents
a. Refinancing agreement – long term
obligation maturing in 12 months after the
reporting period
A. Deferred tax liabilities (assets) are presented as
noncurrent items in a classified statement of
financial position, irrespective of their expected
dates of reversal.
B. Reclassification adjustments are amounts
reclassified to profit or loss in the current period
that were recognized in the current or previous
period
• Total comprehensive income – the change in
equity during a period resulting from transactions
and other event comprises all components of
a. Profit or loss – income less expenses,
excluding the components of other
comprehensive income
b. Other comprehensive income – comprises
item of income and expenses
• Presentation of Expenses
a. Nature of expense method – aggregated
according to their nature
b. Function of expense method – classifies
expenses according to their function
• If an entity classifies expenses by function, it
shall disclose additional information on the
nature of expenses
II. PAS 2 Inventories
• Prescribes the accounting treatment for
inventories
• The primary issue in the accounting for
inventories is the determination of cost to be
recognized as asset and carried forward until it is
expensed
• All items that meet the definition of inventory are
presented on the statement of financial position
as one lines item under the caption “Inventories.”
The breakdown of this line item (as finished
goods, WIP and Raw materials) is disclosed in the
notes.
• Inventories are normally presented in a classified
statement of financial position as current assets.
Inventories are assets:
a. Held for sale in the ordinary course of
business (Finished Goods);
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b. In the process of production for such sale
(Work In Process); or Write down inventories
c. In the form of materials or supplies to be • Inventories are usually written down to net
consumed in the production process or in the realizable value on an item by item basis.
rendering of services (Raw materials and • If the cost of an inventory exceeds its NRV,
manufacturing supplies). the inventory is written down to NRV, the
• The carrying amount of an inventory that is sold is lower amount. The excess of cost over NRV
charged as expense (i.e., cost of sales) in the represents the amount of write-down.
period in which the related revenue is recognized.
• the write-down of inventories to NRV and all
losses of inventories are recognized as expense
in the period the write-down or loss occurs.

Measurement III. PAS 32 – Prescribe principles for presenting

• Inventories are measured at the lower of cost financial instruments as liabilities or equity and for
and net realizable value (NRV). offsetting financial assets and financial activities
• Financial instrument – is “any contract that gives
• The cost of inventories comprised all costs of
purchase, costs of conversion and other costs rise to a financial asset of one entity and a
incurred in bringing the inventories to their present financial liability or equity instrument of another
entity.”
location and condition.
• A compound financial instrument is a financial
• Net realizable value (NRV) is the estimated instrument that, from the issuer’s perspective,
selling price in the ordinary course of business
contains both a liability and an equity component.
less the estimated costs of completion and the
• Treasury shares are an entity’s own shares that
estimated costs necessary to make the sale.
were previously issued but were subsequently
reacquired but not retired.
Costs that are EXPENSED when incurred: (ASAS)
1. Abnormal amounts of wasted materials, – Treasury shares are treated as deduction from
labor or other production costs. equity.
2. Selling costs, for example, advertising and
promotion costs and delivery expense or
freight out.
3. Administrative overheads that do not
contribute to bringing inventories to their
present location and condition.
4. Storage costs, unless those costs are
necessary in the production process before a
further production stage, (e.g., the storage
costs of partly finished goods may be
capitalized as cost of inventory, but the
storage costs of completed finished goods are
expensed
Cost Formulas
1. Specific identification - shall be used for
inventories that are not ordinarily
interchangeable (i.e., used for inventories that
are unique). Cost of sales is the cost of the
specific inventory that was sold.
2. FIFO – cost of sales is based on the cost of
inventories that were purchased first.
Consequently, ending inventory represents
the cost of the latest purchases.
3. Weighted Average Cost – cost of sales is
based on the average cost of all inventories
purchased during the period.
➢ Wtd. Ave. Cost = (TGAS in
pesos ÷ TGAS in units)