Financial Statements and Underlying Assumptions

General Objectives of Financial Statements

Financial statements provide information about economic resources of the reporting entity, claims
against the entity and changes in economic resources and claims.

The information provided by the financial statements help users in:

Assessing future cash flows to the reporting entity.

Assessing management stewardship of the entity’s economic resources.

Financial information is provided in the following:

Statement of financial position

Statement of income

Statement of cash flows

Statement of changes in equity

Notes to financial statements

Types of Financial Statements

Consolidated financial statements

Unconsolidated financial statements

Combined financial statements

Consolidated financial statements

- provide information about the assets, liabilities, equity, income and expenses of both the parent
and its subsidiaries as a single reporting entity. The parent is the entity that exercises control over
the subsidiaries.

Unconsolidated financial statements

- are designed to provide information about the parent’s assets, liabilities equity, income and
expenses and not about those of the subsidiaries.
Combined financial statements

- are designed to provide information about the assets, liabilities, equity, income and expenses of
two or more entities not linked with parents and subsidiary relationships.

Reporting Entity

- is an entity that is required or chooses to prepare financial statements.

- is not necessarily a legal entity.
- can be a single entity or portion of an entity, or can comprise more than one entity.

The following are considered a reporting entity:

1. Individual corporation, partnership or proprietorship

2. The parent alone
3. The parent and its subsidiaries as single reporting entity
4. Two or more entities without parent and subsidiary relationship as a single reporting entity.
5. A reportable business segment of an entity.

Reporting Period

The reporting period is the period when financial statements are prepared for general purpose financial
reporting.

Financial statements must be prepared on an annual basis and may be prepared on an interim basis.

Financial statements may include information about transactions and other events that occurred after
the end of the reporting period if the information is necessary to meet general objective of financial
statements.

Underlying Assumptions

Accounting assumptions or accounting postulates are the basic notions or fundamental premise on
which the accounting process is based.

Accounting assumptions serve as a foundation or bedrock of accounting in order to avoid

misunderstanding but rather enhance the understanding and usefulness of the financial statements.

 Going concern (explicit in the Conceptual Framework for Financial Reporting)

 Accounting entity
 Time period
 Monetary unit

The last three are implicit accounting assumptions.

  Underlying Assumptions – Going Concern
- or continuity assumption means that in the absence of evidence to the contrary, the accounting
entity is viewed as continuing in operations indefinitely.

This principle is the foundation of the cost principle. Assets are normally recorded as cost and as a rule,
market values are ignored. However, some new standards require measurement of certain assets at fair
value.

 Underlying Assumptions – Accounting Entity

- is the specific business organization, which may be a proprietorship, partnership or corporation.
Under this assumption, the entity is separate from the owners, managers, and employees who
constitute the entity.

However, where parent and subsidiary relationship exists, consolidated

statements are usually made for the affiliates because of practical and

economic purposes, the parent and the subsidiary are a single economic

entity.

Underlying Assumptions – Time Period

The time period assumption requires that the indefinite life of an entity is

subdivided into accounting periods which a usually of equal length for the

purpose of preparing financial reports on financial position, performance

and cash flows.

By convention an accounting period or fiscal period is one year or a

period of twelve months.

Most financial statements are prepared using a calendar year to comply

with government reports.

Underlying Assumptions – Monetary Unit

The monetary unit assumption has two aspects, namely quantifiability and

stability of the peso.

The quantifiability aspect means that the assets, liabilities, equity income

and expenses should be stated in terms of a unit of measure which is the

Philippine peso.

The stability of the peso assumption means that the purchasing power of

the peso is stable or constant and that instability is insignificant and

therefore maybe ignored.