Fabregas, Maria Inez T.

BSA - 134

Financial statements how accounting information is reported to secondary

users like investors, lenders, and other creditors

Purposes of the Conceptual Framework:

assembles the theories that determine how financial statements are prepared
and presented
helps users in making economic decisions
different entities have different ways of reporting their financial information so
the Conceptual Framework helps reducing these differences by coordinating
regulations, accounting standards, and procedures that have to do with how
financial statements are prepared and presented
if there is disagreement between the Conceptual Framework and an accounting
standard (from the Philippine Financial Reporting Standards or International
Financial Reporting Standards), the accounting standard will be followed
the Conceptual Framework is being revised in order to minimize conflicts
between it and other accounting standards
aids: the International Accounting Standards Board in the progress and review of
IFRS and in reducing differences in regulations and accounting standards and
procedures present in the presentation of financial statements, national
standards boards in expanding national standards, preparers of financial
statements in the application of IFRS, auditors checking if the financial
statements match up with IFRS, users of financial statements in understanding
the information in financial statements, and give information about how IASB
created the IFRSs

Objective of Financial Statements:

financial statements are also called general purpose reports because they are
usually common information needs for users who cannot ask for their particular
information needs
financial statements are primarily used by investors, lenders, and other creditors
in order to figure out if they should give resources to the
enterprise/department/administration but are also used by employees who care
about how stable and profitable their employer can be, the government to
regulate the entitys activities and taxation, and the public who use information
about trends, developments and the activities of the firm
investors make decisions about buying or selling equity depending on what they
get out of it
the common needs of all the users are to assess the companys liquidity (the
fact of having cash or cash equivalents), solvency (ability to pay debts as they
are due), profitability (generating profit using existing assets), and operating &
financial flexibility (ability of company to react to unplanned expenses)

Info. on Financial Position provided in the statement of financial

position/balance sheet; evaluates companys liquidity and solvency; if company
has the ability to pay
Info. on Financial Performance provided in the statement of comprehensive
income/income statement; how profitable a company is with its assets
Info. on Cash Flows provided in the statement of cash flows; evaluates
investing, financing, and operating activities and the capability of enterprise to
make cash and cash equivalents
Info. on Changes in Equity provided in the statement of changes in equity;
change between the beginning and ending equity
Other info. provided in the notes to financial statement; whatever cannot be
presented on the other financial statements
Accrual Basis income is recognized when it is earned and expense is
recognized when it is incurred; record even when there is no inflow or outflow of
cash

Qualitative Characteristics:

Identify financial information that would be useful to its primary users

Fundamental Qualitative Characteristics:
Relevance if information would influence the assessment of a user; has
confirmatory or predictive value (confirming what was expected of the
enterprise in the past) that helps make predictions for the future of the
enterprise
Materiality depends on nature and size of an item and errors in exclusion or
misrepresentation of information; if its acknowledgement makes a difference
in assessments; considered as a constraint and not as a qualitative
characteristic
Faithful Representation information on financial statements must express
the exact products of transactions; information must be complete (full
disclosure of all needed info.), neutral (unbiased, fair, and does not influence
judgment to create wanted outcome), and free from error (no inaccuracies or
omissions); some elements are estimated (uncertain) but if the amounts are
depicted precisely, it is still faithfully represented
Enhancing Qualitative Characteristics:
Comparability enables comparisons within an entity (intracomparability)
and between other entities (intercomparability); intracomparability is when
information of two accounting periods of one entity are compared with each
other; intercomparability is when information between different entities are
compared with each other to analyze similarities and differences
Verifiability complements faithful representation; if information can be
reproduced using the same process and methods; direct verification is done
by applying the same process to get the same result, indirect verification is
done by recomputing using information that has been verified
Timeliness providing information on time to decision-makers; delay of
availability will cause the information to lose its relevance but sometimes it
may lose its reliability when it is on time

Understandability depends on information and user; information must be

clear and concise but the user must have tolerable knowledge of business
and accounting activities as well
Cost constraint presentation of significant information is bound by the cost of
getting it; benefits must surpass costs in order for the information to be provided
Underlying Assumption: Going Concern enterprise will still continue operations
in the future; if liquidation becomes clear, going concern values become
liquidation values

Elements of Financial Statements:

Classes of items contained in the financial statements

Divided into two groups of elements that measure the companys financial
position and that measure the companys performance
Financial Position
Assets future economic inflows (used by itself or with other assets, assets
exchanged for cash, settle liabilities, and distributed to owners of company),
controlled by company, and acquired from past transactions; recognized if it
will have future economic inflows and if it can be calculated accurately
Liabilities current obligation/debt of a company; acquired from past
transactions; economic outflows (payment, transfer of assets, providing
services, obligation exchanged with another obligation, debt reformed into
equity; recognized if economic outflow will be the consequence of its
payment and if it can be calculated accurately
Equity book value of the company; assets minus liabilities would equal to
equity (residual element); information on capacity of company to distribute
equity to shareholders; depends on the assets and liabilities
Conflict between legal form and economic substance: economic substance is
recognized
Performance
Income increases in equity (inflows of assets or decreases of liabilities);
revenue (inflows; central operations like providing goods and services) and
gains (net inflows difference of amount received and book value of item;
incidental operations like selling non-current assets); recognized when there
is future economic inflows and can be calculated accurately when the good
is sold or service is rendered
Expenses decreases in equity (outflows of assets or increases of liabilities);
expenses (outflows; incurred in the process of generating revenues) and
losses (net outflows; decrease in equity from incidental operations like losses
from fires or floods); recognized when there is a possibility of an economic
outflow and if it can be calculated accurately
Recognition of Expenses:
Associating cause and effect matching principle between costs and
revenue; expenses are recognized simultaneously with related revenues
Systematic and rational allocation provide objectivity and consistency;
benefits arise at different periods so expenses are recognized during these
periods as well; depreciation, amortization, insurance and rent are examples

Immediate recognition when the object has no future benefits, it is

recognized on the date it was acquired; items with benefits that are difficult
to measure or be certain of
Measurement Bases:

Determining how the elements should be recognized on the financial statements

Historical Cost assets recorded at fair value at the time they were bought;
liability recorded at the amount when it was incurred
Current Cost also called market value or fair value; assets recorded at the
amount of present-day acquisition costs; liability recorded at the present-day
amount needed to settle the debt
Realizable Value asset recorded at the amount that would be received if it was
sold presently; liabilities recorded at the settlement amount
Present Value also called amortized cost; asset recorded at the amount of its
future net cash inflows; liabilities are recorded at the amount of its future net
cash outflows