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NEW CONCEPTUAL FRAMEWORK
LETTERS TALKWEARFMORK TAULEONCCPOVERALL THEORETICAL FOUNDATION FOR ACCOUNTINGERNGRAL SEOPURP FSINTENDED FOR USE FOR WIDE VARIETY OF EXTERNAL USERS
PURPOSE OF CONCEPTUAL FRAMEWORKIs to assist the:FRSCPreparersUsersAuditorsInterested in the work of FRSC
Underlying Assumptions: MeaningPostulatesFoundation
Underlying AssumptionsWhat is the only one underlying assumption of accounting?GOING CONCERNContinuity assumptionAccounting entity is viewed as continuing in operation indefinitely
Basic assumptionsA- - - - E - - -M- - - - U - - -Q - - - -S - - - - - of P - --T - - - P - - - -
Accrual accountingEffects of transactions and other events are recognized when they occurIn is recognized when earnedExpense is recognized when incurred
Qualitative characteristicsQualities or attributes that makes financial accounting information USEFUL to the usersWhat are classifications of qualitative characteristics?Fundamental qualitative characteristicsEnhancing qualitative characteristics
Fundamental qualitative characteristicsRelate to the CONTENT OR SUBSTANCE of financial statementsRelevantFaithful representation
Ingredients of relevancePredictive valueConfirmatory value
Materiality
Quantitative THRESHOLDIf its omission or misstatement could influence the economic decision of the user of FS Good judgmentProfessional expertiseCommon sense
Factors of materialitySize of the itemNature of the item
Faithful representationThe description and figures match what really existed or happenedActual effects of the transactions shall be properly accounted for in the FS
Ingredients of faithful representationCompletenessNeutralityFree from error
Completeness Result of adequate disclosure or full disclosureNOTES TO FINANCIAL STATEMENTSTo provide necessary disclosure required by PFRSNarrative description of the items presented in the FS
Neutrality
Without bias
Free from error
Substance over form
Conservatism/prudence
In case of doubt record any loss and do not record any gainUnderstate rather than overstate net income and net assets
Enhancing qualitative characteristicsRelate to the presentation or form of the financial informationIncrease usefulness of the financial information
Enhancing qualitative characteristicsC- - - - -- -- -- -yU - - - - - - --- --- yV - - -- - -- -- -- yT- - - - - --- - s
Comparability
Horizontal or intra-comparabilityComparability within the entity
AndDimensional or inter-comparabilityComparability between and across entities
Understandability
Verifiability
Supported by evidence
Timeliness
Financial information must be communicated early enough when a decision is to be made
Users of financial informationP ------ y U ---- sO---r U- --s
OrInternal usersExternal users
Primary users
Parties to whom general purpose financial reports are primarily directedExisting and potential investors Lenders and other creditors
Other users
EmployeesCustomersGovernments and their agenciesPublic
F-------l R-p-----gIt includes not only the financial statements but also other informationSignificant ratiosFinancial highlightsNon-financial information
Forms of business organizationSole proprietorshipPartnershipCorporationCooperative
Sole proprietorshipO by O PS F of B OAdvantagesE to SFew legal restrictionEasy to discontinueGets all the profit
Sole proprietorshipDisadvantagesUnlimited liabilityLacks business continuity
Partnership
O by t or m pAdvantagesGreater source of capitalBetter credit standing than sole proprietorship
Partnership: DisadvantagesRestricted transfer of ownershipUnlimited liability of partnersPartners friction may terminate the partnershipLimited life
Corporation
Artificial being created by operation of lawOwners is called stockholders or shareholders
Corporation: Advantages
Term of existenceOwnership is easily transferableLimited liabilityGreater source of capital
Corporation: Disadvantages
More costly organizationSubject for more legal restrictionHigh taxStockholders have little control over management of business
Cooperative
Duly registered association of persons, with common bond of interest, who have voluntarily joined together to achieve lawful common social or economic endOpen and voluntary memberships, division of net surplus, cooperation among cooperativesFollow generally accepted principles of cooperative
GAAP: generally Accepted Accounting Principles Collection of commonly followed accounting rules, standards and procedures for financial reportingTo ensure that financial reporting is transparent and consistent in preparation and presentation
Main purpose of accountingTo provide quantitative, financial information about economic entities that is intended to be useful in making economic decisions
Self studyBranches of accountingCareer opportunities in accounting professionsHistorical development of accountingComparative meaning topicsImportance of ethics in accountingProblems of ethics in accounting
Elements of financial statementsQuantitative information reported in the statements of financial position and income statement
Statement of financial positionAssetsLiabilitiesequity
Income statement or statement of financial performanceIncomeexpenses
Assets
Resources controlled by the entityFuture economic benefits are expected to flow to the entity
Liabilities
Present obligations of the entity arising from past transactionsSettlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
Equity
Residual interestAssets minus liabilities
Income
Increase in economic benefit during the accounting periodInflow or increase in assetDecrease in liabilityIncrease in equity other than contribution from equity participants
Expense
Decrease in economic benefit during the accounting periodOutflow or decrease in assetIncrease in liabilityDecrease in equity other than distribution to equity participants
Recognition
Reporting of an asset, liability, income and expense on the face of the FS
Recognition principlesAsset recognition principleLiability recognition principleIncome recognition principleExpense recognition principle
Asset recognition principleProbable that future economic benefits will flow to the entityCost of the asset can be measured reliably (cost principle)
Liability recognition principleIt is probable that an outflow of economic benefits will be required for the settlement of a present obligationThe amount of obligation can be measured reliably
Income recognition principleIt is recognized when earnedProbable that future economic benefits will flow to the entity as a result of an increase in an asset or a decrease in a liabilityThe economic benefits can be measured reliably
Expense recognition principleExpenses are recognize when incurredIt is probable that a decrease in future economic benefits has occurred as a result of a decrease in an asset or an increase in a liabilityThe decrease in economic benefits can be measured reliably
Expense recognition principleMatching principleSystematic and rational allocationImmediate recognition
Measurement of elementsProcess of determining the monetary amounts at which the elements of the FS are to be recognized and carried in the financial position and financial performance
Measurement of elementsHistorical costMost commonly usedamount of cash paid or received at the time of acquisition or settlementCurrent costamount of cash paid or received if the asset or liability was acquired or settled currently
Measurement of elementsRealizable (settlement) ValueAmount that can be obtained by selling the assets in an orderly disposalAmount of cash expected to be paid to satisfy the liability in the normal course of businessPresent valueDiscounted value of future cash inflowsDiscounted value of future cash outflow
AssignmentExercise 1-2Graded recitationExercise 1-3Exercise 1-4Exercise 1-5Exercise 1-6Exercise 1-7