CFAS Notes Chapter 2

Accounting Profession Conceptual Framework- complete, comprehensive and single document

promulgated by IASB. Summary of terms and concepts of FS for external
Overall objective of accounting users.
 To provide quantitative financial information about a business that  Define the basic objectives, terms and concepts of accounting
is useful statement users particularly owners and creditors in
making economic decision. Eight- Chapters of the scope of the revised conceptual framework.

Accounting- to provide quantitative information to be useful in making an Foundation of Standards in Conceptual Framework
economic decision. Contribute to transparency by enhancing international comparability and
1. Quantitative in nature quality of financial information

2. Financial in nature Strengthen accountability of management

3. Useful in decision making. Contribute to economic efficiency by helping investors to identify

opportunities and risks.
Identifying- An event is Accountable or Quantifiable when it has an effect
on asset, liabilities and Equity. Objective of faithenhancing

 Sociological and psychological matters are beyond the province of - This provides the “why” of accounting in Conceptual framework for
accounting. Financial reporting.
 Only Economic Activities Decision Usefulness- Underlying theme of the CF.
External Transaction- involving one entity and another entity. Users of Financial Reports
Internal Transaction  Creditors
Measuring- assigning of peso amounts  Government agencies
 Unions
 Historical Cost- The most common financial attribute used in FI.
 Current Value- Fair value, Value in use, fulfillment value and current Primary users
cost.  Existing and Potential Investors Target Users of
Communicating- Preparing and distributing accounting reports to potential  Lenders and Other creditors Financial Reporting
users. Other users
 Recording- journalizing of business transaction.  Employees
 Classifying- Sorting or grouping of similar econ. transaction  Customers
 Summarizing- preparing of FS  Public
Financial Reports- tell us how well an entity is performing.  Government and their agencies

Liquidity- the availability of cash in the near future to cover currently

Philippine Accounting Act. Of 2004- law regulating the practice accountancy
maturing obligations
in the Philippines
Solvency- …. Over a long term to meet financial commitments when they
Examination offered Twice a year. May and October.
fall due.
Public accounting- Auditing, managerial advisory services and taxation.
Financial Performance- Results of operations. IS/SCI.
The primary service offered by public accounting
Accrual Accounting- income is recognized when earned regardless of when
Private accounting- Maintaining records, produces financial reports, received and expense is recognized when incurred regardless of when paid.
preparing the budgets and controlling and allocating the sources of the
Management stewardship- information about how efficiently and
entity.
effectively management has discharged its responsibilities…
Government- Custody and administration funds.
Management- The primary objective of financial reporting is to provide
Republic Act. No. 10912- strengthening the Continuing Professional useful information to—
Development. 120 CPD credit units/ 15
CHAPTER 3
Inculcation and acquisition of advanced knowledge, skill, proficiency of CPA.
Qualitative characteristics- the qualities or attributes that make the
Bookkeeping- “How” of accounting. financial accounting information useful to the users.
Financial Accounting- FS on internal and external for creditors and  Fundamental qualitative characteristics- relate to the content
investors. or substance
 Relevance- capacity of the information to influence
 Timeliness
a decision.
Managerial accounting- FS on internal users only. Ingredients
 Predictive Value- accurately
 Relevance
predicting or forecasting outcome
GAAP- accounting rules, procedures and practices. events
 Confirmatory Value- it provides
FRSC- the accounting standard setting body created by PRC. feedback about previous
Now called as ASC- Accounting Standards Association. evaluations.
 Faithful representation- represent economic
PAS The approved statements phenomena or transactions in words and numbers.
PFRS of FRSC. Ingredients
 Completeness/adequate
IASC- an independent private sector body. disclosure/Notes to FS- relevant
information should be presented.
IFRS- standards published by IASB
 Neutrality/Prudence/
Standard-setting process Conservatism- Free from biases/ C.
in case of doubt, record any loss
 Research
and not record any gain.
 Discussion paper
 Exposure draft
 Accounting standard
  Free from error/Measurement  Liability- Present obligations
uncertainty/substance over form-  Equity- the residual interest in the assets of the entity after
No errors or omissions deducting all of the liabilities.
 Income
 Enhancing qualitative characteristics  Revenue- regular activities of an entity. Ex. Dividends,
 Comparability/Horizontal comparability- ability to interest, fees, rent. Etc.
bring together for the purpose of noting points of  Gain- other items that are not regular activities.
likeness and difference.  Expense
 Consistency- use of the same method for  Losses- does not arise in ordinary regular activities and
the same item. Either period to period or include losses resulting from disasters.
single period.
CHAPTER 6
 Verifiability- implies consensus/ different
knowledge and independent observers could reach Recognition- process of capturing inclusion in the FS an item that meets the
consensus, although not necessarily complete definition of element of FS.
agreement, that a particular depiction is a faithful
representation AN ASSET OR LIABILITY AND ANY CORRESPONDING INCOME OR EXPENSE
 Direct verification- direct observation CAN EXIST EVEN IF THE PROBABILITY OF INFLOW OR OUTFLOW OF THE
BENEFITS IS LOW.
 Indirect verification- checking inputs to a
model, formula or other technique and Income recognition- income shall be recognized when earned.
recalculating the inputs using the same
methodology. Expense recognition- expense are recognized when incurred.
 Understandability- comprehensible or intelligible if Matching principle- costs and expenses incurred in earning a revenue shall
it is to be most useful. be reported in the same period.
 Timeliness- must be available or communicated
early enough when a decision is to be made. 3 applications

Cost- pervasive constraint on the information that can be provided.  Cause and effect association- expense is recognized when
the revenue is already recognized.
 Systematic and rational allocation- some costs are
CHAPTER 4 expensed by simply allocating them over the periods
benefited.
Financial Statements- provides information about economic resources of  Immediate recognition- cost incurred is expensed outright
the reporting entity, claims against the entity and changes in the economic because of uncertainty of future economic benefits or
resources and claims. difficulty of reliability associating certain costs with future
revenue.
Types of financial statements in Revised conceptual Framework
Derecognition- the removal of all or part of a recognized asset or liability
 Consolidated Financial Statements- both parent and its
from SFP.
subsidiaries
 Unconsolidated Financial Statements- Parent alone D. of an asset- the entity loses control of all or part of the asset.
 Combined Financial Statements- NOT linked by a parent and
its subsidiaries. D. of a Liability- the entity no longer has a present obligation for all or part
of the liability.
Reporting entity- is an entity that chooses or required to prepare FS.
Measurement
Reporting Period- the period when FS are prepared for general purpose
financial reporting.  Historical Cost
- Historical Cost of an Asset- cost incurred in acquiring or
Underlying Assumptions- are the basic notions or fundamental premises on creating the asset comprising the consideration paid plus
which the accounting is based. The foundation or bed rock of accounting. transaction cost.
- Historical Cost of a liability- the consideration received to
 Going Concern- means that in the absence of evidence to the
incur the liability minus transaction cost.
contrary, the accounting entity is viewed as CONTINUING IN
 Current Value
OPERATION INDEFINITELY.
 Fair Value
- Accounting concept that justifies the usage of accruals and - Fair Value of an asset- the price that would be
deferrals. RECEIVED to sell an asset on an orderly transaction
between market participants at measurement date.
 Accounting entity- specific business organization, which may be a
- Fair Value of a Liability – paid to transfer a liability
proprietorship, partnership or corporation.
in an orderly transaction….
 The entity is separate from the owners, managers, and employees
 Value in use- present value of cash flows that an entity
who constitute the entity.
expects to derive from the use of an asset and from the
 Time period- the indefinite life of an entity.
ultimate disposal.
- Calendar year- a twelve-month period that ends on 31/12  Fulfillment value- the present value of cash that an entity
expects to transfer in paying or settling a liability.
- Natural Business year- 12-month period that ends on any
- An exit price or exit value.
months when the business is at lowest or experiencing slack
 Current cost- The physical capital maintenance concept that
session.
requires adoption of measurement basis.
 Monetary unit - C.C. of an Asset- the cost of an equivalent asset at
the measurement date compromising the
- Quantifiability- A, L, OE, Income, and Expenses should be
consideration paid and transaction cost.
stated in terms of unit measure. PESO.
- C.C. of a liability- the consideration that would be
- Stability of the peso- purchasing power of peso is stable or received leas any transaction cost at measurement
constant. date.

Economic entity- when a parent and subsidiary relationship exists, CHAPTER 7

consolidated financial statements are prepared in recognition of….
Presentation and Disclosure- can be an effective communication and tool
CHAPTER 5 about the information in financial statements.

Elements of FS- the building blocks from which FS is constructed. Classification- the sorting of assets, liabilities, equity, income and expense
with similar characteristics.
 Asset- Economic resources.
Control- Appropriate Classification
  Current and non-current assets
 Current and non-current Liabilities
 Ordinary share capital and preferences

Financial Capital- Net assets in monetary terms.

Concept that is applied to net income and other comprehensive

income.

Aggregation- the adding together of assets, liabilities, equity, income and

expenses that have similar or shared characteristics and are included in the
same classification.

Statement of profit or Loss- the primary source of information about an

entity’s FP for the reporting period.

Two approaches of the FP of an entity

 Transaction approach- traditional preparation of Income Statement

 Capital Maintenance approach- net income occurs only after the
capital used from the beg. Of the period is maintained.

Return of Capital- an erosion of the capital invested in the entity.

Return on Capital- an amount in excess of their original investment.

CONCEPTUAL FRAMEWORK

2 concepts of Capital maintenance or Well-offness

 Financial Capital- the monetary amount of the net assets

contributes by shareholders and the amount of the increase in net
assets resulting from earnings retained by the entity.
 Physical Capital- the quantitative measure of the physical
productive capacity to produce goods and services.
- This concept requires that productive assets be
measured at CURRENT COST, rather than historical
cost.