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What is the definition of accounting?
What is the definition of accounting?
Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information.
What are the three important activities in accounting?
What are the three important activities in accounting?
Only accountable events are recognized in the identifying process.
Only accountable events are recognized in the identifying process.
True
What are the two types of events in accounting?
What are the two types of events in accounting?
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Which of these is NOT a measurement base used in accounting?
Which of these is NOT a measurement base used in accounting?
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What is the most commonly used measurement base in accounting?
What is the most commonly used measurement base in accounting?
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What is the primary governing body for general purpose accounting information?
What is the primary governing body for general purpose accounting information?
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What are the two parts of the double-entry system?
What are the two parts of the double-entry system?
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The stable monetary unit concept assumes that purchasing power remains stable over time.
The stable monetary unit concept assumes that purchasing power remains stable over time.
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The time period concept divides the life of the business into small, equal time periods.
The time period concept divides the life of the business into small, equal time periods.
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The materiality concept states that information is material if it could influence economic decisions.
The materiality concept states that information is material if it could influence economic decisions.
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The cost-benefit concept suggests that the benefits of providing information should always exceed the costs.
The cost-benefit concept suggests that the benefits of providing information should always exceed the costs.
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The accrual basis of accounting recognizes transactions when cash is received or paid.
The accrual basis of accounting recognizes transactions when cash is received or paid.
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The historical cost concept determines an asset's value based on its current market price.
The historical cost concept determines an asset's value based on its current market price.
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The concept of articulation emphasizes the interconnectedness of all components within a set of financial statements.
The concept of articulation emphasizes the interconnectedness of all components within a set of financial statements.
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The full disclosure principle states that financial statements should provide maximum detail, regardless of the costs involved.
The full disclosure principle states that financial statements should provide maximum detail, regardless of the costs involved.
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The consistency concept emphasizes using the same accounting practices for all businesses.
The consistency concept emphasizes using the same accounting practices for all businesses.
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The matching concept recognizes expenses when they are incurred, regardless of when revenue is earned.
The matching concept recognizes expenses when they are incurred, regardless of when revenue is earned.
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The residual equity theory applies only to businesses with a single class of shares.
The residual equity theory applies only to businesses with a single class of shares.
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The fund theory focuses on managing and protecting the assets of the entity.
The fund theory focuses on managing and protecting the assets of the entity.
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The realization concept involves converting non-cash assets into cash or claims on cash.
The realization concept involves converting non-cash assets into cash or claims on cash.
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Prudence (conservatism) emphasizes a cautious approach when making estimates, preventing overstatement of assets and income.
Prudence (conservatism) emphasizes a cautious approach when making estimates, preventing overstatement of assets and income.
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Financial accounting focuses on providing general-purpose financial statements to external users.
Financial accounting focuses on providing general-purpose financial statements to external users.
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Management accounting provides specific financial reports that are primarily used by the entity's management.
Management accounting provides specific financial reports that are primarily used by the entity's management.
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Cost accounting systematically records and analyzes the costs associated with the production of goods or services.
Cost accounting systematically records and analyzes the costs associated with the production of goods or services.
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Auditing involves evaluating the consistency of financial statements with established accounting standards.
Auditing involves evaluating the consistency of financial statements with established accounting standards.
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Tax accounting involves preparing tax returns and providing tax advice to individuals and businesses.
Tax accounting involves preparing tax returns and providing tax advice to individuals and businesses.
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Government accounting primarily focuses on the efficient allocation of public funds.
Government accounting primarily focuses on the efficient allocation of public funds.
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The practice of public accountancy involves providing accounting services exclusively to non-profit organizations.
The practice of public accountancy involves providing accounting services exclusively to non-profit organizations.
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The practice of commerce and industry involves accounting positions within companies that are not publicly traded.
The practice of commerce and industry involves accounting positions within companies that are not publicly traded.
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The practice of education/academe primarily involves teaching accounting and finance to students.
The practice of education/academe primarily involves teaching accounting and finance to students.
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The practice in the government involves accounting roles within both federal and local government agencies.
The practice in the government involves accounting roles within both federal and local government agencies.
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The conceptual framework for financial reporting sets forth the basic principles that underlie the preparation and presentation of financial statements.
The conceptual framework for financial reporting sets forth the basic principles that underlie the preparation and presentation of financial statements.
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What is the primary objective of general-purpose financial reporting?
What is the primary objective of general-purpose financial reporting?
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A secondary objective of financial statements is to provide insights into the effectiveness of the entity's management.
A secondary objective of financial statements is to provide insights into the effectiveness of the entity's management.
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Who are considered the primary users of general-purpose financial reports?
Who are considered the primary users of general-purpose financial reports?
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Financial statements are designed to meet the specific needs of all users, including both primary and secondary users.
Financial statements are designed to meet the specific needs of all users, including both primary and secondary users.
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Qualitative characteristics of financial information emphasize the importance of accuracy and reliability.
Qualitative characteristics of financial information emphasize the importance of accuracy and reliability.
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Relevance refers to the ability of financial information to influence decisions made by users.
Relevance refers to the ability of financial information to influence decisions made by users.
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Faithful representation implies that financial information is complete, neutral, and free from error.
Faithful representation implies that financial information is complete, neutral, and free from error.
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Enhancing qualitative characteristics help improve the usability and understandability of financial information.
Enhancing qualitative characteristics help improve the usability and understandability of financial information.
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An asset is a resource controlled by the entity as a result of past events, and from which future economic benefits are expected to flow to the entity.
An asset is a resource controlled by the entity as a result of past events, and from which future economic benefits are expected to flow to the entity.
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A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources.
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Equity represents the residual interest in the assets of the entity after deducting its liabilities.
Equity represents the residual interest in the assets of the entity after deducting its liabilities.
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Income includes only revenues, while expenses include only losses.
Income includes only revenues, while expenses include only losses.
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PAS 1 prescribes the basis for the presentation of general-purpose financial statements, ensuring consistency and comparability across entities.
PAS 1 prescribes the basis for the presentation of general-purpose financial statements, ensuring consistency and comparability across entities.
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A complete set of financial statements includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, notes, comparative information, and an additional statement of financial position as needed.
A complete set of financial statements includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, notes, comparative information, and an additional statement of financial position as needed.
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The fair presentation concept requires entities to prepare financial statements in accordance with PFRSs, ensuring that the statements are accurate and reflective of the underlying economic activities.
The fair presentation concept requires entities to prepare financial statements in accordance with PFRSs, ensuring that the statements are accurate and reflective of the underlying economic activities.
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An entity is considered a going concern if it plans to liquidate or cease trading in the near future.
An entity is considered a going concern if it plans to liquidate or cease trading in the near future.
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Accrual basis accounting records transactions only when cash is received or paid, providing a clear picture of the entity's cash flow.
Accrual basis accounting records transactions only when cash is received or paid, providing a clear picture of the entity's cash flow.
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Materiality and aggregation require that similar items are presented separately in the financial statements, to help users understand the entity's financial position more effectively.
Materiality and aggregation require that similar items are presented separately in the financial statements, to help users understand the entity's financial position more effectively.
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Offsetting allows entities to combine assets and liabilities, income and expenses, as long as the combined amount is material.
Offsetting allows entities to combine assets and liabilities, income and expenses, as long as the combined amount is material.
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Entities are required to present comparative information from the previous period for all amounts reported in the current period's financial statements.
Entities are required to present comparative information from the previous period for all amounts reported in the current period's financial statements.
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Consistency of presentation encourages entities to change the presentation and classification of items in the financial statements from one period to the next, to keep the information up-to-date and more relevant.
Consistency of presentation encourages entities to change the presentation and classification of items in the financial statements from one period to the next, to keep the information up-to-date and more relevant.
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A statement of financial position can be classified into current and noncurrent items, or presented in an unclassified format, based on liquidity.
A statement of financial position can be classified into current and noncurrent items, or presented in an unclassified format, based on liquidity.
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An entity is required to classify an asset as current when it expects to realize the asset, or intends to sell or consume it within twelve months of the reporting period.
An entity is required to classify an asset as current when it expects to realize the asset, or intends to sell or consume it within twelve months of the reporting period.
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A liability is classified as current when the entity expects to settle the liability within twelve months of the reporting period.
A liability is classified as current when the entity expects to settle the liability within twelve months of the reporting period.
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Deferred tax liabilities and assets are presented as noncurrent items in a classified statement of financial position, regardless of their expected dates of reversal.
Deferred tax liabilities and assets are presented as noncurrent items in a classified statement of financial position, regardless of their expected dates of reversal.
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Entities can choose to present income and expenses in a single statement, or in separate statements for profit or loss and other comprehensive income, providing flexibility for presentation.
Entities can choose to present income and expenses in a single statement, or in separate statements for profit or loss and other comprehensive income, providing flexibility for presentation.
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Total comprehensive income includes all components of profit or loss, and other comprehensive income, providing a complete picture of the entity's financial performance.
Total comprehensive income includes all components of profit or loss, and other comprehensive income, providing a complete picture of the entity's financial performance.
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The nature of expense method classifies expenses based on their nature, such as cost of goods sold, selling expenses, and administrative expenses.
The nature of expense method classifies expenses based on their nature, such as cost of goods sold, selling expenses, and administrative expenses.
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Inventories are assets held for sale in the ordinary course of business, or used as materials or supplies in the production of goods or services.
Inventories are assets held for sale in the ordinary course of business, or used as materials or supplies in the production of goods or services.
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Inventories are measured at the lower of cost and net realizable value, ensuring that they are not overvalued in the financial statements.
Inventories are measured at the lower of cost and net realizable value, ensuring that they are not overvalued in the financial statements.
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The cost of inventories includes all costs incurred in bringing the inventories to their present location and condition, ensuring a comprehensive picture of the costs associated with acquiring and preparing goods for sale.
The cost of inventories includes all costs incurred in bringing the inventories to their present location and condition, ensuring a comprehensive picture of the costs associated with acquiring and preparing goods for sale.
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Net realizable value is determined by subtracting estimated selling costs and estimated completion costs from the estimated selling price, providing a realistic assessment of the potential revenue that can be generated from selling the inventories.
Net realizable value is determined by subtracting estimated selling costs and estimated completion costs from the estimated selling price, providing a realistic assessment of the potential revenue that can be generated from selling the inventories.
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The specific identification method is best suited for inventories that are unique or easily identifiable, ensuring that the cost of goods sold is accurately matched to the specific units sold.
The specific identification method is best suited for inventories that are unique or easily identifiable, ensuring that the cost of goods sold is accurately matched to the specific units sold.
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The FIFO method assumes that the oldest inventory items are sold first, leading to a more accurate representation of the costs of goods sold, particularly in times of inflation.
The FIFO method assumes that the oldest inventory items are sold first, leading to a more accurate representation of the costs of goods sold, particularly in times of inflation.
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The weighted average cost method calculates the average cost of all inventories purchased during the period, providing a smoothed-out cost of goods sold, particularly useful in times of fluctuating costs.
The weighted average cost method calculates the average cost of all inventories purchased during the period, providing a smoothed-out cost of goods sold, particularly useful in times of fluctuating costs.
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The carrying amount of inventory sold is recognized as an expense in the period in which the related revenue is recognized, ensuring that the cost of goods sold is appropriately matched to the revenue generated.
The carrying amount of inventory sold is recognized as an expense in the period in which the related revenue is recognized, ensuring that the cost of goods sold is appropriately matched to the revenue generated.
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Study Notes
Chapter 1: Overview of Accounting
- Accounting is the process of identifying, measuring, and communicating economic information to permit informed decisions by users of information.
- Three important activities in accounting are:
- Identifying: Analyzing events and transactions to determine if they are recognized. Only accountable events are recognized.
- Measuring: Assigning numerical values, usually monetary, to economic transactions and events.
- Communicating: Transforming economic data into useful accounting information, such as financial statements, for users.
- Fundamental Accounting Equation: Assets = Liabilities + Equity
Types of Events
- External events involve an external party:
- Exchange (reciprocal transfer): Giving and receiving.
- Non-reciprocal transfer: One-way transaction.
- Other external events: Changes in resources or obligations by an external party without resource transfer.
- Internal events do not involve an external party:
- Production: Transforming resources into finished goods.
- Casualty: Unanticipated loss from disasters.
Measurement
- Various measurement bases exist in accounting, including:
- Historical cost
- Fair value
- Present value
- Current cost
- Inflation-adjusted costs
- Historical cost is the most common method.
Users of Accounting Information
- General purpose information: Meets the common needs of statement users, guided by Philippine Financial Reporting Standards (PFRSs).
- Special purpose information: Meets the specific needs of particular users, provided by other accounting types (e.g., managerial accounting, tax-basis accounting)
Accounting Concepts
- Double-entry system: Each accountable event is recorded in two parts (debit and credit).
- Going concern: Entities are assumed to continue operations indefinitely.
- Separate entity: Entity is treated independently from its owners.
- Stable monetary unit: Financial statements are measured in a stable currency.
- Time period: Business life is divided into reporting periods.
- Materiality: Information is material if its omission or misstatement could influence economic decisions.
- Cost-benefit: Costs of processing and communicating information shouldn't exceed the benefits derived.
- Accrual basis accounting: Financial effects of transactions are recognized when they occur (not when cash is exchanged).
- Historical cost concept: Asset value is based on acquisition cost.
- Articulation: Components of financial statements are interconnected.
- Full disclosure: Sufficient details are provided, maintaining understandable information while minimizing costs.
Consistency, Matching, and Residual Equity
- Consistency concept: Financial statements are prepared using consistent accounting policies.
- Matching principle: Costs are recognized as expenses when related revenue is recognized.
- Residual equity theory: Applicable when multiple classes of shares are issued (ordinary and preferred).
Fund Theory
- Fund theory: Accounting objective is the custody and administration of funds, including the realization of funds.
- Realization: The process of converting non-cash assets into cash or cash equivalents.
- Prudence (conservatism): Estimates are made cautiously, avoiding overstating assets or understating liabilities/expenses.
Common Branches of Accounting
- Financial accounting: Focuses on general purpose financial statements.
- Management accounting: Focuses on special purpose financial reports for internal use.
- Cost accounting: Records costs of materials, labor, and overhead in production.
- Auditing: Evaluating the correspondence of assertions with established criteria.
- Tax accounting: Prepares tax returns and renders tax advice.
- Government accounting: Manages public funds, aiming at accountability and responsible management thereof.
Practice of Accounting
- Public accountancy: Audit or accounting services to multiple clients.
- Commerce and Industry: Private sector employment involving decision-making using accounting knowledge.
- Education and Academe: Teaching accounting, auditing, and related subjects.
- Government: Accounting roles in government and government-owned corporations.
Conceptual Framework for Financial Reporting
- Objective of General Purpose Financial Reporting: Provide useful financial information that assists existing and potential investors, lenders, and creditors in making decisions.
- Secondary Objective: To show management's stewardship.
- Qualitative Characteristics of Financial Statements:
- Relevance (predictive value, feedback value)
- Faithful representation (completeness, neutrality, freedom from error)
- Enhancing features (comparability, verifiability, timeliness, understandability).
Elements of Financial Statements
- Assets: Resources controlled by the entity for future economic benefits.
- Liabilities: Present obligations of the entity from past events.
- Equity: Residual interest in the assets of an entity after deducting liabilities.
- Income: Increases in economic benefits during a period, mainly revenues and gains.
- Expenses: Decreases in economic benefits over a period, primarily costs and losses.
PAS 1 Presentation of Financial Statements
- Contains the general basis for presentation of general purpose financial statements in order to enhance comparability and consistency.
PAS 2 Inventories
- Inventories are assets that are:
- Held for sale in the ordinary course of business.
- In the production process for such sale (Work In Process).
- Materials or supplies consumed in production or services (Raw Materials, etc.).
- Measurement of Inventories
- Lower of Cost or Net Realizable Value (NRV)
- Inventory Cost Formulas
- Specific identification
- FIFO
- Weighted-Average cost
Presentation of Deferred Taxes
- Deferred taxes are non-current items.
- Statement of profit or loss that presents income and expenses recognizes in a period.
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Description
This quiz covers the fundamental concepts introduced in Chapter 1 of accounting. Learn about the core activities of accounting, including identifying, measuring, and communicating economic information. Additionally, explore the distinctions between external and internal events in accounting.
