Accounting Overview Chapter 1
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Questions and Answers

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?

  • Analyzing, Evaluating, Reporting
  • Planning, Organizing, Controlling
  • Identifying, Measuring, Communicating (correct)
  • Recording, Classifying, Summarizing
  • Only accountable events are recognized in accounting.

    True

    Measuring in accounting involves assigning numbers, always in monetary terms, to economic transactions and events.

    <p>True</p> Signup and view all the answers

    What does communicating involve in accounting?

    <p>Communicating transforms economic data into useful accounting information, such as financial statements and other accounting reports, for dissemination to users.</p> Signup and view all the answers

    What are the three components of the basic accounting equation?

    <p>The three components are: Assets, Liabilities, and Stockholders' Equity.</p> Signup and view all the answers

    Which of the following is NOT an example of an external event in accounting?

    <p>A company's employees receive salaries.</p> Signup and view all the answers

    An unanticipated loss from natural disasters is considered an internal event in accounting.

    <p>False</p> Signup and view all the answers

    Which of the following is NOT a measurement basis used in accounting?

    <p>Market Value</p> Signup and view all the answers

    The most commonly used measurement basis in accounting is historical cost.

    <p>True</p> Signup and view all the answers

    Who are considered external users of accounting information?

    <p>All of the above</p> Signup and view all the answers

    General purpose accounting information is designed to meet the common needs of most statement users.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a common type of special purpose accounting information?

    <p>Financial Accounting</p> Signup and view all the answers

    Going concern assumption means that the entity is expected to operate for an indefinite period of time.

    <p>True</p> Signup and view all the answers

    The separate entity assumption states that the entity is treated separately from its owners.

    <p>True</p> Signup and view all the answers

    Changes in purchasing power are recognized in accounting under the stable monetary unit concept.

    <p>False</p> Signup and view all the answers

    The time period concept divides the business life into a series of reporting periods.

    <p>True</p> Signup and view all the answers

    Information is considered material if its omission or misstatement could influence economic decisions.

    <p>True</p> Signup and view all the answers

    The cost-benefit concept states that the costs of communicating information should outweigh its benefits.

    <p>False</p> Signup and view all the answers

    The accrual basis of accounting recognizes transactions when cash is received or paid.

    <p>False</p> Signup and view all the answers

    The historical cost concept values assets based on their estimated market value.

    <p>False</p> Signup and view all the answers

    The concept of articulation states that all components of financial statements are interconnected.

    <p>True</p> Signup and view all the answers

    The full disclosure principle requires companies to provide sufficient detail to users, while avoiding unnecessary complexity.

    <p>True</p> Signup and view all the answers

    The consistency concept requires accounting policies to be applied consistently from one period to the next.

    <p>True</p> Signup and view all the answers

    The matching concept recognizes expenses when the related revenue is recognized.

    <p>True</p> Signup and view all the answers

    The residual equity theory is applicable only when there is one class of shares issued.

    <p>False</p> Signup and view all the answers

    The fund theory of accounting focuses on the custody and administration of funds.

    <p>True</p> Signup and view all the answers

    Realization in accounting focuses on the process of converting non-cash assets into cash or claims for cash.

    <p>True</p> Signup and view all the answers

    The prudence (conservatism) concept encourages companies to overstate assets and income.

    <p>False</p> Signup and view all the answers

    Which of the following branches of accounting focuses on special purpose financial reports for use by an entity's management?

    <p>Management Accounting</p> Signup and view all the answers

    Which of the following branches of accounting deals with the systematic recording and analysis of costs associated with production?

    <p>Cost Accounting</p> Signup and view all the answers

    Which of the following branches of accounting focuses on evaluating the accuracy and reliability of financial records?

    <p>Auditing</p> Signup and view all the answers

    Which of the following branches of accounting involves the preparation of tax returns and rendering of tax advice?

    <p>Tax Accounting</p> Signup and view all the answers

    Which of the following branches of accounting focuses on the financial management of government entities and public funds?

    <p>Government Accounting</p> Signup and view all the answers

    The practice of public accountancy typically involves providing accounting services to one specific client on a fee basis.

    <p>False</p> Signup and view all the answers

    The practice of accounting in commerce and industry usually requires the accountant to be a certified public accountant (CPA).

    <p>True</p> Signup and view all the answers

    The practice of accounting in education typically involves teaching subjects like accounting, finance, and business law.

    <p>True</p> Signup and view all the answers

    The practice of accounting in the government typically requires a civil service eligibility as a CPA.

    <p>True</p> Signup and view all the answers

    The conceptual framework for financial reporting provides guidance on how to prepare and present financial statements for external users.

    <p>True</p> Signup and view all the answers

    A secondary objective of general-purpose financial reporting is to show the results of the stewardship of the management.

    <p>True</p> Signup and view all the answers

    Who are considered primary users of general-purpose financial reports?

    <p>All of the above</p> Signup and view all the answers

    The common needs of all primary users are met by the financial statements.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a qualitative characteristic of financial statements?

    <p>Objectivity</p> Signup and view all the answers

    Materiality is an entity-specific aspect of relevance.

    <p>True</p> Signup and view all the answers

    The faithful representation characteristic requires accounting information to be free from error.

    <p>True</p> Signup and view all the answers

    Verifiability ensures that financial statements can be independently checked and confirmed.

    <p>True</p> Signup and view all the answers

    Timeliness refers to providing information in a timely manner, aiding users in making informed decisions.

    <p>True</p> Signup and view all the answers

    Study Notes

    Chapter 1: Overview of Accounting

    • Accounting is the process of identifying, measuring, and communicating economic information to support informed decisions by users.
    • Three key activities in accounting are:
      • Identifying: Determining events and transactions that are relevant and need to be recognized. Only accountable events are considered.
      • Measuring: Assigning numerical values, usually monetary, to economic events and transactions.
      • Communicating: Transforming economic data into useful accounting information like financial statements for users.

    The Basic Accounting Equation

    • Assets = Liabilities + Stockholders' Equity
      • Assets: Economic resources owned by a business.
      • Liabilities: Financial obligations or debts of the business.
      • Stockholders' Equity: Owners' claims on the assets of the business.

    Types of Events

    • External Events: Involve an external party.

      • Exchange Events: Reciprocal giving and receiving.
      • Non-reciprocal Transfer: One-way transaction.
      • Other External Events: Changes in resources or obligations caused 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 or similar events.

    Measurement

    • Several ways to measure, including but not limited to:
      • Historical cost
      • Fair value
      • Present value
      • Current cost
      • Inflation-adjusted costs
    • Historical cost is the most common method.

    Users of Accounting Information

    • External Users:

      • Lenders
      • Investors
      • Consumer Groups
      • External Auditors
      • Governments
      • Customers
    • Internal Users:

      • Managers
      • Officers
      • Sales Staff
      • Employees
      • Internal Auditors
      • Owners
    • General Purpose Accounting Information: Meets the common needs of various users, governed by Philippine Financial Reporting Standards (PFRSs).

    • Special Purpose Accounting Information: Meant to meet the needs of specific users. Examples include managerial, tax-basis, and others.

    Concepts in Accounting

    • Double-Entry System: Each accountable event is recorded in two parts (debit and credit).
    • Going Concern: Businesses are assumed to operate indefinitely.
    • Separate Entity: The business is treated independently from its owners.
    • Stable Monetary Unit: Financial statements use a common unit of measure (e.g., peso), ignoring changes in purchasing power.
    • Time Period: Business life is divided into reporting periods.
    • Materiality: An event is material if its omission or misstatement could influence economic decisions.
    • Cost-Benefit: The cost of processing and communicating information should not exceed its benefits.
    • Accrual Basis: Accounting recognizes the effect of transactions when they occur, rather than when cash is exchanged.
    • Historical Cost: The value of an asset is determined by its acquisition cost.
    • Articulation: Components of financial statements are interrelated.
    • Full Disclosure: Financial statements provide sufficient detail for users while remaining understandable.
    • Consistency: Accounting policies and methods are applied consistently.
    • Matching: Costs are recognized as expenses when the related revenue is recognized..
    • Residual Equity Theory: Used when there are multiple stock classes (ordinary and preferred).
    • Fund Theory: Focuses on the custody and administration of funds.
    • Realization: The process of converting non-cash assets to cash.
    • Prudence/Conservatism: Includes a degree of caution when making estimates in uncertain situations.
    • Common Branches of Accounting:
      • Cost accounting
      • Financial accounting
      • Management accounting
      • Auditing
      • Tax accounting
      • Government accounting
      • Social accounting
      • Inflation accounting

    Other Accounting Concepts

    • Four sectors/practices in accountancy: public accountancy, commerce/industry, academe, and government.

    • Conceptual Framework for Financial Reporting: Provides the underlying concepts for financial statement preparation. The objective is to provide information useful to investors, lenders and creditors in making decisions regarding resources provided to the entity. A secondary objective is to show results of the stewardship of management.

    • Qualitative Characteristics: Relevance (predictive value and feedback value, especially materiality), and faithful representation (completeness, neutrality, free from error). Other enhancing characteristics: comparability, verifiability, timeliness, and understandability.

    • Elements of Financial Statements:

      • Financial Position:
        • Assets: Economic resources with future benefits.
        • Liabilities: Obligations to transfer resources.
        • Equity: Assets minus Liabilities
      • Performance:
        • Income: Revenues generated and gains realized.
        • Expenses: Costs and losses incurred
    • PAS 1: Presentation of Financial Statements Sets the basis for presenting a general-purpose financial statement, with a goal to improve comparability between and within entities.

    • Complete Set of Financial Statements: Includes statement of profit or loss and comprehensive income, statements of changes in equity, statement of cash flows, notes, and disclosures.

    • General Features: including Fair Presentation and Compliance with PFRS, Going Concern, Accrual Basis of Accounting, Materiality, and Aggregation.

    • Various accounting methods like the nature of expense method, and presentation of deferred tax.

    • PAS 2 Inventories: Inventories are measured at the lower of cost and net realizable value. Cost formulas include specific identification, FIFO, and weighted average. Inventories are presented as a line item on the statement of financial position.

    • Classification of Assets and Liabilities: Current assets are expected to be realized or used up in one operating cycle, while non-current assets are not. The same is true for liabilities.

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    Description

    This quiz covers the foundational concepts of accounting as outlined in Chapter 1. Learn about the processes of identifying, measuring, and communicating economic information, as well as the basic accounting equation. Understand the different types of economic events and their roles in accounting.

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