Conceptual Framework of Financial Reporting
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Questions and Answers

An entity's liability is defined as a duty that it has the practical ability to avoid.

False (B)

Equity is calculated by subtracting liabilities from assets.

True (A)

Income can result from a decrease in an entity's assets.

False (B)

The potential to produce economic benefits from a right must be certain to qualify as an existing right.

<p>False (B)</p> Signup and view all the answers

Expenses are defined as increases in liabilities that decrease equity.

<p>True (A)</p> Signup and view all the answers

The Conceptual Framework serves as a standard for financial reporting in the Philippines.

<p>False (B)</p> Signup and view all the answers

Primary users of general-purpose financial reporting do not need to consider factors outside the financial information provided.

<p>False (B)</p> Signup and view all the answers

In cases of conflict, the Conceptual Framework takes precedence over the Philippine Financial Reporting Standards (PFRS).

<p>False (B)</p> Signup and view all the answers

The Conceptual Framework assists preparers in the development of consistent accounting policies.

<p>True (A)</p> Signup and view all the answers

The hierarchy of reporting standards includes management judgment as the lowest level.

<p>False (B)</p> Signup and view all the answers

Financial information is defined as information that is expressed in monetary value.

<p>True (A)</p> Signup and view all the answers

The Conceptual Framework is intended to guide both standard-setters and users of financial information.

<p>True (A)</p> Signup and view all the answers

The objective of financial reporting is solely to assist in compliance with legal regulations.

<p>False (B)</p> Signup and view all the answers

The primary users of financial statements include only external parties such as existing and potential investors and lenders.

<p>True (A)</p> Signup and view all the answers

Liquidity refers to an entity's ability to meet its long-term financial commitments.

<p>False (B)</p> Signup and view all the answers

Faithful representation of financial information requires it to be complete, neutral, and free from error.

<p>True (A)</p> Signup and view all the answers

Assets are defined as present economic resources controlled by the entity as a result of future events.

<p>False (B)</p> Signup and view all the answers

Solvency is the ability to generate income from operations effectively.

<p>False (B)</p> Signup and view all the answers

Comparability and consistency are considered enhancing attributes of useful financial information.

<p>True (A)</p> Signup and view all the answers

Consolidated financial statements are required when a parent company has less than 50% ownership of its subsidiary.

<p>False (B)</p> Signup and view all the answers

Materiality is a characteristic that influences the decision-making process by providing predictive or confirmatory value.

<p>True (A)</p> Signup and view all the answers

Flashcards

Objective of Financial Reporting

To provide financial information useful to primary users (investors, creditors, etc.) in making decisions about resource provision.

Conceptual Framework

Underlying theory guiding financial statement preparation and interpretation; not a standard itself.

General Purpose Financial Reporting

Reporting to a broad range of users with common needs.

Accounting Policy Judgement

Management's decision-making in the absence of a specific standard, guided by the Framework.

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Hierarchy of Reporting Standards

Prioritization of PFRS, judgement, similar transactions, conceptual framework, and other sources when creating accounting policies.

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PFRS Standards

Philippine Financial Reporting Standards – the primary standards, taking precedence over the Conceptual Framework.

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Conflict Resolution

When a standard and the Conceptual Framework disagree, the standard takes precedence.

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Financial Information

Information expressed in monetary terms.

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What are the three aspects of a liability?

A liability is a present obligation to transfer an economic resource as a result of past events. It has three key aspects:

  1. Obligation: A duty the entity cannot practically avoid (legal or constructive).
  2. Transfer of an economic resource: The potential to require the transfer of an economic resource to another party.
  3. Past events: The obligation arises from past events.
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What is equity?

Equity is the residual interest in an entity's assets after deducting all its liabilities. It represents what remains for the owners of the entity after all debts are paid.

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What is income?

Income is an increase in assets or a decrease in liabilities that results in an increase in equity, other than contributions from owners.

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Control (Right)

Control means the entity has the exclusive right to the benefits of an asset and can prevent others from accessing those benefits.

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What are expenses?

Expenses are decreases in assets or increases in liabilities that result in a decrease in equity, other than distributions to owners.

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Reporting Entity

An economic entity (business or not-for-profit) that prepares financial statements. They can be a single entity or a group.

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Primary Users

Individuals or groups that rely on financial statements for decision-making. This includes investors, lenders, and creditors who provide resources to the entity.

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Profitability

Measures the entity's ability to generate income through effective and efficient use of its resources.

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Liquidity

The entity's ability to meet its short-term financial obligations as they become due.

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Solvency

The entity's ability to meet its long-term financial commitments as they become due.

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Relevance

Information is relevant if it influences a user's decision. It has predictive value and confirmatory value.

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Faithful Representation

Information is faithfully represented if it is complete, neutral, and free from error. It accurately reflects the underlying economic events.

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Comparability

Financial statements are comparable when users can identify similarities and differences between entities across time and across entities.

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Study Notes

Conceptual Framework of Financial Reporting

  • The framework assists the Philippine Accounting Standards Board (PASB) in developing consistent accounting standards based on consistent concepts.
  • It guides preparers in creating consistent accounting policies when no specific standard applies or when a standard allows choices.
  • It also helps all parties understand and interpret the accounting standards.

Scope

  • The scope is focused on general purpose financial reporting, which involves general-purpose financial statements.
  • The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is helpful for primary users (investors, lenders, and other creditors) in making resource allocation decisions.
  • Primary users are existing or potential investors, lenders, and other creditors, who provide resources to the entity. Other users include employees, customers, and governments.

Qualitative Characteristics of Useful Financial Information

  • Financial information is useful if it's both relevant and faithfully represented.
  • Relevance means that it has the capacity to influence decisions. Key components include materiality, predictive value, and confirmatory value.
  • Faithful representation ensures reliability. Characteristics include completeness, neutrality, and freedom from error.

Enhancing Qualitative Characteristics

  • Enhancements like comparability and consistency increase the usefulness of information across entities and time periods.
  • Understandability means the information is comprehensible.
  • Verifiability relates to the evidence available to confirm the measured values.
  • Timeliness describes the availability of information for decision-making.

Financial Statements and the Reporting Entity

  • A reporting entity is the entity that prepares financial statements; it isn't necessarily a legal entity. Single entities or groups (or combinations) of entities can be reporting entities.

Elements of Financial Statements

  • Assets, liabilities, equity, income, and expenses are elements in financial statements.
  • Income is increased in assets or decreased in liabilities, increasing equity (excluding contributions by owners)
  • Expenses are decreases in assets or increases in liabilities, decreasing equity (excluding distributions to owners)
  • Equity is the residual interest in the entity after deducting liabilities from assets.

Recognition and Derecognition

  • Recognition of an item occurs when it meets the definition of a financial statement element and provides useful information (e.g., relevant and faithfully represented)
  • Derecognition is the removal of a previously recognized item from the statement of financial position if its no longer relevant or faithfully represented.

Measurement Bases

  • Historical cost is the original cost plus transaction costs.
  • Current value approaches include fair value (market price), value in use, and current cost (cost to acquire an equivalent asset or incur an equivalent liability).

Presentation and Disclosure

Effective communication involves focusing on the presentation and disclosure objectives, categorizing items into similar groups, and avoiding excessive detail or summarization.

Classification and Aggregation

  • Financial information is classified to make information more useful.
  • Aggregation means adding similar items into larger groups.

Concepts of Capital and Capital Maintenance

  • Financial concept considers capital as invested money.
  • Physical concept views capital as productive capacity of an entity.

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Related Documents

The Conceptual Framework of Financial Reporting - Part 1 PDF

Description

This quiz covers the principles and scope of the Conceptual Framework of Financial Reporting as outlined by the Philippine Accounting Standards Board. It highlights the importance of consistent accounting standards and the qualitative characteristics that make financial information useful for primary users. Dive into the foundational concepts that guide financial reporting practices.

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