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Questions and Answers
An entity's liability is defined as a duty that it has the practical ability to avoid.
An entity's liability is defined as a duty that it has the practical ability to avoid.
False
Equity is calculated by subtracting liabilities from assets.
Equity is calculated by subtracting liabilities from assets.
True
Income can result from a decrease in an entity's assets.
Income can result from a decrease in an entity's assets.
False
The potential to produce economic benefits from a right must be certain to qualify as an existing right.
The potential to produce economic benefits from a right must be certain to qualify as an existing right.
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Expenses are defined as increases in liabilities that decrease equity.
Expenses are defined as increases in liabilities that decrease equity.
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The Conceptual Framework serves as a standard for financial reporting in the Philippines.
The Conceptual Framework serves as a standard for financial reporting in the Philippines.
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Primary users of general-purpose financial reporting do not need to consider factors outside the financial information provided.
Primary users of general-purpose financial reporting do not need to consider factors outside the financial information provided.
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In cases of conflict, the Conceptual Framework takes precedence over the Philippine Financial Reporting Standards (PFRS).
In cases of conflict, the Conceptual Framework takes precedence over the Philippine Financial Reporting Standards (PFRS).
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The Conceptual Framework assists preparers in the development of consistent accounting policies.
The Conceptual Framework assists preparers in the development of consistent accounting policies.
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The hierarchy of reporting standards includes management judgment as the lowest level.
The hierarchy of reporting standards includes management judgment as the lowest level.
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Financial information is defined as information that is expressed in monetary value.
Financial information is defined as information that is expressed in monetary value.
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The Conceptual Framework is intended to guide both standard-setters and users of financial information.
The Conceptual Framework is intended to guide both standard-setters and users of financial information.
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The objective of financial reporting is solely to assist in compliance with legal regulations.
The objective of financial reporting is solely to assist in compliance with legal regulations.
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The primary users of financial statements include only external parties such as existing and potential investors and lenders.
The primary users of financial statements include only external parties such as existing and potential investors and lenders.
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Liquidity refers to an entity's ability to meet its long-term financial commitments.
Liquidity refers to an entity's ability to meet its long-term financial commitments.
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Faithful representation of financial information requires it to be complete, neutral, and free from error.
Faithful representation of financial information requires it to be complete, neutral, and free from error.
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Assets are defined as present economic resources controlled by the entity as a result of future events.
Assets are defined as present economic resources controlled by the entity as a result of future events.
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Solvency is the ability to generate income from operations effectively.
Solvency is the ability to generate income from operations effectively.
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Comparability and consistency are considered enhancing attributes of useful financial information.
Comparability and consistency are considered enhancing attributes of useful financial information.
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Consolidated financial statements are required when a parent company has less than 50% ownership of its subsidiary.
Consolidated financial statements are required when a parent company has less than 50% ownership of its subsidiary.
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Materiality is a characteristic that influences the decision-making process by providing predictive or confirmatory value.
Materiality is a characteristic that influences the decision-making process by providing predictive or confirmatory value.
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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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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.
