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Questions and Answers
What is the primary purpose of International Financial Reporting Standards (IFRS)?
Which authority prescribes the financial reporting framework in the Philippines?
What is a core benefit of adhering to Generally Accepted Accounting Principles (GAAP)?
Which principle ensures that revenues are recognized when earned regardless of when cash is received?
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What does the Philippine Financial Reporting Standard for Small and Medium-Sized Entities (PFRS for SMEs) primarily address?
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What is the primary purpose of the Going Concern Principle in accounting?
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Which of the following best describes the Accrual Principle?
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How does the Consistency Principle enhance financial reporting?
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What does the Historical Cost Principle aim to achieve in financial reporting?
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Which statement best captures the essence of the Conservatism Principle?
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Study Notes
Accounting Principles
- Rules and guidelines for financial data reporting.
- IFRS: International Financial Reporting Standards; issued by the IASB for consistency and comparability in financial statements globally.
- GAAP: Generally Accepted Accounting Principles; U.S. standards for financial reporting.
Philippine Financial Reporting Frameworks
- PFRSs: Philippine Financial Reporting Standards for general entities.
- PFRS for SMEs: Tailored framework for small and medium-sized entities.
- PFRS for SEs: Designed for small entities.
- SEC Authority: The Securities and Exchange Commission regulates the financial reporting framework under the Revised SRC Rule 68.
Core Principles of GAAP
- Ensures financial information consistency across entities.
- Key concepts include revenue recognition, matching principle, and full disclosure.
- Guarantees that income and expenses are matched accurately.
Basic Accounting Principles
- Establishes a reliable framework for financial reporting, promoting transparency and preventing fraud.
Going Concern Principle
- Assumes continuous business operations, allowing for proper asset depreciation and expense recognition.
Accrual Principle
- Recognizes income and expenses at the time they occur rather than when cash is exchanged, presenting a true profitability picture.
Consistency Principle
- Requires the same accounting methods across periods for reliable financial analysis.
Historical Cost Principle
- Assets are recorded at original purchase price, ensuring objectivity and stability in reporting.
Materiality Principle
- Mandates the reporting of significant financial events that influence decision-making.
Conservatism Principle
- Advocates for cautious financial reporting, recognizing expenses immediately while deferring revenue to avoid overestimating financial health.
Accounting vs. Bookkeeping
- Bookkeeping: Involves recording routine transactions like sales and expenses.
- Accounting: Analyzes bookkeeping data to provide a comprehensive financial view.
Importance of Accounting Standards
- Applying GAAP, IFRS, and PFRS is crucial for accurate and transparent financial reporting, aiding compliance and efficient financial management.
Assets and Liabilities
- Balance Sheet: Statement reflecting the financial position; follows the equation: Assets = Capital (Equity) + Liabilities.
Assets
- Resources owned by the business, including cash, equipment, inventory, and accounts receivable.
- Can be tangible (buildings, machinery) or intangible (patents, accounts receivable).
Liabilities
- Amounts owed by the business such as loans, accounts payable, and unpaid expenses.
- Classified as current (expected to be settled within 12 months) or non-current (long-term obligations).
Business Considerations
- Liabilities are not inherently negative; they can facilitate expansion or purchases (e.g., mortgages).
- Current liabilities include payroll and accounts payable, while a mortgage is an example of non-current liability.
Capital (Equity)
- Represents the owner’s investment in the business, reflecting the net value of the entity.
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Description
This quiz covers fundamental accounting principles, focusing on the rules and guidelines necessary for reporting financial data. It includes insights on International Financial Reporting Standards (IFRS) aimed at ensuring consistency and transparency in financial statements. Prepare to enhance your understanding of essential accounting practices.
