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FAR/AP > 03 Conceptual Framework for Financial Reporting > Flashcards

03 Conceptual Framework for Financial Reporting Flashcards

1
Q

What are the chapters of the Conceptual Framework?

A

Chapter 1 Objective of Financial Reporting
Chapter 2 Qualitative Characteristics
Chapter 3 The Financial Statements and The Reporting Entity
Chapter 4 Elements of Financial Statements
Chapter 5 Recognition and Derecognition
Chapter 6 Measurement
Chapter 7 Presentation and Disclosure
Chapter 8 Concepts of Capital and Capital Maintenance

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2
Q

Summary of general terms and concepts that underlie the preparation and presentation of general purpose FS

A

Conceptual Framework

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3
Q

What is the underlying theme of Conceptual Framework

A

decision-usefulness

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4
Q

What is the basic purpose of the Conceptual Framework?

A

guide in developing future PFRSs and guide in resolving accounting issues not directly addressed by existing PFRSs

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5
Q

What are the specific purposes of PFRS?

A

Assist:
IASB and FSRSC - in developing and reviewing accounting standards
Preparers of FS - in developing policies for transactions and events
FS users - in interpreting PFRS
Others - to know what IASB and FSRSC do

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6
Q

In case of conflict between PFRS and Conceptual Framework, which one will prevail?

A

PFRS

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7
Q

Assumptions or postulates on which the accounting process is based

A

Underlying assumptions

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8
Q

The only underlying assumption recognized by the Conceptual Framework

A

Going Concern Assumption

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9
Q

Assumes business operations will continue indefinitely in the absence of contradictory evidence

A

Going Concern Assumption / Continuity Assumption

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10
Q

Assumption supporting cost principle

A

Going Assumption

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11
Q

Examples of application of going concern assumption

A

Classification of current and non-current
Accruals and deferrals
Depreciation, amortization and depletion

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12
Q

Different kinds of periods in years in accounting

A

Calendar - year end December 31
Fiscal - year end is not December 31

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12
Q

Income is recognized when earned, not when collected
Expense is recognized when incurred, not when paid

A

Accrual Principle

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13
Q

Income is recognized when payment is collected

A

Cash basis of Accounting

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14
Q

Life of the entity is divided into series of reporting periods usually in years

A

Time Period Principle / Periodicity Concept

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15
Q

Assumes entity and its owners are two separate beings

A

Accounting Entity Concept

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16
Q

Who are the users of FS and their classification?

A
  1. Primary - existing and potential investors, lenders & other creditors
  2. Other - employees, customers, government, public
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16
Q

The Monetary Unit Principle assumes purchasing power of the peso is ________

A

constant

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17
Q

Assumes there is a common measurement basis for accounting information

A

Monetary Unit Principle

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18
Q

What is the purpose of Chapter 1?

A

foundation of Conceptual Framework

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19
Q

What are the concerns of the users of FS?

A

Investors - risk and return of investment
Lenders and other creditors - liquidity and solvency
Employee - stability and profitability
Customers - continuity
Government - regulatory
Public - various

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20
Q

What is the objective of general-purpose financial reporting?

A

Provide financial information about the reporting entity that is useful to primary users in making decisions relating to providing resources to the entity

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21
Q

What are the information needed by the primary users for their decision making?

A

> economic resources of the entity, claims against the entity and changes in those resources
how efficiently and effectively management uses resources

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22
Q

What are the limitations of financial reporting?

A

> do not and cannot provide all information needs of its users
not designed to show the value of an entity
based on estimate and judgment

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23
Q

Qualitative characteristics that represent the qualities of useful information in users’ decision making

A

Fundamental Qualitative Characteristics

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24
Q

What chapter focuses on qualities or attributes that make financial accounting information useful to the users?

A

Chapter 2 Qualitative Characteristics of Useful Information

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25
Q

What are the fundamental qualitative characteristics?

A

Relevant and faithful representation

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25
Q

Qualitative characteristics that address content or substance of information

A

Fundamental Qualitative Characteristics

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26
Q

How is relevance of information determined?

A

Predictive value - help increase likelihood of correctly predicting or forecasting outcome of events
Confirmatory value - enables confirmation or correction of earlier expectations

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27
Q

Ability of information to influence a decision made by users

A

Relevance

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28
Q

What is the relation of materiality and relevance?

A

All material items are relevant but not all relevant items are material.

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29
Q

Quality of information where omission, misstatement or obsurity could influence economic decisions made by users.

A

Materiality

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30
Q

What factors do you consider when determining materiality?

A

Relative size of the item in relation to total of the group it belongs
Nature of item

31
Q

Means information provides a true, correct and complete depiction of the econoomic phenomena it purports to present

A

Faithful representation

32
Q

What supports neutrality?

A

Prudence or conservatism

32
Q

How is faithful representation determined?

A

Completeness
Neutrality (free from bias)
Free from error

33
Q

Characteristics that enhance the usefulness of information

A

Enhancing Qualitative Characteristics

34
Q

Address the form or presentation of information

A

Enhancing Qualitative Characteristics

35
Q

What are the enhancing qualitative characteristics

A

Verifiability
Comparability
Understandability
Timeliness

36
Q

Means different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

A

Verifiability

37
Q

Enable users to identify and understand similarities in and differences among items

A

Comparability

38
Q

What is the relation between comparability and consistency?

A

Comparability is the goal while consistency is the means to achieve the goal

39
Q

Information must be comprehensible or intelligible if it is to be useful (though complex matters cannot be eliminated)

A

Understability

40
Q

Having information available to decision-makers in time

A

Timeliness

41
Q

What is the objective of general purpose FS?

A

Provide financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is useful in assessing:
1. prospects for future net cash inflows
2. management’s stewardship over economic resources

42
Q

Financial statements are prepared for a specified period of time called _________________.

A

Reporting period

43
Q

Financial statements should provide comparative information for _________________.

A

at least one preceding reporting period

43
Q

What are the elements of the FS?

A

Assets
Liabilities
Equity
Income
Expenses

44
Q

Types of FS

A
  1. Consolidated - parent and subsidiary
  2. Unconsolidated or individual - single entity
  3. Combined - two or more entites but not parent-subsidiary relationship
45
Q

Present economic resource controlled by an entity as a result of a past event

A

Asset

45
Q

Entity who must or chooses to prepare the FS and is not necessarily a legal entity.

A

Reporting Entity

46
Q

Refer to the quantitative information show in the SFP and SCI

A

Elements of Financial Statements

47
Q

Essential characteristics of an asset

A

Control
Result of a past transaction or event
Potential to produce economic benefits
Economic resource is a right

48
Q

Present obligation of an entity to transfer an economic resource as a result of past events

A

Liability

49
Q

Essential characteristics of a liability

A

Present obligation of a particular entity
Obligation is to transfer an economic resource (except settlement of liability through distribution of shares of stocks)
Result of past event

50
Q

Event leading to a legal obligation or constructive obligation

A

Obligating event

51
Q

What are the two classification of comprehensive income?

A

Profit or loss
Other comprehensive income

51
Q

Increases in assets or decreases in liabilities resulting to increases in equity other than those relating to contributions from holders of equity claims

A

Income

51
Q

Residual interest in assets of the entity after deducting all its liabilities

A

Equity

52
Q

Differentiate the two types of income

A

Revenue - ordinary course of business, at gross amount
Gains - incidental or peripheral operations, at net amount

53
Q

What are items of OCI?

A

UGL - FVOCI
Gain/loss from translation of foreign operation FS
Revaluation surplus
UGL from derivatives designated as CF hedge
Defined benefit plan remeasurements

54
Q

Decreases in assets or increases in liabilities resulting to decreases in equity other than those relating to distributions to holders of equity claims

A

Expenses

55
Q

Differentiate the two types of expense

A

Expense - ordinary course of business, at gross amount
Losses - incidental or peripheral operations, at net amount

56
Q

Process of reporting an asset, liability, income or expense on the face of the FS

A

Recognition

57
Q

What are the recognition criteria?

A

> meets definition of asset, liability, equity or expense
recognition would provide useful information

58
Q

Expenses are incurred in conformity with the 3 applications of the matching principle, namely:

A
  1. cause and effect association or strict matching - expenses are strictly recognized only when there is recognition of income
  2. systematic and rational allocation
  3. immediate recognition
58
Q

When does recognition of an item not provide useful information?

A

> uncertain whether asset or liability exists
probability of inflow or outflow is low

59
Q

Simultaneous recognition of both income and related expenses

A

Matching principle

60
Q

Removal of previously recognized asset or liability from SFP

A

Derecognition

61
Q

When does derecognition occur?

A

Item no longer meets definition of an asset or liability

62
Q

Process of determining monetary amounts at which elements of FS are to be recognized and carried in the SFP and income statement

A

Measurement

63
Q

What are the various measurement bases?

A

historical cost - transaction price at time of recognition
current value - updated to reflect conditions at measurement date

64
Q

What is the historical cost of an asset and liability?

A

Asset - consideration paid plus transaction costs
Liability - consideration received less transaction costs

65
Q

What are the types of updated value?

A

FV - price to be received to sell an asset or paid to transfer a liability between market participants today
Value in use - PV of cash flows an entity expects to derive from use of an asset and from its ultimate disposal
Fulfilment value - PV of cash flows expecrs to be obliged to transfer as it fulfills a liability
Current cost - consideration that would be paid/received at measurement date plus/minus transaction costs of an asset/liability

65
Q

Information about assets, liabilities, equity, income and expenses is communicated through _______________________.

A

Presentation and disclosure in FS

66
Q

Differentiate FV and current cost

A

FV - exit price
Current cost - entry price

67
Q

Effective communication requires:

A

> focus on presentation and disclosure objectives and principles, not rules
classifying info by similarity
no obscurities due to excessive detail/summarization

68
Q

Differentiate classification and aggregation.

A

Classification - sorting elements with similar nature, function, and measurement basis
Aggregation - adding elements with same characteristics under the same classification

68
Q

Capital Maintenance Approach

A

Net income occurs only after capital used from beginning of the period is maintained.

69
Q

Differentiate the two types of capital

A

Financial capital - invested money, based on historical cost and is adopted by most entities
Physical capital - productive capacity, based on current cost and is not adopted by most entities

70
Q

How do you compute net income using Capital Maintenance Approach?

A

Net changes in equity
Less: Additional investment by owners
Add: Withdrawals and distributions to owners
Less: OCI
Add: OCL
= Net Income

FAR/AP (7 decks)

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