Chapter 1 The Accountancy Profession

 The MOST COMMON financial attribute used in measuring financial information is

HISTORICAL COST.
 BOARD OF ACCOUNTANCY is the body authorized by law to PROMULGATE RULES
and REGULATIONS affecting the practice of the accountancy profession in the
Philippines.
 The law regulating the practice of Accountancy in the Philippines is R.A. No. 9228.
 The singularly UNIQUE function performed by independent CPAs is the ATTEST
FUNCTION.
 An ATTEST FUNCTION is a CPA's REVIEW of a company's financial statement. After
a comprehensive review, a CPA delivers an opinion on the integrity of the numbers
in the statement. A company may also seek a review or a partial examination.
 A 65-YEAR OLD CPA is PERMANENTLY EXEMPTED from the CPD requirement for
FINANCIAL ACCOUNTING AND REPORTING the renewal of CPA license.
 The FINANCIAL REPORTING STANDARDS COUNCIL (FRSC) is created by PRC upon
NOTES recommendation of BOA to ASSIST BOA in carrying out its powers and functions
under R.A. No. 9298.
 The FRSC shall be composed of 15 with a chairman and 14 representatives.
 The chairman and members of FRSC are appointed by PRC upon recommendation
of BOA and shall have a term of THREE YEARS RENEWABLE FOR ANOTHER TERM.
 International Financial Reporting Standards (IFRS) is a GLOBAL PHENOMENON
intended to bring about TRANSPARENCY and a HIGHER DEGREE IN
COMPARABILITY in financial reporting in order to achieve the goal of ONE
UNIFORM and GLOBALLY ACCEPTED financial reporting standards.
 The INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) was formed to
develop a SINGLE SET OF HIGH QUALITY IFRS.
 The IASB publishes standards called INTERNATIONAL FINANCIAL REPORTING
STANDARDS.
 FINANCIAL ACCOUNTING is concerned with GENERAL PURPOSE reports on
Valix financial position and financial performance.
 FINANCIAL ACCOUNTING is the area of accounting that emphasizes reporting to Chapter 2 Conceptual Framework: Financial Reporting and Assumptions
CREDITORS and INVESTORS.
 The CONCEPTUAL FRAMEWORK is an attempt to provide an overall THEORETICAL
 MANAGERIAL ACCOUNTING is the area of accounting that emphasizes developing
FOUNDATION for accounting which will guide standard-setters, preparers and
accounting information for use WITHIN THE ENTITY.
users of financial information in the preparation and presentation of statements.
 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) derive their credibility
 SPECIAL PURPOSE FIANNCIAL REPORTS are OUTSIDE the scope of the Conceptual
and authority from general recognition and acceptance by the accountancy
Framework.
profession.
 In the ABSENCE of a STANDARD or an interpretation that specifically applies to a
 FINANCIAL ACCOUNTING STANDARD SETTING can be described as a social process
transaction, management shall consider the APPLICABILITY of the Conceptual
which reflects political actions of various interested user groups as well as a
Framework in developing and applying an accounting policy that results in
product of research and logic.
information that is RELEVANT and RELIABLE.
 The Conceptual Framework is NOT a Philippine Financial Reporting Standard.
 The Conceptual Framework DOES NOT DEFINE standard for any particular
measurement or disclosure issue.
 In case where there is a CONFLICT, the requirements of the PFRS shall PREVAIL
over the Conceptual Framework. PFRS > CF
 FINANCIAL POSITION comprises the ASSETS, LIABILITIES and EQUITY of an entity at
a particular moment in time.
 LIQUIDITY is the AVAILABILITY OF CASH in the NEAR FUTURE to cover currently
maturing obligations.
 SOLVENCY is the AVAILABILITY OF CASH over a LONG TERM to meet financial
commitments when they fall due.
 FINANCIAL PERFORMANCE is the LEVEL OF INCOME earned by the entity through
the efficient and effective use of its resources. It is also known as RESULTS OF
OPERATIONS and is portrayed in the INCOME STATEMENT and STATEMENT OF
COMPREHENSIVE INCOME.
 Under the ACCRUAL BASIS, the effects of transactions and other events are
recognized WHEN THEY OCCUR and NOT as cash is received or paid.
 ACCRUAL ACCOUNTING means that INCOME IS RECOGNIZED WHEN EARNED
regardless of when received and EXPENSE IS RECOGNIZED WHEN INCURRED
regardless of when paid.
 ACCOUNTING ASSUMPTIONS (POSTULATES) are the BASIC NOTIONS or Chapter 3 Conceptual Framework: Qualitative Characteristics
FUNDAMENTAL PREMISES on which the accounting process is based.
 QUALITATIVE CHARACTERISTICS are the qualities or attributes that make financial
 GOING CONCERN or CONTINUITY ASSUMPTION means that in the absence of
accounting information USEFUL to the users.
evidence to the contrary, the accounting entity is viewed as CONTINUING IN
OPERATION INDEFINITELY. It is the very foundation of the COST PRINCIPLE.  Information must be BOTH RELEVANT and FAITHFULLY REPRESENTED if it is to be
USEFUL.
 Assets are normally recorded at COST. As a rule, MARKET VALUES are IGNORED.
 The fundamental qualitative characteristics are RELEVANCE and FAITHFUL
 Under the ACCOUNTING ENTITY, the entity is SEPARATE from the owners,
REPRESENTATION.
managers, and employees who constitute the entity. Accordingly, the transactions
 RELEVANCE is the CAPACITY of the information to INFLUENCE a decision.
of the entity shall NOT BE MERGED with the transactions of the owners. The
reason for this is to have a FAIR PRESENTATION of financial statements.  Financial information is capable of making a difference in a decision if it has
 Where parent and subsidiary relationship exists, CONSOLIDATED STATEMENTS for predictive value and confirmatory value. They are the ingredients of relevance.
o Financial information has PREDICTIVE VALUE if it can be used as an input
the affiliates are usually made because for practical and economic purposes, the
parent and subsidiary are a “single economic entity”. However, this does NOT to processes employed by users to predict FUTURE OUTCOME.
ELIMINATE the legal boundary segregating the affiliated entities. o Financial information has CONFIRMATORY VALUE if it provides feedback
 The TIME PERIOD ASSUMPTION requires that “indefinite life of an entity is about PREVIOUS EVALUATIONS.
subdivided into accounting periods which are usually of EQUAL length for the  Information that does NOT bear on an economic decision is USELESS.
purpose of preparing financial reports on financial position, performance and cash  MATERIALITY is a practical rule in accounting which dictates that strict adherence
flows“. to GAAP is NOT REQUIRED when the items are NOT SIGNIFICANT ENOUGH to
 A CALENDAR YEAR is a twelve-month period that ENDS ON DECEMBER 31. affect the evaluation, decision and fairness of the financial statements.
 A NATURAL BUSINESS YEAR is a twelve-month period that ENDS ON ANY MONTH  The materiality concept is also known as the DOCTRINE OF CONVENIENCE.
when the business is at the lowest or experiencing slack season.  The RELEVANCE of information is affected by its NATURE and MATERIALITY.
 The MONETARY UNIT ASSUMPTON has two aspects:  An item is MATERIAL if KNOWLEDGE of it would AFFECT or INFLUENCE the decision
o The QUANTIFIABILITY ASPECT means that the assets, liabilities, equity, of the informed users of the financial statements.
income and expenses should be stated in terms of a unit of measure which  FAITHFUL REPRESENTATION means that the ACTUAL EFFECTS of the transactions
is the PESO in the Philippines. shall be PROPERLY ACCOUNTED FOR and REPORTED in the financial statements.
o The STABILITY OF THE PESO ASSUMPTION or STABLE PESO POSTULATE  To be a perfectly faithful representation, a depiction should have three
means that the purchasing power of the peso is STABLE or CONSTANT and characteristics, namely:
that its INSTABILITY is INSIGNIFICANT and therefore may be IGNORED. o COMPLETENESS requires that relevant information should be presented in
 The accounting function is to account for NOMINAL PESOS ONLY and NOT for a way that facilitates understanding and avoids erroneous implication. It
constant pesos or changes in purchasing power. must include all information necessary for a user to understand the
 The accrual basis of accounting is MOST USEFUL for predicting the LONG-TERM phenomenon being depicted.
financial performance.
  STANDARD OF ADEQUATE DISCLOSURE is best described by o TIMELINESS means that financial information must be AVAILABLE or
disclosure of any financial facts SIGNIFICANT enough to INFLUENCE COMMUNICATED EARLY ENOUGH when a decision is to be made.
the judgment of informed users. o VERIFIABILITY means that different knowledgeable and independent
o NEUTRALITY encompasses information that is FREE FROM BIAS. observers could reach CONCENSUS. Information is supported by
o FREE FROM ERROR means there are NO ERRORS or OMISSIONS in the EVIDENCE.
description of the phenomenon or transaction, and the process used to  It is inappropriate for an entity to leave accounting policies unchanged when
produce the reported information has been selected and applied with NO better and acceptable alternative exists.
ERRORS in the process.  Generally, the OLDER the information, the LESS USEFUL.
 It is necessary that the transactions and events are accounted in accordance with  The BENEFIT DERIVED should EXCEED the COST INCURRED in obtaining the
their SUBSTANCE and REALITY and NOT merely their legal form. information.
 Most often, a conservative or prudent approach is SUBJECTIVE and may contain an
element of bias.
 CONSERVATISM means “in case of doubt, record any LOSS and do NOT record any
GAIN”.
 CONTINGENT LOSS is recognized as a PROVISION if the loss is PROBABLE and the
amount can be RELIABLY MEASURED.
 CONTINGENT GAIN is NOT RECOGNIZED but disclosed only.
 CONSERVATISM is NOT a license to DELIBERATELY understate net income and net
assets.
 Prudence is synonymous with conservatism. It is the desire to EXERCISE CARE and
CAUTION when dealing with the UNCERTAINTIES in the measurement process such
that assets or income are NOT OVERSTATED and liabilities or expenses are NOT
UNDERSTATED.
 The ENHANCING QUALITATIVE CHARACTERISTICS are intended to INCREASE the
USEFULNESS of the financial information that is relevant and faithfully
represented.
 The enhancing qualitative characteristics are: (CUTV)
o COMPARABILITY means the ability to BRING TOGETHER for the purpose of
noting points of likeness and difference. It enables users to identify and
understand SIMILARITIES and DISSIMILARITIES among items.
o UNDERSTANDABILITY requires that financial information must be
COMPREHENSIBLE or INTELLIGIBLE if it is to be most useful.
Chapter 4 Conceptual Framework: Elements of Financial Statements Chapter 7 Cash and Cash Equivalents

Chapter 5 Statement of Financial Position: An introduction  EQUITY SECURITIES CANNOT QUALIFY as cash and cash equivalents because shares
do NOT have a maturity date.
Chapter 6 Statement of Comprehensive Income: An introduction
 PREFERENCE SHARES with specified redemption date and acquired 3 months
before redemption date can qualify as cash equivalents.
 Cash is measured at FACE VALUE.
 Cash in foreign currency is measured at the CURRENT EXCAHNGE RATE.
 If a bank or financial institution holding the funds of an entity is in bankruptcy or
financial difficulty, cash should be written down to ESTIMATED REALIZABLE VALUE
if the amount recoverable is estimated to be lower than the face value.
 The classification of a cash fund as current or noncurrent should parallel the
CLASSIFICATION OF THE RELATED LIABILITY.
 A bank overdraft is classified as a CURRENT LIABILITY and should NOT BE OFFEST
against other bank accounts with debit balances. However, there are EXCEPTIONS.
o If an entity maintains two or more accounts in ONE BANK and one account
results in an overdraft, such overdraft can be OFFSET against the other
bank account with a debit balance in order to show “cash, net of bank
overdraft” or “bank overdraft, net of other bank account.”
o An overdraft can also be offset against the other bank account if the
AMOUNT is NOT MATERIAL.
 It is to be stated that generally overdrafts are NOT PERMITTED in the Philippines.
 Classification of compensating balance

Not legally restricted Legally restricted

Part of cash If the related loan is short If the related loan is long
term: term:
Classified as “cash held as Classified as noncurrent
compensating balance” investment

 In banking practice, a check becomes stale if NOT encashed WITHIN 6 MONTHS

from the time of issuance.
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