[FUNACC] (P2) Chapter 2 | Accounting Principles and Reporting Standards

Decision-makers

_____ need information. The more important the decision is, the greater is the need for reliable information.

• Investors

They need information to help them determine whether they should buy, hold or sell;

Individuals and Financial Institutions Who Invest Money in the Business as Owners, Not Creditors; the Business Has to Earn Profit on Their Capital Invested in the Venture (Sources of Equity Capital)

• Employees

They are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.

Who Are Paid Wages and Salaries and Provided Other Benefits

• Lenders

They are interested in information that enables them to determine whether their loans and the related interest will be paid when due.

Banks and Other Financial Institutions Who Lend Money to the Business on Which Interest Is Paid (Source of Debt Capital)

• Suppliers and other trade creditors

They are interested in information that enables them to determine whether amounts owing to them will be paid when due.

• Customers

They have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise.

• Government and their agencies

They are interested in the allocation of resources and, therefore, the activities of the enterprises. They also require information in order to regulate the activities of the enterprises, determine taxation policies and as the basis for national income and similar statistics.

That Regulate and Collect Taxes from the Business

Public.

Enterprises affect members of the ____ in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the ____ by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.

Entity Concept.

The most basic concept in accounting. Simply put, the transactions of different entities should not be accounted for together. Each entity should be evaluated separately.

accounting entity

is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit.

Periodicity Concept.

This concept allows the users to obtain timely information to serve as a basis on making decisions about future activities. For the purpose of reporting to outsiders, one year is the usual accounting period.

Stable Monetary Unit Concept

This is the basis for ignoring the effects of inflation in the accounting records.

The Philippine peso

Stable Monetary Unit Concept. ___________ is a reasonable unit of measure and that its purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as though each peso has the same purchasing power as any other peso at any time.

rule-making bodies (ex. ASC/IASC and FRSC/IASB)

have developed standards on the basis of logic or deductive reasoning because no clearly defined practices were being used to account for certain types of transaction or events.

relevance, objectivity and feasibility.

The general acceptance of an accounting principle usually depends on how well it meets three criteria: (3)

relevance

A principle has ______ to the extent that it results in information that is meaningful and useful to those who need to know something about a certain organization.

objectivity

A principle has ______ to the extent that the resulting information is not influenced by the personal bias or judgment of those who furnish it. ______ connotes reliability and trustworthiness.

verifiability,

which means that there is some way of finding out whether the information is correct.

feasibility

A principle has ______ to the extent that it can be implemented without undue complexity or cost.

generally accepted accounting principles.

Accounting practices follow certain guidelines. The set of guidelines and procedures that constitute acceptable accounting practice at a given time is GAAP, which stands for _______.

Objectivity Principle.

are based on information that flows from activities documented by objective evidence. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes.

Historical Cost.

This principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at reporting date.

Revenue Recognition Principle.

Revenue is to be recognized in the accounting period when goods are delivered or services are rendered or performed.

Expense Recognition Principle.

Expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services.

Adequate Disclosure.

Requires that all relevant information that would affect the user's understanding and assessment of the accounting entity be disclosed in the financial statements.

Materiality.

depends on the size and nature of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and size of the item are evaluated together.

Consistency Principle.

The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. However, changes are permitted if justifiable and disclosed in the financial statements.

The Conceptual Framework for Financial Reporting

describes the objective of, and the concepts for, general purpose financial reporting.

(a) buying, selling or holding equity and debt instruments;

(b) providing or settling loans and other forms of credit; or

(c) exercising rights to vote on, or otherwise influence, management's actions that affect the use of the entity's economic resources.

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the reporting entity (or the entity). Those decisions involve decisions about: (3)

(a) the economic resources of the entity, claims against the entity and changes in those resources and claims; and

(b) how efficiently and effectively the entity's management and governing board2 have discharged their responsibilities to use the entity's economic resources.

To make the assessments, existing and potential investors, lenders and other creditors need information about: (2)

Financial reports

provide information about the financial position of a reporting entity. This also provide information about the effects of transactions and other events that change a reporting entity's economic resources and claims.

Economic Resources and Claims

Information about the nature and amounts of a reporting entity's ____________ can help users to identify the entity's financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability to obtain financing.

Changes in Economic Resources and Claims

These changes result from that entity's financial performance and from other events or transactions such as issuing debt or equity instruments. Users need to be able to distinguish between both of these changes.

Accrual accounting

This depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.

financial performance

Information about a reporting entity's _______ during a period, representing changes in economic resources and claims other than those obtained directly from investors and creditors, is useful in assessing the entity's past and future ability to generate net cash inflows.

Financial Performance Reflected by Past Cash Flows

Information about a reporting entity's _______ during the reporting period also assists users to assess the entity's ability to generate future net cash inflows and to assess management's stewardship of the entity's economic resources.

Changes in Economic Resources and Claims Not Resulting from Financial Performance

Information about this type of change is necessary to give users a complete understanding of why the reporting entity's economic resources and claims changed and the implications of those changes for its future financial performance.

• Relevance

• Faithful Representation

What makes financial information useful?; Information must be both ____ and _________ if it is to be useful.: (2)

Relevant/Relevance

_____ financial information is capable of making a difference in the decisions made by users; influences the economic decisions of users by helping them evaluate past, present or future events, or confirming, or correcting, their past evaluations.

Confirmatory roles and predictive roles

____ and _____ are the principal ingredients of relevance and are interrelated.

confirmatory role

Financial information has a _________ when it is used to confirm or correct the decision-maker's earlier expectations. It is an analysis of the relationship between predictions and outcomes. The information is used to assess how well management has performed its function by comparing its achievements with expectations.

predictive role

Financial information has a ________ when it is used to make predictions of, for instance, future cash flows or income. For example, historical information can be extrapolated to make predictions about the future. Therefore, for information to be relevant, it should assist in either the confirmation of past predictions or in the making of new predictions.

Materiality

is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity's. financial report.