CFAS Reviewer Chapter 1-5 PDF

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDSCHAPTER 1: Accountancy Profession DEFINITION ASC “Accounting is a service activity, useful in making economic decision” AICPA “. the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events whic...

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS CHAPTER 1: Accountancy Profession DEFINITION 1. ASC “Accounting is a service activity, useful in making economic decision” 2. AICPA “..is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof” 3. AAA “...is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by the users of the information” Purpose – provide quantitative info to be useful in making an economic decision IMPORTANT POINTS 1.Quantitative information 2.Financial in nature 3.Useful in decision making COMPONENTS 1.IDENTIFYING – analytical o Recognition – accountable/quantifiable  Effect on A,L,E o Non-recognition – hiring, death, contract, meeting o External transactions – involving one entity and another o Internal transactions – involving the entity only  Production – resources transformed into products  Casualty – unanticipated loss from a disaster(act of God) 2.MEASURING – technical, assigning of peso amounts (Philippine Peso) o Historical Cost – original acquisition cost, most common measure o Current Value – fair value, value in use, current cost, fulfillment val 3.COMMUNICATING – formal, preparing/distributing accounting reports to potential users o Accounting is the universal language of business o Recording/Journalizing – record business transactions o Classifying – sorting/grouping similar interrelated transactions  Ledger – group of accounts o Summarizing – preparation of financial statements Financial Statements – key product of the info system o Financial reports “how well an entity is performing in terms of profit and loss and where it stands in financial terms” Overall Objective: provide quantitative about a business useful to statement users (owners/creditors) in making economic decisions Primary Task: supply financial info to help users make informed judgment and better decision Essence: decision-usefulness

ACCOUNTANCY PROFESSION o RA No. 9298: Philippine Accountancy Act of 2004– law regulating the practice of accountancy o Board of Accountancy (BOA) – body authorized by law to promulgate rules affecting practice of accountancy profession in PH, preparing/grading the PH CPA Exam o Certificate of Accreditation – issued to CPA in public practice, min of 3 years of experience in taxation/auditing o Securities and Exchange Commission – not register any corporation for practice of public accountancy o Certificate of Registration – valid for 3 years, renewable every 3years MAIN AREAS (Profession) 1. PUBLIC ACCOUNTING 1. Auditing – primary service o External Auditing – attest function 2. Taxation – preparation of annual income tax returns and determination of tax consequences 3. Management Advisory Services – services to clients on Phases of business conduct and operations 2. PRIVATE ACCOUNTING o Acctg staff, chief accnt, internal auditor, controller (highest) o Major Objective: assist management in planning/controlling the entity’s operations o Maintaining records, producing financial reports, preparing budgets, controlling/allocating resources of entity, determination of taxes 3. GOVERNMENT ACCOUNTING – involving receipt, disposition of gov’t funds and property o Custody and Administration of Public Funds o BIR, COA, DOBM, SEC, BSP

CONTINUING PROFESSIONAL DEVELOPMENT (CPD) o Inculcation and acquisition of advanced knowledge skill,…, and moral values after the initial registration of the CPA for assimilation into professional practice and lifelong learning o Technical skill and competence of CPA o RA No. 10912 – mandating and strengthen the CPD program for all regulated professions

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CPD   

IASB – International Accounting Standards Board Credit Units/Hours o Replaces IASC 120 CPD credit units accreditation o Publishes standards in series of pronouncements (IFRS) 15 CPD credit units for renewal Permanently exempted from renewal 65 y/o o Continue to be designated as International Accounting Standard ACCOUNTING

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ACCOUNTING WHY or reason for action conceptual ACCOUNTING reference only to a particular field

FINANCIAL ACCOUNTING recording transactions, preparing FS internal/external users

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BOOKKEEPING HOW of accounting Procedural mechanical recording ACCOUNTANCY profession of accounting practice

MANAGERIAL ACCOUNTING accumulation/preparation of financial reports only for internal users

GAAP – generally accepted accounting principles o Like laws that must be followed in financial reporting o Political process incorporates political actions Accounting Standards o Identify proper accounting practices for FS o Create common understanding o Ensure comparability and uniformity FRSC – Financial Reporting Standards Council o Replaced the Accounting Standards Council o Accounting standard setting body created by PRC o To assist the Board of Accountancy in its power and functions o Highest hierarchy of gaap o Approved statements:  PAS – Philippine Accounting Standards  PFRS – Philippine Financial Reporting Standards Composition of FRSC o 1 Chairman and 14 Representatives PIC – Philippine Interpretations Committee o By FRSC and replaced the Interpretations Committee o Prepare interpretations of PFRS for approval of FRSC o Authoritative guidance IFRIC – International Financial Reporting Interpretations Committee o United Kingdom and replaced the Standing Interpretations Committee IASC – International Accounting Standards Committee o Independent private sector body o Achieve uniformity around the world o Objectives:  Formulate and publish in the public interest accounting standards  Promote worldwide acceptance and observance  Improvement and harmonization relating to FS

AUDITING

begins after FS beginning analytical constructive in nature professional skepticism embraces auditing o Standard-setting process  Research  Discussion paper  Exposure draft  Accounting standard IFRS – International Financial Reporting Standard o Uniform and globally accepted FR Standards o Factors deciding to move to IAS  Common language and removal of free choices of accounting treatments PFRS – Philippine Financial Reporting Standards o Corresponds to IFRS o PAS = IAS o PH Interpretations = Interpretations of IFRIC, SIC, PIC

CHAPTER 2: OBJECTIVE OF FINANCIAL REPORTING CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING o Complete, comprehensive, single document promulgated by IASB o Summary of terms and concepts that underlie the preparation/presentation of FS for external users o For general purpose financial reporting and overall theoretical foundation for accounting FOUNDATION FOR STANDARDS 1. Contribute to transparency 2. Strengthen accountability 3. Contribute to economic efficiency PURPOSES OF REVISED CONCEPTUAL FRAMEWORK a) Assist IASB: develop IFRS Standards b) Assist preparers of FS: develop consistent accounting policy (when no applies) c) Assist preparers of FS: develop accounting policy (when allows a choice) d) Assist all parties: understand/interpret IFRS Standards AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK o 1st – Standard/Interpretation (overrides CF) o 2nd – Conceptual Framework (not an IFRS, not overrides Standard)

ACCRUAL ACCOUNTING USERS OF FINANCIAL INFORMATION No money involved  Primary Users – general purpose financial reports are Only recognized when they occur primarily directed (must rely) Income when earned and Expense when incurred o Existing and Potential Investors – risk/return provided by investment LIMITATIONS OF FINANCIAL REPORTING o Lenders and Other Creditors – if amounts owing to Don’t provide all information needed by primary users them will be paid b) Not designed to show value of entity, estimate value of entity Provide common information, can’t accommodate every request for info d) Based on estimate and judgment rather than exact depiction  Other Users – reports are not directed to them primarilyMANAGEMENT STEWARDSHIP – predicting how management will use entity’s o Employees – stability/profitability of entity and their economic resources in benefits future periods o Customers – continuance of entity Your peso today is worth more than tomorrow.” TIME VALUE MONEY o Governments and their Agencies – allocation of CHAPTER 3: QUALITATIVE CHARACTERISTICS resources and activities, determine taxation policies QUALITATIVE CHARACTERISTICS o Public – trend and the range of its activities o Qualities/attributes that make info useful to users OBJECTIVE OF FINANCIAL REPORTING 1. FUNDAMENTAL QUALITATIVE CHARACTERISTICS o Forms the foundations of the CF o Application: o Overall objective of Financial Reporting: provide financial info about  Identify if economic phenomenon is useful the reporting entity useful to primary users in making decisions about  Identify type of information (relevant and faithfully providing resources to the entity represented)  Why, purpose, goal of accounting  Determine if information is available o Financial Reporting – provision of financial info about an entity to 1. RELEVANCE – capacity of information to influence a decision external users useful for economic decisions and effectiveness of entity’s o INGREDIENTS: management 1. Predictive Value – forecast/predict future  Annual financial statements – way of providing FS to external users outcome  Nonfinancial information – description of products/listing officers 2. Confirmatory Value – if it provides feedback and directors about previous evaluations TARGET USERS/PRIMARY USERS o MATERIALITY – practical rule that strict adherence to o Have the most critical and immediate need for financial information GAAP is not required when items are not significant o Provide resources to the entity enough to affect the FS 1. Doctrine of Convenience SPECIFIC OBJECTIVES OF FINANCIAL REPORTING (to provide information…) 2. Subquality of relevance based on a) Economic Decisions – investors to buy, sell, hold equity/creditors to nature/magnitude provide or settle loans 3. Relative size rather than absolute size, may be b) Assessing Cash Flow Prospects – principal and interest payments, immaterial for another future net cash inflows to entity 4. ITEM OF MATERIALITY - if it could reasonably c) Economic Resources and Claims affect economic decision  Economic Resources – assets 5. Rounding off amounts  Claims – liabilities and equity o IMPORTANT ASPECTS  Liquidity – availability of cash in near future to cover currently a) Could Reasonably be Expected to Influence maturing obligation b) Obscuring Information – FS is not readily  Solvency – availability of cash over a long term to meet financial understood/not clearly expressed commitment c) Primary Users – primarily affected by general  Financial Position – financial strength and weakness purpose FS d) Changes in Economic Resources and Claims o FACTORS OF MATERIALITY  Financial Performance – results of operations, assess ability to 1. Size of the Item generate future cash inflows from operations

2. Size of the Entity d) Timeliness – financial info must be available and communicated early 3. Nature of the Item  Cost – pervasive constraint on info 2. FAITHFUL REPRESENTATION – represented in words  Cost Constraint – consideration of the cost incurred, judgment and numbers, process description/figures must match what really existed,  Benefit should exceed cost incurred properly accounted  Cost Benefit Principle, financial information is not free o INGREDIENTS a) Completeness – facilitates understanding and avoids erroneous disclosure, all necessary description/explanation CHAPTER 4: FS AND REPORTING ENTITY, UNDERLYING  Standard of Adequate Disclosure – ASSUMPTIONS principle of full disclosure, clearly reported FINANCIAL STATEMENTS – info about economic resources, claims  Notes to FS – narrative against entity, changes in economic resources and claims description/disaggregation o Statement of Financial Position - ALE b) Neutrality – without/free from bias, principle of o Statement of Financial Performance - IE fairness  Prudence – exercise of care and caution, o Other Statements and Notes deal with uncertainties  TYPES OF FS  Conservatism – alternative that has 1. Consolidated FS – both parent and its least effect on equity subsidiaries  Contingent Loss –reliably 2. Unconsolidated FS – parent alone measured 3. Combined FS – comprises 2 or more  Contingent Gain – not entities not linked by a parent and subsidiary recognized, disclosed relationship c) Free from Error – no errors/omissions, accurately as an estimate REPORTING ENTITY – entity required to prepare financial statements,  Measurement Uncertainty – monetary amount can’t be not a legal entity observed, estimated REPORTING PERIOD – period when FS are prepared  Substance Over Form – substance prevails o ALE – end of reporting period o IE – during reporting period 2. ENAHNCING QUALITATIVE CHARACTERISTICS – increase the o Comparative Information for atleast one preceeding reporting usefulness of the financial period Information a) Comparability – ability to bring together, likeness and difference  Horizontal Comparability (Intracomparability) – within an entity, one accounting period to another ACCOUNTING ASSUMPTIONS (POSTULATES) – basic notions or  Comparability between entities – 2 or more entities engaged in fundamental premises, accounting process is based, same industry bedrock/foundation of accounting  Dimensional Comparability (Intercomparability) – across 1. GOING CONCERN – continuing in operation indefinitely/ entities foreseeable future  Consistency – uniform application from period to period within  very foundation of cost principle entity, helps to achieve comparability  abandoned when there’s persistent losses and operations  Full disclosure of the change terminated b) Understandability – comprehensible/intelligible, clearly/concisely, for 2. ACCOUNTING CONCEPT – entity is separate from the owner to users who have reasonably knowledge of business have fair presentation, each business is independent, single c) Verifiability – implies consensus that is supported by evidence to assure economic entity users 3. TIME PERIOD – completely accurate report and can’t be  Direct Verification – direct observation obtained until entity is  Indirect Verification – uses formula, technique, recalculating dissolved/liquidated, one year period

Calendar Year – 12month ends on Dec. 31 Natural Business Year – 12month ends on any month (slack season) 4. MONETARY UNIT  Quantifiable Aspect – stated in peso (PH)  Stability of the Peso – purchasing power of the peso is stable/constant  Stable Peso Postulate – adjustments are unnecessary to reflect any changes in purchasing power, not necessarily valid  

CHAPTER 5: ELEMENTS OF FS ELEMENTS OF FS – quantitative information, building blocks o Equity – residual interest in the assets after deducting liabilities ASSET – present economic resource by entity as a result of past events o Economic Resource – produce economic benefits o Economic Benefits – no longer need to be expected to flow to the entity o ESSENTIAL CHARACTERISTICS  Present economic resources  Right to produce economic benefits  Controlled by entity as a result of past events 1. Right a. Correspond to an obligation of another entity (favorable terms) b. Don’t correspond to an obligation of another entity c. Established by contract/legislation 2. Potential to Produce Economic Benefits  Don’t need to be certain that the right will produce  Right already exist 3. Control of an Economic Resource  Ability to prevent others from using such asset  If an entity enforces legal rights  No legal rights, no other party can benefit from asset

LIABILITY – present obligation to transfer economic resource, IAS 37 o ESSENTIAL CHARACTERISTICS  Entity has an obligation  Obligation to transfer an economic resource  Present obligation as a result of past event 1. Obligation – duty or responsibility that can’t be avoided  Legally enforceable – contract/statutory requirement

Constructive obligations – maintain good business relations and equitable manner 2. Transfer of an Economic Resource – unfavorable terms and uncertain future event 3. Past Event – has already obtained economic benefits and must transfer economic resource 

INCOME – increase in AE, decrease in L o Revenue – ordinary regular activities, regularity o Gains – don’t arise ordinary regular activities, disposal, expropriation EXPENSE – decreases in AE, increases in L o Losses – ordinary regular activities o Losses – don’t arise if resulting from disasters STATEMENT OF FINANCIAL PERFORMANCE o Profit or loss and presenting other comprehensive income o Recycling – permitted as long as it would result to relevant and faithfully represented information about financial performance...