CFAS in fair value and price levels, obsolescence,

technological changes, vandalism)

Accounting - “the process of identifying, measuring,
and communicating economic information to permit Types of Internal Events
informed judgements and decisions by users of a. Production - resources are transformed into
information” (Association of Accountants) finished goods
b. Casualty - unanticipated loss from disasters or
Identifying - process of analyzing events and similar events (e.g flood, fire)
transactions to determine whether or not they will be
recognized Measuring - assigning numbers, normally in monetary
units, to the economic transactions and events
Recognition - process of including the effect of the
accountable event in the SFP or SCI through a journal Historical cost - most commonly used measurement
entry basis

Accountable event - “economic activity” (subject Mixture of Cost and Values - how financial statements
matter of accounting); one that affects assets, liabilities, are prepared
equity, income or expenses of an entity
Cost - include historical cost and current cost
Sociological and psychological matters are not
recognized only economic activities. Values - include other measurement bases

Non-accountable event - not recognized but are Valued by opinion - when measurement is affected by
disclosed in the notes if they have accounting relevance estimates (e.g uncollectible accounts, depreciation and
through a memorandum entry amortization, liabilities such as provisions, retained
earnings)
Disclosure only in the notes is not an application of the
recognition process. Valued by fact - measurement is unaffected by estimates
(e.g ordinary share capital valued at par, land stated at
Types of events of transactions acquisition cost, cash at face amount)
1. External - involve an entity and another
external party Communicating - transforming economic data into
2. Internal - do not involve an external party useful accounting information (e.g financial statements
and reports)
Types of External Event
a. Exchange (reciprocal transfer) - reciprocal Communication Process of Accounting
giving and receiving (e.g sale, purchase, 1. Recording - systematically committing into
payment of liabilities) writing the journal entries of accountable events
b. Non-reciprocal transfer - “one way” 2. Classifying - grouping of similar & interrelated
transaction (e.g donations, gifts, payment of items to their classes (posting to the ledger)
taxes, imposition of fines, theft, distribution to 3. Summarizing - putting together in condensed
owners) form the recorded and classified transactions
c. External other than transfer - changes in
economic resources or obligations caused by an Interpreting - involves the computation of financial
external party or source but does not involve statement ratios
transfer of resources or obligation (e.g changes
Basic purpose of Accounting - provide information Accounting as Science - is a body of knowledge which
useful in making economic decisions has been systematically gathered, classified, and
organized
Economic entity - separately identifiable combination
of persons and property that uses economic resources to Accounting as an Art - requires the use of critical
achieve certain goals thinking and judgment
a. Not-for-profit entity - carries out socially
desirable need and not directed towards making Creative thinking - use of imagination and insight to
profit solve problems by finding new relationships among
b. Business entity - operates primarily for profit items of information; important in identifying alternative
solutions
Economic activities - activities that affect economic
resources, obligations, and equity of an entity Critical thinking - logical analysis of issues using
a. Production inductive and deductive reasoning to test new
b. Exchange - trading resources or obligations for relationship, important in evaluating alternative solutions
other resources or obligations
c. Consumption - using the final output Steps in Problem Solving:
d. Income distribution - allocating rights to the 1. Recognizing a problem
use of output 2. Identifying alternative solutions
e. Savings - setting aside rights in exchange for 3. Evaluating
rights for future consumption 4. Selecting a solution
f. Investment - using current inputs to increase 5. Implementing
stock of resources available for output
Accounting as an Information System - identifies,
Types of Information provided by Accounting measures, process information then communicate to
1. Quantitative - expressed in numbers, units, or decision makers
quantities
2. Qualitative - expressed in words or descriptive Accounting as a language of business - fundamental to
form; found in the notes and on the face of other the communication of financial information
financial statements
3. Financial - expressed in money and also a Accounting Concepts - principles upon which the
quantitative information process of accounting is based

Types of Information as to users’ needs Accounting Assumption - “postulates”; basic notions

1. General Purpose - designed to meet the that provide the foundation of the accounting process
common need of most statement users and
provided under financial accounting; governed Accounting Theory - broad principles that provide
by GAAP general frame or reference for evaluation of accounting
2. Special Purpose - designed to meet the specific practice and explain the accountant’s action; contain the
needs of particular statement users; provided by Conceptual Framework and the PFRS
other types of accounting
Accounting Concepts
Information is not obtained exclusively on the entity’s 1. Double-entry system - “debit and credit”
accounting record but also from external sources (e.g two-part recording
fair value measurements, resolutions of uncertainties, 2. Going concern assumption - assumed to carry
future lease payments, and contractual commitments) on an indefinite period of time (mixture of cost
 and values); liquidating concern (realizable statement by the equation “Assets = Lia +
value) Capital”
3. Separate Entity - entity is viewed separately 15. Proprietary theory - geared towards proper
from its owners valuation of assets; emphasizes the balance sheet
4. Stable Monetary Unit - [Link] are by the equation “Assets - Liabilities = Capital”
stated in a common unit (peso) and the 16. Residual Equity theory - when there are two
purchasing power of peso is regarded as stable class of shares issued; applied in the
and its instability is insignificant and ignored computation of book value per share and return
*to be useful, information should be stated in a on equity by the equation “”Assets - Liabilities -
common denominator Preferred Shareholders Equity - Ordinary
5. Time Period - life of the entity is divided into Shareholders’ Equity”
series of reporting periods 17. Fund theory - more on the custody and
6. Materiality concept - material if its omission or administration of funds; geared towards cash
misstatement could influence economic flows by the equation “cash inflows - cash
decisions; matter of professional judgment and outflows = funds”; used in government and
based on the size and nature of the item fiduciary accounting
7. Cost-Benefit - cost of processing information 18. Realization - converting non-cash assets to cash
should not exceed the benefits to be derived or claims for cash and deals with revenue
from it recognition
8. Accrual Basis of Accounting - effects of 19. Prudence - “conservatism”; use of caution when
transactions are recognized when they occur making estimates under conditions of
(regardless when cash is received/paid) uncertainty, such that assets are not understated;
9. Historical Cost concept - value of an asset is one that has the least effect on equity is chosen;
determined on the basis of acquisition cost; not does not allows intentional understatement of
always maintained assets or overstatement of liabilities to make
10. Concept of Articulation - components of hidden reserves because the FS will not be
financial statements are interrelated faithfully represented
11. Full disclosure Principle - nature and amount
of information in the financial statements Expense recognition principles
reflects a series of judgment trade-offs 20. Matching concept - costs directly related to
a. Sufficient detail to disclose matters that revenue is recognized as expense at the same
make a difference to users period the related revenue is recognized
b. Sufficient condensation to make the 21. Systematic and rational allocation - costs
information understandable keeping in indirectly related to revenue are initially
mind the cost of preparing and using it recognized as assets and recognized as expenses
12. Consistency concept - accounting principles over the periods their economic benefits is
used are applied consistently from one period to consumed (e.g depreciation expense on equip)
next; changes are made when 22. Immediate recognition - costs that ceases or do
a. Required or permitted by the PFRS not meet the definition of asset are recognized as
b. Change results to more relevant and expense immediately
reliable information
*changes in accounting policies are disclosed in notes Common Branches of Accounting
13. Matching - costs are recognized as expenses 1. Financial Accounting - focuses on general
when the related revenue is recognized purpose financial statements; governed by the
14. Entity theory - geared towards proper income PFRS
determination. Proper matching of costs and ● General Purpose Financial Statements - cater to
expenses is the end; emphasizes the income the common needs of external users
 2. Management Accounting - accumulation and Financial Reporting - provision of financial
communication of information for use by information about an entity that is useful to external
internal users or management users
3. Cost Accounting - recording and analysis of
cost of materials, labors, and overhead incidents Primary Objective of Financial Reporting - provide
4. Auditing - evaluating the correspondence of economic information about an entity’s economic
certain assertion with established criteria and resources, claims to those resources, changes in those
expressing an opinion thereon resources.
5. Tax Accounting - preparation of tax returns and
rendering of tax advice Secondary Objective of Financial Reporting - provide
6. Government Accounting - accounting for information useful in assessing the management
government and its instrumentalities stewardship
7. Fiduciary Accounting - handling of account
managed by a person entrusted with custody of Bookkeeping - recording the accounts of an entity and
property for benefit of another] normally end with the preparation of trial balance; does
8. Estate Accounting - handling of accounts for not require interpretation
fiduciaries who wind up the affairs of deceased
person Accountancy - profession or practice of accounting
9. Social Accounting - communicating the social
and environmental effects of an entity’s Four Sectors in the Practice of Accounting
economic actions to the society 1. Public Practice - rendering of audit or
10. Institutional Accounting - accounting for accounting services to more than one client on a
non-profit entities fee basis
11. Accounting systems - installation of accounting 2. Commerce and Industry - employment in the
procedure for the accumulation of financial data private sector and must be a CPA
12. Accounting Research - careful analysis of 3. Education/Academe - employment in an
economic events to understand the impact to education institution which involves teaching of
their decisions accounting, auditing, and other technically
related subjects
Financial Accounting vs Financial Reporting 4. Government - employment in the government
or a government-owned corporation and must be
Both focus on general purpose financial statements but a CPA
Financial Reporting promotes principles useful in
“Other Financial reporting”. Philippine Financial Reporting Standards (PFRS) -
represent the GAAP in the Philippines and accompanied
Other Financial Reporting - information provided by guidance; Standards and Interpretations adopted by
outside the financial statements that improves users the Financial Reporting Standards Council (FRSC)
ability to make efficient economic decisions. comprising:
a. Philippine Financial Reporting Standards
Financial Statements - structures representation of an (PFRS)
entity’s financial position and results of its operations; b. Philippine Accounting Standards (PAS)
end product of accounting process c. Interpretation

Financial Report - all financial statements + other Guidance - states whether it is an integral part of the
information provided outside the financial statements PFRS; a guidance that is integral part of PFRS is
mandatory
For financial statements to be useful, they should be Government 1
prepared using reporting standards that are generally Total 15
acceptable. If none, FS would not be comparable. 2. Philippine Interpretations Committee (PIC) -
formed by the ASC now FRSC, with the role of
The process of establishing financial accounting reviewing the interpretations of the IFRIC for
standards is a democratic process in that a majority of approval and adoption by th the FRSC
practicing accountants must agree with a standard before 3. Board of Accountancy (BOA) - professional
it becomes implemented. regulatory board to supervise the registration,
licensure, and practice of accountancy in the
Hierarchy of Reporting Standards Philippines; chairperson and 6 members
1. PFRS appointed by the President of the Philippines.
2. judgment 4. Securities and Exchange Commission (SEC) -
a. Requirements in PFRSs dealing with regulating corporations and partnership, capital
similar and related issues and investment markets, and the investing public
b. Conceptual Framework 5. Bureau of Internal Revenue (BIR) -
Management may consider the following: administers the provision of National Internal
a. Pronouncement of other standard-setting bodies Revenue Code
b. Accounting literature and accepted industry 6. Bangko Sentral ng Pilipinas (BSP) - influences
practices the selection and application of accounting
policies by banks and other performing banking
Although the selection of accounting policies is the functions
responsibility of the entity's management, the proper 7. Cooperative Development Authority (CDA) -
application of the policies is most dependent upon the influences the selection and application of
professional judgment of the accountant. accounting policies by cooperatives

Accounting standard setting bodies and other

relevant organizations Regulatory Accounting Principles - Accounting
1. Financial Reporting Standards Council - policies prescribed by a regulatory body (e.g BSP, CDA)
created under the Philippine Accountancy Act of
2004 (R.A. No. 9298) is official accounting International Accounting Standards Board (IASB) -
standard setting body in the Philippines; standard-setting body of the IFRS Foundation; main
composed of 15 members—a chairperson who objective of developing and promoting global
had been or presently a senior accounting accounting standards; established on April 1, 2001.
practitioner in any scope of accounting practice
and 14 representative members: International Accounting Standards Committee
Chairperson 1 (IASC) - founded in June 1973 and based on Delaware,
14 Representatives from: USA and the parent of IASB; July 1, 2010, renamed to
BOA 1 International Financial Reporting Standards Foundation
COA 1 or IFRS Foundation
SEC 1
BSP 1 International Financial Reporting Standards (IFRS) -
BIR 1 standards issued by the IASB composing:
A major organization of prepares 1 1. International Financial Reporting Standards
and users of financial statements (IFRSs)
Public Practice 1 2. International Accounting Standards (IASs)
Commerce and Industry 1 3. Interpretations
Academe/Education 1
The IASs are the standards issued by the IASC which a. Make their existing financial reporting standards
were adopted by the IASB. The PFRSs and PASs are fully compatible
based on these standards. b. Coordinate their future work programs to ensure
that once achieved, compatibility is maintained
Due Process
1. Identifies and reviews issues associated with a Financial reporting standards are continually reviewed,
topic and considers application of Conceptual revised or superseded. Changes to reporting standards
Framework are primarily made in response to users’ needs. Legal,
2. Study of national accounting requirements political, business and social environments also
3. Consulting Trustees and Advisory Council influence these changes.
4. Formation of advisory group
5. Publishing a discussion document PAS 7 STATEMENT OF CASH FLOWS
6. Publishing an exposure draft
7. Publishing a basis for conclusion and the Statement of Cash Flows - provides information about
alternative views of any IASB member the sources and utilization of cash and cash equivalents
8. Consideration of all comments during the period
9. Holding a public hearing and field tests
10. Publishing a standard Cash - cash on hand and cash in bank

International Financial Reporting Interpretations Cash Equivalents - short-term, highly liquid

Committee (IFRIC) - replaced Standing Interpretations investments that are readily convertible to known
Committee (SIC); prepares interpretations of how amounts of cash and which are subject to an insignificant
specific issues should be accounted for under the risk of changes in value
application of IFRS where *only debt instrument acquired within 3 months or less
a. There is no specific authoritative guidance before their maturity qualify as cash equivalents
b. There is risk of divergent and unacceptable a. 1-year treasury bill acquired 3 months before
accounting practices maturity date
b. 90-day money market instrument or commercial
IFRS Advisory Council - organizations and individuals paper
with an interest in international financial reporting; c. 3-month time deposit
advising on priorities within the IASB’s work program;
IASB is required to consult before any board decision on Cash Flows - inflows (source) and outflows (uses) of
major projects; members are appointed by the IFRS cash and cash equivalents
Foundation
The statement of cash flows help users assess:
International Federation of Accountants (IFAC) - a. Ability of the entity to generate cash and cash
represents the worldwide accountancy profession to equivalents
develop and enhance the profession to provide services b. Timing and certainty of the generation of cash
of consistently high quality flows
c. The needs of the entity to utilize those cash
International Organization of Securities flows
Commissions (IOSCO) - international body of security
commissions SCF may also provide information on the quality of
earnings of an entity.
Norwalk Agreement - FASB and the IASB formalized
their commitment to the convergence of the U.S. GAAP SCF can only be prepared on a cash basis, it enhances
and IFRS to use their best effort to the inter-comparability among different entities.
Classification of Cash Flows a. Cash receipts from issuing shares or other equity
1. Operating Activities instruments and cash payments to redeem them
2. Investing Activities b. Cash receipts from issuing notes, loans, bonds,
3. Financing Activities and mortgage payable and other short-term or
long-term borrowings and their repayments
Operating Activities - primarily derived from the c. Cash payments by a lessee for the reduction of
principal revenue-producing activities of the entity; the outstanding liability relating to a lease
usually include inflows and outflows if income and
expenses or those in the profit or loss determination Only cash flows on non-trade liabilities are included as
a. Cash receipts from sale of goods, rendering financing activities.
service
b. Cash payments for purchase of goods and
services
Operating Activities Affect profit or loss
c. Cash payments for operating expenses
d. Cash receipts and payments from contracts held Investing Activities Affect non-current assets
for dealing or trading purposes and other investments

Special Items in Operating Activities Financing Activities Affect borrowings,

non-operating liabilities,
● Cash flows from buying and selling held for
and equity
trading securities (similar to inventories as they
are acquired specifically for resale)
● Cash flows from the acquisition, rentals, and Cash Flows excluded from the activities section
subsequent sale and transfer to inventories. The ● Cash flows on the movement between cash and
proceeds from the sale of such assets are cash equivalents (part of the entity’s cash
recognized as revenue. management)
● Loan transactions of financial institutions ● Bank overdrafts that cannot be offset to cash are
presented as financing activities but those that
Cash flows on trades payable, accrued expenses, and can be offset to cash is part of the entity’s cash
other liabilities are classified as operating activities. management
● Exchange differences of foreign currency that
Investing Activities - acquisition and disposal of are translated using the spot exchange rate but
noncurrent assets and other investments the effect of the changes is reported in the SCF.
a. Cash receipts and payment in the acquisition and
disposal of PPE, investment property, intangible General concept in the preparation of SCF
assets, and other noncurrent assets
b. Cash receipts and payment in the acquisition and SCF is presented using cash basis.
sale of equity or debt instruments of other
entities (except those classified as CE) Cash Basis - income is recognized only when collected
c. Cash receipts and payments on derivative assets and expenses are recognized only when paid, rather than
and liabilities (except those held for trading and when these items are earned or incurred.
classified as financing activities)
d. Loans to other parties and collections thereof Only transactions that affect cash and cash equivalents
(except those made by a financial institution) are reported (e.q purchase of assets by paying cash).
Non-cash transactions are disclosed only (purchase of
Financing Activities - affects entity’s equity capital and asset by issuing notes payable).
borrowing structure
Interest and Dividends
Option 1
● Interest Income, interest expense and dividend
income are classified as operating activities
because they enter into the determination of
profit or loss (e.g income & expenses)
● Dividend paid is classified as financing activity
because it is a transaction with the owners and
alters the equity structure

Option 2 PAS7 does not require any method but encourages

● Interest income and dividend income are direct methods. In practice, the indirect method is more
classified as investing activities because they commonly used because it is easier to apply.
result from investments Choosing between direct and indirect methods is
● Interest expense is classified as financing applicable only for operating activities.
activity because it results from borrowing
● Dividend paid is classified as operating activity Cash flows from acquisition or disposals of subsidiaries
in order to assist users in assessing the entity’s or other business units due to loss or obtaining control
ability to pay dividends out of operating cash are classified as investing activities. Those that do not
flows result to loss or obtaining control are financing
activities.
Only interest and dividends paid in cash are included in
the SCF. Disclosure
a. Components of CCE and a reconciliation of
Only option 1 is available for financial institutions. amount in the SCF with the equivalent items in
the SFP
When silent, option 1 is presumed. b. Significant CCE held by the entity that are not
available for use by the group, together with a
Investing and financing activities are presented management commentary
separately at gross amount, unless they qualify for net
presentation.
PAS 10 EVENTS AFTER THE REPORTING
Presentation PERIOD
a. Direct Method - shows each major class of
gross cash receipts and gross payments Events after the Reporting Period - events, favorable
b. Indirect Method - profit or loss is adjusted for and unfavorable, that occur between the end of the
the effects of non-cash items and changes in reporting period and the date when the financial
operating assets and liabilities statements are authorized for issue

Date of authorization of the FS - date when the

management authorizes the financial statements for issue
regardless whether such authorization is final or subject
for approval
Types of events after the reporting period h. Announcing a plan to discontinue an
1. Adjusting events - provide evidence of operation
conditions that existed at the end of the reporting i. Change in tax rate enacted
period j. Declaration of dividends
a. Settlement after the reporting period of a
court case that confirms the entity has a Dividends
present obligation at the end of the RP. Dividends declared after the RP are not recognized as a
b. Receipt of information indicating that an liability at the end of the RP because no peasant
asset was impaired at the end of the RP. obligation exists at the end of the RP.
i. Bankruptcy of a customer that
occurs after the RP indicating Going Concern
that the carrying amount of the PAS 10 prohibits the preparation of FS on a going
trade receivables at the end of concern basis if management determines after the RP
the RP is impaired that it intends to liquidate the entity and the likes.
ii. Sale of inventories after the
reporting period may give PAS 1 PRESENTATION OF FINANCIAL
evidence to their net realizable STATEMENTS
value at the end of the RP.
c. Determination after the RP of the cost of PAS 1 prescribes guidelines for presentation of general
asset purchased, proceeds from asset purpose financial statements to ensure comparability.
sold, before the end of the RP.
d. Determination after the RP of the Types of comparability
amount of profit-sharing or bonus a. Intra-comparability (horizontal) - same entity
payment, if the entity has a present but different periods
obligation at the end of the RP to make b. Inter-comparability (dimensional) - between
such payments. different entities
e. Discovery of fraud or errors that
indicate that the financial statements are Comparability requires consistency in the adoption and
incorrect. application of the accounting policies.
2. Non-adjusting events - indicative of conditions
that arose after the reporting period General purpose financial statements are the subject
a. Changes in fair values, foreign exchange matter of the Conceptual Framework and the PFRS.
rates, interest rates or market prices after
the RP Complete set of Financial Statements
b. Casualty losses (e.g fire, storm, 1. Statement of Financial Position
earthquake) after the RP but before the 2. Statement of Comprehensive Income
authorization of the FS 3. Statement of Changes in equity
c. Litigation arising solely from events 4. Statement of Cash Flows
after the RP 5. Notes
d. Significant commitments or contingent 6. Additional statement of financial position
liabilities entered after the RP
e. Major and potential ordinary share General Features of Financial Statements
transactions 1. Fair Presentation and Compliance with
f. Major business combination PFRSs - compliance with PFRSs is presumed to
g. Announcing or commencing the be faithfully represented; propers
implementation of a major restructuring selection/application of policies, proper
presentation,and provision of disclosure
*inappropriate accounting policies cannot be rectified by securities and from translation of foreign
mere disclosure currency except if they are material
*either make an explicit and unreserved statement of c. Presenting loss from a provision net of
compliance or conclude that the compliance with a reimbursement from a third party
PFRS requirement is misleading (permits departure from
a PFRS requirement) 6. Frequency of Reporting - prepared at least
annually; if the period will be shorter or longer,
Regulatory Framework - accounting principles and it shall disclose the following:
other financial reporting requirements prescribed by a a. Period covered
government regulatory body b. Reason for longer/shorter period
c. Fact that amounts are not entirely
When an entity departs, it shall disclose the comparable
management’s conclusion as to fair presentation, all 7. Comparative Information - present
other requirements of the PFRSs are complied with, the comparative information in respect of the
title of PFRS from which the entity has departed. preceding period for all amount reported
currently unless PFRS requires otherwise
2. Going Concern - unless an entity has an
intention to liquidate or has no other alternative Additional Statement of Financial Position
but to do so. a. When the entity applies an accounting policy
retrospectively, makes a retrospective statement
Assessing the entity’s ability to continue as a going of items, or reclassifies items in its financial
concern, taking account all available information about statements
the future, which is at least, but not limited to, 12 b. The instance in (a) has a material effect on the
months from the reporting date. information on the SFP at the beginning of the
preceding period
If the entity has a history of profitable operations,
management may conclude that the entity is a going 8. Consistency of Presentation - presentation and
concern without detailed analysis. classification of items in the financial statements
is retained from one period to the next unless
If there are material uncertainties, it must be disclosed. required by a PFRS or results information that is
reliable and more relevant
If the entity is not a going concern, FS shall be prepared
using another basis. This fact shall be disclosed. Change in presentation requires the reclassification of
items in comparative information. If the effect is
3. Accrual Basis of Accounting - all financial material, the entity shall provide additional SFP.
statements except for SCF
4. Materiality Aggregation - each material class PAS 1 requires particular disclosure to be presented
of similar items is presented separately; either in notes or on the face of other financial
dissimilar items are presented separately unless statements.
they are immaterial; individual immaterial items
are aggregated with other items. Management is responsible for an entity’s financial
5. Offsetting - permitted when it reflects the statements including:
substance of the transaction a. Preparation and fair presentation of FS in
a. Presenting gains/losses from sales net of accordance to PFRS
the related selling expenses b. Internal control over financial reporting
b. Presenting at net amount the unrealized c. Going concern assessment
gains and losses arising from trading d. Oversight over the financial reporting process
 e. Review and approval of FS
*responsibilities are expressly stated in the “Statement of
Management’s Responsibility for Financial Statements”

PAS 1 does not prescribe the order of presenting items in

the SFP. The entity may modify the descriptions and the
sequence of their presentation. Additional line items may
also be presented whenever relevant to the understanding
of the SFP.