Chapter 1 DEFINITION OF ACCOUNTING Acounting Standard Council - Service activity - Qualitative information - Financial in nature about economic entities - Useful in making economic decisions Committee on Accounting Terminology (American Insitute of Certified Public Accountants) - Art of recording, classifying, and summarizing - Significant manner - Interpreting the results American Acounting Association (Statement of basic accounting theory) - Process of identifying, measuring, and communicating economic information - BEST DEFINITION IMPORTANT POINTS - One: qualitative information - Two: financial in nature - Three: useful in decision making Very purpose of accouting is to provide qualitative info that is useful in making decisiond. COMPONENTS ACCOUNTING - Identifying = analytical component - Measuring = technical component - Communicating = formal component IDENTIFYING - Process of recognition or nonrecognition of business activities as “accountable events” - Only accountable events are emphazied and recognized in accounting Not accountable events - Cannot be quantified or expressed in terms of unit of measurement Accountable events - Has an effect on A.L.O Economic activity - Subject matter of accounting - Measurement of economic resources and liabilities Sociological and psychological are beyond the province of accounting EXTERNAL AND INTERNAL TRANSACTIONS Transactions - Economic activities of an entity - Classified as external or internal External transactions / Exchange transactions - Events involving one and another entities Internal Transactions - Entirely within the entity - No other entity involve Ex. Production – process of transforming resources into products Casualty Loss – sudden and unanticipated from act of God (e.g. fire, flood, earthquake, etc.) MEASURING - Assigning peso amount to accoutable transaction/events - No monetary amount... ...useless ...FSs are unintelligible and uncomprehensible Information to be usefull... ...need to be expressed in a common financial denominator Measurement bases - Historical Cost o Original acquisition cost o Most commonly used - Current value o Fair value, value in use, fulfillment value, current cost COMMUNICATING - Preparing and distributing accounting reports to potential users - The reason why accounting is called “universal language of business” Identifying and measuring is pointless if nit communicated. Implicit in communicating process - Recording, classifying, and summarizing aspect Recording or journalizing - Systematically maintaining a record of all accountable events Classifying - Sorting or grouping or same or interrelated economic transactions into respective classes - Done by positng to ledger Ledger o Group of accounts categorized into ALORE accounts Summarizing - Preperation of FS o Statement of financial position o Income statement o Statement of comprehensive income o Statement of changes in equity o Statement of cash flows OVERALL OBJECTIVES OF ACCOUNTING - To provide qualitative financial info about a business useful to statement users making economic decisions Accounting as Information System - Measures business activities - Processes info to make reports - Communicate reports to decision makers Accountant’s primary task - To supply financial info for users to make informed judgements and better decisions Financial reports shows.. - ...how well entity performs (profit and loss) - ...where it stands in financial terms THE ACCOUNTANCY PROFESSION RA No. 9298 (Philippine Accountancy Act of 2004) - Law regulating the practice of accountacy profession in the PH Qualification to practice accountancy - Finish BSA - Pass government examination given by BOA Board of Accountancy (BOA) - Body authorized by law - Promulagate rules and regulations affecting the practice of accountancy profession - Prepares and grades the Philippine CPA Examination Philippine CPA Examination / CPALE - Computer-based - Twice a year (may and october) - In authorized testing centers LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY Who? - Single practitioners and pernerships - No corporation Requirements: - They shall be reistered CPAs in the PH Certificate of Accreditation - Issued to CPAs in public practice only - Abiding with rules and regulations by BOA and approval of PRC that the registrant acquired minimum of 3 years in any areas of public practice including taxation ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY Who are required to register with BOA and PRC for the practice of public accountancy - CPAs - Firms and partnership of CPAs (partners and staff members) Certificate of Registration - PRC upon recommendation of the BOA shall issue the certificate - Valid for 3 years - Renewable every 3 years upon payment of fees Three main areas to practice by CPAs: - Public accounting - Private accounting - Government accounting PUBLIC ACCOUNTING - Render independent and expert financial services to the public Composed of - Single practitioners - Small accounting firms - Large multinational organizations (they have department for each kind of services Three kinds of services offered by public accountants: - Taxation - Auditing - Management advisory services AUDITING/EXTERNAL AUDITING - Examination of FS by an independetn CPA for the puspose of giving opinion on the fairness with which th FSs was prepared - Primary service offered by most public accounting practitioners - Attest function of independent CPAs Uses: - BIR requires audited FS to accompany the filing for annula ITR - Banks and lending institutions frequently require audited FS to grant loan - Creditors and other investors relie on audited FS to make economic decisions TAXATION - Preperation of annual ITR - Determination of tax consequences on proposed business endeavors To be effective and effecient: - Thorougly familiar with tax laws and regulations - Updated to changes in tax laws - Updated with court cases concerned with interpreting taxation law Representation in tax investigation - CPA not infrequently (commonly) represents the client MANAGEMENT ADVISORY SERVICES - Audit and tax services is still the mainstay of public accountants The terms has no specific coverage and generally refer to services like: - Advise on installation of computer system Quality control Installation and modification of accounting system Budgeting Forward planning and forecasting PRIVATE ACCOUNTING Employed in business entity as: - Accounting staff - Chief accountant - Internal auditor - Controller (the highest accounting officer) Major objective of private accounting - Assist management in planning - Controlling entity’s operations Includes: - Maintaining the records - Producing FS - Preparing budgets - Controlling and allocating entity’s resources GOVERNTMENT ACCOUNTING - Encompasses the process of analyzing, classifying, summarizing, and communicating all transactions involving the receipt and disposition of givernment funds and property and interpreting the results thereof Focus of government accouting - Custody and administration of public funds Employed mostly in: - Bureau of Internal Revenue (BIR) - Commission on Audit (COA) - Secuirities and Exchange Commission (SEC) - Banko Sentral ng Pilipinas (BSP) CONTINUING PROFESSIONAL DEVELOPMENT (CPD) RA No. 10912 - Law mandating and strentghing the CPD of all profession including acountancy CPD - Acquisition of advance knowledge, skills, adn proficiency - Raises and enhances the technical skills and competence of CPAs Rules - All CPA must abide with requirements, rules, and regulations - Will be promulgated by BOA, approval of PRC CPD CREDIT UNITS/ CPD CREDIT HOURS New BOA resolution - All CPAs regardless of sector of practice are required to comply with 120 CPD credit units For the renewal of CPA licence - 15 CPD credit units - 65 years of age CPA is exempted For CPA accreditation to practice acountancy - 120 CPC Credit units - Every 3 years Rules: - Excess credit units cannot be carried over to next three year period - Except for units earned for masteral and doctoral degree ACCOUNTING VS. AUDITING Broad sense - Accounting embraces auditing - Auditing is an area of accounting specilization Limited sense Accouting - Constructive - Work ceases when FS is done Auditing - Analytical - Work begins when the work of accountants ends - Examines the FS to ascertain they are in conformity with GAAP ACCOUTING VS. BOOKEEPING Bookeeping - Procedural - Development and maintainance of accouting records - How of accounting - Procedural element Accouting - Conceptual - Why, reasons, and justification of action adopted ACCOUNTING VS. ACCOUNTANCY Board sense - Sysnonymous - Refer to field of accounting theory and practice Technically Accountancy - Profession of accounting Accounting - Used to refer only in particular field of accounting FINANCIAL REPORTING VS. MANAGERIAL ACCOUNTING Financial reporting - Recording business transactions and preperation of FS - Focuses on General Purpose Reports or FS for internal and external use - Emphasizes on creditors and investors Managerial accounting - Accumulation and preperation of finacial reports for internal use only - Developing accounting information for use within entity only GENERALLY ACCEPTED ACCOUNTING PRINCIPLE (GAAP) - Rules, procedures, practice, and standards in preperation of FS - “law” in financial reporting - Based on experience, reason, usage, custom, and practical necessity - Extablishing GAAP is a political process PURPOSE OF ACCOUNTING STANDARDS Overall purpose - To identify proper accounting practices for the preperation of FS Common Understanding - It creates this between preperers and users fo FS (measurement of A and L) Why? - Ensure comparability and conformity FINANCIAL REPORTING STANDARD COUNCIL (FRSC) Accounting Standards Council (ASC) - Created to initially fomalize the developtment of GAAP FRSC - Replaces the ASC - Created by PRC through reccommendation of BOA Function - To assist BOA in carrying out its power and function (RA 9298) Main function - To establish and improve accounting standards that will be generally accepted in the PH Highest Hierarchy - Accounting standards by FRSC is of highest hierarachy of accepted accounting principle in the PH Approved staments of FRSC - Philippines Accounting Standards (PAS), & - Philippine Financial Reporting Standards (PFRS) COMPOSITION OF FRSC Members: 15 Term: 3 years, renewable for another term 1 Chairman - Senior accounting practitioner 14 representative from - 1 each from BOA, COA, SEC, BSP, BIR, and FINEX - 2 each accredited national professional org of CPAs: o Public practice o Commerce and industry o Academe or education o Government PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) - Formed by FRSC in August 2006 - Replaces the Interpretations Committee formed by ASC in May 2000 Role - To prepare interpretations of PRFS for approval of FRSC - To give authoratative guidance on issues that wold most likely divergent or unacceptable because it is not addressed in current PFRS International Financial Reporting Interpretation Committee (IFRIC) - Counterpart of PIC in International Accounting Standards Council (IASC) INTERNATIONAL ACCOUNTING STANDARD COMMITTEE (IASC) - Independent private sector body - Created in June 1973 - Through an agreement made by prefessional accounting bodies from Australia, Canada, France, Germany, Japan, Mexico, Metherland, UK, Irdelan, and USA - Headquarters at London UK Objectives - To achieve uniformity in the accounting principles used around the world Main objectives - Formulate and publich in public interest accounting standards in presentation of FS - To promote their worlwide acceptance and observance - To work generally for the inprovement and harmonization of regulations, standards, and procedures relating to presentation of FS INTERNATIONAL ACCOUNTING STANDARD BOARD (IASB) - Replaces the IASC - Adopted the body standard of IASC International Accounting Standard (IAS) - Pronouncements of IASC International Financial Reporting Standard (IFRS) - Pronouncements of IASB IASB standard setting process - Research - Discussion paper - Exposure draft - Accounting Standard Neutrality - IASB declared mertis or porposed standards from a position of neutrality Due Process System - Employed for interrested parties to express their views on issues under consideration MOVE TOWARD IFRS - Essential to achieve one uniform and globally accepted financial reporting standards Consideration in developing accounting standards - Standards by USA Financial Accounting Standard Board (FASB) and IASB are considered Past years - Before PH standards are based on American standards Present - FRSC adopted entirely all IAS and IFRS PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS) - Pronouncements of FRSC It includes - PRFS corresponds to IFRS (numbered the same with their counterparts) - PRFS corresponds to IAS (numbered the same with their counterparts) - PH interpretations corresponds to International Financial Reporting Interpretations Committee (IFRIC) and interpretations by PIC Chapter 2 CONCEPTUAL FRAMEWORK Conceptual framework for financial reporting complete, comprehensible, and single document promulgated by IASB Conceptual Framework - Theory and concepts in preperation and presentation of FS for external users (for general purpose reports - Overall theoritical foundation for accounting - Intended to guide standard setters, preparers, users of information in statements - Underlying theory for development of standards and revision of previously issued Conceptual framework is a foundation for standards that: a. Contribute to transparency o Enhancing cmparability and uniformity b. Strengthen accountability o Reducing information gaps between investors and investee c. Contribute to economic efficiency o Helps investor identify risks and oppurtunity around the world PURPOSES OF REVISED CONCEPTUAL FRAMEWORK a. To assist IASB to develop IFRS based on consistent concept b. To assist the preparers of FS to develop consistent accounting policy if the no standard applies c. To assist the preparers of FS to develop accounting policy if standard allows to choose d. To assist all parties to understand and interpret IFRS AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK If there is a standard or conflict - The standard will prevail over the conceptual framework If there is no standard - Management should consider conceptual framework that results in information to be relevant and reliable USERS OF FINANCIAL INFORMATION Classified into two 1. Pimary users o Investors, creditors, lenders 2. Other users o Employee, customers, government and their agencies, and the public PRIMARY USERS - Direct users of general purppose financial reports - Cannot require the entity of financial information directly to them - They need to rely on financial reports for info they need INVESTORS Existing and potential investors need to know: - The risk inhereted in and return to their investements - To determine if to buy, hold, or sell - To assess the ability of the entity to pay dividends CREDITORS AND LENDERS - Need to know if their loans, interest thereon, and other amounts will be paid when due OTHER USERS - Users other than the primary users - May find general purpose financial reports useful - Reports are not directed to them primarily EMPLOYEES - Stability and profitability of the entity - Ability of the entity to give remunirations, retirement benefits, and employment oppurtunities CUSTOMERS - Continuance of the entity - Especially if they have long-term involvement with or they are independent on the entity GOVERNMENT AND THEIR AGENCIES - Allocation of resources and therefore acitivities of the entity - Regulates the activities, determine taxation policy, and basis for national income and other statstics PUBLIC - Determine contribution to the local economy (number of employed) and patronage to the local suppliers - Provide info about trend and range of its acitivties SCOPE OF REVISED CONCEPTUAL FRAMEWORK 1. Objective of finacial reporting 2. Qualitative characteristics of useful financial information 3. Financial statements and reporting entity 4. Elements of financial statements 5. Recognition and derecognition 6. Measurement 7. Presentation and disclosure 8. Concept of capital and capital maintainance OBJECTIVE OF FINANCIAL REPORTING - It forms the foundation of conceptual framework - “why”, reason, or purpose of accoutning Overall objective - To provide financial information about the reporting entity to the existing and potential investors, creditors, lenders in maing decisions about providing resources to the entity Financial reporting - Provision of financial info about an entity to the external users - To assess the effectiveness of entity’s management Annual financial statements - Principal way of providing financial info to the external users Other financial information - Financial reporting also give other financial info other than FS - Financial highlights, summary of important financial figures, analayzes of FS, and significant ratios Nonfinancial information - Description of major products - List of officers and directors TARGET USERS - Financial reporting is dericted to primary users Primary users - They have the most critical and immmedite need of financial info in the reports - They are the providers of resources to the entity - If info meet their needs, most likely other users’ needs will be meet too Management - Interested on the general purpose financial reports - Tho they do not rely on them beacsue they can acquire accitional information internally SPECIFIC OBJECTIVE OF FINANCIAL REPORTING Overall objective - Provide financial info useful for decision making Management Stewardship - Conceptual framework emphaizes on the impotance of info to assess the management stewardship of the resources Specific objectives a. To provide info udeful in making economic decision about providing resources to the entity b. To provide info useful in assessing cash flow prospects of the entity c. To provide infor about entitity’s resources, claims, and changes in resources and claims ECONOMIC DECISIONS Investors - Whether to hold, buy, or sell equity investments Creditors/Lenders - Whether to provide or settle loans ASSESSING CASH FLOW PROSPECS Investors - Economic decision depends on the returns that they expect (dividends) Creditors/Lenders - Economic decision based on the principal and interest payment or other returns they expect Future net cash inflows - Should provide info useful in assessing the amouont, timing, and uncertainty of this ECONOMIC RESOURCES AND CLAIMS - General purpose financial reports provide info about financial position Financial position - Provide info about the entity’ economic resources, claims against the reporting entity - Comprises asset, liability, and equity - Info about the nature and amount of these can help users identify the entity’s financial strength and weaknesses Asset - Resources Liabilities and Equity - Claims against the asset Financial position can help users assess the: - Liquidity o Availability of cash in near future to cover currently maturng obligations - Solvency o Availability of cash over a long term to meet financial commitments when they fall due - Need for additional funding Future cash flow distribution - Info about priorities and requirements of claims can help users to predict how future cash flow will be distributed CHANGES IN ECONOMIC RESOURCES AND CLAIMS - Provide info the effects of transactions and other events that change the resources and claims Financial performance/results of operations - Results of changes in resources and claims - Comprises revenue, expensess, net income or net loss fro a period of tim - Level of income - Portrayed in income statement and statement of comprehensive income USEFULNESS OF FINANCIAL PERFORMANCE - For users to understand the returns that the entity produces on the economic resources Returns - Indicates how well management has discahrged its responsibilities with the use of resources Past financial performance - Predict future returns Financial performance during - Ability to genertae future cash infloes from operations ACCRUAL ACCOUNTING - Must be used to measure the financial performance - Effects of transactions to the resources and calsims in the period those effects occur Recognition - Effects are recognized hrn they occur not as cash is received or paid Income - Recognized when earned Expenses - When incurred Importance - Info measured in accrual accoutning provide better basis for assessing past and future performance LIMITATIONS OF FINANCIAL REPORTING a. General purpose financial reports (GPFR) do not and cannot provide all info that primary users need They need to consider other petinent info from other sources (general economic conditions, political evets, industry outlook) b. GPFR are not designed to show the value of an entity, users will use the reports to estimate the value of the entity c. GPFR intended to provide common information, cannot accomodate every request d. GPFR based on estinate and judgement rather than exact depiction MANAGEMENT STEWARDSHIP - How effeciently and effectively management has discharged its responsibiliies to use resources - Useful to know predict future management of the resources - Useful for assessing the prospects for future net cash flows Chapter 3 QUALITATIVE CHARACTERICTICS - Qualities and attributes that make financial info useful Deciding which info to include in FS? - Ensure that the information is useful in making economic decisions Classification a. Fundamental qualitative characteristics b. Enhancing qualitative characteristics FUNDAMENTAL QUALITATIVE CHARACTERISTCS - Relates to the content or substance of info Characteristics a. Relevance b. Faithful representation For information to be useful, it should be both relevant and faithfuly represented APPLICATION OF QUALITATIVE CHARACTERISTICS Most effecient and effective process of applying fundamental characteristics: - First, identify economic transactions that has potential to be useful - Second, identify type of info about the transaction that is most relevant and can be faithfully represented - Third, determine whether the info is available RELEVANCE - Capacity of information to influence a decision - If it can make a diffirence in the decision by users - Info should be related to the economic decisions Statement of financial position (financial position) Income Statement (Financial performance) INGREDIENTS OF RELEVANCE Predictive value - It can be use as an input to processes employed by users in predicting outcome - If it can help user to increase the likelyhood of correctly or accrutely predicting or forecasting future outcomes Financial position and past perfomance can.. - Predict dividend - Wage payments - Ability of the enity to meet maturing commitments Net cash - Predict loan payment or dafault Conformitory value - Provides feedback about previous evalutions - Enables to confirm or correct earlier expectations Example - Interim income statement is 2M (confirmatory) - If it continues, we can assume that the income entire year is 8M (predictive) MATERIALITY - Also called doctorine of convenience - Practical rule in accounting which states that strict adherance to the GAAP is not needed if the items are not significant enough to affect the evaluation, decision, and fairness of FS As quantitative threshold - Linked closely to the qualitative characteristics of relevance - Materiality is a subquality of relevance Relevance - Is affected by the nature and materiality (manitude) or both Specification - Conceptual framework do not specify a quantitative threshold for materiality or predetermine what could be matterial in a particuar situation MATERIALITY IS A RELATIVITY - Depends of relative size not obsolute size - What is material to one might be immaterial to other entity WHEN IS AN ITEM MATERIAL? - No strict or uniform rule - Based on good judgement, professional expertise, and common sense - It is material if knowledge of it can affect the decision of the primary users NEW DEFINITION OF MATERIALITY IASB define materiality as - It is material is omission, misstatement, or obscuring of the info can affect the economic decision of primary users Three important highlights - Could resonably be expected to influence - Obscuring information - Primary users COULD REASONABLY BE EXPECTED TO INFLUENCE - Adds an element of reasonability - Material info shall be limited to the economic decision of primary users rather than to all (too broad in scope) - Information capable of influencing economic decision of the primary user should be included in the FS OBSCURING INFORMATION - Presentation of info cannot be readily understood or not clearly expressed - Characterized by deliberate vagueness, ambiguity, abstruseness. Info is obscured when - If presenting and coomunicating of the info will have the same effect as ommission or mistatement of the info Example of obscured info - Language is vague and unclear - Info is scattered throughout the FS - Dissimilar items are aggregated inappropriately - Similar items are disaggregated inappropriately PRIMARY USERS - Primarily affected by the GPFR - New definition specify that only primary users are considered because GRFP are directed to them FACTORS OF MATERIALITY - Depends on nature and magnitude - Relative size and nature is considered in determining the materiality Relative size - Size of an item in realation to the total of the group it belongs to - Ex. Advertising expense to selling expense Nature - Inheritly material because of its very nature can affect economic decision - Ex. 20k bribe in a multibillion entity FAITHFUL REPRESENTATION - Financial reports represent economic transactions in words and numbers - The descriptions and figures should match what really happened or existed - Actual effects of the transactions are properly accounted for and reported in the FS INGREDIENTS REPRESENTATION - Completeness - Nuetrality - Free from error OF FAITHFUL COMPLETENESS - Info should be properly presented in a way that facilitates understanding and avoids errouneous implication - All information necessary (description and explanation) should be present for users to understand the transactions Notes to financial information - Accompanies FS for it to be complete - Provide necessary disclosure required by PFRS STANDARD OF ADEQUATE DISCLOSURE - Completeness is result of standard of adequate disclosure or principle of full disclosure - All significant anf relevant info leading to the preperation of FS should be reported Accountants - They should disclose a maetrial fact known to them that are not disclose in the FS if disclosure of which is necessary for the FS to be not misleading Standard of disclosure - Disclosure of any financial facts significant enough to influence the judgement og informed users NEUTRALITY - Without bias or free from bias in preperation and presentation of FS - Depicted with not slanted, weighted, emphasized, deemphasized and other manipulation to increase the probability of info to be favored or unfavored - Shall not favor one patry to the detirement of another one. Common needs - Inofmation id for the common needs of many users not for particulary specif useers Pinciple of fairness - Nuetrality is synonymous - To be nuetral is to be fair PRUDENCE - Exercise of care and caution when dealing with unceratinty in measurement process - Asset and income are not overstated; liabilities and expenses are not understated - Neutrality is supported by prudence CONSERVATISM - Synonymous with prudence - If alternatives exist, choose the alternative with less effect on equity - In case of doubt, record any loss and do not record and gain Lower figure - If there is a choice in asset value, choose the lower figure - Ex. Inventories is measured by Lower of Cost and Net Realizable Value” Contingent Loss - Recognized as provision - If the loss is probable and can be reliably measured Contingent Gain - Not recognized but disclosed EXPRESSION OF CONSERVATISM - Antisipate no profit, and provide for probable and measurerable loss - No matter how sure the business,an in capturing the bird, the accountant, must see it in the hand - Dont count you chicks until the eggs hatch FREE FROM ERORR - No error or ommission on the description of the transactions - The process to produce reported infromation have been selected and applied with no erorrs Does not mean that all is accrute in all respects. Estimate - Of unobservable price and value cannot be determined accrutely - Should be described clearly and accuretly as an estimate Faithful representation of an estimate - Nature and limitations of the estiamte should be describe and explaned - No errors in selecting and applying appropriate process in developing the estimate MEASUREMENT UNCERTAINTY - Monetary amounts cannot be observed directly instead, need to be estimated - Affect the faithful representation if th level of uncertainty is high High level of uncertainty - Can still be represented faithfuly by clearly and accuretly describing and explaning SUBSTANCE OVER FORM - If information is to represent faithfully, transactions should be accounted in accordance with their substance not ther legal form Subtance - It is not considered a separate substance of faithful representation - Faithful repreentation inherenty repreents the subtance If there are differences in substance and legal form - Subatance >> legal form = faithfully represented - Legal form >> subsatnce = not fiathfully represented EXAMPLE Contract: Lease, transfer of property by the end of the lease term Legal form: Lease contract Substance: because of transfer of ownwership, the rental is considered insrallment payment ENHACING QUALITATIVE CHARACTERISTICS - Relate to presentation or form - Increases the usefulness of th financial info Characteristics - Comparability - Understability - Verifiability - Timeliness COMPARABILITY - Ability to bring together for noting points of likeness and defference - Enable users to identify and understand similarities and dissimilarities among items - To be comparable, like things must look alike and diffirent things must look diffirent. Can be made - Comparability within an entity o Horizontal / intracomparability o Comparison within a single enitity from period to period - Comparability between accross entity o Dimensional / intercomparability o Comparison between two or more entity in the same industry COSISTENCY - Implicit of comparability is the principle of cosistency - It is not the same as comparability Broad sense - Consistency is the use of same method on same items, either from period to period within an entity or in a single period between and across entities in the same industry - Comparability is the goal, and consistency helps achieve that goal Limited sense Consistency - Uniform application of accounting method from period to period within an entity Comparability - Uniform application of accounting method between and accross entities in the same industry Changes - If you used FIFO then next year it should still be FIFO - But changes can be made if it will result to more useful and meaningful info - But full disclosure of the chagne and the peso effect thereof UNDERSTANDABILITY - Info should be comprehensible and intellibgle to be useful - Info should be presented in a form and expressed in terminologies that users can understand - Classifying, characterising, and presenting info “clearly and consicely” makes it undertandable - Relevant and fiathfully represented info is useless if users cannot understand them Financial statements - cannot realisticly be understandable by everyone, that is why Users should have understanding about - economic events, financial accounting processes, and terminologies in FS Financial statements are directed to users that - have reasonable knowledge about business and economic activities - they review and analyze info diligently - but they can also seek aid VERIFIABILITY - different knowledgable and independent observers can reach a consensus - verifiability implies consensus - synonymous with objectivity Evidences - verifiability is supported by evidences - other accountants will derive with the same results and conclusion when they see the evidences Users - they are assured that the info is represented properly TYPES OF VERIFICATION Direct verification - verifying the amount of representation using direct observation - counting cash Indirect verifivcation - checking inputs to the model, formula, and other techniques and rechecking using the same method TIMELINESS - must be available and communicated early enough when decisions are to be made - the older the info, the less useful Truism - timeliness echances truism - without knowledge of the past, the basis for prediction is lackig - without interest in the future, the past knowledge is sterile what happened in the past would become the basis of what would happen in the future COST CONSTRAINT ON USEFUL INFORMATION - cost is a pervasive constraint on the info - reporting financial info incur cost - benefit derived form the info >> cost incurred to obtain the info - the evaluation is a judgemental process
