JPIA LEVEL UP

CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

“The road ahead might be full of uncertainties but we must keep driving through it. Let’s do our best in everything we
do and eventually we’ll get there. Because the secret to getting ahead is getting started.”
-Marianato Jesus Del Rio- May 2017 CPA topnotcher

CHAPTER 1.
ACCOUNTING- about quantitative information which is financial in nature useful in decision making.
COMPONENTS OF ACCOUNTING
Analytical- Identifying
Technical- Measuring
Formal- Communicating

Identifying- non/recognition of “accountable” economic activities (it becomes accountable if it affects Assets, Liabilities, and Equity).
Economic Activities

INTERNAL transactions- occur within an entity EXTERNAL transactions- involve two different
entities

Measuring- assigning of peso amounts to the accountable economic events.

>historical cost- most common measure of financial transaction
Communicating- preparing and distributing accounting reports to users of accounting information
-makes accounting the “universal language of business”
-it involves:
 Recording- translates financial information into written accounting data.
 Classifying- similar and interrelated transactions are sorted and grouped
 Summarizing- preparation of financial statements
 Accounting aims to supply quantitative financial information that could help statement users make informed judgment and better decision. Hence, its essence is decision-
usefulness.
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

Accountancy Profession
 RA No. 9298 or the Philippine Accountancy Act of 2004

 Board of Accountancy (BOA) - body regulated by law to promulgate rules and regulations affecting the practice of accountancy profession in the Philippines.

 Certificate of Accreditation- issued to a CPA who had acquired a minimum of three years of meaningful experience in any of the areas in public practice including
taxation.

 Certificate of Registration- issued by the Professional Regulation Commission; valid for 3 years and renewable every 3 years

PUBLIC ACCOUNTING
AUDITING
-primary service offered
-independent CPAs express
an opinion by examining the
financial statements
-attest function
TAXATION MGMT ADVISORY
SERVICES
-preparation of annual -services to clients on
income tax returns matters of accounting,
-determines tax finance, product cost, quality
consequences control, budgeting, etc.

PRIVATE ACCOUNTING
 To assist management in planning and controlling the entity’s operations
 Maintain records, produce financial reports, prepare budgets
 Controller- highest accounting officer

GOVERNMMENT ACCOUNTING
 Receipt and disposition of government funds and property

CONTINUING PROFESSIONAL DEVELOPMENT (CPD) - promulgated by BOA

- Inculcation of new advanced knowledge, skill, and proficiency
- CPAs are required to comply with 120 CPD credit units
- Mandated and required for license and accreditation renewal
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

CHAPTER 2.
Conceptual Framework- promulgated by International Accounting Standards Board (IASB)
- A complete, comprehensive summary of terms and concepts that underlie the preparation and presentation of financial statements for external users.
- The presence of a standard/interpretation that applies to a financial event overrides the conceptual framework. Therefore, applicability of it is only considered once a
standard is not applied. IT DOESN’T OVERRIDE ANY SPECIFIC PFRS.

USERS OF FINANCIAL INFORMATION

PRIMARY USERS ( provide resources)
 Investors- study financial reports to
judge the prospect of a profitable
investment; ability to pay dividends
 Creditors- study the liquidity, cash
flow, and profitability
 Lenders- to help assess the safety of
his investment from the risk of
lending.
 Management- agents of investors
SECONDARY USERS
 Employees- assess the stability and
profitability of its employer.
 Government (tax authorities &
regulatory agencies)- regulate
activities of an entity; proper reporting
for the computation and collection of
national income taxes
 Customers & the general public- they
can be potential investors/creditors

Financial Reporting- to provide information useful in decision making, in assessing cash flow prospects, and about entity resources and claims; directed primarily to the primary
user group.

Accrual Accounting- income is recognized when earned regardless of when received and expenses is recognized when incurred regardless of when paid.

Accounting Assumptions (Postulates) - bases of standards

 Going concern- accounting entity is viewed as continuing in operations indefinitely; also known as continuity assumption.
- Assets are normally recorded at original acquisition cost and market value is disregarded.
 Accounting Entity- entity is separate from the owners, managers, and employees to have a fair presentation of FS; thus, every business is an independent accounting
entity.
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

- Personal transactions of owners are not allowed

 Time Period/Periodicity- the indefinite life of an entity is usually subdivided into equal accounting periods.
 Monetary Unit- quantifiability ( economic transactions and events should be stated in terms of a unit of measure) and stability of peso (constant purchasing power of
peso)

CHAPTER 3. QUALITATIVE CHARACTERISTICS

Qualitative characteristics- qualities that make financial information useful to the users in making decisions.

FUNDAMENTAL qualitative characteristics- ENHANCING qualitative characteristics-

content or substance
 Relevance- degree of significance
that affects a decision.
 Predictive value-can be used
as input to processes to
predict future time or
outcome events.
 Confirmatory value- provides
feedback about a past
evaluation, confirms earlier
expectations.
 Faithful representation- actual effect
of transactions shall be properly
accounted for.
 Completeness- presented in a
way that facilitates
understanding and prevent
erroneous implications;
adequate disclosure.
 Neutrality- information should
be free from bias
presentation or form; to increase usefulness
of financial information
 Understandability- must be
comprehensible; clear and concise
 Verifiability- various observers could
reach consensus
 Direct verification- through
direct observation like
counting inventories
 Indirect verification-
recalculation of inputs using
the same methodology
 Timeliness- information is available
when a decision is to be made;
enhances truism
 Comparability- bring together for
noting similarities and differences
 Horizontal or
intracomparability- within an
entity
 Dimensional or
intercomparability- between
and across entities
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

 Free from error- no errors or *consistency- uniform

omissions application of accounting
method from period to period
 Materiality (doctrine of convenience) - within an entity while
an item is material if it affects the comparability is between and
decision of users across entities.
- No uniform quantitative threshold
for materiality
- Depends on relative size

Factors of Materiality
A. Size of the item
B. Nature of the item (bribe, fraud)

 Conservatism- choosing an
alternative with the least effect on
equity.
 Prudence- exercise care and caution
when dealing with uncertainties

CHAPTERS 4-6:

FINANCIAL STATEMENTS (General Purpose FS)

- contains the financial position, financial performance and cash flows of an entity directed to all common users useful for making economic decisions
- serves as the main product of financial accounting process
COMPONENTS
 Statement of Financial Position (Balance Sheet)- comprised of asset, liabilities and equity used to evaluate liquidity, solvency, and the need of the entity for
additional financing
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

 Income Statement- financial performance of an entity a.k.a. results of operations; Useful in predicting future performance and ability to generate cash flows
 Statement of Comprehensive Income- Changes in equity from transactions other than those such with owners in their capacity as owners
 Statement of Changes in Equity- shows movements in the elements of shareholders’ equity
 Statement of Cash Flows- summary of operating, investing and financing activities
 Notes, comprising a summary of significant accounting policies and other explanatory notes- narrative description or disaggregation of items presented in FS
as well as the necessary disclosures required by PFRS that do not qualify for recognition.

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

ASSETS LIABILITIES CAPITAL/EQUITY

DEBIT(Dr) CREDIT(Cr)
 Controlled by the entity  Present obligation  Residual interest or Assets= Liabilities + Capital or
 Result of past transaction  Arises from past transaction claims held by the Equity
 Has future economic benefit  Requires outflow of resources owners of business after Drawings and Income
 Probable and can be measured  Probable and can be measured claims of creditors are Expenses
reliably (Asset recognition reliably (Liability recognition satisfied.
principle) principle)

CURRENT vs. NONCURRENT

CURRENT ASSETS NONCURRENT ASSETS CURRENT LIABILITIES NONCURRENT LIABITIES

 Within the entity’s normal operating
cycle or twelve(12) months
whichever is longer
 For trading purposes
 A cash or cash equivalent
o Cash and Cash equivalents
 All other assets not classified
as current
o Property, Plant and Equipment
 Within the entity’s normal  All other liabilities not classified as
operating cycle or twelve(12) current
months whichever is longer
 For trading purposes
 No unconditional right to defer
settlement
o Trade and Other Payables o Finance Lease Liability
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

o Financial Assets at Fair Value o Long-term Investments o Current Provisions o Deferred Tax Liability
o Trade and Other Receivables o Intangible Assets o Short-term Borrowings o Noncurrent Portion of Long-term Debt
o Inventories o Deferred Tax Assets o Current portion of Long-term o Long term
o Prepaid Expenses o Other Noncurrent Assets Debt liabilities/obligations/deferred
o Current Tax Liability revenues

Property, Plant, and Equipment

 Tangible
 For use in production, supply of goods and services, for rental or for administrative purposes
 To be used for more than one period
Long term Investments
 For accretion of wealth through capital distribution
 For capital appreciation
 For other benefits to the investing entity
Intangible Assets
 Identifiable nonmonetary asset without physical substance

 COMPONENTS OF COMPREHENSIVE INCOME

o PROFIT OR LOSS- total income less expenses excluding those of other comprehensive income
o OTHER COMPREHENSIVE INCOME- other income and expenses including reclassification adjustments not recognized in profit or loss
 Will be reclassified subsequently as profit/loss:
 Unrealized gain/loss on Debt Investment at Fair Value through Other Comprehensive Income (FVOCI)
 Unrealized gain/loss from Derivative Contracts
 Gain/loss from Translation adjustments
 Will NOT be reclassified subsequently as profit/loss:
 Unrealized gain/loss on Equity Investment at FVOCI
 Revaluation Surplus
 JPIA LEVEL UP
CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

 Remeasurements of Defined Benefit/Pension Plan

 Change in Fair Value due to credit risk
SOURCES OF INCOME
o Sales of merchandise to customers (All Sales with Sales Returns, Allowances and Discounts to be deducted)
o Rendering of services (e.g. Professional Fees, Commissions, Admission Fees and Tuition Fees)
o Use of entity resources (e.g. Interest, Rent, Royalty, and Dividend Income)
o Disposal of resources other than products(e.g. Gain on sale of Investments/ Property Plant and Equipment/Intangible Assets)

COMPONENTS OF EXPENSE
o COST OF GOODS SOLD- cost attributable to product
o DISTRIBUTION COST/SELLING EXPENSES- selling, advertising, and delivery of goods
o ADMINISTRATIVE EXPENSES- cost of administering the business
o OTHER EXPENSES- those of which are not directly related to selling and administrative function
o INCOME TAX EXPENSE
INCOME EXPENSE
 Increase in economic benefit (increase in asset or decrease in  Decrease in economic benefit (decrease in asset or increase in
liability) that results in increase in equity other that shareholders’ liability that results in decrease in equity other than shareholders’
contribution. distribution.
 Probable and reliably measured  Probable and reliably measured
REVENUE GAIN EXPENSES LOSSES
- Arise in course of - Do not arise in course of - Arise in course of ordinary - Do not arise in course of
ordinary regular activities ordinary regular activities regular activities ordinary regular acivities

RECOGNITION PRINCIPLE
o COST PRINCIPLE- assets initially at original acquisition cost
o INCOME RECOGNITION PRINCIPLE- income are recognized when earned (point of sale)
Exception:
 Installment method and Cost Recovery (Sunk Cost) Method - at point of collection
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CONCEPTUAL FRAMEWORK REVIEWER FOR PRELIMS

 Percentage of completion method- by reference to stage of completion of contract activity

 Production method- at point of production
o EXPENSE RECOGNITION PRINCIPLE- expenses are recognized when incurred
o MATCHING PRINCIPLE- simultaneous recognition of income and the corresponding expenses upon earning such income
 Cause and Effect Association- expense is recognized when revenue is already recognized
 Systematic and Rational Allocation- costs are expensed by allocating over the periods benefited
 Immediate Recognition- cost are expensed outright due to uncertainty of future economic benefits

MEASUREMENT OF ELEMENTS
o HISTORICAL COST- original acquisition cost a.k.a. “past purchase exchange price”
o CURRENT COST- cost to be paid if the same asset was acquired currently a.k.a. “current purchase exchange price”
o REALIZABLE VALUE- amount to be obtained through sale on disposal of an asset a.k.a. “current sale exchange price”
PRESENT VALUE- discounted value of future net cash inflows a.k.a. “future exchange price”