NATIONAL COLLEGE OF BUSINESS AND ARTS

Cubao • Fairview • Taytay

Valuation Concepts and Method (VCM)

BSA AE233-VCM
Saturday 10:30AM-1:30PM
Activity 1 – Review of Conceptual Framework and Accounting
Rules
Name:  _________/40 points

Direction: Answer the following questions. Input your answer in the boxes provided. Ensure to submit/upload this
file within the schedule assigned. You will be graded based on the following criteria:

5 points Submitted on time.

35 Answered the question correctly and with clarity.
points

Question Answer Points

1. Differentiate the following: The Conceptual
 Conceptual Framework Framework is a body
 PAS/IAS of interrelated
 PFRS/IFRS
objectives and
fundamentals.Those
concepts provide
guidance in selecting
transactions, events and
circumstances to be
accounted for, how
they should be
recognized and
measured, and how
they should be
summarized and
reported.

The PAS corresponds

to the adopted
International
Accounting Standards
 (IAS), It involves the
collection, storage, and
processing of financial
and accounting data
used by internal users
to report information to
investors, creditors, and
tax authorities. It is
generally a computer-
based method for
tracking accounting
activity in conjunction
with information
technology resources

The IFRS is a set of

accounting
standards.provides a
guide on how particular
types of transactions
and other events should
be reported in financial
statements. The
rationale for using the
IFRS/Philippine
Financial Reporting
Standards (PFRS) is to
ensure consistency in
recording, recognizing
and measuring financial
transactions, which, if
followed properly, will
ensure stability and
transparency
throughout the financial
reporting process of the
company. These
standards are not
enforceable as
compliance is
voluntary.

2. What are the purposes of the Revised Conceptual Framework? The revised conceptual
framework introduces
new concepts on
measurement,
 presentation and
disclosure,
derecognition and has
updated the definition
of assets and liability,
and derecognition
criteria for assets and
liabilities in financial
statements. The revised
framework also
introduces clarification
on prudence,
stewardship,
measurement
uncertainty and
substance over form.
3. Enumerate the primary and secondary (other) users of financials statements 1. Owners and
and their information needs. investors
Stockholders of
corporations need
financial information to
help them make
decisions on what to do
with their investments
(shares of stock), i.e.
hold, sell, or buy more.

Prospective investors
need information to
assess the company's
potential for success
and profitability. In the
same way, small
business owners need
financial information to
determine if the
business is profitable
and whether to
continue, improve or
drop it.

2. Management
In small businesses,
management may
include the owners. In
huge organizations,
however, management
is usually made up of
hired professionals who
are entrusted with the
responsibility of
operating the business
or a part of the
business. They act as
agents of the owners.

The managers, whether

owners or hired,
regularly face
economic decisions –
How much supplies
will we purchase? Do
we have enough cash?
How much did we
make last year? Did we
meet our targets? All
those, and many other
questions and business
decisions, require
analysis of accounting
information.

3. Lenders
Lenders of funds such
as banks and other
financial institutions
are interested in the
company’s ability to
pay liabilities upon
maturity (solvency).

4. Trade creditors or
suppliers
Like lenders, trade
creditors or suppliers
are interested in the
company’s ability to
pay obligations when
they become due. They
are nonetheless
especially interested in
the company's liquidity
– its ability to pay
short-term obligations.

5. Government
Governing bodies of
the state, especially the
tax authorities, are
interested in an entity's
financial information
for taxation and
regulatory purposes.
Taxes are computed
based on the results of
operations and other tax
bases. In general, the
state would like to
know how much the
taxpayer makes to
determine the tax due
thereon.

6. Employees
Employees are
interested in the
company’s profitability
and stability. They are
after the ability of the
company to pay salaries
and provide employee
benefits. They may also
be interested in its
financial position and
performance to assess
company expansion
possibilities and career
development
opportunities.

7. Customers
When there is a long-
term involvement or
contract between the
company and its
customers, the
customers become
interested in the
 company’s ability to
continue its existence
and maintain stability
of operations. This
need is also heightened
in cases where the
customers depend upon
the entity.

For example, a
distributor (reseller),
the customer in this
case, is dependent upon
the manufacturing
company from which it
purchases the items it
resells.

8. General Public
Anyone outside the
company such as
researchers, students,
analysts and others are
interested in the
financial statements of
a company for some
valid reason.
4. Explain the most efficient and effective process of applying fundamental First, identify
qualitative characteristics of financial information. aneconomic
phenomenon that has
the potential to be
useful to users of the
reporting
entity’sfinancial
information. Second,
identify the type of
information about that
phenomenon thatwould
be most relevant if it is
available and can be
faithfully represented.
Third,
determinewhether that
information is available
and can be faithfully
represented. If so, the
 process ofsatisfying the
fundamental qualitative
characteristics ends at
that point. If not, the
process isrepeated with
the next most relevant
type of information.
5. Explain the following terms and concepts: Materiality Principle
 Concept of materiality or materiality concept
 Neutrality of financial information. is the accounting
 Measurement uncertainty
 Cost constraint on financial information
principle that concern
about the relevance of
information, and the
size and nature of
transactions that report
in the financial
statements.The main
objective of the
materiality principle is
to provide guidance for
the accountant to
prepare the entity’s
financial statements.

Neutrality of financial
information -
Information contained
in the financial
statements must be free
from bias. It should
reflect a balanced view
of the affairs of the
company without
attempting to present
them in a favored light.
Information may be
deliberately biased or
systematically biased.

measurement
uncertainties-
describes financial
statement amounts that
are inherently
imprecise and must be
estimated.
 cost constraint - arises
when it is excessively
expensive to report
certain information in
the financial
statements. When it is
too expensive to do so,
the applicable
accounting frameworks
allow a reporting entity
to avoid the related
reporting. The intent of
allowing the cost
constraint is to keep
businesses from
incurring excessive
costs as part of their
financial reporting
obligations, especially
in comparison to the
benefit obtained by
readers of the financial
statements.

6. Enumerate and briefly describe the underlying assumptions in the preparation Revenue Recognition
of financial statements. Principle
The revenue
recognition principle
directs a company to
recognize revenue in
the period in which it is
earned; revenue is not
considered earned until
a product or service has
been provided. This
means the period of
time in which you
performed the service
or gave the customer
the product is the
period in which
revenue is recognized.
There also does not
have to be a correlation
between when cash is
collected and when
revenue is recognized.
A customer may not
pay for the service on
the day it was provided.
Even though the
customer has not yet
paid cash, there is a
reasonable expectation
that the customer will
pay in the future. Since
the company has
provided the service, it
would recognize the
revenue as earned, even
though cash has yet to
be collected.

Expense Recognition
(Matching) Principle
The expense
recognition principle
(also referred to as the
matching principle)
states that we must
match expenses with
associated revenues in
the period in which the
revenues were earned.
A mismatch in
expenses and revenues
could be an understated
net income in one
period with an
overstated net income
in another period.
There would be no
reliability in statements
if expenses were
recorded separately
from the revenues
generated.
Cost Principle
The cost principle, also
known as the historical
cost principle, states
that virtually
everything the
company owns or
controls (assets) must
be recorded at its value
at the date of
acquisition. For most
assets, this value is easy
to determine as it is the
price agreed to when
buying the asset from
the vendor. There are
some exceptions to this
rule, but always apply
the cost principle unless
FASB has specifically
stated that a different
valuation method
should be used in a
given circumstance.

The primary exceptions

to this historical cost
treatment, at this time,
are financial
instruments, such as
stocks and bonds,
which might be
recorded at their fair
market value. This is
called mark-to-market
accounting or fair value
accounting and is more
advanced than the
general basic concepts
underlying the
introduction to basic
accounting concepts;
therefore, it is
addressed in more
advanced accounting
courses.

Once an asset is
recorded on the books,
the value of that asset
must remain at its
historical cost, even if
its value in the market
changes.

Full Disclosure
Principle
The full disclosure
principle states that a
business must report
any business activities
that could affect what is
reported on the
financial statements.
These activities could
be nonfinancial in
nature or be
supplemental details
not readily available on
the main financial
statement. Some
examples of this
include any pending
litigation, acquisition
information, methods
used to calculate certain
figures, or stock
options. These
disclosures are usually
recorded in footnotes
on the statements, or in
addenda to the
statements.

Separate Entity
Concept
The separate entity
concept prescribes that
a business may only
report activities on
financial statements
that are specifically
related to company
operations, not those
activities that affect the
owner personally. This
concept is called the
separate entity concept
because the business is
considered an entity
separate and apart from
its owner(s).

Conservatism
This concept is
important when valuing
a transaction for which
the dollar value cannot
be as clearly
determined, as when
using the cost principle.
Conservatism states
that if there is
uncertainty in a
potential financial
estimate, a company
should err on the side
of caution and report
the most conservative
amount. This would
mean that any uncertain
or estimated
expenses/losses should
be recorded, but
uncertain or estimated
revenues/gains should
not. This understates
net income, therefore
reducing profit. This
gives stakeholders a
more reliable view of
the company’s financial
position and does not
overstate income.

Monetary
Measurement Concept
In order to record a
transaction, we need a
system of monetary
measurement, or a
monetary unit by which
to value the transaction.
In the United States,
this monetary unit is
the US dollar. Without
a dollar amount, it
would be impossible to
record information in
the financial records. It
also would leave
stakeholders unable to
make financial
decisions, because there
is no comparability
measurement between
companies. This
concept ignores any
change in the
purchasing power of
the dollar due to
inflation.

Going Concern
Assumption
The going concern
assumption assumes a
business will continue
to operate in the
foreseeable future. A
common time frame
might be twelve
months. However, one
should presume the
business is doing well
enough to continue
operations unless there
is evidence to the
contrary. For example,
a business might have
certain expenses that
are paid off (or
 reduced) over several
time periods. If the
business will stay
operational in the
foreseeable future, the
company can continue
to recognize these long-
term expenses over
several time periods.
Some red flags that a
business may no longer
be a going concern are
defaults on loans or a
sequence of losses.

Time Period
Assumption
The time period
assumption states that a
company can present
useful information in
shorter time periods,
such as years, quarters,
or months. The
information is broken
into time frames to
make comparisons and
evaluations easier. The
information will be
timely and current and
will give a meaningful
picture of how the
company is operating.
7. Based your opinion, why is presentation and disclosure considered as an presentation and
effective tool for communication? disclosure considered
as an effective tool for
communication because
to classify information
in a manner that groups
similar items are
separated from
dissimilar items.Aswell
as it aggregates
information,in such a
way it is not obscured
either by unnecessary
 detail or by excessive
aggregation.Disclosures
are intended to
"communicate" rather
than result in a
compliance exercise for
preparers.

***Nothing follows***