Page 1 of 9 COLLEGE OF ACCOUNTANCY

C-AE14 Conceptual Framework and Accounting Standards

First Semester AY 2022-2023
MODULE 5 & 6 QUIZ
1. Faithful representation requires a high degree of accuracy – False

2. In all cases, relevance and faithful representation must be equally achieved in order to

ensure that the financial information is useful to decision-makers. – False

3. Use of estimates is unacceptable because of measurement uncertainty. – False

4. Financial information has confirmatory value if it provides feedback about previous

evaluations. – True

5. The Predictive value and confirmatory value of financial information are interrelated. -

True
6. Prudence is a fundamental qualitative characteristic of useful financial information.

False
7. Comparability is a fundamental qualitative characteristic of useful financial
information. - False
8. A neutral depiction of financial information is a requirement to achieve
relevance. -False
9. Financial reports represent economic phenomena in words and numbers – True
10. Information is material if omitting it or misstating it could influence decisions that the
primary users of general-purpose financial reports. - True

Multiple Choice

1. Which of the following enhances the comparability of information?

Consistent application of accounting policies from period to period
2. The enhancing qualitative characteristics of financial information are
Comparability, understandability, verifiability and timeliness
3. Two primary users are using the financial information of Entity A. If User #1 concludes

that Entity A’s sales has increased while User #2 concludes that it has decreased,

Entity A’s financial information is not

Verifiable
4. The fundamental qualitative characteristics are

Relevance and faithful representation

5. Which concept of accounting holds that, to the maximum extent possible, financial

statements shall be based on arm’s length transactions (transaction between two

independent parties in which both parties are acting in their own self-interest. Both

buyer and seller are independent, possess equal bargaining power, are not under

pressure, or duress)?

Verifiability
6. An entity issuing the financial reports within a few months at the end of the reporting

period is an example of which enhancing quality of accounting information?

Timeliness
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C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
7. Qualitative characteristics:
Are considered either fundamental or enhancing.
Contribute to the decision-usefulness of financial reporting information.
Distinguish better information from inferior information for better decision-making purposes.
8. In the Conceptual Framework, the "Board" refers to

International Accounting Standards Board

9. Entity A deliberately overstated its liabilities from P1M to P1.2M. What qualitative

characteristic is violated?

Faithful representation
10. Which of the following is not a factor to consider when applying the qualitative

characteristics?

To be useful, information need only to meet one, but not necessarily all, of the qualitative characteristics.
11. The characteristic that is demonstrated when a high degree of consensus can be

secured among independent measurers using the same measurement method is

Verifiability
12. According to the Conceptual Framework, physical count of inventory is an example of
direct verification
13. A piece of information that can be used in coming up with estimates or forecasts is

said to have

predictive value
14. Allowing entities to estimate rather than physically count inventory at an interim

period is an example of a tradeoff between

Timeliness and faithful representation

15. Accounting information is considered relevant when it
Is capable of making a difference in a decision.
16. Which statement best describes the cost and benefit constraint?
The benefit of the information must be greater that the cost of providing it.

17. Which of the following statements about materiality is correct?

Materiality is affected by an item's relative size, and importance.
An item must make a difference in the decision that is to be made by the financial statement users..
An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
18. A complete depiction includes all information necessary for a user to understand the

phenomenon being depicted. This means that reporting entities have complied with at

least the presentation and disclosure requirements as indicated in the

both financial reporting standards and requirements of the government agencies or regulators
19. Financial information exhibits consistency when
Accounting entities give similar events the same accounting treatment each period.
20. Which statement is true in relation to the enhancing qualitative characteristics of
understandability of financial information?
Users have a reasonable knowledge of business and economic activities and review the information with
reasonable diligence.
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C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
21. When information about two different entities engaged in the same industry has been

prepared and presented in a similar manner, the information exhibits the enhancing

qualitative characteristic of

Comparability
22. What are the qualitative characteristics of financial statements?

These are attributes that make the information provided in financial statements useful to users.
23. Information that is capable of making a difference in the decisions made by users has

this qualitative characteristic.

Relevance
24. Only large and publicly traded companies are required to present useful financial

information.

False
25. The Filipino adage “Aanhin mo pa ang damo pag patay na ang kabayo” relates to which

of the following qualitative characteristics?

Timeliness

The Conceptual Framework gives us six qualitative characteristics of useful financial

information. These are:

FQC (Fundamental) EQC (Enhancing)

* Relevance * Comparability
* Faithful Representation *Verifiability
* Timeliness
* Understandability

FQC – FUNDAMENTAL Qualitative Characteristics, and

EQC – ENHANCING Qualitative Characteristics

The usefulness of financial information is enhanced it is comparable, verifiable, timely and understandable.

Relevance
Capable of making a difference in the decision made by users.
A piece of information is relevant if it pertains to the decision that has to be made and if it is material in
nature.
Information is material if omitting it or misstating

Relevant information has predictive value, confirmatory value or both

I. Predictive value –used as an input in processes to predict future outcomes.

II. Confirmatory value –provides feedback about (confirms or changes)
Page 4 of 9 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
These two values predictive and confirmatory are interrelated.

Faithful Representation

3 CHARACTERISTICS OF FAITHFUL REPRESENTATION

• Complete - includes all information necessary for a user to understand the phenomenon being depicted
N• Neutral - depiction is without bias
€ It is not slanted, weighted, emphasized, de-emphasized.
€ Information has neither purpose nor influence on decision makers.
€ It is supported by prudence which is the exercise of caution when making judgments under conditions of
uncertainty.
• Prudence means that assets and income are not overstated, and
liabilities and expenses are not understated.
F • Free from Error - means there are no errors or omission in the description of the phenomenon
€ Free from error does not mean perfectly accurate in all respects
€ Estimates cannot be determined as accurate or inaccurate; no errors have been made in selecting and applying an
appropriate process for developing the estimate.

Cash – an economic resource

Statement of Financial Position – asset, liabilities, owners’ equity
Statement of Cash Flows - inflows and outflows of cash
Notes to Financial Statements -The recognition and measurement criteria used
in accounting for cash as well as all necessary information
RELEVANCE + FAITHFUL INFORMATION = USEFUL FINANCIAL INFORMATION

Module No – Title : MO 6 Enhancing Qualitative Characteristics of Useful Financial Information

Comparability - . It enables users to identify and understand similarities in, and differences among, items

(intercomparability) - with similar information about the same entity

(intracomparability) - for another period or another date
2 items – number of items to achieve comparability
Consistency - It refers to the use of the same periods for the same items
Consistency is needed in order to achieve comparability.
Comparability is not the same with uniformity.
Uniformity - usually pertains to appearances form
Comparability - the substance of the economic phenomenon
Comparability – make things different not look alike.

Verifiability - proving the truth about something

Verify – Latin “verus” means “true”

Verifiability - helps assure users that information faithfully represents
Direct verification – direct observation
Indirect Verification - This means checking the inputs to a model, formula

Timeliness - means having information available to decision-makers in time

For information to be useful, it must be provided on time.

Decision makers need the information as soon as possible
Information should be served when the primary users need it
The older the information, the less useful it is
Some information may continue to be timely long after the end of a reporting period
Page 5 of 9 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
Understandability

Classifying, characterizing and presenting information clearly and concisely make it understandable.
Financial reports- are prepared for users who have reasonable knowledge of
business and economic activities.
Diligence - they are also able to review and analyze the information

Applying the enhancing qualitative characteristics is an iterative (it involves repetition) process that does not follow a
prescribed order.

Sometimes, one enhancing characteristic may have to be diminished to maximize another qualitative
characteristic.

Cost Constraint on Useful Financial Reporting

Cost - is a pervasive constraint on the information

Pervasive – widely spread
Constraint – limitation
Reporting information imposes costs and it is important that those costs are justified by the benefits of
reporting that information.
Users also incur costs of analyzing and interpreting this information
Users ultimately bear those costs and result to reduced returns
€ The Board assesses whether the benefits of reporting particular information are likely to justify the costs
incurred to provide and use that information.
€ When applying the cost constraint in developing a proposed standard, the Board seeks information from
providers of financial information

Module No – Title : Module 7- The Financial Statements and the Reporting Entity

Ms. Bernadine T. Siy – chairman of the audit committee of PLDT

Signatories of the Statement of Management Responsibility for Consolidated Financial Statements
Alfredo S. Panlilio – President and CEO
Annabelle Lim Chua – Senior VP and Chief Financial Officer
Gil Samson D. Garcia – First VP and OIC – Financial Reporting and Controllership Head
SyClip Gorres Velayo & Co. (SGV) – Accounting firm audited the company’s financial statements
March 22, 2022 – auditors report
2019 – 2021 – Financial statements pertains
Notes To Consolidated Financial Position– longest report

6 Financial Statements According To The Report

1. Consolidated Statements of Financial Position
2. Consolidated Income Statements
3. Consolidated Statements of Comprehensive Income
4. Consolidated Statements of Changes in Equity
5. Consolidated Statements of Cash Flows
6. Notes to Consolidated Financial Statements

Lesson 1 – Financial Statements

Objective and Scope of Financial Statements

Financial statements- is to provide financial information about the reporting entity’s assets, liabilities,
equity, income and expenses that is useful to users of financial statements in assessing:
€ The prospects for future net cash inflows to the reporting entity, and
€ Management’s stewardship of the entity’s economic resources.
Page 6 of 9 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
a) In the statement of financial position, by recognizing assets, liabilities and equity;

b) In the statement of financial performance, by recognizing income and expenses; and

c) In other statements and notes, by presenting and disclosing information

I. Recognized assets, liabilities, equity, income and expenses, including information about their nature

and about the risks arising from those recognized assets and liabilities;

II. Assets and liabilities that have not been recognized including information about their nature and about the
risks arising from them;
III. Cash flows;
IV. Contributions from holders of equity claims and distributions to them; and,
V. The methods, assumptions and judgments used in estimating the amounts presented or disclosed and changes
in those methods, assumptions and judgments.
Financial Statements Information

1. Statement of Financial a. Assets, Liabilities and Equity

Position

2. Statement of Financial
Performance (Income b. Income and Expenses
Statement and Statement of
Comprehensive Income)

3. Statement of Changes in c) iv. Contributions from holders of equity claims and distributions to them
Equity

4. Statement of Cash Flows c) iii. Cash flows

5. Notes to Financial c) i. Recognized assets, liabilities, equity, income and expenses, including
Statements information about their nature and about the risks arising from those recognized
assets and liabilities; c) ii. Assets and liabilities that have not been recognized
including information about their nature and about the risks arising from them;

Reporting period
Financial statements include information about transactions/ from the perspective of the reporting entity as
a whole
Financial statements are prepared for a specified period of time and provide information about assets,
liabilities, income and expenses
Financial Statements also provide comparative information for at least one preceding reporting period.
There should at least be TWO periods presented in the financial statements in order to achieve
comparability.
The oldest set of information is the least relevant;
Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to
cease trading.
If such intention or need exists, the financial statements may have to be prepared on a different basis. If
so, the financial statements describe the basis used.

Faithful representation requires that:

a) The boundary of the reporting entity does not contain an arbitrary or incomplete set of economic activities;
b) Including that set of economic activities within the boundary of the reporting entity results in neutral
information; and
c) A description is provided of how the boundary of the reporting entity was determined and of what constitutes
the reporting entity.
Page 7 of 9 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
Lesson 2 – The Reporting Entity

Consolidated Financial Statements - If a reporting entity comprises of the parent and its subsidiaries
Unconsolidated Financial Statement - If the reporting entity is the parent alone
Combined Financial Statement - If a reporting entity comprises two or more entities that are not all linked by a
parent subsidiary relationship

Difficulty in determining the reporting entity

Determining the appropriate boundary of a reporting entity can be difficult if the reporting entity:

a) Is not a legal entity, and

b) Does not comprise only legal entities linked by a parent-subsidiary relationship. (par. 3.13)

In such cases, determining the boundary of the reporting entity is driven by the information needs of the primary
users. We go back to relevance and faithful representation. Faithful representation requires that:

a) The boundary of the reporting entity does not contain an arbitrary or incomplete set of economic activities;
b) Including that set of economic activities within the boundary of the reporting entity results in neutral
information; and
c) A description is provided of how the boundary of the reporting entity was determined and of what constitutes
the reporting entity.

Module No – Title : Module 8 The Elements of Financial Statements

Liability – A present obligation

Equity – Residual Interest
Income - Increases in assets, or decreases in liabilities, that result in increases in equity
Expenses - Decreases in assets, or increases in liabilities, that result in decreases in equity
Holders of Equity – Income and Expenses

Lesson 2 – Definition of an ASSET

Asset- A present economic resource controlled by the entity as a result of past events
Economic resource - is a right that has the potential to produce economic benefits
Contract – meetings of minds
Treasury Funds- funds na naissue pero binili ulet pwede pang ibenta sa iba
Treasury shares - are the company’s own shares repurchased and held by the entity. Thus, these are not to
be considered as assets.

Three very important aspects that you should remember:

1. Right – right to future benefits corresponds to an obligation/do not corresponds
2. Potential to produce economic benefits
3. Control – to control, enjoy the assets

For rights that correspond to an obligation of another party:

a. Rights to receive cash
b. Rights to receive goods or services
c. Rights to exchange economic resources with another party on favorable terms
d. Rights to benefit from an obligation of another party to transfer an economic resource if a specified uncertain
future event occurs.

For rights that do not correspond to an obligation of another party:

a. Rights over physical objects, such as property, plant and equipment or inventories
b. Rights to use intellectual property
Page 8 of 9 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
Many rights are established by contract, legislation or similar means. An entity might also obtain rights in
other ways, for example:

a. By acquiring or creating know-how that is not in the public domain.

b. Through an obligation of another party that arises because that other party has no practical ability to act in a
manner inconsistent with its customary practices, published policies or specific statements. ( Ang isang entity ay
pwedeng magkaroon ng right kahit walang napag usapan dahil dati na niyang naipangako o inanounce yon wala
siyang Karapatan o ibang paraan para umiwas sa obligasyon niya)

Not all of an entity’s rights are assets of that entity – to be assets of the entity, the rights must BOTH have:
1. The potential to produce for the entity economic benefits beyond the economic benefits available to all other
parties, and
2. Be controlled by the entity.

An entity cannot have a right to obtain economic benefits from itself

(it cannot recognize a separate investment from itself)

a. Debt instruments or equity instruments (shares of stock) issued by the entity and repurchased and held by it are not
economic resources of that entity.
b. If a reporting entity comprises more than one legal entity, debt instruments or equity instruments issued by one of
those legal entities and held by another of those legal entities are not economic resources of the reporting entity.

In principle, each of an entity’s rights is a separate asset. However, for accounting purposes, related rights
are often treated as a single unit of ACCOUNT that is a single asset.

Uncertainty

In some cases, it is uncertain whether a right exists. Until that existence uncertainty is resolved, it remains uncertain
whether the entity has a right, and consequently, whether an asset exists.

Potential to produce economic benefits

An economic resource is a right that has the potential to produce economic benefits. For that potential to exist, it does
not need to be certain, or even likely, that the right will produce economic benefits.

It is only necessary that the right already exists and that, in at least one circumstance, it would produce for the entity
economic benefits beyond those available to all other parties.

A right can meet the definition of an economic resource, and hence can be an asset, even if the probability that it will
produce economic benefits is low.

Accountants must assess the effects of that low probability on decision makers.

In your next accounting course, Intermediate Accounting, you will discuss how this low probability will affect such
decisions, thus, will result to reference to the recognition criteria.

Present right not future economic benefits

Although an economic resource derives its value from its present potential to produce economic benefits, the economic
resource is the present right that contains that potential, not the future economic benefits that the right may produce.
Do all outlays of cash or expenditures result to assets?

There is a close association between incurring expenditures and acquiring assets, but the two do not necessarily
coincide.
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C-AE14 Conceptual Framework and Accounting Standards
First Semester AY 2022-2023
a. When an entity incurs expenditures, this may provide evidence that the entity has sought future economic benefits
but does not provide conclusive proof that the entity has obtained an asset. Remember, you have to look at all
THREE components of the definition for an asset to exist.
b. The absence of an expenditure does not preclude an item from meeting the definition of an asset like in the case of
rights when the government has granted to the entity free of charge or when another party has donated to the
entity.

Control
Control links an economic resource to an entity.

An entity may control a proportionate share in a property without controlling the rights arising from ownership of the
entire property. In this case, the entity’s asset is the SHARE in the property, which it controls, not the rights arising
from ownership of the entire property, which it does not control.

Control usually arises from an ability to enforce legal rights. For an entity to control an economic resource, the future
economic benefits from that resource must flow to the entity either directly or indirectly rather than to another party.

Exposure to significant variations in the amount of the economic benefits produced by an economic resource may
indicate that the entity controls the resource. However, it is only one factor to consider in the overall assessment of
whether control exists.

Principal and Agent

Sometimes one party (a principal) engages another party (an agent) to act on behalf of, and for the benefit of, the
principal.

Remember, that even if the custody of the economic resource controlled by the principal is with the agent, that
economic resource is not an asset of the agent. Furthermore, if the agent has an obligation to transfer to a third party
an economic resource controlled by the principal, that obligation is not a liability of the agent, because the economic
resource that would be transferred is the principal’s not the agent’s.